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2014 Global Liquidity Management Planning and Investment Policy Review

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Current landscape Cash levelsCorporate investment behavior

Corporations are deploying cash, but cash levels are still growing

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$900

$1,000

$1,100

$1,200

$1,300

$1,400

$1,500

$1,600

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '1320%

30%

40%

50%

60%

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '1314%

16%

18%

20%

22%

24%

26%

28%

30%

Corporate Cash as a % of Current Assets

Cash Returned to ShareholdersDividend Payout Ratio

S&P 500 companies – cash and cash equivalents, quarterly

$bn, S&P 500 companies, rolling 4-quarter averages

Source: Standard & Poor’s, FRB, Bloomberg, FactSet, J.P. Morgan Securities, J.P. Morgan Asset Management. (Top left) Standard & Poor’s, FactSet, J.P. Morgan Asset Management. (Top right) M&A activity is the quarterly value of deals completed and capital expenditures are for nonfarm nonfinancial corporate business. (Bottom left) Standard & Poor’s, FactSet, J.P. Morgan Asset Management. (Bottom right) Standard & Poor’s, Compustat, FactSet, J.P. Morgan Asset Management. “Guide to the Markets – U.S.” Data are as of 9/30/13.

Eq

uit

ies

Corporate Growth

Capital Expenditures M&A Activity

$bn, nonfarm nonfinancial capex, quarterly value of deals completed

S&P 500 companies, LTM

Dividends per Share

Share Buybacks

$20

$40

$60

$80

$100

$120

$140

$160

$15

$18

$21

$24

$27

$30

$33

'00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 '11 '12 '13

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Holdings of cash and short-term investments

Source: The 2013 AFP Liquidity Survey, Association for Financial ProfessionalsJPMorgan Global Liquidity Investment PeerView (June 2013)

Change in cash and short-term investment balances over the past year: U.S. and non-U.S. cash holdings(Percentage distribution of organizations with cash and short-term investment holdings outside of the U.S.)

Within the U.S. Outside the U.S.

Much larger (+15%) 11 12

Somewhat larger 26 25

No significant change 43 49

Somewhat smaller 10 9

Much smaller (-15%) 10 5

Nearly of organizations hold some amount of their cash outside of the U.S.

The share increases to for public corporations75%

60%

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Liquidity by the numbers

Source: The 2013 AFP Liquidity Survey, Association for Financial Professionals

Among organizations increasing cash balances generated higher operating cash flow , the most common driver of higher cash holdings

of all cash balances are maintained in banks, money market funds and Treasury securities.

of organizations’ short-term investment balances are held in bank deposits

Out of organizations’ short-term investment portfolios, matures in 30 days or less

of financial professionals expect the average maturity of their organization’s short-term investment portfolio to stay the same or shorten further

Among organizations decreasing cash balances acquired a company or launched new operations, the most common driver of lower cash holdings

65%

50%

74%

80%

36%

54%

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Allocation across cash instruments

Source: JPMorgan Asset Management Global Liquidity Investment PeerView Study Results June 2013

32%

42%

50%

61%

27%

34%

25%

30%

26%

16%

18%

5%

15%

8%

7%

4%

Bank deposits/earnings credit rate – offset to bank fees

Money Market

Repos, CDs, commercial paper, corporate bonds

Other

66%

40%

35%

50%

19%

41%

34%

29%

8%

13%

22%

14%

7%

6%

9%

7%

Bank deposits/earnings credit rate – offset to bank fees

Money Market

Repos, CDs, commercial paper, corporate bonds

Other

Total

N. America

Europe

Asia

<$500M

$500M - $999M

$1B - $5B

>$5 B

Close to a third of cash assets are allocated to money market funds, with usage highest in Europe and in companies with smaller cash balances

By Region By Cash Balance

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Strategies with more yield are attracting corporate cash

Chart shown for illustrative and discussion purposes only. Source: J.P. Morgan Asset Management. Data as of December 31, 2013Opinions and statements of financial market trends that are based on current market conditions constitute our judgment and are subject to change without notice

Money Market Fund AUM ($)

0

100,000,000,000

200,000,000,000

300,000,000,000

400,000,000,000

500,000,000,000

600,000,000,000

0

10,000,000,000

20,000,000,000

30,000,000,000

40,000,000,000

50,000,000,000

60,000,000,000

70,000,000,000

JPMorgan Money Market Funds

Managed Reserves & Short Duration

Managed Reserves & Short Duration AUM ($)

A disciplined approach for evaluating investment solutions

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FOR INSTITUTIONAL/WHOLESALE AND PROFESSIONAL CLIENT USE ONLY | NOT FOR RETAIL DISTRIBUTION

Benefits of a well-executed investment policy

Ensures consistent approach in all market conditions

Provides clarity so that everyone understands the policy

Imposes transparency for internal control

Helps you meet your corporate investment goals

With consistency and clarity, an investment policy sets the strategy for your investment decisions.

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Weighing the risks and rewards for cash investments — a rigorous, ongoing, sequential process

Steps toward creating an investment policy

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Segmenting cash by liquidity need and profile

This is the first step in determining your investment strategy and ensuring optimal return.

Risk profile Total balance sheet cash

Operating

Cash typically used for daily operating needs may be subject to unforeseen volatility

Requires preservation of principal

Late-day access

Same-day liquidity

Reserve

Investment horizon of 6 to 9 months or longer

Fairly static, same-day access not needed

Cash set aside for possible acquisition, stock buy backor R&D

Strategiccash

Restrictedcash

Operatingcash

Reservecash

Restricted

Balances trapped in highly regulated jurisdictions or with repatriation-related tax issues

Cash collateral tied to credit agreements or derivative contracts

Strategic

No short-term forecasted use

Cash on balance sheet that has not been historically used

Investment horizon of 1 year or longer

The above chart is for illustrative purposes only.

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Assess your tolerance for volatility

Considerations

Do you have any tolerance for volatility?

What is your maximum acceptable realized loss in a given period?

Should you have any restrictions on gains?

What data will you need to assess potential volatility in an investment strategy?

What is an appropriate impairment policy?

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Assess whether to extend maturity both at the security and portfolio level

Considerations

Does the yield curve merit longer-term investment?

What proportion of the portfolio should you allocate to different maturities, given your liquidity requirements?

What should be the maximum duration for the overall portfolio?

What will be the agreed course of action if immediate liquidity requirements cannot be met?

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Investors with longer horizon can, over time, pick up higher returns by extending maturities

Period Worst Average Best

3 Months 0.00 0.42 1.346 Months 0.00 0.85 2.701 Year 0.05 1.74 5.292 Years 0.08 1.80 5.033 Years 0.10 1.91 4.425 Years 0.12 2.32 3.6010 Years 1.68 2.76 3.81

BofA Merrill Lynch US 3-Month Treasury Bill

BofA Merrill Lynch US 6-Month Treasury Bill

Benchmark returns,% (rolling) Benchmark returns, % (rolling)

Total rate of return (%)

1 Year 0.07 3 Years 0.10 5 Years 0.12 10 Years 1.68 StDev* 0.56

Total rate of return (%)

1 Year 0.18 3 Years 0.21 5 Years 0.31 10 Years 1.97 StDev* 0.63

Total rate of return (%)

1 Year 0.26 3 Years 0.35 5 Years 0.54 10 Years 2.07 StDev* 0.80

Frequency of negative returns (rolling)

1 Month 5.00%3 Months 2.50%1 Year 0.00%Avg 1M Negative Return (%) (0.00)Avg 3M Negative Return (%) (0.00)Avg 1Y Negative Return (%) -

Frequency of negative returns (rolling)

1 Month 3.33%3 Months 0.00%1 Year 0.00%Avg 1M Negative Return (%) (0.01)Avg 3M Negative Return (%) - Avg 1Y Negative Return (%) -

Frequency of negative returns (rolling)

1 Month 17.50%3 Months 5.00%1 Year 0.00%Avg 1M Negative Return (%) (0.06)Avg 3M Negative Return (%) (0.11)Avg 1Y Negative Return (%) - Benchmark returns, % (rolling)

BofA Merrill Lynch 1-Year US Treasury Note

Period Worst Average Best

3 Months 0.00 0.49 1.826 Months 0.04 1.00 3.401 Year 0.14 2.04 6.082 Years 0.17 2.11 5.503 Years 0.21 2.24 4.795 Years 0.31 2.67 3.9010 Years 1.97 3.08 4.03

Period Worst Average Best

3 Months -0.30 0.52 2.526 Months 0.04 1.05 4.151 Year 0.22 2.14 6.912 Years 0.25 2.24 5.843 Years 0.35 2.41 5.005 Years 0.54 2.93 4.6410 Years 2.07 3.34 4.34

BofA Merrill Lynch 1-3 Yr US Treasuries

Total rate of return (%)

1 Year 0.36 3 Years 0.78 5 Years 1.09 10 Years 2.56 StDev* 1.40

Frequency of negative returns (rolling)

1 Month 26.67%3 Months 16.67%1 Year 1.67%Avg 1M Negative Return (%) (0.21)Avg 3M Negative Return (%) (0.28)Avg 1Y Negative Return (%) (0.19)

Benchmark returns, % (rolling)

Period Worst Average Best

3 Months -1.06 0.65 3.756 Months -0.33 1.31 5.951 Year -0.35 2.66 9.162 Years 0.28 2.83 6.983 Years 0.67 3.06 5.955 Years 1.09 3.61 5.5310 Years 2.56 3.96 4.93

Source: BofA Merrill Lynch. Above data is based on 120 monthly observations. Returns for periods of 1 year or longer are annualized. * Annualized standard deviation of monthly returns on a trailing 10-year basis. Charts are shown for illustrative purposes only. All data as of December 31, 2013.

All data as of December 31, 2013

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Assess whether greater credit risk is acceptable

Considerations

Besides using agency ratings, how will you assess and monitor credit quality of potential investments/issuers?

Do you have the ability and resources in-house to assess credit quality or should you outsource?

What will be your guidelines for credit allocation?

How often will you review credit quality and your credit risk exposures?

What is the agreed course of action if a security or issuer is downgraded, put on watch or falls below your minimum credit quality standards?

Consider also how you expect to be notified of a downgrade event or threat in a timely way. Is this information that can be captured in-house or tasked to a third party?

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Risk Return Profiles for 1-3 Corporate Only Indices

BofA Merrill Lynch 1-3 Yr AAA US Corporate

BofA Merrill Lynch 1-3 Yr AA US Corporate

BofA Merrill Lynch 1-3 Yr Single-A US Corporate

Benchmark returns, % (rolling) Benchmark returns, % (rolling) Benchmark returns, % (rolling)

Total rate of return (%)

1 Year 0.87 3 Years 1.53 5 Years 2.72 10 Years 3.23 StDev* 2.05

Total rate of return (%)

1 Year 1.06 3 Years 1.81 5 Years 3.45 10 Years 3.29 StDev* 2.02

Total rate of return (%)

1 Year 1.54 3 Years 2.56 5 Years 5.04 10 Years 3.30 StDev* 3.56

Total rate of return (%)

1 Year 2.47 3 Years 3.40 5 Years 7.29 10 Years 4.64 StDev* 3.26

Frequency of negative returns (rolling)

1 Month 27.50%3 Months 16.67%1 Year 0.83%Avg 1M Negative Return (%) (0.33)Avg 3M Negative Return (%) (0.62)Avg 1Y Negative Return (%) (0.43)

Frequency of negative returns (rolling)

1 Month 25.00%3 Months 18.33%1 Year 1.67%Avg 1M Negative Return (%) (0.39)Avg 3M Negative Return (%) (0.60)Avg 1Y Negative Return (%) (0.48)

Frequency of negative returns (rolling)

1 Month 24.17%3 Months 15.00%1 Year 8.33%Avg 1M Negative Return (%) (0.69)Avg 3M Negative Return (%) (1.82)Avg 1Y Negative Return (%) (5.07)

Frequency of negative returns (rolling)

1 Month 20.83%3 Months 15.83%1 Year 5.00%Avg 1M Negative Return (%) (0.59)Avg 3M Negative Return (%) (1.29)Avg 1Y Negative Return (%) (3.35)

BofA Merrill Lynch 1-3 Yr BBB US Corporate

Source: BofA Merrill Lynch. Above data is based on 120 monthly observations. Returns for periods of 1 year or longer are annualized. * Annualized standard deviation of monthly returns on a trailing 10-year basis. Charts are shown for illustrative purposes only. All data as of December 31, 2013.

Period Worst Average Best

3 Months -2.43 0.81 4.306 Months -2.19 1.63 5.761 Year -0.43 3.33 8.782 Years 0.88 3.55 7.053 Years 1.42 3.80 6.205 Years 2.72 4.33 6.5610 Years 3.22 4.63 5.53

Period Worst Average Best

3 Months -10.22 0.85 7.346 Months -10.27 1.70 11.321 Year -8.05 3.46 16.902 Years -1.58 3.61 11.033 Years 0.48 3.79 7.795 Years 0.98 4.18 6.7210 Years 3.26 4.50 5.62

Period Worst Average Best

3 Months -2.96 0.83 4.746 Months -2.43 1.66 7.271 Year -0.73 3.39 10.512 Years 1.23 3.57 7.593 Years 1.64 3.80 6.315 Years 2.70 4.32 6.7010 Years 3.27 4.63 5.57

Period Worst Average Best

3 Months -7.48 1.17 9.516 Months -7.19 2.37 15.081 Year -5.04 4.90 23.112 Years -0.25 5.09 14.773 Years 1.38 5.17 10.425 Years 1.78 5.29 7.7410 Years 3.99 5.24 6.01

All data as of December 31, 2013

Benchmark returns, % (rolling)

17

Decide how your investment strategy will be executed

Do you want an investment strategy imposed and managed locally, regionally or globally?

Do you want to use in-house resources or outsource?

What will be the process and criteria for selecting and monitoring third-party providers?

What type of metrics and reports will be required and how frequently?

ConsiderationsLocal

Held to maturity Available for sale

In-house Outsource

Regional Global

Yieldversus

total return

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Instituting an Investment Policy

1. Consider cash segmentation

2. Create a governance framework

3. Establish investment parameters, including objectives, benchmarks and scope

4. Determine permissible investments

5. Define characteristics of investments, such as credit rating and diversification by security type

6. Monitor investments

7. Ensure compliance with rigorous due diligence

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Conclusion

The “right” investment policy can vary significantly from one organization to another, depending on these factors:

Liquidity requirement

Cash flows

Comfort level

Treasuryresources

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J.P. Morgan Asset Management

NOT FOR RETAIL DISTRIBUTION: This communication has been prepared exclusively for Institutional/Wholesale Investors as well as Professional Clients as defined by local laws and regulation.   The opinions, estimates, forecasts, and statements of financial markets expressed are those held by J.P. Morgan Asset Management at the time of going to print and are subject to change. Reliance upon information in this material is at the sole discretion of the recipient.  Any research in this document has been obtained and may have been acted upon by J.P. Morgan Asset Management for its own purpose. References to specific securities, asset classes and financial markets are for illustrative purposes only and are not intended to be, and should not be interpreted as advice or a recommendation relating to the buying or selling of investments. Furthermore, this material does not contain sufficient information to support an investment decision and the recipient should ensure that all relevant information is obtained before making any investment. Forecasts contained herein are for illustrative purposes, may be based upon proprietary research and are developed through analysis of historical public data.

There can be no assurance that the professionals currently employed by JPMAM will continue to be employed by JPMAM or that the past performance or success of any such professional serves as an indicator of such professional’s future performance or success. J.P. Morgan Asset Management is the brand for the asset management business of JPMorgan Chase & Co. and its affiliates worldwide.  This communication issued in the United States by J.P. Morgan Investment Management Inc., JPMorgan Distribution Services Inc., and J.P. Morgan Institutional Investments, Inc. member FINRA/ SIPC.   © 2014 JPMorgan Chase & Co.

Investment Management STP

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Investment Management STP

Transaction Capture• Investment details are only

input once and then flow into various the various financial systems

• Options: interfaces from investment portals, exports from bank systems, manual upload, manual input

• Benefits:• Reduced errors• Increased efficiency

Capture

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Investment Management STP

Liquidity Position• Financial systems have flexible

reporting options and are able to consolidate investment balances with bank balances and borrowing information into one overall position report

• Future dated investment related cash flows automatically appear in the cash forecast

• Benefits:• Increased efficiency• Enhanced decision making

abilities

Capture

LiquidityPosition

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Investment Management STP

Integrated Payments• Investment related payments

are automatically generating based on investment details

• Default payment details associated with each counterparty and investment type

• Multiple options for payment notification and approval workflow

Capture

LiquidityPosition

Payments

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Investment Management STP

Accounting• Financial systems

automatically generate investment accounting entries (including accruals) across multiple general ledger systems and multiple charts of accounts.

• Accounting entries generated at any frequency required (daily, weekly, monthly)

• Benefits:• Reduced errors• Increased efficiency• Timely update of GL

systems

Capture

LiquidityPosition

Payments

Accounting

Investment Policy Compliance Support

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Investment Policy Compliance Support

• System enforced approvals based on delegation of authority limits or other policy considerations

• Configuration of only approved investment types

• Notifications if maximum approved transaction amount and/or maturity exceeded

• Attachment of supporting documents to the investment transaction

• Ability to capture counterparty credit ratings

• Flexible counterparty reporting including ability to consolidate investment positions with bank account balances

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Additional Resources

J.P. Morgan Global Liquidity PeerView survey report http://goo.gl/Bl81Fa

Kyriba white paper: Treasury Mandate - A Strategic Partner for Unlocking Business Value http://kyri.ba/19sqt0R

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