by Dennis Lübcke, CFA, Executive Director, Goldman Sachs Asset Management
Introduction
Corporate treasurers’ approach to liquidity management has changed, especially in recent years. The first time Goldman Sachs Asset Management (GSAM) introduced stable NAV money market funds (MMFs) to treasurers in Germany four years ago only few took serious interest. While counterparty risk has always been a consideration for treasurers, this has generally been less of a priority than other forms of market risk, and has been secondary to yield in treasurers’ investment decisions. Consequently, most have been satisfied with bank deposits to manage their short-term liquidity, confident in the security provided by the deposit guarantee fund.
The first time we introduced stable NAV money market funds (MMFs) to treasurers in Germany four years ago only few took serious interest.
Growth of MMFs in Germany
Today, the situation has changed dramatically. While MMFs have gained traction in the US and UK over a number of years, Germany is now catching up, and the number of advocates of MMFs as an investment vehicle has increased significantly over the past few years. Counterparty risk has returned as a key priority for treasurers, extending to government or sovereign risk. However, most treasuries, even of the largest companies, don’t have the capacity to evaluate counterparty risk on a systematic basis; while they may be able to evaluate a few assets, credit analysis cannot be applied comprehensively. In some cases, treasurers have considered appointing an asset manager to invest cash on their behalf, but it is difficult to justify investment management fees when senior management thinks that treasury already has the ability to invest in low risk instruments directly, such as government debt. However, while investing directly in government securities makes sense for longer term investments, by holding to maturity, most corporates are keen to keep their cash as liquid as possible, so they need to find a different approach.
Advantages of MMFs
Corporates in Germany are now turning to MMFs as they offer a lower risk product than deposits without sacrificing liquidity, with a range of advantages:
- MMFs are inherently diversified, as they invest in a range of assets and issuers, which would be virtually impossible for a treasurer to replicate. The key goal is the preservation of capital.
- MMFs have a conservative approach to risk, including some funds which invest only in government debt. For example, since GSAM launched its EUR and USD government and Treasury funds in April 2008, and subsequent GBP fund, these funds have grown enormously. AAAm-rated MMFs, such as those provided by GSAM, which operate according to the IMMFA Code of Conduct (as opposed to other types of pooled investment vehicles known as money funds) are managed to a constant or accumulating NAV (net asset value).
- MMFs, in effect, enable treasurers to outsource their credit analysis. This is a crucial advantage of MMFs over direct investments, and treasurers gain access to a vast pool of resources that they would not otherwise be able to access. For example, GSAM has a credit department of more than 250 people, including dedicated resources for MMFs and sovereign risk as at March 2009.
- MMFs typically provide equivalent or better liquidity than deposits. Treasurers can add to, or draw down from funds on a T+1 basis or in some cases, such as GSAM’s funds, T+0 basis. This avoids the problem of having to decide the amount and tenor of a deposit, which is particularly valuable during a period when many companies have greater cash flow volatility than in the past, and are seeking to maximise liquidity.
- MMFs yield returns are equivalent to, and often better than deposits.
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Importance of MMF Provider
In addition to the generic benefits of AAA-rated MMFs, it is important to select the right provider. In Germany, as in other parts of Europe, we are seeing a strong move amongst corporate treasurers to invest in our funds. For example, assets under management for our commercial paper and government money market funds globally have now reached around $300bn, compared with $120bn 2 years ago. We see a variety of reasons for this, in addition to the fund range and technology which we provide:
Credit Analysis. The credit analysis capability at GS is a key differentiating factor. The GS Credit Department operates entirely independently of the fund managers, and produces “approved for purchase” lists which portfolio managers are mandated to follow. This process is strictly adhered to, and credit managers are not incentivised by fund performance but on the quality of their credit analysis only. We have applied this procedure since GSAM’s funds were first launched in 1981, giving our clients confidence in the long-term quality and consistency of our investment process.
Fund Size. With the positive growth in assets under management which GSAM has experienced, our MMFs are of a size that large corporations with significant cash balances can invest in our funds whilst still limiting their holdings to a relatively small percentage of the total fund size.
Flexibility. Our funds offer considerable flexibility for treasurers seeking to manage their liquidity needs. Unlike many funds typically available in Germany, our funds settle T+0, as opposed to T+1, giving treasurers same-day access to funds. In addition, our cut-off time is 14.00 in Germany, which is later than for several other fund managers, both for CP and government funds.
Conservatism. GSAM made the decision many years ago that our MMFs would not invest in direct asset-backed securities (ABS) or longer dated corporate bonds which helped more aggressive funds to earn an extra yield until 2006 but have created substantial NAV and asset volatility in some of these funds in the recent past. In 2006, this meant that our funds had lower returns but today’s situation shows that our conservative strategy and approach has, in our view, paid off. Our investment strategy has not changed and thus corporate treasurers recognise that GSAM is a “safe pair of hands” for their cash with a constant commitment to security of cash for our clients.
Relationship. Finally, although our clients often use electronic methods for trading, we maintain a close relationship so that we understand companies’ liquidity and investment management needs and can suggest the right products to match treasurers’ needs.
Continuing Focus on Government Debt
Looking ahead, we see MMFs continuing to grow in Germany with an increasing number of treasurers moving from deposits to a more diversified, secure and liquid investment strategy. Counterparty risk will continue to be a priority for treasurers, including a focus on government debt, even though many institutions have implicit or explicit government support. While retail investors’ capital investment may be protected in the case of a bank default, the situation is less clear for institutional investors.
By placing deposits with numerous German banks, many corporates in Germany still have concentrated exposure to German financials. It may be valuable to diversify this exposure further to include direct government exposure, not only in Germany but also elsewhere. Government MMFs provide diversified sovereign credit risk and set an appropriate investment period and amount within the fund but still provide daily liquidity under the stable NAV concept. Consequently, while we see government debt continuing to be attractive to investors, we see sovereign risk being more closely managed and diversified through the use of MMFs.
