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Cash & Liquidity Management
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The Growth of Money Market Funds in a Changing Landscape

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: