Pension funds and other asset owners can limit the cash positions in their portfolios, but they cannot significantly influence other huge pools of cash sitting on the sidelines — cash idle on corporate balance sheets. This must change.
For non-financial corporations, this cash position totals more than $2 trillion held outside the United States, according to a number of estimates.
Large cash positions outside corporate needs for liquidity for pension benefit payments and other commitments are never a good investment strategy.
That cash generally is earning no alpha and no equity market beta and practically no interest at current short-term fixed-income rates.
Pension funds cannot hedge this cash, for instance, by overlaying it with equity derivatives to achieve a market return.
The cash belongs to the shareholders of the companies, foremost among them pension funds and other asset owners.
That aggregate corporate cash position equals some 30% of the combined $6.539 trillion in defined benefit and defined contribution plan assets of the 200 largest U.S. retirement plans.
The cash is a major drag on corporate performance and, as a result, on the performance of retirement plans and other asset owners.
By contrast, the average cash position of the top 200 defined benefit plans ranged between 0.6% and 2.1%, depending on the type of sponsor, and for defined contribution plans it ranged from zero to 2.1%.
Pension funds shouldn't remain passive, seeing their portfolios vulnerable to opportunity costs. As shareholders they should urge reinvestment of that huge pool of idle cash. If this cash cannot be reinvested with expectations of outperforming equity market averages, then it should be returned to shareholders.
This cash rightfully belongs to the shareholders. It's part of their assets. Pension fund executives, as fiduciaries, have an obligation to see that pension assets are invested in the interest of participants. They should see that corporate executives are likewise doing so with the corporate assets.
One complication is that much of the corporate cash is held overseas because of U.S. tax laws. Apple Inc.'s record-setting quarterly profit, reported Jan. 28, should give new attention to the issue.
Apple reported $153.3 billion in cash, cash equivalents and marketable securities on its balance sheet as of Sept. 27. Of that total, $137.1 billion was held by Apple's foreign subsidiaries outside the U.S. and subject to U.S. tax upon repatriation.
By contrast Apple has $231.8 billion in total assets on its balance sheet. The market value of its stock was $587.2 billion as of the close of the market Sept. 29. Apple's cash position is equal to 26% of the stock's market value.
That cash position earned a weighted average return of 1.11% return in the company's recently concluded fiscal year, according to its 8-K report filed Jan. 28 with the Securities and Exchange Commission.
The tax system is a complicated issue, and it, more than weak growth in the global economy, is holding back potential reinvestment of the cash. Whatever part of this cash corporations cannot reinvest with expectations of outperforming equity market averages, should be returned to shareholders in dividends or stock buybacks.
Asset owners should step up to engage federal legislators who write tax laws, and officials of the Department of the Treasury, who make and oversee tax policy, urging changes that would make it more attractive to bring the cash home.
The huge idle cash holdings also are holding back economic growth. Some companies could reinvest the repatriated cash to expand operations. If it were paid out to shareholders in dividends or stock buybacks, other companies could access it as the shareholders reinvested it.
Economic growth from this investment would bolster pension fund returns. It would also raise employment, creating new plan participants who would benefit from pension and other retirement savings programs.
Pension fund executives, sponsors and investment executives should embrace this issue. They should get behind shareholder proposals calling for companies to address the issue of their huge cash positions. Asset owners should join corporate voices in seeking reform of corporate tax policy so the idle cash can be brought back to the U.S. market at reasonable cost in terms of taxes owed.
The large cash positions held by Apple and other U.S. companies represent an opportunity cost for asset owners.
Asset owners should commit to devote as much concern to the allocation of corporate cash as they do to their own asset allocation. Raising their voices as responsible institutional investors could stimulate reform of tax and economic policy that is keeping cash bottled up, and hasten its reinvestmentto add to asset owner and economic growth. n
