J.P. Morgan Asset Management released a survey of global liquidity investors last week which showed that worldwide money fund usage remains strong and should continue to do so even with potential regulatory changes. Their press release comments, "Research from J.P. Morgan Asset Management shows that treasurers are concerned about a possible move to floating NAV, but they are still committed to money market funds. The inaugural J.P. Morgan Global Liquidity Investment PeerView has been established to be able to provide respondents with customised scorecards so they can see where they sit in line with their peers in the same region, cash balances and industry. The first survey has focused on corporate treasurers' investment decisions. The findings of the survey showed that of those treasurers who would reduce or eliminate their use of money market funds as a result of a move to floating NAV MMFs, most would reallocate assets to bank deposits or other assets that are less diversified and still have credit risk. The respondents noted that two of the biggest barriers preventing companies from using floating NAV are the uncertainty of realised or unrealised gains or losses and the existing structure of their investment policies."
Jim Fuell, Head of Global Liquidity, EMEA, tells us, "Uncertainty around regulation is prevalent amongst investors, as is risk and yield. These competing factors are increasing in intensity and the result of this is that some investors are looking to recalibrate their cash investment decision-making. However, the fact that more than two thirds of respondents continue to be committed to money market funds shows how integral investors consider this sector to be in their cash assets.... We have experienced growing interest from investors for customised portfolios and we put this down to a clear demonstration of the need for yield. The benefit to investors is that they are defining their own risk, return and liquidity objectives, which can obviously lead to a higher yield."
JPMAM adds, "The survey of 201 cash investors [clients of JPM] highlighted that close to a third of their cash assets are allocated to money market investments, the highest usage being in Europe, and that one in every five dollars is in separately managed accounts." The geographical breakdown of respondents was Asia (41%), North America (31%) and Europe (28%).
The "Executive Summary" explains that investors are "Searching for yield, managing risk," saying, "This year's survey took place against a backdrop of an improving global economy, as central bank monetary stimulus kept rates and yields at historical lows and risk assets attracted strong investor demand. Amid widespread expectation of an eventual end to monetary stimulus, treasurers looked to prepare for a rising rate environment. They also contemplated potential regulatory change, including a floating net asset value (NAV) for some money market funds (MMF), which could recalibrate cash management decision-making. As always, treasurers must grapple with competing forces -- a need for yield on the one hand, and a mandate to control risk on the other. In the current low-rate environment, these competing forces have been more intense than usual."
Its Key findings include: Liquidity is still key - Liquidity is a central concern of survey respondents, as reflected in their choice of investments. Half of cash assets are placed in bank deposits, with usage most prevalent in Asia. Close to a third of cash assets are allocated to MMF, with usage highest in Europe. Regulatory change is a concern – Treasurers voiced concern about a possible move to a floating NAV. If funds are required to transact at a floating NAV, 71% of respondents would continue to use MMF, with some of them reducing their allocations. Respondents who said they would reduce or eliminate their use of MMF would reallocate assets mainly to bank deposits or other assets that have both credit and term risk. Our survey finds that the biggest barriers preventing companies from using floating NAV MMF is the uncertainty of realized or unrealized gains or losses and the limitations of their investment policies."
Other key findings include: Lack of diversification - Companies with larger cash balances are permitted to invest in a range of securities, including riskier investments. But companies with relatively smaller balances may be restricted to a smaller, less diversified pool of securities. Risk remains a focus - In an effort to control risk, the majority of respondent investment policy statements limit the use of shorter duration debt securities and require minimum credit ratings for both longer and shorter term securities. Search for Yield - Approximately one in every five dollars is invested in separately managed accounts, customized portfolios that allow investors to define their own return, security and liquidity parameters. Investor demand for separately managed accounts can be seen as a clear demonstration of the need for yield."
The survey comments on Liquidity and Money Market Funds, "Close to a third of all cash assets are allocated to MMF. Usage of MMF is highest in Europe and in companies with smaller cash balances. Money Market Funds can be a viable solution to the challenges of a rising rate environment, but treasurers should be cognizant of the weighted average maturity (WAM) of the securities held in a fund.... The yield in MMF will generally rise in line with prevailing interest rates, presenting no unrealized losses. But the increase in yield will lag rising rates to a greater or lesser extent, depending on a fund's WAM."
It adds, "While treasurers express widespread concern about an impending push toward a floating NAV, close to 71% of respondents said they would continue to invest in MMF even with a floating NAV. However, some of the respondents that would continue to invest in MMF would reduce their allocations.... In assessing the likelihood that they would use floating NAV MMF, most respondents cited either the impact to realized and unrealized gains or losses, or investment policy limitations, as the main factors driving their decision. Tax and accounting requirements were also cited, but they were seen as secondary concerns."
On "Separately Managed Accounts," the survey says, "Diversified solutions (MMF and separately managed accounts) are a critical tool for navigating a shifting rate environment because they provide a range of securities and strategies with varying risk, return and liquidity characteristics. Close to one in five dollars in cash balances are allocated to separately managed accounts, a leading diversified solution."
