Published: August 01, 2011
Money market funds are used by institutional investors as a treasury management solution for short-term cash balances. They are designed to deliver security of capital and liquidity, and allow investors to benefit from professional cash management services. Their usage tends to increase when investors need greater security or certainty of the liquidity of their investment. In Europe and the US, total balances invested in money market funds peaked in Q2 2009 and Q1 2009 respectively. Since that time, there has generally been a steady outflow of cash, as the appetite of investors for yield returns, and banks have begun to actively seek additional deposits. However, contrary to this general outflow, balances invested in the money market funds represented by the Institutional Money Market Funds Association (IMMFA) funds have continued to increase. Indeed, since the inception of the Association in 2000, the total assets managed by IMMFA funds have increased every year. Whereas other parts of Europe have been witnessing an outflow of assets since Q2 2009, IMMFA funds have grown by 9%. How can that be? What makes IMMFA funds so different from their continental counterparts?
Money market funds have increased in size over the years because of the fundamental benefits they provide to investors. All money market funds seek to provide security and liquidity, and the provision of these two objectives is partly achieved through the diversification of risk which a collective investment delivers. Money market funds therefore provide a viable short-term cash management solution, with access to professional cash managers. Constant net asset value (NAV) money market funds also have an additional benefit: by maintaining a constant value, the accounting and taxation rules which are applicable to any investment in such a money market fund are simplistic, more so than any investment which changes in value. If a treasurer invests a pound in a constant NAV money market fund, the proceeds upon redemption should be exactly that: a pound. This simplicity eases the administrative burden on investors, thereby increasing their attractiveness.
Constant NAV money market funds offered by IMMFA members also benefit from having a triple-A rating from one or more of the independent credit rating agencies (Fitch Ratings, Moody’s Investors Service and Standard & Poor’s). This rating is an independent opinion on the ability of the fund to provide security and liquidity, with the triple-A rating being the highest which can be awarded. This is further supporting evidence that IMMFA funds are able to deliver against their objectives.
Given these benefits which IMMFA funds provide, they are used by a variety of investors from across the globe. This breadth in both the type and location of investors is testament to the success of the product in delivering against its objectives.
If a treasurer invests a pound in a constant NAV money market fund, the proceeds upon redemption should be exactly that: a pound.
As we track the location of investors in IMMFA funds, it is clear that there is increasing investment from those locations which have historically favoured the variable NAV money market fund model. Within IMMFA funds, the proportion of investment received from European investors (excluding the UK) where variable NAV money market funds have historically been used, increased from 30.0% to 31.4% from December 2009 to June 2010, during which period the total assets managed in IMMFA funds increased by 3%, making this increased contribution more sizeable in real terms. The growth included French based investors, who increased their relative share of IMMFA funds from 0.59% in December 2009 to 0.85% in June 2010. The French market has historically been the largest market for money market funds in Europe, but in recent months, IMMFA funds have grown larger than their French counterparts (at December 2010, the French market totalled €394bn, whereas the IMMFA market totalled €466bn).
Some of this overall growth may be attributable to the fact that the European market for constant NAV money market funds is less mature than that in the US. Whereas constant NAV money market funds have been in existence in the US for 40 years, they did not arrive in Europe until the mid-1990s. The European market can therefore be seen as still developing when compared to its US cousin. This helps to explain some of the additional investment received in IMMFA funds in recent years as greater numbers of treasurers – including some who have historically used other money market funds – become familiar with the product and place cash.[[[PAGE]]]
The J.P. Morgan Global Cash Management Survey for 2010 reinforces this perception, highlighting that the US continues to witness a greater volume of corporate cash being placed in money market funds. The survey revealed that in North America, 41% of corporate treasurers rank money market funds as their most used by size of asset allocation, whereas in Europe and Asia, bank deposits are favoured by 58% of treasurers as they preferred cash management tool. If the European and Asian markets for money market funds continue to mature along the same lines as in the US, there should be continued growth until such time as there is a similar proportion of corporate cash invested in European and US money market funds.
If the popularity of IMMFA funds is to continue, the industry and the investors in the product will need to address some outstanding questions. Significant alterations have already been made to the product, which have improved its robustness and increased the ability of money market funds to continue to operate in stressed markets. However, questions continue to be asked about whether further changes to the product are necessary. These questions stem from regulators who wish to reduce risk within the financial system, including any evident within the shadow banking sector. Shadow banking includes any non-bank which may perform bank-like activities. For money market funds, the interest of regulators relates to the ability of these funds to provide instant access even though they purchase longer-dated securities – or maturity transformation as it is known.
One of the solutions which has been suggested previously to reduce risk associated with money market funds is to require all funds to convert to a variable NAV. Under this model, which already operates throughout Europe, all variations in price are passed instantly to the investor.
However, experience has shown that a variable NAV model is not protected from investor behaviours. In the event of any concerns associated with a variable – or constant – NAV money market fund, investors will seek to redeem their holdings to protect themselves from losses. We have to remember that cash placed in a money market fund is not cash which any investor is prepared to lose. A variable NAV model does not prevent large-scale redemption activity, or its consequent impact on the wider financial system, and should not be viewed as the solution to regulators’ concerns. Despite the best intentions of the industry and its regulators, no single solution has been identified which would retain the product’s function and usefulness whilst also satisfying regulators that any risk to the wider financial system has been sufficiently mitigated.
We have witnessed the continued growth of constant NAV money market funds in Europe for a number of reasons. The fundamental benefit of diversification of risk is one which will exist in all markets, and thus money market funds are a viable treasury management solution for corporate treasurers. We must as an industry ensure that any changes to the product which are proposed are amenable to investors, thereby facilitating the continued use of the product. If any solution that is delivered generates a product which investors do not or cannot use, the continued growth of money market funds will halt, and their ability to enhance and deepen the money markets will also cease. These are not outcomes which any regulator wishes, and therefore there is an imperative need to ensure that the interests of all parties are considered as any proposal is tabled.
How Thought Leadership Can Reduce the Cost of Sales by Patrik Havander, Havander & Partners A focused attention on the costs incurred by the global sales and marketing processes is becoming increasingly important for corporate banks and their transaction banking departments. While the client/bank relationship remains vital, research has shown that in fact relationship selling […]
