Published: June 01, 2008
The last 12 months have seen the European money market fund (MMF) industry mature rapidly as it faced its first real, or to be more accurate perceived, crisis since the introduction of treasury-style funds in the late 1980s. However, whether real or perceived, the simple fact is that the credit crunch has changed the landscape for both MMFs and their investors in a fundamental way that has widespread implications for both parties. The initial reaction of many investors when the potential implications of the sub-prime crisis became apparent was a review of their fund investments to decide whether they were secure or not. Some investors did not even bother to do this but simply bailed out of MMFs because key decision makers didn’t know enough to distinguish between different types of funds and weren’t prepared to delay long enough to find out.
The reaction of those who did make the time and effort to find out depended critically on the information they received. Where there were concerns about a fund’s exposure to potentially risky investments such as asset-backed commercial paper or SIVs there was typically a net outflow of funds, even if the portfolio holdings in these asset classes were at very low levels. Funds that appeared either slow or reluctant to provide detailed information about their investment portfolios also experienced a net outflow. This was hardly surprising given that these MMFs are used by treasurers precisely because they place security and liquidity right at the top of their list of objectives with yield following on very firmly in third place. The role of treasurers is to make conservative investments to protect their organisation’s capital whilst ensuring that day to day cash flow requirements are met in an efficient and effective way. They are not there to take risks and make speculative profits for their organisations. This means that the slightest perceived threat to either the security or liquidity of their investments prompts strong and immediate action.
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So what are the major implications of the last 12 months for MMFs? One obvious development has been the reversal of the clear trend in the first half of 2007 towards increasing investments in enhanced cash funds in which minor sacrifices in security and/or liquidity are made in return for additional yield. The ensuing flight to quality has seen a significant shift back to the traditional, more secure treasury style liquidity funds in general and in particular those that are perceived to be the most secure because they are invested in government treasuries or other government debt. The brief fling with improved yields lasted only as long as there were no concerns about security, but the race between the fund providers now is not to set up enhanced yield funds but rather funds invested only in government treasuries or other government debt that offer the highest possible levels of security. This is a rational response by fund providers to the emergence of a much more sophisticated investor base in MMFs. There is now a stark understanding by investors that not all types of funds offer the same security/liquidity/yield profile and even where funds are notionally the same type, as in the case of triple-A rated, treasury style MMFs, there can actually be fundamental differences between them.
The role of treasurers is to make conservative investments to protect their organisation's capital whilst ensuring that day to day cash flow requirements are met in an efficient and effective way.
All this means that investors in MMFs are being forced to become much more informed customers. In some cases the information is needed to justify using MMFs for the first time, as a substantial number of European corporates were planning to do at the time the credit crunch hit. In other cases it is needed by treasurers in organisations that withdrew from MMFs to build the business case to get back into them; and again there are a lot of these companies around Europe at the moment, particularly those that were forced out of funds by highly nervous parents in the US. Those organisations which have remained invested in funds also typically need improved information to allow them to perform their job with due diligence and ensure that their boards and/or credit committees remain sufficiently confident of MMFs to allow continued investment in them. The problem is that the MMF industry, from the investor’s point of view, is highly fragmented. At the moment each fund has to be researched and tracked individually and any comparative studies undertaken directly by the investor. This makes the task of becoming and remaining a sophisticated investor extremely difficult, to the detriment of the industry as a whole as organisations choose to stay out of funds completely if they cannot participate in an informed way.
In these circumstances it is not surprising that there is growing momentum for the emergence of multi-fund portals offering potential and existing MMF investors a single gateway for a comprehensive view of the available market and the ability to trade on line with all the relevant funds. Increasingly these portals are being seen by many European investors, and particularly those participating in a number of funds, as the only realistic way to keep fully informed about the MMF marketplace and achieve the required level of trading efficiency in a multi-fund environment.
Meeting the needs of increasingly sophisticated investors - and their sometimes less knowledgeable overseeing boards and committees - sets multi-fund portal providers some significant challenges.
The first of these is helping potential investors to perform initial due diligence on the funds available so that they can identify those that best meet their needs. At present this is not a simple task as investors have to source the relevant information from each fund individually. Even where the necessary documentation and information is available on-line, each fund website is different and the discovery process is frequently long and difficult. In some cases the websites have been specifically designed to make finding useful documentation and information as difficult as possible in the mistaken belief that this will encourage potentially interested investors to get in touch directly. Sadly for these fund providers the evidence of our own research suggests that, in these circumstances, most interested parties will simply look elsewhere for more accessible funds.
Another major challenge, and one which has not been very well addressed by portals up until now, is a very strong preference on both the fund and investor side for a strengthening of the fund/investor relationship once an account has been opened rather than its disintermediation, which characterises most fund portal business models. Official fund documentation and performance data are important contributors to keeping investors informed but less formal communication through direct interaction between fund manager and investor is increasingly seen as being critical to having a full understanding of fund strategy and practice in a potentially volatile environment.
However, the flow of intelligence that comes from direct interaction with the fund does not remove the requirements for an increasingly wide range of hard data to meet the needs of sophisticated investors. As well as the usual range of standing data and key fund facts, investors are demanding easy access to a wide range of comparable performance data on at least a daily basis, and where appropriate intra-day. Investors expect instant access to key data such as fund size, share value, weighted average maturity and underlying investment portfolio by asset type. And they want this information across a broad range of funds, both those they trade with and others they are interested to view for comparative purposes and potential future use.
Investors also want daily current balance and dividend information so that they can keep the valuations of their portfolio of investments continuously updated. In addition they want to be able to compare relative fund performance on a net yield basis for the share classes they are invested in, reflecting any rebates they have been able to secure, and compare their fund returns with those of other investments on a gross yield basis, if necessary. At present assembling this information on a daily basis is no easy task and presenting it on a comparative basis in an effective way can be extremely time-consuming, which is why investors are increasingly looking towards multi-fund portals both to source and present this information in a consistent and automated manner.
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As investors become increasingly sophisticated they are also placing more emphasis on the need to trade electronically in a fully automated way. The MMF industry is currently one of the least technologically advanced fields of business activity as far as most treasurers are concerned, with a substantial proportion of trading still taking place by phone and fax. An increasing number of funds now have their own portals to process their own trades and some of these have been extended to offer access to a limited number of other funds. However, for a variety of reasons these have only secured limited penetration and the vast majority of trades still require significant manual intervention by all the major parties including investors, fund administrators and the funds themselves. On the investor side in particular there is growing discontent with this state of affairs and hence the major push on their part for suitable technology solutions in the form of integrated portals which offer secure automated trading from order placement through to order confirmation and settlement.
The final set of major drivers for the move towards multi-fund portals is the increasingly tight and complex regulatory environment in which institutional investors are participating in MMFs. This has ensured that compliance and audit issues have assumed a high importance in all investing organisations and virtually ensured that traditional manual approaches are unlikely to meet the requirements of an increasingly complex regulatory requirement. Investors require technology support to ensure that they adhere to internal rules and policies regarding investment practices and that individuals within their organisations operate within the constraints laid down. They need comprehensive documentation of both the process and outcome of the investments they made and just as important in a post-MiFID world, they need to be able to justify these investments in the light of the other investment opportunities that were available to them at the time. A portal that captures and documents the activities of all parties to a trade and that can recreate the available market at the time of the trade has become almost mandatory for any organisation investing in multiple funds if it is to meet its regulatory requirements in an efficient and effective way.
Until now the available portals have offered limited capabilities matched against the key requirements identified here. And this is reflected in the relatively slow penetration of portals in this area compared to others such as FX. However, a new generation of multi-fund portals is now beginning to emerge, which are specifically focused on meeting the emerging needs of sophisticated investors in a complex world. In the remainder of this article we shall review MyTreasury, a leading example of this new type of portal , to explore how it can support both investors and fund providers to the overall benefit of the industry.
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