Brave, New Post-Tax Reform World for Treasury Investment Managers
Members of TIMPG contemplate cash levels, external investment managers and artificial intelligence at recent meeting.
The TIMPG 2018 fall meeting sponsored and hosted by Franklin Templeton Investments in San Mateo, CA, was chock-full of valuable insights on the outlook for interest rates and the economy, portfolio optimization and other topics of interest to investment managers confronting new decisions about cash levels and deployment post tax-reform. Here are a few of the meeting’s key takeaways.
Find your spot on the spectrum. As members look to define the steady state of their cash levels, they must ask anew where they will position themselves on an investment spectrum ranging from conservative—traditional short-duration investments and few external managers—to sophisticated, meaning those with more expansive mandates and more extensive use of external managers. Several members noted that they will be looking to invest more in traditional money-market funds and in-house managed SMAs going forward and most said that they are looking to consolidate their list of external managers.
Define the steady state of your cash balances. A big question for most member companies is what their steady-state cash levels will be once they have allocated their excess cash that is no longer trapped offshore and rejiggered their capital structure. This question will get answered over the next several months for most companies and there is wide variance of opinion, even within some companies: “Our debt guy talking hundreds of millions and I’m thinking billions.” What framework will be used, what level of risk appetite and how much weight will be given to R&D, tangible vs. intangible assets and rating agency concerns?
External managers: How to keep score. Many members will be consolidating managers due to expected lower, steady-state cash levels and all seem to want to scrutinize them more. So there was keen interest in one member’s discussion of external manager scorecards and how they’re used to communicate performance to external managers—and even justify firing them. What goes into such scorecards: “credit, credit, credit,” which emphasizes the importance of using external managers’ credit research capabilities to supplement a firm’s own. Beyond credit, the scorecards note the number of good ideas the manager comes up with vs. your own and how many winning picks in the portfolio are yours vs. theirs, plus how many losers are theirs and how many they insisted on keeping after you questioned holding them.
Prepare for the new asset management ecosystem with machine learning and AI. Roger Bayston, director of investment grade bonds at Franklin Templeton, urged members to look out for the new asset management ecosystem, including a bond market built on tech platforms. One area tech-based ecosystems are showing promise is in the bank loan market, where marketplace lending is taking off. As much as $1 trillion in loans may be originated by marketplace lending (non-banks like Lending Club, Prosper, OnDeck, Marcus ad Enova) by circa 2025, Franklin Templeton predicts.