Published: May 01, 2011
We have seen the SEC1 refining 2a-7 funds in the United States, ESMA2 (formerly CESR) issuing standard definitions of MMFs in Europe and IMMFA3 revising its COde of Conduct, partly in response tot eh crisis. What are your thoughts on these changes?Kathleen: IMMFA and EFAMA started working on an initiative to standardise the MMF industry a few years ago, which has since been adopted and taken one stage further by ESMA. The new definitions of Short Term MMFs (of which IMMFA funds form a subset) and MMFs offer greater clarity to investors, which is a positive development for the industry. The compliance deadlines by MMF providers (1 July 2011 for new funds, 31 December 2011 for existing funds) are aligned with the implementation of UCITS IV legislation; however, local regulators in certain countries, such as Ireland and Luxembourg have already adopted these classifications into national law.Although the introduction of new, standard definitions is a positive step forward, these are still relatively high-level in terms of weighted average life (WAL) and weighted average maturity (WAM). The IMMFA Code of Conduct provides further refinement in terms of the way in which funds are managed, which in turn encourages greater investor confidence.
Jason: One of the distinctions made by ESMA is that while MMFs, according to the new definition, must have a variable net asset value (NAV), Short Term MMFs can have either a stable or variable NAV. Most corporate investors will have a preference for a stable NAV to provide greater reassurance on the return of principal. Consequently, we are seeing greater interest in IMMFA funds as investors recognise how these products contribute to their risk and liquidity objectives.
Kathleen: The new ESMA definitions have emphasised other reasons for focusing on IMMFA funds too. For example, there is a significant difference in WAM between Short Term MMFs and MMFs. While the former can have a maximum of 60 day WAM, MMFs can have a WAM of 6 months, which makes a significant difference in the way that the fund is managed, with a greater appetite for risk.
Jason: In Europe, there has been relatively little consistency across different types of MMF compared with 2a-7 funds in the United States, with the exception of IMMFA funds. We are now seeing more commitment amongst regulators and industry associations globally to achieving universally recognised standards and definitions. This is particularly important for multinational investors seeking to use similar investment products across all the regions in which they operate.
Kathleen: Our leadership in cash management dates back to 1981, when the Fixed Income Division acquired management responsibilities for $2bn in two institutional money market portfolios. GSAM was formally established around this small but growing business. As we mark 30 years in global liquidity management, our assets have grown to $244bn, which is approximately a third of GSAM’s total AUM (as of 31 March 2011). In fact, 2011 is also a milestone here as we pioneered the industry in Europe 15 years ago, four years before IMMFA was first incorporated.
Throughout our history, we have always kept investors’ primary objectives to preserve capital, manage risk and deliver liquidity at the forefront of our investment strategy. Consequently, corporate investors select GSAM as they recognise our strong commitment to risk management and credit research. In addition to the research capabilities of our GSAM portfolio managers, we also leverage the resources of the Goldman Sachs Credit Risk Management and Advisory department, with over 330 credit professionals delivering separate and independent credit analysis.[[[PAGE]]]
Jason: For many fund providers, risk management has typically focused on the asset side with emphasis on credit and interest rate risk. In addition, here at GSAM, we recognise the importance of both sides of the balance sheet and manage risk on the liability side too. For example, an investor base that is concentrated into one region, industry or that is subject to similar economic dynamics could jeopardise the fund’s liquidity in the event of a major market or political event, or a natural disaster. GSAM actively manages both asset and liability risk, and consequently, the changes to regulations and industry guidelines have not resulted in significant modifications to the way that we manage our funds. To ensure compliance we will continue to lead the profession in our focus on risk management and addressing investor objectives.
Throughout our history, we have always kept investors’ primary objectives to preserve capital, manage risk and deliver liquidity at the forefront of our investment strategy.
Kathleen: Multinational corporations are increasingly faced with the challenge of how to manage the growing amount of cash on their balance sheets. There are various reasons for this. In some cases, as revenues improve, companies are building up a war chest of cash to take advantage of investment opportunities that arise, repay debt, return cash to shareholders or buy back stock. Some simply remain cautious and wish to avoid being caught out should access to the capital markets become constrained again in the future.
Whatever the motivation behind each organisation’s decision to hold larger cash balances, the resulting challenges are similar. Treasurers need to ensure that their counterparty risk is appropriately managed, which becomes more difficult when credit limits with a smaller number of highly rated deposit banks become fully utilised. Risk also needs to be diversified to avoid the impact of systemic risk that could affect a whole industry. Few treasuries have sufficient resources internally to perform the required level of credit research to manage a diversified investment portfolio, leading to an increasing number of treasurers working with expert providers of AAA-rated, diversified pooled MMFs that are managed according to IMMFA guidelines.
Jason: The build-up of cash on the balance sheet also means that treasurers need to structure the balance sheet appropriately. For example, companies will rarely need immediate access to all of their cash, so some can be invested in funds that do not compromise on security, but provide a higher yield in exchange for lower levels of liquidity.
Jason: Multinational corporations headquartered outside of Asia often find it difficult to repatriate cash held in accounts in parts of Asia, such as China. Increasingly, we are talking to clients about how they can leverage investment opportunities using this ‘trapped’ cash and therefore make it work harder for them and support future strategic growth in the relevant countries. As these amounts are usually relatively small compared with the balances held in the company’s home market, companies may choose to take a different investment approach than with their core funds.
Kathleen: While there undoubtedly are challenges when seeking to invest cash in different locations in a consistent way, they are not insurmountable. Working with a global provider such as GSAM with a local presence and depth of capability across key markets such as China, Korea, Brazil and India can bring major advantages and enable treasurers to adopt a truly international approach to cash investment.
Views and opinions expressed are for informational purposes only and do not constitute a recommendation by GSAM to buy, sell, or hold any security. Views and opinions are current as of the date of this article and may be subject to change; they should not be construed as investment advice.
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