by Mark Allen, Head of EMEA Cash Sales, Goldman Sachs Asset Management
A year since the collapse of Lehman Brothers, with all that has happened since, there is still speculation about the reasons behind the crisis and the potential solutions and ways in which the financial markets need to change to avoid a similar crisis in the future. These issues are complex and may take years to fully understand and resolve; what is apparent, however, is how corporate perceptions of liquidity and risk have been transformed. Eighteen months ago, the majority of treasurers were satisfied with using short-term deposits for their short-term liquidity requirements. Today, with a far greater awareness of liquidity and counterparty risk, we see that treasurers are seeking more secure, diversified and liquid investments for their short-term cash flow. Money market funds (MMFs), specifically AAA-rated IMMFA (Institutional Money Market Funds Association) funds, are suited to addressing corporates’ liquidity and risk concerns, but in order that treasurers can be fully confident in what they are investing, there needs to be complete clarity and transparency over what a MMF comprises and its implications.
The nature of MMFs
Although the use of MMFs was already prevalent amongst corporate investors, particularly in the United States and United Kingdom, the crisis has proved a catalyst for investors of all types to select MMFs. There are a variety of reasons for this. When seeking potential investments, investors consider security, liquidity and yield. These three priorities will differ depending on how immediately a company needs to access this cash. For example, when investing short-term cash required for working capital purposes, security and liquidity will be the most important considerations. For cash that is not required immediately, yield may be a higher priority.
During the crisis, most MMFs have evidenced that they satisfy investors’ needs in these areas more successfully than equivalent investment choices such as bank deposits, as follows:
When investing in a deposit, there is 100% exposure to the counterparty so many investors have selected overnight or short-term deposits, adding to the administration workload. To address this, some investors split their cash into smaller principal amounts to invest with multiple counterparties, again adding to the amount of administration required, and yet they may still maintain a large exposure to each counterparty.