Corporate Cash Management:

Current Trends and Winning Strategies

Larry Fernandes, Managing Director, Business Development
Mike Rodgers, Managing Director, Institutional Fixed Income
Wells Capital Management

June 2007

Cash managers today are functioning in unprece-

dented circumstances: Despite an economic recovery
that is seven years old and significant tightening of
the mone­tary policy by the Federal Reserve from June
2004 to June 2006 — followed by an extended period
of Fed inaction — many companies are swimming
in ­liquidity. Complicating matters is a yield curve
that has been inverted since January 2006 (with the
exception of two months) and the Sarbanes-Oxley
Act that has significantly altered the way companies
can manage and report their finances.

This paper addresses how companies have reacted

to the current environment, provides insight on key
trends in liquidity management and offers strategies
for maximizing cash investments.
The current business, economic, and regulatory
environ­ments have created a complex cash manage­
ment environment for companies. Double-digit
cor­porate profit gains over the past two years, the
prolonged inverted yield curve, and the interest-rate
environment leading up to it have contributed to a
build-up of large amounts of cash on corporate bal­
ance sheets. While at record-high levels in 2005, pres­
ent cash levels are still significantly above the average.
Coupled with the aftermath of the Sarbanes-Oxley
Act of 2002, which enforced stricter regulations
around transparency and fiduciary oversight, institu­
tional investors face a challenging environment that
calls for a proactive approach to cash ­management.
Given this environment, maintaining an optimal
cash position is essential for chief financial officers
(“CFOs”) and treasurers, who have the opportunity
to improve their companies’ balance sheets through
sound, flexible cash management strategies. Some of
the key questions they are asking include:
• Given the current conditions, which vehicles are
best for short-term investment of cash?
• What is the best overall liquidity plan and strategy
for my organization?
• What are the trade-offs between outsourcing liquid­
ity management and keeping it in-house?
This paper addresses how companies are answer­
ing these questions, provides insight on key trends in
liquidity management, and offers strategies for maxi­
mizing cash management.
Current state of cash management
The current business, economic and regulatory envi-
ronments offer both opportunities and challenges for
cash managers seeking to optimize their cash positions.
Companies flush with cash
As a result of a sustained period of strong earnings
growth over the past couple of years, many compa-
nies have seen unprecedented cash flow levels and
today are flush with cash.
U.S. cash balances touched historically high levels in
2005 and have been gradually moving downward
since then. Many companies have been redeploying
surplus cash — not only in increased dividends and
merger-and-acquisition activity, but also in stock
buybacks and some capital expenditures. While com-
panies have begun using cash, they continue to carry
near record-high levels of liquid assets on their bal-
ance sheets.
Cash is cheap
Today, companies can borrow at comparatively low
rates. Cash, in other words, is “cheap.” And for an
extended period (January 2006 to March 2006 and
June 2006 to present), there’s been an “inverted yield
curve,” with shorter-term interest rates higher than
many longer-term rates. This yield curve has made
very short-term investments — including higher-yield-
ing depository products — attractive to cash manag-
ers. Treasury yields across the maturity spectrum have
hovered below the rate on Fed funds and other money
market investments since late-August 2006, amid
expectations of an interest-rate cut by the Fed.
Cash-investment policies gain popularity
A number of developments in recent years — includ-
ing enactment of the Sarbanes-Oxley Act of 2002
— have prompted many companies to adopt stricter
liquidity management policies as part of improving
financial controls. In fact, a 2006 liquidity survey by
the Association for Financial Professionals (“AFP”)
revealed that 80 percent of organizations have a writ-
ten cash investment policy.
One of the obvious reasons for developing a written
policy is that these companies have a fiduciary respon-
sibility to their shareholders. Clearly delineating cash
investment policies helps address today’s more strin-
gent transparency mandates and at the same time
provides better controls for the company.
While fewer privately-held companies develop and
maintain written cash-investment policies, there’s
every reason they should, since it can help instill a
measure of discipline into their short-term investment
practices and help maintain a solid fiscal footing.
Diversification not fully realized
The AFP survey also revealed that, while many orga-
nizations’ policies allow for the use of a significant
variety of investment vehicles for short-term invest-
ments, relatively few of those companies embrace
the opportunity to fully diversify. Survey respondents
reported their investment policies allowed for as many
as eight or more investment vehicles for short-term
investments. However, those organizations that man-
age their own cash typically make use of only two or
three short-term investment vehicles.
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The number of different investments in a company’s
short-term portfolio is often a function of an organi-
zation’s relative level of sophistication and resources.
For example, companies with fewer resources or
limited internal expertise may not have the ability to
perform credit research. They may lean toward “plain
vanilla” or more conservative investments, thereby
making use of only a small portion of the market.
To achieve a much fuller range of diversification,
many more organizations are enlisting an outside pro-
fessional investment manager to administer at least
some of their short-term portfolios.
Expanding allowable investments
One category of short-term investments that could
provide additional return, but which companies aren’t
turning to in very large numbers, includes ­investment-
grade securities at the lower end of the ratings scale.
Companies’ investment policies often dictate the levels
of investment quality that are required in order to
invest in various corporate-debt or municipal-debt
vehicles, and some policies ignore the potential viabil-
ity of BBB or even A rated investments.
These ratings may not be the highest, but the invest-
ments they represent can actually offer excellent risk/
reward characteristics. In effect, policies may establish
credit-quality requirements that could be described as
too conservative in certain instances. For instance, a
policy that forbids investment in BBB rated municipal
bonds might impose an unnecessary opportunity cost,
when you consider that such bonds have had lower
historical default rates than some AAA rated corpo-
rate debt.
“Cash plus funds” could offer a similar opportunity
for higher returns, but relatively few liquidity manag-
ers are including them in their portfolios. “Cash plus”
indicates something beyond a simple money market
fund, such as ultra-short bond funds with fluctuating
net asset values, or even what are sometimes called
“enhanced-cash” funds.
According to the AFP liquidity survey, organizations
that use cash plus funds expect an 8.6 basis point
advantage over money market funds. However, only
21 percent of large organizations and 10 percent of
smaller organizations have policies that allow cash
plus fund investments. Furthermore, investment in
cash plus funds comprised only slightly more than
one percent of all respondents’ short-term invest­
ment allocation.
The Wells Capital Management Difference
The Wells Capital Management (“WellsCap”) difference
begins with how we define “liquidity management” and
extends to our comprehensive approach to service.
Some professional investment managers narrowly define
liquidity management as investment in conventional
money market funds. Others, including WellsCap, define
liquidity management more broadly, encompassing invest-
ment vehicles with maturities that go out several years.
“Our definition of ‘liquidity management’ ranges from
overnight instruments to accounts we manage against a
much longer one- to five-year benchmark,” explains Larry
Fernandes, managing director of business development for
Wells Capital Management.
Customized approaches
One of the ways that WellsCap differentiates itself in the
liquidity management world is by taking a consultative
approach. “We work to understand each customer’s unique
situation and then team with them to develop the appro-
priate investment plan,” Fernandes says.
“Initially, we want to know the company’s organizational
structure, how much money it has, its plans for the money,
whether it has a cash flow forecast and whether it’s profit-
able,” he explains. “And in the end, we come up with a plan
tailored to their situation and objectives.”
For every account it manages, WellsCap has a performance
benchmark that it and clients can use to measure and
monitor performance. “If there are multiple managers, the
client can also benchmark us by looking at all of the man-
agers relative to each other,” Fernandes says.
Range of benefits
“Given today’s leaner treasury staffs and the major impact
of Sarbanes-Oxley, outsourcing has become a logical stra-
tegic move for many organizations,” Fernandes says.
“We can offer better credit research and analytical capabili-
ties—as well as direct access to the markets and experi-
ence in managing a wide range of cash and fixed-income
securities,” he says. “Another important component of our
service is to monitor and recommend updates to invest-
ment guidelines, manage the client’s risk and work with the
client to develop strong compliance and internal controls.”
Due to Sarbanes-Oxley mandates, transparency is critical to
any outsource relationship, Fernandes adds. “Clients need
to understand the actions we take on their behalves and
have that information reported back to them expeditiously.
Meaningful and frequent reports are a necessity.”
Comprehensive service
“Whether you have an overnight portfolio or a one- to
five-year mandate, you’ll receive the consultative advice,
the credit research, the active dialogue and the reporting
support,” says Mike Rodgers, managing director of institu-
tional fixed income relationship management for WellsCap.
“The result is less uncertainty and much less potential for
surprises along the way.”
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Investing offshore
Another growing trend is for companies to invest cash
outside the United States. Companies invest offshore
for many reasons, such as to avoid certain U.S. taxes
or to domicile an offshore insurance captive. Of
course, companies must assess the foreign tax impli-
cations of maintaining cash offshore before making
substantial investments.
Taking control with electronic trading portals
Another trend highlighted in the AFP liquidity sur-
vey is the choice made by many businesses to use an
electronic, multifamily trading portal to execute at
least some of their short-term investment transactions,
including money market mutual funds.
Outsourcing on the rise
One way to achieve sound investment management
is through outsourcing, and in the last several years,
more and more companies have been looking for
advice and guidance from professional money man-
agers. In fact, a quarter of organizations responding
to the AFP liquidity survey reported using an outside
investment manager to administer some portion of
their short-term portfolios.
Outside money ­managers can provide companies with
the market knowledge and insight needed to more
effectively diversify their short-term investments while
seeking to capture opportunities for higher returns
than they currently achieve.

This “self-service” approach is more common among
large corporations with dedicated teams who trade
frequently and can therefore more readily realize eco-
nomic gains from an electronic trading portal. Often-
times, companies that use an electronic, multifamily
trading portal complement this approach by having a
professional investment manager oversee a core por-
tion of their portfolios.
The way some companies approach liquidity man-
agement is to make “overnight” or money market
investments — representing their primary liquidity
— through the electronic, multifamily trading portal.
They then outsource to a professional investment
manager the responsibility of investing the other core
cash balances in longer-term instruments.
What to expect from outsourcing
You should have a number of critical expectations
of an investment manager and be able to measure
your investment manager’s performance using indus-
try benchmarks. Obviously, competitive investment
returns are essential, but also of great importance
is the ability of a liquidity investment manager to
provide key ongoing services: strategic consulting;
investment policy development; delivery of consistent,
informative and timely reports; and in-person invest-
ment reviews with you or other staff members.
Cash management is practiced in a fluid, dynamic
environment. A truly useful array of services includes
access to experienced money managers who will
assess and recommend strategic course corrections
in response to economic or other changes in that
environment.

The Value of Enhanced Credit Research

One of the advantages that Wells Capital Management offers is its credit-research capability and expertise. Our proprietary credit
research gives clients a more solid basis upon which to evaluate risk in the market.
Well-known institutions such as Standard & Poor’s and Moody’s Investors Service perform due diligence and publicly rate the credit
quality of debt issuers. In addition to monitoring these ratings agencies, we also perform our own credit research. We assemble
all relevant qualitative and quantitative data about the company and its business sector, and develop our own proprietary rating.
Then we monitor these issuers on an ongoing basis to ensure we change our credit scores in response to material changes in issu-
ers’ circumstances.
This proprietary credit research provides a further indication of whether a given investment is appropriate for our clients. It is an
important capability because cash managers who rely solely on the broadly acknowledged credit ratings could face unanticipated
credit deterioration on bond issues in their portfolios.
For example, WellsCap watches leveraged buyout (“LBO”) activity in the industrial sector very closely. Because an LBO leverages a
company’s balance sheet, chances are that such activity will result in a downgrade of the company’s debt rating.

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Balance sheet advice
You also want your investment manager to clearly
communicate how investment strategy affects
accounting, your balance sheet and everyday business
at your company. For example, in 2005, the Public
Company Accounting Oversight Board declared that
certain short-term investments such as auction-rate
securities must be reclassified on company balance
sheets as short-term marketable assets rather than
cash equivalents (see the box below). A good money
manager can help you evaluate the potential impact
of restating such assets on your balance sheet and
cash flow statement. Your balance sheet cash posi-
tion influences perceptions regarding your company’s
liquidity and may also have implications for compli-
ance with debt covenants that are based on cash or
cash equivalent requirements.
Classifying Investments on the Balance Sheet
With the increased scrutiny and accounting changes that
are occurring today, companies must be very careful about
how they classify investments on their balance sheets.
Recently, the Financial Accounting Standards Board
(“FASB”) has been looking to redefine “cash and cash
equivalents.” Under previous rules, when a company clas-
sified assets on the balance sheet, they were classified as
“cash and cash equivalents” and “short-term marketable
securities.”
But now FASB is dropping “cash and cash equivalents”
and redefining what “cash” means. Anything that’s not
considered “cash” now becomes a “short-term marketable
security,” effectively eliminating the classification of “cash
equivalent.”
“There’s an ongoing debate as to how certain investments
should be classified on the balance sheet, which may have
ramifications for financial-statement ratios,” says Mike
­Rodgers, managing director of institutional fixed income
relationship ­management for WellsCap.
This fluid situation with regard to classification suggests
the need for expert advice.
“Wells Capital Management can add value because, among
other things, we see what other companies are doing,”
Rodgers says. “We can benefit the companies we work
with by passing along best practices and other educated
observations.
“We make a concerted effort to stay on top of accounting
developments and trends in order to anticipate what our
clients will have to deal with and better position ourselves
to help them through that process and provide value.”
Comprehensive reporting
Today, you should expect a comprehensive report-
ing package that is tailored to your investment policy
and business needs. An investment manager can work
with you to assess your needs and formulate an array
of reports that can give you a timely, meaningful view
of your cash position. Your outsource partner’s invest-
ment in technology and reporting capabilities will
offer economies of scale that benefit most companies.
Seek active dialogue
Investment managers should employ a proactive,
consultative approach toward the relationship, includ-
ing the development of your investment policy. Your
investment policy should be a dynamic document that
will change as your company moves into different
stages. By maintaining an open dialogue with you, a
manager can guide you in making policy changes that
reflect your changing goals, objectives and circum-
stances, as well as fluctuating market factors.
For example, as your company’s tax situation
changes, regular modifications in your liquidity strat-
egy are required to minimize tax exposure and maxi-
mize after-tax return. An outsource provider should
be able to counsel you in this area.
Change: the one constant
There’s one factor in this discussion that continually
points to the need to partner with an investment man-
ager: change. It is a perpetual reason to consider hir-
ing a highly knowledgeable, experienced professional
money manager to handle vital liquidity management
throughout business and interest-rate cycles.
For many organizations, outsourcing is the most
important step you can take to preserve principal,
provide liquidity in a timely fashion and judiciously
maximize return.
For more information on the topics discussed in this paper,
contact:
Larry Fernandes
Managing Director of Business Development
Wells Capital Management
415.396.0479
larry.fernandes@wellsfargo.com
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 About Wells Capital Management
Wells Capital Management is a multi-boutique asset management firm focused on institutional clients. Our diverse and autonomous teams
provide a broad range of investment solutions to our clients. With over $193.2 billion in assets under management as of March 31, 2007, our
mission is to deliver superior investment service to each client and maintain the highest professional standards of integrity ­and competence.

Larry Fernandes
Managing Director, Business Development
Larry Fernandes is the sales manager for liquidity management services and insurance asset management at
Wells Capital Management. He entered the investment industry in 1985 and joined WellsCap in 1987, prior to the
establishment of the firm as an independent subsidiary of Wells Fargo. Before becoming sales manager, he held other
positions within the firm including portfolio management and relationship management for the liquidity manage-
ment services group. Prior to joining the firm, Larry managed the investment performance and analytics group
at Wilshire Associates, a pension fund consultant firm in Santa Monica, Calif. He holds a bachelor’s degree in busi-
ness administration from San Diego State University and a master’s degree in business administration-finance from
San Francisco State University. Larry is a member of the Association for Financial Professionals, Risk and Insurance Management Society Inc.,
the Captive Insurance Companies Association, the Vermont Captive Insurance Association, and the Hawaii Captive Insurance Council.

Michael P. Rodgers
Managing Director, Institutional Fixed Income
Mike Rodgers manages the institutional fixed income client service team for Wells Capital Management. In this
­capacity, he oversees the delivery of client communications, the development and monitoring of investment
guidelines, and strategy implementation. Prior to his current role, Mike was a relationship manager with WellsCap
for 12 years. He began his investment industry career when he joined the firm in 1992. Mike served for four years
in the United States Marine Corps with an Honorable Discharge in 1988. He holds a bachelor’s degree in business
adminis­tration-finance from the McLaren School of Business at the University of San Francisco.

Wells Capital Management (WellsCap) is a registered investment adviser and a wholly owned subsidiary of Wells Fargo Bank, N.A. WellsCap provides invest-
ment management services for a variety of institutions. The views expressed are those of the author at the time of writing and are subject to change. This
material has been distributed for educational purposes only, and should not be considered as investment advice or a recommendation for any particular
security, strategy or investment product. The material is based upon information we consider reliable, but its accuracy and completeness cannot be guaran-
teed. Past performance is not a guarantee of future returns. As with any investment vehicle, there is a potential for profit as well as the possibility of loss. For
additional information on Wells Capital Management and its advisory services, please view our web site at www.wellscap.com, or refer to our Form ADV Part II,
which is available upon request by calling 415.396.8000.

©2007 Wells Fargo Bank, N.A. All rights reserved.