Published: October 01, 2012
In this interview with TMI, we feature Thierry Ancona, Global Head of Corporate Clients, and Thierry Darmon, Head of Money Market and Short Term Solutions for leading asset management company Amundi. As part of a comprehensive range of asset management services, with €692.9bn under management (as of June 30, 2012) and 3,000 institutional clients, Amundi provides euro-denominated CNAV (constant net asset value) and VNAV (variable net asset value) money market funds (MMFs) for which assets total €112bn. Helen Sanders, Editor discusses some of the current issues in the money funds industry, and how corporate investment behaviour is changing.
Thierry Ancona: While many MMF providers are well-established in providing CNAV MMFs, and may now be considering introducing VNAV funds, Amundi has a long, proven track record as a leader in VNAV funds, although we also provide CNAV funds. We have over 100 risk and research professionals providing in-depth analysis and extensive risk monitoring. We are not simply product providers, but our focus is on delivering solutions that specifically meet our clients’ requirements. This represents quite a different approach from many fund managers. In particular, we recognise the importance of our role as a trusted, strategic business partner for our clients. We take the time to understand our clients’ investment objectives and constraints, and develop solutions accordingly. Over time, a company’s investment requirements will change as their business strategy evolves, alongside on-going market developments, so we work closely with our clients over the long term to ensure that these changing needs continue to be met.
Thierry Ancona: There is a popular misconception that MMFs can only be AAA-rated, CNAV funds as defined by IMMFA (Institutional Money Market Funds Association). In reality, this group of funds is relatively small compared with the wider spectrum of MMFs that have a variable NAV, although these have not typically been part of most corporates’ investment strategy in the past.
Thierry Darmon: A constant or stable NAV money market fund seeks to maintain an unchanging face value NAV (for example $1/€1 per unit/share). A variable NAV fund uses mark-to-market accounting so as the value of assets changes, the value of each share will vary a little.
Thierry Ancona: Under definitions published by the European Securities and Markets Authority (ESMA), AAA-rated IMMFA funds fall within the category of ‘short-term money market funds’. Funds that are still subject to stringent regulation and have similar investment objectives, but permit a slightly broader scope of assets for longer maturities, are defined as ‘money market funds’. These are described more fully in figure 1 (see next page). Within these categories, while short-term MMFs may be either CNAV or VNAV, MMFs under the second definition cannot have a constant NAV. Most corporates using money funds today invest in short-term MMFs, and have not yet explored the opportunities that MMFs offer.[[[PAGE]]]
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Thierry Ancona: There are two important elements in this description: firstly, that a fund is AAA-rated, and secondly, that it has a constant NAV. These two issues may be of greater or lesser importance to different investors. The stipulation in a corporate’s treasury policy that a fund must be AAA-rated reflects a security consideration. The fact that a fund has a constant NAV is a different requirement, however, relating primarily to accounting and valuation. In reality, the fact that a fund does not have a constant NAV should not be a deterrent to corporate investors, and in some cases, the opposite may apply.
Thierry Darmon: Most (but not all CNAV) funds are valued on a cost amortisation basis for all their assets, maturity is limited at 397 days. Amortised cost accounting values the asset at par at maturity, and discounts the premium on a linear basis through the life of the asset back to the purchase price. Effectively, the daily return of the fund compared with the market is stripped out of the fund portfolio for accounting purposes. There are some exceptions, however. For example, Amundi’s CNAV funds are valued on a cost amortisation basis only for maturities up to 90 days, and on a mark to market basis thereafter. When accounting for a VNAV fund, this return,is calculated on a mark-to-market basis and is added, or ‘deducted’ incrementally to the fund each day.
This distinction does not have a major implication except under extraordinary market conditions, as we saw in 2008-9, or, more recently, during the second half of 2011, for example. Maintaining a constant NAV is an objective, but is not guaranteed and where a discrepancy between the market value and the amortised cost value of the portfolio becomes material, the money market fund can no longer issue and redeem units at the stable NAV of $1/€1 per unit (i.e., ‘breaking the buck’).[[[PAGE]]]
However, any new regulations are likely to see a change in the way that CNAV funds are valued. Under policy regulation recommendations published by the International Organisation of Securities Commissions (IOSCO) in October 2012, CNAV funds need to be regulated further so that the cost amortisation method should only be used for maturities up to 90 days, while maturities from 90-397 days should be valued on a mark-to-market basis. This is the way that Amundi values its CNAV funds currently.
There are also issues to consider with respect to the potential for negative interest rates. As the dividend is stripped each day from the valuation of CNAV funds, it has not yet been determined how negative interest rates would affect the accounting and valuation of CNAV funds.
Thierry Darmon: Tax and accounting issues, along with practical reasons, are the main factors in corporate investors’ preference, and investments in CNAV and VNAV funds need to be reported separately on the balance sheet. In concrete terms, however, the investment process and guidelines may be the same, and their risk exposure comparable. It is important to focus on the more relevant distinction between short-term MMFs and MMFs, as opposed to CNAV and VNAV funds.
Thierry Ancona: MMFs are complementary, as opposed to an alternative to short-term MMFs by providing greater flexibility. For short-term cash required for working capital purposes, often termed operating cash, short-term MMFs (which include IMMFA AAA-rated funds) have a valuable role to play, with same-day access to liquidity and returns that are typically comparable with bank deposits, but with the benefit of diversification.
MMFs can fulfil the same purpose, but as there is a greater variety of funds, and as funds can invest in assets up to a 2-year maturity, they can also meet medium- or longer-term investment objectives. These funds are still strictly regulated and have stringent controls over the assets that can be included, but provide higher expected returns and greater diversification than short-term MMFs.
As an example, many large multinational corporations hold substantial surplus cash balances for future M&A, capital investment, future dividends or business contingency purposes, often described as strategic cash. Typically, treasurers invest strategic cash in instruments such as short-term bonds. Their other option, however, is to outsource this investment process to an asset manager, which offers risk controls, expertise and systems capability that far exceeds that which an individual treasury function could provide. Furthermore, the diversification of assets is far greater than direct investment can offer.
Thierry Ancona: Enhanced products are additional types of fund for investment of strategic cash. These do not fall into the MMF category as they may permit a wider range of assets and longer maturities to be invested. Their investment objective is typically to provide a higher yield, without exposing the investor to disproportionate risk. These funds are typically attractive to very specific investor groups with high levels of investment experience and expertise.
Thierry Darmon: Regulatory changes to short-term MMFs in particular will not spell the end of these funds, but corporate investors are likely to complement these funds with MMFs. This can take time as treasurers go through the process of adapting treasury policies and ensuring internal systems can support the accounting calculations. Furthermore, there are tax issues to consider in some jurisdictions. Another trend that is likely to result in the further growth of MMFs is the continued low interest rate environment. Since 2008-9, treasurers have become adept at forecasting cash flow more accurately, so the distinction between what cash is required operationally and strategic cash is clearer. Consequently, treasurers are now looking for secure, diversified investment products for their longer-term cash that provide a more competitive expected return that MMFs can offer.
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