Investment management

Surplus cash sits in bank accounts earning nothing until treasury puts it to work, and the rules for putting it to work form a strict hierarchy of three objectives.

Safety first: don't lose the principal. A loss of capital is a failure of treasury's core function, which rules out default risk, credit risk and unnecessary market risk — and accepts that the safest homes, government paper and bank deposits, pay the least. Liquidity second: cash may be needed tomorrow for payroll or in three months for capex, so maturities must ladder to the need, even at the cost of yield. Yield last — the residual objective. You earn what the market gives on whatever surplus remains after the first two are satisfied.

The hierarchy is enforced through a written investment policy, approved by the board or audit committee, that sets the rules before any money moves.

The policy protects in both directions. It protects the company by removing discretion — no individual can chase yield beyond the guardrails. And it protects treasury: when an investment inside the rules goes bad, the function can show it invested within the approved guidelines, which is the difference between a market loss and a career-ending one.

Short-term instruments — under a year — are the liquid, low-risk core of a treasury portfolio. In Zambia the anchor is the BoZ Treasury bill, issued for 91, 182 or 364 days at a discount to par: the safest and most liquid kwacha investment, usually the lowest-yielding — though in the 2023–24 inflation fight, T-bill yields in the mid-20s were an exceptional inversion of that rule. Around it sit call deposits (interest with near-instant access, at a price in rate), term deposits of 30–120 days (better rates for locked money, penalties for early exit), and money market funds (pooled, professionally managed, withdrawable at net asset value — still young in Zambia but growing).

Medium-term instruments — one to five years — mean bonds: government and corporate paper paying regular coupons. The extra yield buys interest rate risk, because bond prices move inversely to rates. The risk only bites if you must sell before maturity — a bond held to maturity delivers its purchase yield regardless of where prices wandered meanwhile — which is why the liquidity objective decides how much medium-term paper a portfolio can carry.

Yield to maturity, not price, is how bonds are quoted and compared — it folds the coupon, the price paid and the time to maturity into one rate that lines up against the T-bill and deposit rates on the same screen.

Every instrument that is not government paper carries credit risk — the risk the issuer defaults. Government bonds in a stable country carry a negligible amount; a bank deposit carries the bank's solvency; a corporate bond carries whatever its rating says. Since the safety objective outranks everything, the policy caps this risk two ways.

• Counterparty limits — no more than a set share of investable cash with any single bank (say 20%), no corporate paper below a set rating, no single issuer above a fixed amount.
• Diversification — spread across instruments and issuers: 50% T-bills, 30% call deposits across three banks, 20% short-dated corporate bonds is diversified; 100% in one bank's CD is a single point of failure.

The reasoning is the same as a lender's, in reverse: treasury investing surpluses is extending credit to banks and issuers, and no borrower — however sound — deserves the whole book.

Three standard shapes organise a portfolio's maturities. Laddering spreads equal amounts across 1, 3, 6 and 12 months and rolls each maturing rung to the far end — constant liquidity while harvesting the yield curve's upward slope. A bullet puts everything on one future date to meet a known cash need. A barbell splits between very short and long — say 60% in 30-day deposits, 40% in 3-year bonds — for liquidity and yield at once, with a view on rates deciding the balance.

The lecture's worked example builds a matched portfolio. A manufacturer holds ZMW 5 million: ZMW 2 million is needed in 3 months for tax, ZMW 1.5 million in 6 months for a dividend, ZMW 1.5 million is free for the year — of which 500,000 is kept as a standing liquidity reserve.

Each tranche's maturity is its need date, so nothing is ever sold early and nothing sits idle — the safety-liquidity-yield hierarchy expressed as a table. Performance is then judged against a benchmark weighted the same way as the portfolio: total return (coupons plus any mark-to-market movement) compared to what the matching mix of market rates delivered. Large deviations from benchmark signal one of two things, and both deserve investigation — skill, or risk the policy didn't intend.