Driving performance - why liquidity management matters

Our Barclays Advisors

What are the main challenges around liquidity and capital management?

Simon Smith: Interest rates on cash are negligible at best, and penal at worst. Institutions are (for certain currencies) charging you to hold cash on their balance sheet now as costs are rising and yields continue to fall. Typically to manage liquidity our clients will look at cash or cash-like instruments, such as short-dated bonds and Money Market Funds.

In a world of falling interest rates that yield well below inflation (which is one of the side effects of quantitative easing as the central banks hoover up debt issuance), there’s not a lot of yield to play with anymore. To manage your liquidity and longer-term capital, you need a policy in place that determines the company’s appetite and objectives. You can’t just sit on cash anymore because the risk and returns don't work in the same way they used to.

Pete Downey: Yes, so in terms of market dynamics, if you're holding assets, particularly cash, and you're not managing risk, realistically what you're seeing is a fall in returns that affects performance. For longer-term capital management this becomes even more critical as the yield dictates limited returns even out past 10 years. Determining how to blend risks across capital protection, credit/counterparty, access/liquidity, and price volatility will determine the most sensible policy for our clients’ business.

Are clients awake to the opportunities and risks around liquidity and capital management?

Nick Carpentier: For shorter-term holdings clients remain fixated on having cash to hand, but this is rotating. Its utility value is seen more as a tool to support trading activities than as something that could help to enhance overall returns or manage risk.

Simon Smith: It's a historic position, but clients are waking up to the effects that zero return can have, especially while inflation continues to erode. We advocate having an appropriate policy in place, and monitoring its effectiveness We live in extraordinary times, so to continue effectively managing your business’ short and long term cash flow is imperative.

Pete Downey: That’s right, ignorance to risks can have catastrophic consequences, but all too often the default position can be ‘well let’s keep everything liquid in the event of a rainy day’, but the reality is that rainy days come along less often than you might expect (look at global GDP growth over time as an example!) and I think if clients undertook analysis on their existing assets and their liquidity requirement, they’d probably find that they can consciously make their holdings work much harder.

And of course, whether it’s a term deposit with a bank, buying an equity or a bond, it’s time in the market as opposed to timing the market that we would advocate.

So, how can Barclays help clients address these challenges?

Simon Smith: Access to the wider Barclays Group is invaluable when we’re helping to implement a treasury and investment policy, so we can bring in specialists to optimise the risk management and returns across asset classes. A common demand will be to ensure we are helping with liquidity management on both sides of the balance sheet and as a bank this is an area where we’re very strong. The ability to construct an end-to-end liquidity profile solution that spans both banking and investments makes a real difference.

Pete Downey: It’s central to our proactive approach with clients, offering a holistic rather than a silo solution, which looks at the length and breadth of a company as opposed to just one individual item on the financial statement.

Nick Carpentier: On a practical level, the range of products and the risk modelling tools at our disposal to help clients see what the potential outcomes of a decision are, even if that decision is to do nothing, makes a real difference.

In terms of those products and solutions, is innovation important for your clients?

Pete Downey: It’s really important. As we've seen the market and regulation change over the last 10 years, being innovative around how we pick and blend specific solutions that will perform across various scenarios, and how we support all the elements that surround this is critical. It’s important not to overstep the mark however; innovation that leads to little more than complexity isn't beneficial. It’s important to know our client and mirror their need.

Nick Carpentier: I agree. I think innovation is important providing it actually meets a need, rather than just simply the next shinier, brighter solution. Investment in our platform, developing risk management tools and in structuring solutions (including everything from simple onboarding, reporting and specialist support) have been particularly beneficial for clients.

Simon Smith: Innovating to provide solutions to clients that solve problems they may have thought were unsolvable, is absolutely essential. The Barclays platform is a great example of us investing in infrastructure that will make it even easier for clients to manage their liquidity and capital in one place, by allowing them to have greater visibility and control in a defined risk framework. Coupled with personal support from specialists that are experts in the industry, we think that the client outcomes are excellent.

What factors of liquidity management can be a driver of performance?

Nick Carpentier: You can't beat the yield curve without managing alternatives to cash, therefore we advise clients to look at certain parts of their holdings, then look to apportion them dependent on their eventual requirements. You may have very short-term cash holdings that are your working capital. You may have other funds assigned for expenditure 6 to 12 months down the line. And then you may have assets which you've never dipped into for the last 5 years or more.

A first step is to understand the holdings and capacity/ tolerance for risk in each area. From here it’s working with your investment specialist to determine whether it could work harder.

Simon Smith: Our breadth of offering means we have an investment suite that's capable of providing solutions for clients with different objectives; we can look to build out short-term liquidity or capital management solutions that target returns, for example. That’s where the advisers come in, providing professional advice and making sure that it’s the right product for a client, not just the right return.

Please remember the value of investments can go down as well as up, and you may get back less than your original investment.

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