Opportunities in China and European money market fund regulations were the main topics of a session at Crane's Money Fund Symposium 2015 in Minneapolis entitled "European and Global Money Fund Outlook." The segment featured Jonathan Curry of HSBC Asset Management (and until recently Chairman of the Institutional Money Market Fund Association) giving an update on European money fund reforms, followed by commentary from John Donohue of JP Morgan Asset Management on the awaking giant that is the Chinese money fund industry.
Curry said assets under management in IMMFA funds have been growing despite major challenges, including low and negative interest rates, a paucity of supply, and pending regulations in both the money fund and banking sectors. On reforms, Curry provided an update of where things currently stand. In March, the EU's Committee on Economic and Monetary Affairs voted to pass a compromise position. The proposal retained a CNAV structure for government funds and retail funds and created a new Low Volatility NAV fund type (LVNAV) that is a hybrid between CNAV and VNAV with use of amortized cost accounting below 90 days. CNAV funds would be available to only about 10% of investors.
In a statement issued back in March, IMMFA commented on the proposal, saying, "The options presented to the CNAV industry, which makes up over 50% of AUM, are severely limited under the Parliament's draft. The Retail CNAV and EU Public Debt CNAV options are restricted in scope, and under current market conditions together account for less than 10% of the CNAV AUM.... The proposed LVNAV structure is not an adequate substitute for the CNAV product. Only a very small proportion of the current CNAV market would be able to transition into this new MMF formulation. Furthermore it is unclear how useful this construct would be to investors. Even then, under a so-called 'sunset clause' the authorisation of these funds would lapse five years after the Regulation comes into force.... IMMFA remains confident that through the ongoing negotiation a more feasible solution for the MMF industry will be found -- that promotes financial stability whilst preserving efficient short term capital markets in Europe. IMMFA remains committed to working with all parties involved in the regulatory debate and hopes that in the long run an approach which is both practical and effective will prevail."
Curry explained that the Presidency of the European Parliament passed to Latvia in January 2015, and that they are unlikely to work on this file. Luxembourg takes over the EU Presidency in July 2015, but he said their involvement is made more difficult as they are one of the main 3 domiciles for MMF in Europe. He says, "Bilateral meetings have been taking place between the "big 5" to try and find a compromise position. Germany appear to be blocking any compromise at this time," he said.
"IMMFA will prepare a strategy to engage with the European Council and European Member States on the proposal. Despite a negative yield environment for government Euro MMFs, due to last year's cut in the ECB's "deposit facility" to negative 0.20%, the good news is that assets in IMMFA funds have grown. Corporate cash balances continue to remain high and implementation of new banking regulations will push more cash into MMFs," he added. Curry concluded, "The asset management industry is committed to providing useful and reliable products which suit the investors' needs. IMMFA is committed to maintaining standards in the industry and to engaging in dialogue with regulators."
Donohue focused on what he called the "sleeping giant that is being awoken" in money markets -- that is Asia in general but more specifically, China. "We at JP Morgan believe that is the next big opportunity," he said. JP Morgan has over US $20 billion in Asia-Pacific assets, and the numbers have grown steadily over the last few years. "Assets are growing, which is a good story in and of itself, but I think the better story is the mix of assets. Back in 2008, the primary source of those assets were U.S. dollars. If you look fast forward to today, that mix has completely shifted. So now you have an overwhelming amount of those assets in local currencies -- that's because these clients want to hold local currencies as those currencies appreciate against the dollar. We would expect this story to continue to play out."
"Clearly the opportunity is in mainland China." He continued, "Since 2013, assets in money funds have grown four-fold. `That is primarily driven by retail money market funds particularly these e-commerce or online fund providers like Alibaba," which owns the Yu'e Bao Money Fund. [It] has grown from nothing to $94 billion, or approximately RMB700 billion, since 2013. Typically, money market funds in China have much longer weighted average maturities, longer WALs, and lower credit quality, explained Donohue. But there has also been significant growth over that same time period in AAA-rated funds, he stated. Assets in [one] J.P. Morgan Fund, a joint venture fund in Shanghai, have doubled. "`A lot more of the local entities are starting to look at these AAA, western style funds much more seriously. We would love to see this market grow. Growing a sector and an industry can only help grow the pie for everyone."
Donohue explains, "One of the biggest challenges in China is you have to do everything through a joint venture right now. You own 49% of the J.V. and the Chinese entity that you partner with owns 51%.... As it stands today the players that are going to be able to get in there are part of the large global entities that already have a footprint in China. That said, I think over the next couple to several years we're quite confident that you will see that loosen up. We think that at some point the Chinese regulators and government will allow wholly owned investment advisers to get in there and deliver their own pure investment solutions.... It's still a very small piece of the global money fund industry, but it's a pretty attractive place to be."
Donohue added, "One thing to keep in mind is that a lot of the funds distributed in Asia are Luxembourg based funds so they are not immune to the [pending European] regulations. I think one of the outcomes there is that you are potentially going to see a lot of funds transition to more domiciled regulated funds and move away from Luxembourg. That's something that we should just keep an eye on and consider as we as we move forward."
While money funds are not specifically regulated in China, regulators have taken notice. The regulating authority has proposed to lower the WAM down to 120 days and have 5% overnight liquidity. He says, "It's much more liberal than anything that we're used to in the U.S. or Europe. But one of the things that it will do is standardize the product and standardization I think benefits Western or global asset management firms."
