A press release entitled, "J.P. Morgan Asset Management Releases 2015 Global Liquidity Survey Results, Identifies Investor Sentiment amid Shifting Market and Regulatory Landscape," announced late last week that JPMAM released the findings of its "2015 Global Liquidity Investment PeerView" survey, which "highlights the current sentiment of more than 400 respondents, including CIOs, treasurers and other senior decision-makers, representing more than 400 unique entities from all sectors of the global economy." It says, "The survey uncovered widespread industry trends, as the decision-makers confront both a shifting interest rate environment and far-reaching regulatory reforms." The report shows that 70% of respondents (institutional investors) who have Prime money funds intend to stay in them, while 83% will either maintain their allocations to money funds or increase them. The JP Morgan survey comes on the heels of a recent Sungard survey (see our Nov. 9 News, "Sungard Survey Shows Majority of Corps Will Stick w/Prime; Portals") that also says the majority of corporate investors will stick with Prime funds after the new SEC rules requiring these funds to have a floating NAV go into effect in October 2016.
John Donohue, CEO of Investment Management Americas and Head of Global Liquidity at J.P. Morgan A.M., explains, "The evolving market and regulatory landscape presents opportunities, as well as challenges, to liquidity investors as they re-evaluate their cash investment decision-making. As they anticipate these changes -- including the potential first Fed rate hike in more than nine years, possible tightening by the Bank of England and the impact of Basel III -- they are preparing to re-assess their short-term investment portfolios."
The press release says, "Key findings from the 2015 survey include: Investment in money market funds still strong Based on the market outlook for next year, 63% of respondents will continue with the same allocation to money market funds, while an additional 20% will increase their allocations. In the U.S., of the respondents who are currently invested in a prime money market fund, 70% intend to still use it when SEC 2a-7 money market rules go into effect next year."
The findings continue, "Regulatory pressures. Respondents are grappling with a host of regulatory pressures, including SEC Rule 2a-7 reform in the U.S., pending money market fund regulation in Europe and Basel III around the globe. Almost half of respondents report that their banks have encouraged them to move non-operating deposits off the banks' balance sheet. Also, approximately 40% of participants plan to make changes to their investment policies given the current regulatory landscape."
Other findings include, "Safety and liquidity remain priorities. As indicated by their choice of investments, survey respondents focus on safety and liquidity: Almost half of global cash assets are still placed in bank deposits. Usage is most prevalent in Asia, where 57% of assets are held in bank deposits, vs. 44% in Europe and 42% in the Americas. Money market funds represent roughly one-third of cash assets in the Americas and Europe. Risk is still a focus While risk management continues to be critically important, the framework for assessing risk is shifting for many liquidity investors."
JPMAM's release adds, "Negative interest rates in Europe and low rates globally are compelling organizations to re-evaluate their appetite for risk and more precisely calculate their short-term liquidity needs. Search for yield Separately managed accounts (SMAs), customized portfolios that allow investors to define their own risk, security and liquidity parameters, will continue to account for a significant share of cash allocations. Twenty percent of respondents in the Americas and 16% in Europe plan to increase their allocations to cash assets that are invested with SMAs or outside managers. Investor demand for SMAs can be seen as a clear demonstration of the need for yield."
The "Executive Summary" of the 35-page PeerView survey, subtitled, "Cash in Motion: Laying the Groundwork for New Rates and Regulations," says, "J.P. Morgan surveyed respondents at a time of transition, as investors prepare for significant changes in both the interest rate and regulatory arenas. As they anticipate the first Federal Reserve (Fed) rate hike in more than nine years and eventual tightening by the Bank of England investors expect continued stimulus from the European Central Bank (ECB). New SEC rules governing money market funds take effect in October 2016. Basel III regulations, which redefine global standards for bank capital, liquidity and leverage, will continue to impact banks' appetites for non-operating deposits. On all these fronts, liquidity investors are preparing to restructure and reposition their short-term investment portfolios."
It continues, "As our survey reports, that process has already begun. Many organizations are contemplating changes in their investment policies. Floating net asset value (NAV), the use of repurchase agreements (repo), requirements for money market fund ratings -- these are among the subjects that investors may need to reconsider or more precisely define in their investment policies. An evaluation of the relative merits of bank deposits vs. money market funds will be an ongoing process; the spreads between government and prime money market funds will require close attention in a changing rate environment. Investors will be looking for innovative products and solutions from their providers. A growing number of investors have opted for the individualized approach of separately managed accounts, and that pace of growth may accelerate."
JPMAM adds, "The churn of market and regulatory change presents opportunities, as well as challenges, to investors as they re-assess their cash investment decision-making. That process -- essential but never simple -- will greatly benefit from a peer comparison as firms consider how their policies and practices resemble, and differ from, those of their peers. In this regard, the J.P. Morgan Global Liquidity Investment PeerView survey can serve as a valuable industry benchmark."
Drilling down into some of the survey responses, under the header, "Prime Money market Funds: Minimum Net Yield," it says "For respondents who are not currently invested in prime money market funds, or who do not intend to continue using them, when asked how much net yield a prime money market fund must pay over a government money market fund before they would consider investing in one, more than half indicated that yield is not a factor."
The report's "Conclusion" explains, "Even as investors anticipate a new rate environment, they confront interest rates and yields that are exceptionally low by any historical measure. As a result, many investors are rethinking both their appetite for risk and their need for short-term liquidity. As they do so, many companies and organizations have the ability to be more adept at forecasting cash flow. They are therefore in a better position to segment their cash between short-term working capital requirements, core cash and strategic cash that is not required to support daily cash flow needs."
It adds, "Liquidity investment is further complicated by a changing regulatory environment.... Whatever their investment policy allows, liquidity investors must grapple with competing forces -- a need for yield on the one hand, and a mandate to control risk on the other. (Risk control covers both liquidity risk and preservation of principal risk.) As investors re-evaluate their decision-making, the peer comparison provided by the J.P. Morgan Global Liquidity Investment PeerView survey can provide an especially useful perspective."
