Playing the corporate investment game - literally.

• Author: Cody, Mathew R.
• Position: Portfolio Management

Where is the cash? This question is faced everyday by corporations that by their very nature generate substantial funds from daily operations. Banks have worked hard to accelerate the collection of funds via lock box operations, automated clearing mechanisms including zero balanced accounts, and timely collection of receipts. The next logical step is to decide on a rational approach to investing the cash from operations until it's disbursed for payrolls, taxes, and capital expenditures. Herein lies a problem that can result in substantial losses, despite the best efforts to carefully invest these temporary funds.

What to do? What to compare? Whose advice to seek?

More important, what do other companies do in a similar situation, and what is their portfolio likely to comprise in terms of instruments and maturity? These are questions I posed to attendees at a seminar, entitled "Managing Liquid Assets for incremental Return," sponsored by KPMG Peat Marwick.

Each participant was asked to manage a $100-million portfolio over a two-day period. The only constraint was that $5 million be made available on the second day to cover unexpected cash requirements. The allowable instruments ranged from straightforward repurchase agreements to floating rate notes and variable rate demand bonds.

I did ask participants to follow the investment guidelines their companies currently use in constructing their portfolios, because we wanted as realistic results as possible. We applied interest rates for the first day, as well as foreign exchange rates, and I talked briefly about the existing outlook for the economy. The game-players used instruments with which they were familiar and some new vehicles as part of the portfolio mix.

As for the types of executives who played, the cast included chief financial officers, treasurers, cash managers, and controllers. Their institutions ranged from the largest money center banks to foundations, large corporations, securities firms, and small, closely held companies.

Look at the table on page 12 for a rundown of the investment strategies used by groups from mid 1988 to the end of 1989. The results are interesting and tend to mirror the universe of instruments available to the corporate investor. (See the chart on page 13 for a list of instruments from which the executives could choose.)

The tally

What do we conclude from this data? In the first instance, despite the fact that U.S. government direct and agency obligations are...