Cash & Liquidity Management

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The Growth of Money Market Funds in a Changing Landscape Corporate treasurers’ approach to liquidity management has changed, especially in recent years. The first time Goldman Sachs Asset Management (GSAM) introduced stable NAV money market funds (MMFs) to treasurers in Germany four years ago only few took serious interest. While counterparty risk has always been a consideration for treasurers, this has generally been less of a priority than other forms of market risk, and has been secondary to yield in treasurers’ investment decisions.

The Growth of Money Market Funds in a Changing Landscape

by Dennis Lübcke, CFA, Executive Director, Goldman Sachs Asset Management

Introduction

Corporate treasurers’ approach to liquidity management has changed, especially in recent years. The first time Goldman Sachs Asset Management (GSAM) introduced stable NAV money market funds (MMFs) to treasurers in Germany four years ago only few took serious interest. While counterparty risk has always been a consideration for treasurers, this has generally been less of a priority than other forms of market risk, and has been secondary to yield in treasurers’ investment decisions. Consequently, most have been satisfied with bank deposits to manage their short-term liquidity, confident in the security provided by the deposit guarantee fund.

The first time we introduced stable NAV money market funds (MMFs) to treasurers in Germany four years ago only few took serious interest.

Growth of MMFs in Germany

Today, the situation has changed dramatically. While MMFs have gained traction in the US and UK over a number of years, Germany is now catching up, and the number of advocates of MMFs as an investment vehicle has increased significantly over the past few years. Counterparty risk has returned as a key priority for treasurers, extending to government or sovereign risk. However, most treasuries, even of the largest companies, don’t have the capacity to evaluate counterparty risk on a systematic basis; while they may be able to evaluate a few assets, credit analysis cannot be applied comprehensively. In some cases, treasurers have considered appointing an asset manager to invest cash on their behalf, but it is difficult to justify investment management fees when senior management thinks that treasury already has the ability to invest in low risk instruments directly, such as government debt. However, while investing directly in government securities makes sense for longer term investments, by holding to maturity, most corporates are keen to keep their cash as liquid as possible, so they need to find a different approach.

Advantages of MMFs

Corporates in Germany are now turning to MMFs as they offer a lower risk product than deposits without sacrificing liquidity, with a range of advantages:

  • MMFs are inherently diversified, as they invest in a range of assets and issuers, which would be virtually impossible for a treasurer to replicate. The key goal is the preservation of capital.
  • MMFs have a conservative approach to risk, including some funds which invest only in government debt. For example, since GSAM launched its EUR and USD government and Treasury funds in April 2008, and subsequent GBP fund, these funds have grown enormously. AAAm-rated MMFs, such as those provided by GSAM, which operate according to the IMMFA Code of Conduct (as opposed to other types of pooled investment vehicles known as money funds) are managed to a constant or accumulating NAV (net asset value).
  • MMFs, in effect, enable treasurers to outsource their credit analysis. This is a crucial advantage of MMFs over direct investments, and treasurers gain access to a vast pool of resources that they would not otherwise be able to access. For example, GSAM has a credit department of more than 250 people, including dedicated resources for MMFs and sovereign risk as at March 2009.
  • MMFs typically provide equivalent or better liquidity than deposits. Treasurers can add to, or draw down from funds on a T+1 basis or in some cases, such as GSAM’s funds, T+0 basis. This avoids the problem of having to decide the amount and tenor of a deposit, which is particularly valuable during a period when many companies have greater cash flow volatility than in the past, and are seeking to maximise liquidity.
  • MMFs yield returns are equivalent to, and often better than deposits.

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