A new report by Moody's Investors Service says the interest in Chinese RMB money market funds of among global asset managers is growing; however, hurdles remain in this still developing market. Also in the news, Vanguard has joined the list of money managers launching ultra-short bond funds. The Moody's report, "Global Asset Managers Tap Growth of China Money Market Funds," states, "Over the past decade, firms including JPMorgan Asset Management, HSBC Global Asset Management, BNP Paribas Investment, Invesco, and Deutsche Asset Management have formed joint ventures with local Chinese money market fund (MMF) managers. These international joint ventures are providing an alternative for Chinese companies and multinational corporations with Chinese operations seeking to invest cash across different types of investments beyond bank deposits. In the process, global asset managers are gaining access to a larger pool of potential clients," writes Soo Shin-Kobberstad, vice president, senior analyst at Moody’s, who wrote the report along with Evangelia Gkeka, analyst.
The report explains, "A rising tide of institutional cash in China is driving demand for Renminbi (RMB) money-market funds as treasurers seek alternatives to simple bank deposits. The surge of growth in multinational corporations in China over the past decade has fuelled demand for short-term investments, as companies look for safe instruments to hold their increased liquidity. While there is limited availability of granular data about joint-ventured Chinese MMFs, it is clear the industry has grown substantially since it was started 10 years ago, and assets under management held in more than 100 MMFs totaled almost 900 billion Renminbi (RMB) as of January 2014."
Note: See Crane Data's Oct. 6 News article, "Worldwide MF Assets Drop Slightly in 2Q; China, India Show Big Jumps," says "China continued its dramatic money fund growth in Q2 of 2014. The 6th largest money fund country saw assets jump again. China now reports $256.7B in total, up $22.3B (9.5%) in Q2 and up a massive $207.2 billion (418.6%) over the last 12 months."
Moody's adds, "Until recently, exchange controls restricted cross-border flows in and out of China, leading to large amounts of cash building up in multinational corporations' local subsidiaries. The recent liberalization of trade and capital flows and growing internationalization of the RMB have not only raised the volume of RMB trades but also bolstered investor confidence in the domestic capital market, leading more multinational corporations to manage their liquidity and strategic cash locally."
The commentary continues, "Global asset managers will benefit from experience in global money markets and brand reputation among multinational companies. International firms, which operate their Chinese MMFs through joint ventures with local firms, have benefited from international recognition that has helped them attract more assets. JPMorgan Asset Management's MMF, which is operated through its China Investment Fund Management Company, Ltd. (CIFM), provides a clear example of the sector's rapid growth, having nearly tripled its AUM between 2011 and 2013 to approximately RMB 35 billion. For global asset managers, MMFs offer cross-selling opportunities. JPMorgan and Invesco are leveraging their access to MMF clients to offer longer-duration fixed income funds and other investment products, while HSBC is cross-selling corporate banking and treasury management services in addition to asset management products."
Further, "China’s MMF market remains underdeveloped, which will constrain international firms' ability to manage risks fluidly. At present, China's MMF market structure does not offer the same degree of diversification and credit quality that investors can find in the US or Europe. Key challenges include the limited diversity of issuers, comparatively high price volatility and shallow liquidity of underlying securities. This has created an opportunity for global asset managers to import international standards and best practices. At the same time, international asset managers will face the challenges of managing MMFs given relatively riskier domestic market features."
In other news, Vanguard is launching a new fund in the ultra-short bond fund space. In recent months, both Invesco and Western Asset have also come out with new ultra short bond funds. (See our Oct. 14 News "UBS Brokerage Latest to Push Enhanced Cash, Ultra Short Bond Options".) Vanguard's press release says, "The new actively managed fund will round out Vanguard's taxable bond fund lineup, which comprises 10 active funds and 12 index funds covering the broad quality and duration spectrum. The fund will invest in high-quality bonds, including a combination of money market, government, and investment-grade corporate securities with an expected average rating of Aa and duration of approximately one year." (Note: Crane Data will be releasing the first "beta" issue of its new Bond Fund Intelligence, which will track the ultra-short bond sector, later today.)
Vanguard CEO Bill McNabb comments, "Vanguard Ultra-Short-Term Bond Fund is a low-cost and diversified option for investors seeking to augment the bond component of a balanced portfolio. It will afford investors the opportunity for further duration diversification. The new fund, however, should not be used as a money market fund substitute, as it will subject investors to some level of principal risk."
The release continues, "The fund, which is expected to be available in the first quarter of 2015, will offer low-cost Investor Shares and Admiral Shares. Investor Shares, with an estimated expense ratio of 0.20%, will require a minimum initial investment of $3,000. Admiral Shares, with an estimated expense ratio of 0.12%, will require a minimum initial investment of $50,000. Gregory S. Nassour, CFA and David Van Ommeren, principals and senior portfolio managers in Vanguard Fixed Income Group, will co-manage the new fund."
"The Independent Adviser for Vanguard Investors" newsletter, run by Daniel Wiener, also reported on the news. Wiener writes, "What's most interesting about this new option is not that Vanguard is finally offering a low-risk way of dealing with rising interest rates, but that it has argued for some time that risks of investing in short-term or even intermediate-term bond funds are mitigated by the value of rising monthly distributions -- particularly when they are reinvested. The appeal of an ultra-short bond fund will probably be for those investors taking income distributions out of their holdings rather than reinvesting. Price moves will be small and yields should rise at a decent rate as interest rates rise."
