Separate accounts showed up a little more distinctly when AFP asked companies where they invested funds they moved out of banks when unlimited FDIC insurance expired at the end of last year: 8% of the assets that exited bank accounts were invested in SMAs, while 22% went to Treasury money market funds, 21% to prime money funds, and 15% to Treasury or agency securities.

Thomas Hunt, AFP's director of treasury services, noted that AFP asked specifically about short-term assets and suggested companies might use separate accounts more for assets with longer maturities.

Tyler Haws, director of business development at Clearwater Analytics, which provides investment accounting and reporting, said the pros and cons of using separate accounts for short-term assets vary depending on each company's circumstances. “If I'm a company that needs all of my cash within a week or two weeks, I'm going to look at the world much differently than someone who knows they don't need 50% of their cash for the next year,” he said.

In general, money market funds “are convenient, simple and offer same-day liquidity for all my assets,” Haws said, while a separate account “is going to be completely customized to the maturity and liquidity needs I would have to meet for my business.”

Hugh Lamle, president of M.D. Sass Investors Services, a New York-based investment management firm, noted that the company controls the securities in the separately managed account. In fact, if the company has a seasonal need for cash, it could borrow against the securities in its account, Lamle said.

At a panel at the New York Cash Exchange conference in May, Bruce Guiot, the chief investment officer at Miami University of Ohio, said that investing in SMAs provides organizations with “much greater transparency and control.” Using a separate account entails setting up custodial arrangements for the securities involved, which means an extra layer of fees, Guiot said. But he argued that that setup provides additional fraud control, because it means the investor gets two separate statements each month on the account, one from the investment manager and one from the custodian

Lamle said he expects to see some money leave mutual funds for separate accounts: “Not a flood, but a trickle.” But he sees the shift having more to do with companies' interest in moving out the yield curve.

With short-term interest rates so low, many companies with excess cash have extended the maturity of their investments, venturing out to hold securities maturing in a year, or two or three years. “Often those are in separate accounts,” Lamle said, in part because few ultra-short bond funds are of sufficiently high quality to satisfy corporate investors.

The SEC is considering two changes to money fund regulations, one of which would require prime funds, which invest in short-term corporate debt, to switch from using a stable, $1-a-share net asset value (NAV) to a variable NAV. It also proposed a 2% liquidity fee on money fund redemptions if a fund's liquidity falls below a certain level.

Companies that use money funds are concerned a floating NAV would mean more work because they would have to mark their investments to market and recognize the changes in value in their financial statements. Companies are also concerned about any restrictions on redeeming the cash they invest in money funds.

But separately managed accounts don't offer a stable NAV, so using them still entails dealing with a variable NAV and marking investments to market. Observers argue, though, that the administrative burden involved is not that great.

“If you're in very, very high-grade, short-term securities, the degree of fluctuation can be controlled to a very minimal amount,” Lamle said. “The custodian is going to give [companies] a daily, weekly or monthly report marking the securities to market. Or if they're in a money market fund, they will get a report [from the money fund].”

Clearwater Analytics' Haws, pictured at left, noted that companies considering using a separate account needn't worry about the burden of marking investments to market or tracking other accounting elements such as impairment or amortization, since reporting solutions like Clearwater's handle that work for companies.

In fact, Haws said, “separate account managers have over the last few years really put together full-service offerings to make it as easy as possible—management of the assets, custody of the assets, reporting of the assets, and accounting and SEC disclosures for the assets, all in a single integrated solution.”

When it comes to liquidity, Lamle said the ability to pull money out of separate accounts depends on the type of securities the account holds. And in a separately managed account, companies needn't worry about getting caught up in a panic in which the fears of other investors in a money fund cause a rush to the exits, a situation that can disadvantage investors who are late to move, Lamle said.

Haws said treasurers considering investing in separate accounts should start by educating themselves. “Talk to managers of funds as well as separate accounts,” he said. “Learn about the pros and cons.”

Companies should determine their investment objectives and how far out the yield curve they're willing to go, and they should have “a reasonably conservative cash-flow forecast,” Lamle said.

“Then look at the tradeoff between quality and yield,” he said. “We would always advise clients to stick with the very highest quality. Even if you have a perfectly valid cash-flow forecast, things can come up to change it.”

To read about the money fund market in Europe, see Who's Afraid of Floating NAV?