5 Keys to Constructing an International Investment Program
By Ivan Troufanov and Linda Ruiz-Zaiko
The accumulation of cash offshore, coupled with the volatility of currency markets, make international portfolios a timely topic. From a treasurer’s perspective, there are several practical considerations when constructing an international investment program.
Global cash flow forecast: A systematic global cash forecast helps identify global cash pools that are available for target investment portfolios. Regular cash forecast updates help to avoid surprises for change in cash and target investment allocations around the globe. Treasury should establish specific targets in global cash liquidity needs that are helpful in outlining the immediate liquidity needs versus longer-term strategic cash reserves.
Global tax and repatriation strategy: Treasury should be involved in global tax and repatriation strategy planning. Maintaining a regular dialog with your global tax department helps avoid surprises that could result in poorly timed, sub-optimal global cash movements. It is critical to plan ahead with respect to sizable global repatriations and re-investments so that markets are favorable for any liquidations.
FX rate risk and hedging strategy: Together with global tax, treasury should establish a foreign exchange risk strategy for international investment portfolios. Decisions should be made as to implementing an active or passive hedging strategy, placing foreign exchange gain/loss limits, and the selections of hedging instruments such as forward contracts, options and option combinations. The strategy should be linked to the global corporate FX risk policy. Treasury should establish a consistent method of tracking FX risk strategy performance.
If hedging the portfolio’s currency exposure is permitted, it becomes important to identify the proper permissible hedging instruments. Futures contracts may be used to hedge against market risk, gain exposure to an underlying market or to hedge against interest rates. Forward contracts may be used to hedge or gain exposure to an increase in the value of an asset, currency or deposit. Options may be used to hedge or achieve exposure to a particular market instead of using a physical security to hedge against interest rates.
Local tax and regulatory requirements: Understand local tax and compliance regulations before deciding on the locations for global investment portfolios. Some jurisdictions may significantly limit the security selection available and even prohibit investments in interest bearing securities. Include local restrictions and limits in specific investment policy to ensure compliance. The liquidity and availability of investments, transaction costs and taxes should be understood. They may impact the investment maturity and turnover decisions of the portfolio.
Reporting and accounting considerations: Assess the reporting requirements, such as possible global roll-up or standalone reporting. Determine the functional currency, FX translation requirements and the complexity of FX hedge accounting.
Establishing an international investment program requires coordination among the treasury, international tax and accounting groups to develop an efficient, risk-controlled investment program. Key issues to be resolved among the parties depend on the company’s international tax structure, domiciles of the offshore entities, functional currencies or the base currency of the portfolio that may be different than the country that holds the portfolio.
Like all investment programs, the investment horizon, projected cash flows, risk profile and the intended uses of the surplus balances are key elements. The currency decision also entails coordination with the company’s hedging policy. Ivan Troufanov is assistant treasurer, BioMarin Pharmaceutical Inc. Linda Ruiz-Zaiko is president of Bridgebay Financial Investment Consultants.