Current and Future Developments in Government Money Market Funds
by Mark Allen, Head of International Cash Sales, Goldman Sachs Asset Management (GSAM)
In the last 18 months, investor appetite for risk across Europe has fallen sharply in response to the tumultuous events in the world’s financial markets. However, one sector has experienced significant growth amidst the extraordinary market instability. Since the onset of the liquidity crisis, global money market fund (MMF) assets have risen approximately 20% to around $4.38 trillion, with European AAA-rated money market assets totaling €427.3 billion at the end of December 2008. The investor base in MMFs has also expanded significantly.
As we look ahead to the remainder of 2009, we believe that MMFs will continue to attract investors. In particular, we see strong interest in those MMFs which are characterised by certain key features including an AAA-rating and a stable net asset value with a clear investment objective to maximise current income whilst preserving capital and maintaining liquidity. Within the MMF segment characterised by these key features, we see particular interest in government only funds. Whilst traditional ‘commercial paper’ money market strategies have been widely accepted by investors in Europe, there has also been a flight to safety which has led some investors to avoid all forms of corporate credit exposure. Consequently, we have seen the emergence of government MMFs. Although a recent phenomenon, these funds are now firmly established, and look set to remain an important element in many fund managers’ portfolios and investors’ cash management armoury.
Emergence of offshore government debt MMFs
Although onshore pooled government funds existed before the liquidity crisis, the offshore market for funds solely comprised of government debt was largely undeveloped. As investors became increasingly concerned about the vulnerability of the financial markets, GSAM saw significant client demand for pooled investment vehicles with MMF-like liquidity but no corporate credit exposure. This demand came initially from hedge fund managers and smaller asset managers with private wealth clients. The message we heard repeatedly was that while investors were happy in theory to accept, say, the risk inherent in a hedge fund manager’s principal strategy, any loss of cash could not be contemplated. These investors were also seeking complete transparency over the fund’s assets and were conducting greater due diligence when selecting a fund than perhaps they had in the past.
As a result of this investor sentiment, clients were starting to buy government debt directly to eliminate credit risk in their cash holdings. However, they still ran the risk that, in the event of having to sell, the price could be lower than when they purchased, thus leading to a capital loss. Indeed, such was the demand for European government debt on some occasions over the past 18 months that some corporates found it difficult to buy bills directly. Therefore, there was a need for pooled vehicles with a diversified portfolio, daily liquidity and a broad investor base to help mitigate this pressure on liquidity.
Investors in government MMFs
The demand for MMF-style pooled vehicles for government debt grew dramatically between late 2007 and 2008. For example, between August and October 2008, approximately $70bn flowed into government MMFs in Europe alone. Not only did we see hedge fund and private wealth clients, from whom much of the original demand had come, increase the level of their investment in government funds, but other types of investor, such as corporate clients, also became aware of, and interested in them. This included companies which would not normally have invested in MMFs, but which found government debt-based pooled investments appealing. A government MMF typically invests in highly rated (tier one) government securities and supranational securities with explicit guarantees, held directly or through tri-party repurchase agreements. A typical fund will have the same credit and maturity guidelines as traditional IMMFA AAA-rated MMFs, such as a minimum credit rating of A-1/P-1 for any individual security, a maximum weighted average maturity of 60 days and a maximum maturity of any individual security of 13 months.