FOR INSTITUTIONAL INVESTORS ONLY. NOT FOR PUBLIC DISTRIBUTION. Investment policies in practice Greg...
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Transcript of FOR INSTITUTIONAL INVESTORS ONLY. NOT FOR PUBLIC DISTRIBUTION. Investment policies in practice Greg...
FOR INSTITUTIONAL INVESTORS ONLY. NOT FOR PUBLIC DISTRIBUTION.
Investment policiesin practice
Greg Romano, Executive Director, J.P. Morgan Asset Management 312-732-6608, [email protected]
FOR INSTITUTIONAL INVESTORS ONLY. NOT FOR PUBLIC DISTRIBUTION.
2
Current landscapeCash levelsCorporate investment behavior
FOR INSTITUTIONAL INVESTORS ONLY. NOT FOR PUBLIC DISTRIBUTION.
Corporate cash balances remain high
18% have balances in excess of $1 billion.
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Source: J.P. Morgan Asset Management Global Liquidity Investment Survey 2011.
As in 2010, 30% of treasury departments have an average cash balance of more than $500 million.
FOR INSTITUTIONAL INVESTORS ONLY. NOT FOR PUBLIC DISTRIBUTION.
Corporate investment behavior has evolved
4
Since the liquidity crisis, there is greater focus on due diligence and investment policies.
Focus on yield
Outdated policies – no systematic reviews
Decisions made by treasury team with little or no oversight by board or management team
Limited emphasis on due diligence
Pre-liquidity crisis
Heightened focus on due diligence and investment policies
Increased concern and uncertainty regarding investment portfolios
Re-evaluated investment philosophies – determined whether to manage in-house or outsource
Updated and revised investment policies
Increased due diligence on investment providers
Integrated investment oversight
Post-liquidity crisis
STRICTLY PRIVATE/CONFIDENTIAL
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A disciplined approach for evaluating investment solutions
FOR INSTITUTIONAL INVESTORS ONLY. NOT FOR PUBLIC DISTRIBUTION.
Benefits of a well-executed investment policy
Ensures consistent approach in all market conditions
Provides clarity so that everyone understands the policy
Imposes transparency for internal control
Helps you meet your corporate investment goals
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With consistency and clarity, an investment policy sets the strategy for your investment decisions.
FOR INSTITUTIONAL INVESTORS ONLY. NOT FOR PUBLIC DISTRIBUTION.
Creating a cash governance framework
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Two key actions may help organization protect their cash investments.
Develop an investment policy that clearly and fully documents the acceptable parameters of all cash investments.
1Institute a rigorous and systemic due diligence process to review and ensure compliance with the investment policy.
2
FOR INSTITUTIONAL INVESTORS ONLY. NOT FOR PUBLIC DISTRIBUTION.
How do you measure investment policy success?
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Base: 447. Other included FX losses, liquidity, FFP/interest, return on risk. *New choices this year.Source: J.P. Morgan Asset Management Global Liquidity Investment Survey 2011.
For most organizations, an effective policy can help ensure return on investment and principal preservation.
Other (please specify)
Peer performance*
Accurate cash segmentation and deployment
Low volatility*
Benchmark that reflects risk and return objectives*
Accurate cash flow forecasting
Preservation of principal
Return on investment
0% 10% 20% 30% 40% 50% 60% 70%
3%
11%
16%
25%
34%
40%
58%
64%
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Weighing the risks and rewards for cash investments — a rigorous, ongoing, sequential process
Steps toward creating an investment policy
FOR INSTITUTIONAL AND PROFESSIONAL USE | NOT FOR PUBLIC DISTRIBUTION
Performance as of May 17, 2012
The performance quoted is past performance and is not a guarantee of future results. Current performance may be higher or lower than the performance data shown. For performance current to the most recent month-end please call 1-800-766-7722 . Money market fund performance may reflect the waiver of a portion of the fund's fees. The unsubsidized 7-day SEC yield shows the fund’s performance if fees had not been waived. Performance may reflect the waiver of a portion of the fund's fees. If fees had not been waived, the 7-day SEC yield would have JPMorgan Prime Money market Fund, 0.02, JPMorgan U.S. Government Money market Fund -0.15, JPMorgan 100% Treasury Securities Money Market Fund -0.22.
** Muni Yields grossed up at a 35% tax rate* The yield shown is the 7 day SEC yield on the stated as-of-date
As of May 17, 2012 7 Day SEC 1 Month 3 Months 6 Months 9 Months 1 Year 2 Years 3 Years 5 Years
Prime Money Market Fund (Cap Shrs)* 0.19
US Government MMF (Cap Shrs)* 0.01
Tax Free Money Market Fund (Inst Shrs)* 0.07
AAA-GO's** 0.32 0.51 0.68 1.20
AA-GO's** 0.57 0.80 1.08 1.66
Pre-Refunded Securities** 0.31 0.51 0.69
Treasuries 0.07 0.09 0.14 0.16 0.19 0.29 0.40 0.73
Agencies 0.06 0.09 0.11 0.16 0.17 0.20 0.39 0.61 1.20
Commercial Paper (A-1/P-1) ABCP 0.16 0.20 0.25 0.40 0.55
Commercial Paper (A-1/P-1) Financials 0.16 0.15 0.25 0.35 0.50
Commercial Paper (A-1/P-1) Industrials 0.07 0.07 0.15 0.20 0.35
Certificates of Deposit (A-1) 0.16 0.15 0.25 0.35 0.48 0.50
Time Deposits 0.16
AA Corporate Industrials 0.30 0.37 0.44 0.59 1.00 1.58
AA Corporate Financials 0.46 0.57 0.69 1.09 1.80 2.33
A Corporate Industrials 0.30 0.42 0.49 0.74 1.10 1.83
A Corporate Financials 0.51 0.62 0.84 1.19 1.95 2.51
BBB Corporate Industrials 0.48 0.62 0.74 1.29 1.65 2.43
BBB Corporate Financials 1.05 1.27 1.69 2.29 3.20 4.23
AAA-Rated Credit Card Receivables (WAL) 0.62 0.77 0.92
FOR INSTITUTIONAL INVESTORS ONLY. NOT FOR PUBLIC DISTRIBUTION.
Defining parameters of permissible investments
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Set the characteristics of each investment, such as credit quality and maximum maturity.
U.S. treasury securities
Minimum credit rating AAA/Aaa
Maximum maturity 3 months 6 months 1 year 3 years 5 years
Maximum portfolio exposure
No limit
Maximum issuer exposure
No limit
U.S. government agency obligations
Minimum credit rating AAA/Aaa
Maximum maturity 3 months 6 months 1 year 3 years 5 years
Maximum portfolio exposure
No limit 50% 25%
Maximum issuer exposure
No limit
Commercial paper (include all applicable currencies USD, EUR, GBP, JPY, etc.)
Minimum credit rating A-1+/P-1 A-1/P-1A-2/P-2
Maximum maturity 1 month 3 months 6 months 13 months
Maximum portfolio exposure
No limit 50% 25% 15%
Maximum issuer exposure
5% 3%
FOR INSTITUTIONAL INVESTORS ONLY. NOT FOR PUBLIC DISTRIBUTION.
Segmenting cash by liquidity need and profile
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This is the first step in determining your investment strategy and ensuring optimal return.
Risk profile Total balance sheet cash
Operating
Cash typically used for daily operating needs may be subject to unforeseen volatility
Requires preservation of principal
Late-day access
Same-day liquidity
Reserve
Investment horizon of 6 to 9 months or longer
Fairly static, same-day access not needed
Cash set aside for possible acquisition, stock buy backor R&D
Strategiccash
Restrictedcash
Operatingcash
Reservecash
Restricted
Balances trapped in highly regulated jurisdictions or with repatriation-related tax issues
Cash collateral tied to credit agreements or derivative contracts
Strategic
No short-term forecasted use
Cash on balance sheet that has not been historically used
Investment horizon of 1 year or longer
The above chart is for illustrative purposes only.
13
Assess your tolerance for interest rate volatility
Considerations
Do you have any tolerance for volatility?
What is your maximum acceptable realized loss in a given period?
Should you have any restrictions on gains?
What data will you need to assess potential volatility in an investment strategy?
What is an appropriate impairment policy?
14
Assess your tolerance for interest rate volatility
All data as of December 31, 2011
Total rate of return
1 Year
0.10 3 Years
0.14 5 Years
1.48 10 Years
1.95 StDev*
0.52
Frequency of negative returns (rolling)
1 Month
3.33%3 Months
0.83%1 Year
0.00%Avg 1M Negative Return
(0.01)Avg 3M Negative Return
-Avg 1Y Negative Return
-
Benchmark returns (rolling)
Period Worst Average Best3 Months 0.00 0.49 1.346 Months 0.02 1.01 2.701 Year 0.10 2.13 5.292 Years 0.11 2.40 5.153 Years 0.14 2.67 5.075 Years 1.48 3.08 5.1410 Years 1.95 3.13 3.81
BofA Merrill Lynch 3-Month Treasury Bill
Total rate of return
1 Year
0.27 3 Years
0.40 5 Years
2.06 10 Years
2.29 StDev*
0.59
Frequency of negative returns (rolling)
1 Month
1.67%3 Months
0.00%1 Year
0.00%Avg 1M Negative Return
(0.01)Avg 3M Negative Return
- Avg 1Y Negative Return
-
Benchmark returns (rolling)
Period Worst Average Best3 Months 0.03 0.57 1.826 Months 0.11 1.18 3.401 Year 0.27 2.49 6.082 Years 0.31 2.79 5.713 Years 0.40 3.06 5.375 Years 2.06 3.41 5.4310 Years 2.29 3.44 4.03
BofA Merrill Lynch 6-Month Treasury Bill
Total rate of return
1 Year
0.54 3 Years
0.72 5 Years
2.55 10 Years
2.49 StDev*
0.82
Frequency of negative returns (rolling)
1 Month
16.67%3 Months
4.17%1 Year
0.00%Avg 1M Negative Return
(0.08)Avg 3M Negative Return
(0.14)Avg 1Y Negative Return
-
Benchmark returns (rolling)
Period Worst Average Best3 Months -0.30 0.62 2.526 Months 0.15 1.29 4.151 Year 0.52 2.77 6.912 Years 0.62 3.15 7.193 Years 0.72 3.41 6.185 Years 2.38 3.73 5.9910 Years 2.49 3.76 4.34
BofA Merrill Lynch 1-Year Treasury Note
Total rate of return
1 Year
1.55 3 Years
1.55 5 Years
3.68 10 Years
3.25 StDev*
1.55
Frequency of negative returns (rolling)
1 Month
25.00%3 Months
13.33%1 Year
1.67%Avg 1M Negative Return
(0.27)Avg 3M Negative Return
(0.35)Avg 1Y Negative Return
(0.19)
Benchmark returns (rolling)
Period Worst Average Best3 Months -1.06 0.80 3.756 Months -0.33 1.67 5.951 Year -0.35 3.53 9.162 Years 0.97 3.93 8.283 Years 1.39 4.15 7.355 Years 2.68 4.37 6.5810 Years 3.22 4.38 4.93
BofA Merrill Lynch 1-3 Year Treasuries
Above data is based on 120 monthly observations. * Annualized standard deviation of monthly returns on a trailing 10-year basis.
Source: BofA Merrill Lynch; Bloomberg
15
Assess whether greater credit risk is acceptable
Considerations
Besides using agency ratings, how will you assess and monitor credit quality of potential investments/issuers?
Do you have the ability and resources in-house to assess credit quality or should you outsource?
What will be your guidelines for credit allocation?
How often will you review credit quality and your credit risk exposures?
What is the agreed course of action if a security or issuer is downgraded, put on watch or falls below your minimum credit quality standards?
Consider also how you expect to be notified of a downgrade event or threat in a timely way. Is this information that can be captured in-house or tasked to a third party?
16
Assess whether greater credit risk is acceptable
Source: Barclays Live; Bloomberg; BofA Merrill LynchPlease note that Loss Frequencies and Benchmark Returns data is based on 120 monthly observations. * Annualized standard deviation of monthly returns on a trailing 10-year basis. Charts are shown for illustrative and discussion purposes only.
Interest rate spreads can alter perceptions on credit risk
Total rate of return
1 Year
1.71 3 Years
3.58 5 Years
4.39 10 Years
3.95 StDev*
2.18
Frequency of negative returns (rolling)
1 Month
26.67%3 Months
15.00%1 Year
0.83%Avg 1M Negative Return
(0.38)Avg 3M Negative Return
(0.70)Avg 1Y Negative Return
(0.43)
Benchmark returns (rolling)
Period Worst Average Best3 Months -2.43 0.99 4.306 Months -2.19 2.05 5.761 Year -0.43 4.33 8.78
BofA ML 1-3 Yr Corp AAA rated
Total rate of return
1 Year
1.45 3 Years
4.44 5 Years
4.23 10 Years
3.90 StDev*
2.16
Frequency of negative returns (rolling)
1 Month
25.00%3 Months
16.67%1 Year
1.67%Avg 1M Negative Return
(0.43)Avg 3M Negative Return
(0.66)Avg 1Y Negative Return
(0.48)
Benchmark returns (rolling)
Period Worst Average Best3 Months -2.96 0.97 4.746 Months -2.43 2.01 7.271 Year -0.73 4.3010.51
BofA ML1-3 Yr Corp AA rated
Total rate of return
1 Year
1.67 3 Years
6.42 5 Years
3.76 10 Years
3.84 StDev*
3.64
Frequency of negative returns (rolling)
1 Month
25.00%3 Months
15.00%1 Year
8.33%Avg 1M Negative Return
(0.69)Avg 3M Negative Return
(1.82)Avg 1Y Negative Return
(5.07)
Benchmark returns (rolling)
Period Worst Average Best3 Months -10.22 0.97 7.346 Months -10.27 2.0011.321 Year -8.05 4.2516.90
BofA ML 1-3 Yr Corp A rated
Total rate of return
1 Year
2.18 3 Years
9.54 5 Years
5.86 10 Years
5.10 StDev*
3.41
Frequency of negative returns (rolling)
1 Month
24.17%3 Months
15.83%1 Year
5.00%Avg 1M Negative Return
(0.56)Avg 3M Negative Return
(1.34)Avg 1Y Negative Return
(3.35)
Benchmark returns (rolling)
Period Worst Average Best3 Months -7.48 1.27 9.516 Months -7.19 2.5915.081 Year -5.04 5.4523.11
BofA ML 1-3 Yr Corp BBB rated
basi
s po
ints
All data as of December 31, 2011
17
Assess whether to extend maturity both at the security and portfolio level
Considerations
Does the yield curve merit longer-term investment?
What proportion of the portfolio should you allocate to different maturities, given your liquidity requirements?
What should be the maximum duration for the overall portfolio?
What will be the agreed course of action if immediate liquidity requirements cannot be met?
18
Review your investment policy
How and by whom in the company will the investment policy be approved, reviewed and modified?
On what frequency will the investment policy be formally reviewed?
In what circumstances, if any, can exceptions to the investment policy be made – and how would these be approved?
Considerations
Compliance
Objective BenchmarkPermissible investments
Tax-aware investing
Credit qualityMaximum portfolio
exposures
Maximum issuer
exposuresRealized gain
Realized lossLiquidity targets
Reporting Custody
Evaluation ComplianceDisaster recovery
Periodic reviews
Investment Policy
19
Decide how your investment strategy will be executed
Do you want an investment strategy imposed and managed locally, regionally or globally?
Do you want to use in-house resources or outsource?
What will be the process and criteria for selecting and monitoring third-party providers?
What type of metrics and reports will be required and how frequently?
ConsiderationsLocal
Held to maturity Available for sale
In-house Outsource
Regional Global
Yieldversus
total return
FOR INSTITUTIONAL INVESTORS ONLY. NOT FOR PUBLIC DISTRIBUTION.
20
Wrap-up
FOR INSTITUTIONAL INVESTORS ONLY. NOT FOR PUBLIC DISTRIBUTION.
Establishing broad investment parameters
21
When developing your investment policy, consider your objectives, benchmarks and scope.
Objectives
Necessary liquidity Required preservation of capital Maximizing returns Fiduciary control Compliance Diversification
Benchmarks
Risk and volatility tolerance Investment horizon Return expectations
Scope
Global coverage – or, are all subsidiaries and corporate entities separate
Manage in-house, use external managers, or both
Segmentation differences (e.g., working capital, reserve cash and strategic cash)
Global policy – investment options in multiple currenciesand jurisdictions
FOR INSTITUTIONAL INVESTORS ONLY. NOT FOR PUBLIC DISTRIBUTION.
Monitoring your investments
22
Ongoing monitoring is essential to ensure that your portfolio remains within guidelines.
Reporting
Board of directors Senior management Accounting Frequency Format
Compliance
Approvals Updates Exceptions Remediation
Evaluation
Performance Reporting Frequency
FOR INSTITUTIONAL INVESTORS ONLY. NOT FOR PUBLIC DISTRIBUTION.
Review
1. Consider cash segmentation
2. Create a governance framework
3. Establish investment parameters, including objectives, benchmarks and scope
4. Determine permissible investments
5. Define characteristics of investments, such as credit rating and diversification by security type
6. Monitor investments
7. Ensure compliance with rigorous due diligence
23
7 steps to establishing and maintaining an effective investment policy.
FOR INSTITUTIONAL INVESTORS ONLY. NOT FOR PUBLIC DISTRIBUTION.
Conclusion
24
The “right” investment policy can vary significantly from one organization to another, depending on these factors:
Liquidity requirement
Cash flows
Comfort level
Treasuryresources
FOR INSTITUTIONAL INVESTORS ONLY. NOT FOR PUBLIC DISTRIBUTION.
Important information
25
This material is intended to report solely on the investment strategies and opportunities identified by J.P. Morgan Asset Management. Additional information is available upon request. Information herein is believed to be reliable but J.P. Morgan Asset Management does not warrant its completeness or accuracy. Opinions and estimates constitute our judgment and are subject to change without notice. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. J.P. Morgan Asset Management and/or its affiliates and employees may hold a position or act as market maker in the financial instruments of any issuer discussed herein or act as underwriter, placement agent, advisor or lender to such issuer. The investments and strategies discussed herein may not be suitable for all investors; if you have any doubts you should consult your J.P. Morgan Asset Management Client Adviser, Broker or Portfolio Manager. The material is not intended to provide, and should not be relied on for, accounting, legal or tax advice, or investment recommendations. You should consult your tax or legal adviser about the issues discussed herein. The investments discussed may fluctuate in price or value. Investors may get back less than they invested. Changes in rates of exchange may have an adverse effect on the value, price or income of investments. J.P. Morgan Asset Management is the marketing name for the asset management businesses of JPMorgan Chase & Co. Those businesses include, but are not limited to, J.P. Morgan Investment Management Inc., Security Capital Research & Management Incorporated and J.P. Morgan Alternative Asset Management, Inc.