Maintaining Liquidity in Corporate Cash Accounts

1. Maintaining Liquidity inCorporate Cash Accounts September 13, 2012 Marc St. Andre Senior Portfolio Manager mstandre@capitaladvisors.com

2. Capital Advisors Group • Institutional investment advisor focused on short-term cash investments and money market fund due diligence services • Founded in 1991 • Currently serves 200+ clients * • Three products/services: • Money Market Fund Research • Separate Account Management • Credit/Risk Management Oversight • Assets under management = about $7 billion* * As of August 31, 2012

3. What is Liquidity? Defining liquidity as “same day access to cash with no loss of principal” is less than straightforward: • Unlimited FDIC guarantee on bank deposits may not last forever • Same day access is engineered • Regulators are still considering floating NAV money market funds • Yields are incredibly low! • Traditional definitions of liquidity may be oversimplified.

4. Agenda • Refining Liquidity Definitions • Structuring Liquidity in Separate Accounts • Using Liquidity to Your Yield Advantage

5. Liquidity Planning – 2012 Strategic Treasurer Liquidity Survey “Liquidity” means different things to different companies. Which answer best describes the ability to forecast short-term cash? • Only 1 in 4 reported that they have highly accurate and reliable forecasts • 48% said their forecast is moderately reliable and accurate Source: Joint CAG and Strategic Treasurer 2012 Liquidity Risk Survey

6. If Matching Liabilities with Maturities Isn’t Sufficient…What Else? • The SEC can offer us some insight: • According to the SEC’s new 2a-7 definition, “Weekly Liquid Assets” means: • Cash • Securities that will mature or are subject to a Demand Feature that is exercisable and payable within five Business Days • Direct obligations of the U.S. Government Source: Amended SEC Rule 2a-7(a)(32), http://www.sec.gov/rules/final/2010/ic-29132.pdf

7. Treasuries Trade Efficiently Ask Yields, 2-Year T-Note Bid Yields, 2-Year T-Note Source: Bloomberg

8. Clarity on Interest Rate Expectations “…economic conditions […] are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.” Futures Source: Bloomberg, as of 9/7/12 FOMC Statement: www.federalreserve.gov

9. Treasury Yield Curve (as of 9/7/12) Steady rate expectations and a positive yield curve slope argue for maturity extensions

10. U.S. Treasury Securities • Efficient secondary market trading • Explicit interest rate guidance from the Fed • Positive yield curve shape

11. “Weekly Liquidity” Definition • The SEC’s revision to Rule 2a-7 offers some insight: • According to the SEC’s new 2a-7 definition, “Weekly Liquid Assets” means: • Cash • Securities that will mature or are subject to a Demand Feature that is exercisable and payable within five Business Days • Direct obligations of the U.S. Government • Government Securities that are issued by a person controlled or supervised by and acting as an instrumentality of the Government of the United States pursuant to authority granted by the Congress of the United States that: • Are issued at a discount to the principal amount to be repaid at maturity; and • Have a remaining maturity date of 60 days or less Source: Amended SEC Rule 2a-7(a)(32), http://www.sec.gov/rules/final/2010/ic-29132.pdf

12. Longer Maturity Agencies Discount Notes also Trade Efficiently Source: Bloomberg

13. U.S. Government Securities

14. Longer Maturity Agency Notes also Trade Efficiently Source: Bloomberg

15. Treasury & Agency Yield Curve (as of 9/7/12) Steady rate expectations and a positive yield curve slope argue for maturity extensions

16. What Other Securities Trade Efficiently? Commercial Paper issued by the strongest non-financial companies also trades efficiently, and can be added to our “Secondary Liquidity” category: Ask Yield, 9-month Nestle CP 0.24% Bid Yield, 9-month Nestle CP 0.28% Source: Bloomberg

17. U.S. Government Securities

18. What Other Securities Trade Efficiently? Bank CP. With very short maturities, the strongest banks can qualify as Secondary Liquidity: Ask Yields, 30-day Deutsche Bank CP 0.16% Bid Yields, 30-day Deutsche Bank CP 0.18% Source: Bloomberg

19. What Other Securities Trade Efficiently? …but with longer maturities, bid-to-ask spreads for banks widen: Ask Yield, 11-month Wells Fargo Note 0.46% Bid Yields, 11-month Wells Fargo Note 0.60% Source: Bloomberg

20. Yield Curve Including Non-Financial Corporates and Large Banks* *The selection of banks includes only the strongest large banks domiciled in stable countries, and excludes banks domiciled in less economically stable nations such as Italy, Portugal or Spain. It also excludes banks with asset quality concerns or a reduced ability to access capital markets. Yields for the types of issuers that are excluded from the list may be significantly higher. *as of 9/7/12

21. Tiered Portfolio Construction More Liquid Less Liquid

22. Sample Portfolio - Highly Variable Liquidity Needs WAM: 49 Days Wtd. Avg. YTM: 0.24% Recommended purchases do not represent actual market offerings. Securities typify those in which Capital Advisors Group invests and may differ from purchased securities. The yield presented for each security represents estimates of attainable yield levels as of 9/7/12 and may not reflect your account’s results. Account structure may differ from the recommended structure above. All information is subject to change without notice.

23. Sample Portfolio – Somewhat More Predictable Liquidity Needs WAM: 316 Days Wtd. Avg. YTM: 0.37% Recommended purchases do not represent actual market offerings. Securities typify those in which Capital Advisors Group invests and may differ from purchased securities. The yield presented for each security represents estimates of attainable yield levels as of 9/7/12 and may not reflect your account’s results. Account structure may differ from the recommended structure above. All information is subject to change without notice.

24. Sample Portfolio – Highly Predictable Liquidity Needs WAM: 360 Days Wtd. Avg. YTM: 0.51% Sample purchases do not represent actual market offerings. Securities shown may differ from purchased securities. The yield presented for each security represents estimates of attainable yield levels as of 9/7/12 and may not reflect your account’s results were CAG actually managing your money. Account structure may differ from the structure above. All information is subject to change without notice.

25. Conclusions • Clarifying the definitions of liquidity, plus a realistic assessment of the predictability of cash flows, may allow corporate treasurers to: • Set specific duration limits overall, by asset class, and by individual issuer depending on secondary market liquidity characteristics • Decrease credit risk exposures versus MMFs and Bank Deposits • Meet both planned and unexpected cash needs • Earn higher returns than money market funds

26. Q & A Maintaining Liquidity in Corporate Cash Accounts Marc St. André, Senior Portfolio Manager, Capital Advisors Group mstandre@capitaladvisors.com The information contained in the presentation has been obtained from outside sources which we believe to be reliable; however, we make no representation as to its accuracy or completeness. Nothing contained in this report should be construed as a solicitation or offer with respect to the purchase or sale of any security. All information is subject to change without notice. Graphical representations may not be drawn to precise scale. Percentage figures are rounded. This report is considered confidential and proprietary and may not be provided or disclosed to any other parties other than the intended recipient(s) without the prior written consent of Capital Advisors Group. Photocopying and redistributing this report is strictly prohibited.