Why diversification matters for corporate cash

Corporate treasurers diversify constantly. FX exposure is hedged across several counterparty banks, supplier contracts rarely sit with a single vendor, and even the company's pension scheme spreads its assets across equities, bonds, and property. That same instinct regularly extends to the company's own excess cash, but it doesn't always hold up under closer inspection.

It's common for treasury teams to keep the bulk of their surplus with one or two main banks, and/or place it with one or more money market funds. That can feel like diversification, since the cash sits in more than one place. 

Still, it isn't always real. Money market funds draw on a relatively narrow pool of highly rated, short-dated instruments, so funds can end up holding assets from many of the same underlying issuers without the treasurer knowing it.

Financial volatility and closer stakeholder scrutiny mean treasury teams must justify every cash decision. This article explains what diversification means for corporate cash and how to put it into practice.

What is diversification?

Diversification is about spreading exposure across several positions instead of putting everything in one place. If one position does poorly or fails, the rest of the portfolio can help absorb the loss, so the investor doesn't have 100% exposure to it.

Investors have used this idea for decades, applying it to stocks, bonds, property, and different regions. It remains the standard for building a strong investment portfolio, so most finance professionals know it well.

For corporate treasurers, this same principle applies to the company’s operating cash. But spreading cash across a few banks or money market funds reduces concentration risk only if those options are truly independent. If they all rely on the same small group of issuers, it only feels like diversification, but it is not real.

The concentration problem

Most treasury teams show diversification on paper by spreading cash across several banks or funds, but they do not always examine whether this actually reduces concentration risk. Recent research shows that about 92% still use money market funds for surplus cash, 83% use traditional bank deposits, and only 8% use the repo market for secured lending.

Money market funds spread exposure across issuers that treasurers can’t easily review one by one. The pool of eligible money market instruments is small, so that many funds may hold the same issuers. Bank deposits also concentrate risk with the bank holding the balance, and this risk is unsecured beyond the limit of the deposit guarantee scheme.

Neither approach is wrong on its own, and using both is a reasonable first step. However, without knowing the underlying issuers, treasury teams can’t say confidently how diversified their cash really is.

Portfolio and cash diversification

Portfolio diversification means spreading investments across diverse asset classes: stocks for growth, bonds for income, property for inflation protection, and cash for stability. Cash diversification is different because cash is already meant to be the stable part of the portfolio.

The aim isn’t to spread cash over asset classes, but to spread it among different issuers, instrument types, and maturities within the cash portion. For example, a treasury bill from one government, a secured deposit with one bank, and an unsecured deposit with another are all separate exposures.

This process differs from managing a typical investment portfolio, but the main idea is the same: spread risk instead of concentrating it. 

What diversified cash exposure looks like

In practice, diversifying cash means more than choosing between a bank deposit and a money market fund. Ensuring exposure to sovereign, financial and corporate issuers with varying maturities avoids pooled-fund risk. This avoids pooled-fund risks. The same setup lets treasury teams use the tri-party repo market, where collateral secures the cash instead of leaving it unsecured with one counterparty.

By onboarding once to the TreasurySpring platform, treasury teams can access more than 120 counterparties in these markets, including 10 in reverse repo format. This is much more than they could reach through direct banking relationships alone.

A cash strategy for shareholders

Diversifying cash is about identifying and managing risk and following good governance. Whether a CFO asks about treasury’s numbers, a board checks exposure limits, or an auditor reviews counterparty risk, they all want the same thing. They want a cash strategy that the treasury team can explain in terms of risk, not just the top-line yield.

By spreading exposure across highly-rated sovereigns, banks, and corporates, treasury can give a better answer than just relying on old habits. Keeping clear records of collateral and maturity for each position makes this answer even stronger. This approach also lowers the risk of a single point of failure and helps protect important banking relationships for credit lines and FX.

This is the same change that TreasurySpring’s multinational and large business clients are already making. They spread exposure across issuers without affecting their key relationships.

Building a diverse portfolio

Diversification isn’t a new idea. Most treasury teams already do some version of it by spreading cash across a few banks or funds. The mistake is thinking this alone spreads the real risk, instead of checking what is behind each position.

Treasurers already diversify FX exposure and supplier relationships without hesitation, and often think they have done the same with cash. Real diversification goes further. It means comprehending the underlying issuers behind every position, not just counting the number of banks or funds holding the cash.

Moving from a concentrated position, such as using one bank or pooled fund, to a diversified mix of sovereign, financial, and corporate exposures reduces concentration risk.

Get in touch to learn how a single onboarding can give you direct, diversified access to cash markets that banks have traditionally kept for themselves.