The strategy you choose for your company’s short-term investments depends on your main objective. At its core, investment management revolves around three fundamental objectives: preserving principal (safety), maintaining liquidity and generating returns.

Because these three objectives move you in different directions, you cannot maximize all three simultaneously and must instead determine where your priority lies.

Objectives of short-term investments

Safety

Treasury professionals protect investments using three main strategies: carefully vetting counterparty credit quality, selecting stable investment instruments such as bank deposits, and diversifying across different counterparties and instrument types. Foreign exchange risk is an additional factor to consider when safeguarding investments for multinational companies.

Liquidity

When it comes to short-term investments, it’s important for a company to be able to convert assets to cash quickly without significant losses. Liquidity requirements vary widely by industry and company; for example, broker-dealers need daily access, while pension funds can work with longer horizons. Even within industries, factors such as cash flow cycles, profitability and seasonality shape liquidity needs. The key is accurate cash forecasting — the less precise your forecasts, the more important it is to maintain liquidity.

Yield and risk/return tradeoff

Any investment strategy aims to maximize returns while balancing safety and liquidity. Risk tolerance — the willingness to accept higher risk for better returns — varies by organization, shaping their approach. For short-term investments, preserving principal and maintaining liquidity typically take priority over high yields, though some might accept lower liquidity on longer-term funds in order to boost returns. Key risks for consideration include credit, counterparty, interest rate and FX exposure.

A balanced approach

Smart investment management, particularly in the short term, is about striking the right balance. This is where cash tiering comes into play. Treasury professionals often segment their cash into three distinct tiers — immediate working capital needed within 90 days, medium-term funds required within the year and longer-term cash that won't be needed for about a year — which allows for tailored investment strategies that match each segment’s time horizon and risk profile.

Success lies in understanding how the different cash segments warrant different investment approaches.

Short-term investment strategies

Your investment decisions should reflect your company’s broader investment strategy and risk appetite. Three of the primary short-term investment strategies used are buy-and-hold-to-maturity, actively managed portfolio and tax-based. They can be used individually or in combination, depending on the company’s investment needs and objectives for each cash tier.

Buy-and-hold-to-maturity strategy

The buy-and-hold-to-maturity strategy is a conservative approach to cash management that focuses on three key principles: investing in securities that align with anticipated cash needs, holding them until maturity and only reinvesting when the proceeds aren't needed for expenses.

This strategy offers predictability. When structured correctly, funds are always available when needed, and market fluctuations can be largely ignored as you hold to maturity. The trade-off is potentially missing out on more lucrative investment opportunities.

Also known as a matching strategy, this approach allows companies to align investment maturities with future cash requirements. In order to gain the potentially increased yields this strategy offers, accurate forecasting of future cash flow and capital requirements is a must. Companies typically implement this strategy conservatively, covering only a portion of projected needs to maintain flexibility in case cash is needed earlier than expected.

Actively managed portfolio strategy

The actively managed portfolio strategy (or total-return strategy) aims for enhanced returns by capturing capital gains from longer-dated instruments. This involves selling holdings when prices rise, typically when interest rates fall or credit ratings improve. It's better suited for medium- and long-term cash rather than working capital investment.

This strategy can be particularly effective when the yield curve is positive (short-term rates are lower than long-term rates). When longer-dated securities approach maturity, they can be sold at a premium since they pay above-market rates for their shortened maturity period.

The risk with this approach is that if prices don't rise as expected, the company could be locked into a longer-duration portfolio than intended. Success with this strategy requires accurate interest rate forecasting, and it should only be used for cash that won't be needed before the longest-maturity security that might be purchased.

Tax-based strategy

Tax-based investment strategies aim to minimize income taxes on investment returns; the benefits vary by location and tax regulations. For corporations in high tax brackets, tax-advantaged investments may offer better yields relative to their marginal tax rate and can be employed with both passive and active strategies.

Global organizations should look into how they can leverage tax advantages across different locations and currencies. For example, India offers tax-free infrastructure bonds, and the U.S. offers municipal securities and state-specific tax-advantaged mutual funds.

Dividend capture is another U.S. tax strategy where corporations can exclude 70-80% of dividends received from stock owned in another corporation, provided they hold the stock for at least 46 days around the ex-dividend date. This requires equity investment, making it riskier than traditional short-term investments; however, companies typically execute multiple transactions to offset potential gains and losses.

Tax-based strategies should be avoided during market downtrends or a potential macroeconomic shock or political event.

In-house vs. outsourced investment management

Once you’ve determined your objectives and risk appetite for your short-term investments, you’ll need to decide who is going to implement the portfolio. Will you manage it in-house, outsource it all or do a combination of both? Below are the advantages and disadvantages of each approach.

In-house management

When an organization opts for in-house management, it takes on the responsibility of directly overseeing its portfolio. Though the company’s investment policy provides basic guidance, your team will need to be prepared to make decisions at all times, based on current market conditions. This method is best suited for teams with the necessary investment management training and experience.

Clear documentation of responsibilities by title or name, which is updated with any personnel change, is essential to ensure accountability. Key controls for in-house management include:

• Delegation of authority matrix.
• Compliance monitoring methods for policies, procedures and internal controls.
• Performance measurement provisions with regular reporting.
• Exception management and related approval processes.
• Clear segregation of duties between investment analysts and managers.

The primary advantage of in-house management is that you retain full control over the investment process. However, the high costs of recruiting, training and retaining skilled personnel can be a significant disadvantage.

In-house management is particularly effective for organizations with small cash surpluses that need to be invested for very short periods, such as overnight. Automation tools, including sweeps to money market deposit accounts or funds, can minimize the need for investment staff.

Outsourced management

Outsourcing short-term investment management involves delegating portfolio duties to third-party providers such as asset managers, investment banks or registered investment advisors. While this approach incurs fees (typically 10–100 basis points), these costs must be weighed against the expense of building and maintaining internal expertise. External managers often bring greater resources, including access to securities research, which can be costly for in-house teams to acquire, especially under regulations like MiFID II in the EU.

The advantages of outsourcing include:

• Access to specialized expertise and research.
• Ability to tailor portfolios through separately managed accounts (SMAs) to meet specific investment needs.
• Potential for benchmarking manager performance against industry indices or other portfolio managers, and the attainment of data for fee negotiation.

The potential disadvantages include:

• Communicating investment policies and ensuring the outside manager adheres to them can be complicated, particularly when using money market funds (MMFs), though this can be overcome by using an SMA.
• Incentive structure misalignment can occur where broker-dealers prioritize their inventory over the client’s needs because they lack fiduciary duty. Alternatively, a company could hire a registered investment advisor, who has a fiduciary duty to their client.
• Compliance monitoring and due diligence require ongoing effort to ensure alignment with the organization’s investment policy.
• Using multiple managers may increase overall costs.

A combination of the two

For organizations with tiered cash strategies, a combination of in-house and outsourced management can be most effective. This approach allows working capital to be managed internally while medium- and long-term cash is handled by external portfolio managers.

• The in-house treasury team focuses on preserving principal and maintaining liquidity by placing short-term cash in low-risk instruments.
• Medium- and long-term cash can be managed through an SMA by an external manager under a pre-defined mandate, or invested in mutual funds that align with the organization's risk appetite for longer-term assets.

This method enables organizations to tailor their management approach based on cash duration and risk preferences, optimizing both control and expertise across different cash tiers.