US ideas about cash management are making headway in Europe, although some fund managers remain to be convinced. On the following pages, IPE looks at the services and products on offer
US-style cash management, according to custodians and consultants, is joining other accepted investment techniques in changing the pattern of investment management in Europe.
However, the vaunted treatment of cash as a separate asset class and predictions that pension funds will award cash management to custodians have yet to be borne out, particularly in continental Europe. Funds there have not, on the whole, accepted the specialisation argument, with most content to manage cash themselves, seeing short-term investments largely as an in-house responsibility. The picture in the UK is mixed.
In September the £820m ($1.3bn) Rio Tinto pension fund announced that it was appointing Midland Securities Services as sole custodian. Investment manager Stephen Burley says Midland won the mandate because its cash management service was tailored exactly to the needs of the fund - although he also notes its competitive pricing.
The service provided by Midland is, according to Burley, relatively straightforward. It involves the daily selection of one of four banks - including Midland itself - with which to place the cash on deposit depending on available rates.
Options such as self-management or delegating cash management to a fund manager simply did not fit with what it saw as the needs of the fund.
It takes the onus off us as far as time and management effort is concerned. It is much easier for us to have the custodian and the cash management under the same roof. It is not a sophisticated system of money management. We just make sure we get a decent overnight or seven-day rate."
Steven Mendel, principal in Aon Consulting's investment practice in London, supports this line of thinking, believing that pension funds should consider their cash requirements along with custody. "When you have carefully considered custodial services for the rest of your fund, if you are not looking at it for your cash you are only doing half your job."
Other funds, however, do not place such strong emphasis on cash as part of a custodial service.
Richard Gregory, finance manager at Glaxo Wellcome's £2.7bn pension fund in London, says that its custodian is used largely to "sweep up the odds and ends". Cash management expertise is provided by the group's treasury department or by external investment managers. "The cash that we hold centrally to cover on-going running costs and in case of emergencies is managed with the help of the group's treasury department. They provide us with advice although the decisions are taken ultimately by the trustees."
Other cash for the fund is managed by investment managers as part of their overall brief but this is not the foremost criterion in manager selection. "Clearly we want to make sure that they offer a secure means of investment for cash so the fact that they offer something is very important but we don't expect them to hold a great deal." Fund managers either place the cash in certificates of deposit or in some form of pooled vehicle. "The benchmark that we give them usually has zero for cash so any amount they hold in cash will detract from their overall performance."
Another UK pension fund, with assets of over £1bn, uses one manager to hold the majority of any cash holdings, treating him as a "banker". The reasoning is that the fund is a mature one and therefore requires access to liquid assets. "One of our external managers acts as a banker and he holds more of the cash. Any cash held is on short-term deposit. We do not have cash in the benchmark but there is always between 2 and 3% in aggregate in the process of being invested or held against pensioners' transfers. We are a mature fund and require cash on this basis."
Mendel's views support this line of thinking to some extent. He does not think that cash should be held strategically but because of the need to overcome a particular problem such as cash flow management or pension matching. "What gives rise to it is quite important because that determines why you want to hold it in the first place and how you perceive it. It is very important if you are holding it for strategic issues that it is part of the benchmark," he says.
In contrast to the UK, the clear bias in continental Europe is towards self-management of cash. The Volvo Trucks Europe fund, based in Gent in Belgium, carries out its own cash management on grounds of cost although the fund does not, as with most others, use straight bank deposits alone. "Quite simply we believe that it is the cheapest way and think that we have it under control," says fund manager Roger Claeys. "We spread our investments in about seven or eight different products. We buy a note or invest in a fund and that is it."
Cornelius Willemsen, managing director of the Dfl1bn ($510m) Internatio-Muller Pension Fund in Rotterdam says: "All our cash is managed in-house, which means that we have a list of banks with which I am authorised to deal."
He continues: "We feel we can do it reasonably well. We try to keep the cash level as low as possible and we monitor the amount of cash on a continual basis, constantly updating our buying lists for shares and bonds."
André Perrinjaquet, treasurer of the Sfr1bn ($714m) Fabriques de Tabac Réunies fund, based in Neuchatel in Switzerland, takes a similar view. He accepts the specialisation argument for long-term investments but believes that his own team is better equipped for the short term.
"We assume that managers are better equipped than we are to manage equities and bonds, whereas for short-term investments I know when I need the funds and how long I can put them on deposit. There is not much added value in going via someone who is specialising in that."
He adds that within the fund's current asset allocation the short-term cash requirement should be kept at a minimum. As for more sophisticated investments: "We have not considered using money market funds because it doesn't tie in with our strategic policy. When we say short term, we really mean short term. Money market funds might buy bonds with longer maturity. We place cash on short-term deposit and we have no money market transactions or fees."
Svein Garberg, managing director of the Nkr4.5bn ($630m) Meieribrukets fund in Oslo puts forward a similar argument. "We are very light in short money because we have transparent liquidity flow here. We know when money goes out from here and we have nearly all our money in bonds and equities," he says. "Our money is mostly on deposit with specified banks but for the last year it has been a very limited amount."
Not all European funds are self managing for cash, however. John Zeilstra, treasurer of the Dfl300m ($154m) Philip Morris fund in Bergen Op Zoom in the Netherlands says that cash management is delegated to the fund manager simply because they feel it to be the easiest way to handle it. Control by the fund itself in this case is limited to setting targets for the fund manager.
Aon's Mendel is ambivalent about the holding of cash by fund managers, believing that eventually they will outsource it as an element of custody. "I would say that most fund managers are outsourcing or are close to outsourcing their custodial advice for cash management. Most fund managers offer a range of banks rather than the whole thing going to one bank. You usually get the option to choose how many it goes to."
Much of Mendel's advice derives from the need to avoid any Barings-style difficulties with cash on deposit. Trustees obviously need to be aware of the credit rating of banks where they hold cash on deposit.
But while continental managers are careful in selecting deposit banks they are unconvinced by Mendel's argument for custodians. Claeys and Perrinjaquet cite cost and the simplicity of managing cash themselves.
Mendel believes that argument is going his way. "Trustees will be increasingly aware that cash is an easy asset to lose and are beginning to look at it more carefully. Once you have sorted out the custody arrangements for your equities why leave it there? Why not sort it out for everything?""