Published: April 01, 2010
How have you seen corporate demand for MMFs change over recent months?
HSBC Global Asset Management is somewhat unusual amongst providers as we offer MMFs across all major markets based on our strong global presence and local expertise in each market. These include the United States, Caribbean, French domestic funds, and funds in various smaller currencies such as HKD, INR, SAR, as well as offshore funds in Europe. During the first part of 2009, we saw treasurers continuing to build up cash levels due to continuing concerns about the borrowing environment. With market liquidity returning, but with ultra-low interest rates remaining, we have seen recent net outflows from MMFs across the industry of around 11.7% since June 2009, although HSBC has seen continued robust growth across our MMF business with a 1.9% increase in assets over the same period.
However, these statistics mask some interesting trends. Firstly, we have seen treasurers’ confidence in ‘prime’ MMFs (i.e., those that invest in financial institution and corporate assets) return, which reflects a more balanced view of risk than we saw during 2008 when government funds took precedence. For example, since June 2009, USD government funds have fallen by over 28% and EUR government funds by more than 26%. In contrast, ‘prime’ offshore MMFs have seen a net increase which is particularly apparent in EUR funds which have grown by over 20% over this period. Secondly, despite low interest rates, treasurers are not chasing yield. For example, although we have witnessed a net outflow from some MMFs, this is not matched by an equivalent inflow into enhanced funds. For example, in France, while there has been a drop in ‘regulaire’ funds of over $39bn, ‘dynamique’ or enhanced funds have grown by only $7bn. It is a positive sign that treasurers have not forgotten the lessons learnt during the crisis and have found an appropriate balance in their cash investment approach.
In general, non-core currency funds tend to be local funds that could be targeted at either institutional or retail investors. With low interest rates globally, it has not been the right time to launch new funds, although this is likely to happen as interest rates rise. There are other factors influencing the introduction of new funds, however, in addition to low interest rates. For example, government intervention to support the banking industry in many countries has created market distortion which makes it difficult to assess risk objectively. Furthermore, in countries such as India and China, currency controls mean that funds in these currencies are essentially restricted to domestic investors. Overall, over such a volatile and eventful period, both fund providers and investors have kept their portfolio of funds simple, and focused more on international funds in core currencies as opposed to reaching further into local funds.[[[PAGE]]]
HSBC is very supportive of the changes to the IMMFA Code of Practice which essentially reflects the first phase of regulatory evolution, and deal mostly with housekeeping issues such as weighted average maturity, stress testing and maturity ladders. In these areas there is broad consensus amongst regulators both in Europe and United States, and the rating agencies. Consequently, these changes are not controversial and provide clarification for MMF providers and investors.
HSBC Global Asset Management has always had a conservative, risk-averse culture, and the crisis has illustrated the benefit of this strategy.
Over time, we would expect to see modifications to the regulation of MMFs that address systemic risk, specifically how the industry can be more resilient to market shocks. There are various proposals on how to achieve this, such as changing redemption levies, loss reserves etc. that are likely to be more complex and controversial.
Although the changes that have taken place so far should provide greater assurance for investors, the day to day implications of these revisions are relatively minor. It remains vitally important that investors understand the investment process undertaken by a fund manager, and ensure that they can adapt to changing market conditions. The fund manager needs to be active in managing credit, liquidity and interest rate risk, and to manage the shareholder register carefully. It can be difficult to gain an objective and transparent view of investment processes and compare these across providers. To help potential investors, we have invested significantly both in validating and enhancing our processes to reflect best-in-class, and in articulating these clearly to investors.
Corporate treasurers have a clear appreciation of what credit and liquidity risk means to their business and increasingly recognise that MMFs are a legitimate way of addressing these risks. While the specific nature of future regulatory changes is as yet unknown, we are likely to see a regulatory response that is proportionate and appropriate. It is not in central banks’ interest to frustrate corporates’ legitimate cash investment requirements, and MMFs fulfil a genuine market need and demand. However, it is in both fund managers’ and investors’ interest for the MMF industry to be as robust as possible, so although it may be difficult to find a clear consensus on the specific steps to take, the impact should be positive. As a global business, HSBC is keen to promote greater communication between regulators and encourage efforts to harmonise MMF regulations internationally.
HSBC Global Asset Management has always had a conservative, risk-averse culture, and the crisis has illustrated the benefit of this strategy. While this has consistently proved attractive to corporate investors, we have seen an increasing number of treasurers recognising the value of MMFs, and specifically of HSBC’s approach, reflected in the relative growth of HSBC funds compared with the market as a whole. Gaining a reputation for good financial management has created a virtuous circle as investors who share our financial prudence are attracted to our funds.
As we sell our funds directly to clients, HSBC Global Asset Management benefits from a direct, long-term relationship with shareholders of each fund. This commitment to maintaining direct relationships with our clients is a valuable way of managing risk, as we can maintain a close understanding of their financial objectives and requirements, and when they are likely to need to withdraw cash.
The combination of financial conservatism and vigilance in ensuring that we maintain a close appreciation of our client base has resulted in a lower volatility of HSBC Global Asset Management funds than those of other fund managers. Looking ahead, we will continue to build on the reputation, client loyalty and stability of funds for which we have become known, and to develop our international offerings, initially in CAD, for example, and then in additional currencies in the future.
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