Low rates = tough challenge: treasurers and cash managers still feel frustrated by the low yields on short-term instruments, but research and comments from industry experts suggest that few are ready to ramp up their risk to boost returns. Indeed, many face policies that mandate conservative investments.

• Author: Holliday, Karen Kahler
• Position: Investments

Low interest rates are dandy for borrowers, but not so good for investment managers. Against the backdrop of a low-but-rising rate environment, corporate treasurers and investment managers are working hard to extract the most they can from their short-term cash and marketable securities--and finding the going tough.

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"Generally, corporate cash managers feel a bit frustrated with the relatively low rates of return that are available today in the short-term markets," says Michael Hutchinson, director of Short-Duration Management Solutions at SEI Investments. "Twelve months ago, the marketplace was forced to adapt to short-term interest rates that had fallen to a 40-year low, and though yields have increased through the past year, investors still want more."

Given the recent environment, managers are balancing their desire for stronger returns with issues such as liquidity, credit and structure, among others. Not surprisingly, many corporate treasurers and investment managers are keeping proprietary strategies close to the vest--indeed, many would rather read about the topic rather than being quoted about it. Still, some industry experts say that treasury managers may be feeling a little more freedom these days to keep more cash available versus no cash, as well as a little less pressure in managing their short-term position.

Nonetheless, there are some trends regarding policies, benchmarking, risk, providers and products that may be gleaned from a recent national research study, as well as from interviews with treasury management consultants and financial services professionals. While nuances of opinion exist, depending on any individual company's broader goals and resources, those interviewed concur that a carefully crafted investment policy for short-term investments is a critical component of any effort.

Written Policies Prevalent

Research conducted by Connecticut-based Greenwich Associates underscores this. After polling more than 700 cash management professionals at large U.S. corporations between May and July of 2004, Greenwich found that more than 85 percent of U.S. companies have a written investment policy that guides their short-term cash and marketable securities investing activities. According to the firm's associate director of institutional research and marketing, Ryan Randolph, an effective policy documents the goals and risk tolerances in writing and is proactively communicated by management to treasury...