The return of the all-weather asset class

Treasury Spring - Kevin Cook

Kevin Cook

Co-founder and CEO
Wednesday, Jan, 18, 2023

I’ll be honest, I found it difficult to find the right words to start my round up of 2022.

The problem is that the adjectives that seem most appropriate to describe last year (whether in terms of our business, the markets or even more generally) are words like “extraordinary”, “unprecedented”, “unexpected”, “inspiring”. But then the same words were absolutely true of 2021… and 2020… Can extraordinary things really happen regularly? Can a third year in a row of wild surprises be viewed as unprecedented? Should we start to expect major global economic and political shocks to roll in year after year?

Regrettably, I think that the answer to all of these questions is probably “yes”. There is certainly no recent precedent in the UK for transitioning through three Prime Ministers in seven weeks. Or for the near collapse of the entire pensions market. There weren’t many people that expected us to sleepwalk to the doorstep of global war in 2022. And even fewer foresaw the crippling energy crisis, supply chain decimation and food price inflation that the desperately sad war in Ukraine precipitated across the globe and, in particular, in Europe. Yet, in the face of all of these challenges, it is hard not to be inspired by the resilience and stoicism of the human race, embodied so remarkably by the people of Kyiv, the broader Ukraine and a global community that came together in empathy and love (albeit arguably too briefly) to help in whatever way they could.

From a markets perspective, whilst there certainly were people agitating for interest rate rises in the UK and the US at the beginning of 2022 (including us), anyone betting on base rates of 4.25-4.5% (US), 3.5% (UK) and 2.5% (ECB) at year-end would have got very long odds. Yet that is where we find ourselves; and there are unquestionably more rate rises to come from each of the Central Banks in these jurisdictions in the first half of 2023.

Whatever words you think appropriate to describe 2022 from a political, economic or markets perspective, they are unlikely to be particularly positive. In stark contrast, whilst the terms “extraordinary”, “unprecedented” and “remarkable” are equally applicable to the progress of our business this year, the context could not be more different.

In addition to posting stellar growth numbers in terms of clients, AUM and revenue, we also added more than 300 FTF options and four new currencies to our platform, signed partnerships with the largest global money market fund platform and the leading startup CFO network in the UK, and launched an extremely exciting collaboration with the London Stock Exchange in the sustainability space. We also saw the power of network effects really start to take hold, thanks to the hard work that we have put in with the investor community and our existing strategic alliances.

Just as importantly, we doubled the size of our brilliant team and had a huge amount of fun along the way, culminating our inaugural TreasurySpring offsite in Italy. That offsite gave us a much-needed opportunity to pause for thought, to reflect on our achievements to date, to solidify our core values and ambitions and to plan for the future. The energy, unity and happiness that were in such abundance in those few days will live long in the memory and brought me every bit as much pride as any of the milestones and contracts. The quality and diversity of our team has been critical to all of the success that we have had to date and it is the engine that will drive everything that we might achieve in the future.

The natural question is how to position our excellent progress and prospects in the context of the market – did we succeed despite, because of, or irrespective of the backdrop? My view is that the answer is a little bit of all three.

2022 was definitely the first year for a long time that “cash is king” made more headlines than “cash is trash”. As interest rates rise, bond prices naturally fall – the problem was that this year so did almost everything else, with commodities the only asset class delivering double-digit returns across the year; and that was driven in no small part by the war in Ukraine, so is hardly a success story to shout about. So, on a relative basis, holding cash looks attractive again, which generates column inches, and in turn some tailwinds for those in the cash management business.

But that really only tells a portion of the story. For me, the truth lies in the fact that for many businesses, cash is the only genuine “all-weather” asset class and that for our clients, our team and our sanity, we are trying our best to build an “all-weather” business.

Of course, the allure of cash as an asset class may be greater when interest rates are higher – indeed for those younger folk out there who have never experienced proper positive interest rates, this “money for nothing” trade can seem like some sort of alchemy! The reality though, 
is that those interest rates represent payment for an accumulation of risks, many of which have been under-priced, or even forgotten, arguably for far too long. When those risks return and others arise, as surely they will, interest rates may fall but the liquidity benefits of holding cash will still have value. And arguably more so. Cash provides a shock absorber against market or business crises, delivers flexibility in times of change; and provides the opportunity to capitalise on opportunities when others find themselves in distress. Put simply, it is the lifeblood of every business, a genuine all-weather asset which every firm should hold. And probably in higher amounts than might feel natural.

Which leads on to building an all-weather business. If 2021 was the pinnacle of venture capital exuberance, 2022 was the year it all came crashing down. Rising interest rates precipitated a massive sell off in public tech stocks, which spilled over quickly to private markets, resulting first in a slowdown and ultimately almost a shutdown of new VC investment. Too many companies had “bet the farm” on winning market share by investing hugely aggressively for growth in the belief that they were only ever a phone call away from unlimited cheap equity, And now we are seeing mass redundancies of a scale not seen since the dotcom bust.

Whilst we are relentlessly focused on growth and continue to deliver exceptional numbers, we have never subscribed to the “growth at all costs” mantra; and we have always been highly sceptical of the “tournament” dynamics that exists in some venture-backed sectors. Being slightly pessimistic fixed income folks at heart, we have long preferred investing on evidence rather than hope. That may have led to us growing marginally slower than possible at points along the way, but it has also delivered stability for our team, our clients and our investors, something for which we were all very grateful over the last 12 months. In the immortal words of Blade Runner (or possibly originally a Taoist philosopher), the candle that burns twice as bright burns half as long.

On reflection, 2022 was definitely extraordinary, unprecedented, unexpected and remarkable in many ways. But looking through a slightly wider lens, the biggest lessons for me were not new ones but rather reminders of principles that have long held true. Cash is a wonderful and essential all-weather asset class. And building an all-weather business is critical if you are in this game for the long-term.

Looking to 2023

What might 2023 have in store for us; and more broadly for our market

It promises to be another hugely exciting year for TreasurySpring. We have big plans to grow, both in our existing business and beyond.

In 2022, we cemented our proposition as a very useful weapon in the armoury of every major UK corporate treasury team; and the “go-to” solution for any venture capital backed business raising significant funds.

There is much more to come on these themes in the next 12 months as interest rates that look likely to remain elevated throughout the year offer greater opportunity for companies large and small to maximise value from the excess cash holdings.

For growth companies, these additional returns will help to extend runway, create optionality and fund future investment. For larger corporations, better returns can pay for other treasury projects that have long been on the backburner; and our ever-growing product set offers an easy way to diversify and reduce risk as we most probably move into a recessionary environment.

But building on these core sectors is only the tip of the iceberg. 2023 will see us expand our financial institutions business, selling to more banks, private equity firms, asset managers and hedge funds. We will build on our nascent international presence, increasing our sales and distribution into Europe, where positive interest rates for the first time in a decade offer huge opportunities for return-starved companies to finally earn a fair rate on their excess liquidity. And we will begin actively selling to US clients, the biggest of all cash markets, where we already have hundreds of USD products to offer.

One of the most exciting developments for me personally this year will be the launch of our sustainable corporate FTFs, in partnership with the London Stock Exchange. Whilst ESG has become a mega-trend in financial markets as a whole over the last five years, it has struggled to find a foothold in the money markets space. There are many reasons for that which I don’t have time to discuss here but suffice to say that we believe that we have at least some of the answers. And in the LSE, we have the best possible partner to deliver robust, transparent and innovative sustainable cash investment products that will bring great value to cash investors and issuers alike.

We also have big plans on the product side, increasing the breadth and quality of our existing offering, as well as adding new product options and technological functionality that will offer even more value to our existing clients, as well as enabling us to attract AUM from different types of cash investors. And from a team perspective, we expect to continue to invest in growth to support all of these opportunities, but always with an eye on our guiding “all-weather business” principles. That will lead to us moving into new office space, hopefully in Q1, to provide the best possible environment for in-person collaboration to complement our remote-first working patterns.

As for the market, I expect more and more companies to wake up to the value of cash as an all-weather asset class. In the first instance, this will probably be driven primarily by interest rates and the possibility of greater returns but I suspect that the corollary of those interest raises will lead to other dynamics as we move through the year. There are many companies that have been built/subsisted on cheap capital (debt and equity) and abundant (Central Bank-fuelled) demand. As both of those forces shift into reverse, I would be surprised if we don’t see the return of credit issues and ultimately bankruptcies. If that happens, cash returns will only become more crucial to help keep the administrators from the door. But additionally, diversification and risk reduction will once again enter the cash manager’s lexicon.

The recent troubles of Silvergate Bank in the US (following the crypto/FTX meltdown) or, closer to home, the pension fund schisms (following the KamiKwase budget) serve as a prescient reminder of how quickly credit and liquidity risks can still rock the stability of seemingly venerable and creditworthy financial institutions. Predicting where and how the next crises will emerge is impossible (at least for me) but, as last year, we remain watchful for potential “canaries” and would encourage all of those that share our views on building all-weather businesses to make sure that their cash holdings are sufficiently diversified across highly-rated financial institutions, taking collateral where possible.

On a more positive note, whilst the tails of the probability distributions can deliver unpleasant surprises, they can also be the bearer of unexpected upsides. I am sure that all of us hope for a peaceful conclusion to the war in Ukraine in 2023, as well as path back to political stability in the region. Whilst we have no ability to estimate the likelihood of that, I am certain that it would provide a huge release for financial markets that would stave off some of the downsides, at least for a while. Either way, I am expecting 2023 to be another extraordinary, remarkable and inspiring year that will bring us more than our fair share of unexpected events. But I am hugely excited about it. I wish you all a happy, healthy and successful 12 months ahead.

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