Ahead of next week's Crane's European Money Fund Symposium (Sept. 20-21 at the London Tower Bridge Hilton), we noticed some fresh analysis and new product announcements involving European and "offshore" money market mutual funds. J.P. Morgan Securities latest "Short-Term Fixed Income" discusses how offshore prime money market funds are not shortening maturities or avoiding CDs and CP like their U.S. counterparts, and J.P. Morgan Asset Management announced the launch of a new "enhanced cash" Sterling fund. We review these updates below, and we look forward to seeing many of you in London next week.
JPM Securities writes on "Offshore MMFs," "One theme that has emerged since prime MMFs began to shorten their maturities is the increased importance of other investors to the US money markets. Other money market investors include offshore prime MMFs, Separately Managed Accounts, securities lenders, short-term bond funds and corporations with excess cash on their balance sheets. In addition to this, recent cheapening has attracted non-traditional buyers, moving investments in along the curve to take advantage of improved risk reward trade-offs in the money markets that are now available. By and large, their participation in buying bank CP/CD has moderated Libor's rise as they opportunistically took advantage of wider credit spreads particularly in the 6m and 1y part of the money markets curve."
Authors Alex Roever, Teresa Ho, and John Iborg, write, "Against this backdrop, we are often asked why offshore prime MMFs are not impacted by US MMF reform. Do they have to follow the same structural changes as onshore prime MMFs? The answer is no. In a nutshell, offshore prime MMFs are not governed by SEC's Rule 2a-7 whose structural changes go into effect next month. Domiciled predominately in the EU, they are instead governed by the European Securities and Market Authority (ESMA) as well as the Institutional Money Market Funds Association (IMMFA) in the case of institutional funds. While ESMA's and IMMFA's guidelines resemble SEC’s Rule 2a-7 in terms of portfolio management, they have not finalized any structural changes to offshore prime MMFs as of yet."
They explain, "European MMF reform is still a work in progress. To this end, assets under management at offshore USD prime MMFs have been fairly stable at slightly above $225bn according to iMoneyNet, in contrast to onshore USD prime MMFs which has suffered a dramatic decline in assets over the past year. This suggests that money that has left prime MMFs has not migrated into offshore prime MMFs, as to be expected. Offshore USD funds are predominately used by corporations that have cash trapped overseas for tax reasons. In general, shareholders do not have the ability to easily move cash from onshore to offshore. As such, the size of the USD offshore complex is not enormous and is slightly smaller than the prime retail MMF complex in the US at roughly $290bn."
JPM continues, "As offshore prime MMFs are unaffected by SEC's MMF reforms, they have, in contrast to onshore of longer dated bank CP/CD while the latter group has pulled back. Indeed, a closer look at offshore funds' bank CP/CD holdings suggests they have maintained roughly $8-9bn of assets in the 6m-1y part of the curve predominately across Australian, Canadian and US issuers. To a smaller extent, they also added exposures to Japanese issuers in this part of the curve recently." (Note: JPM cites Crane Data info in a chart; our 8/31 cut of MFI International Portfolio Holdings is scheduled to ship Thursday, 9/15.)
They add, "While exposure to the long end of the money markets curve has held constant, the story inside of 6 months has not. In fact, offshore funds appeared to have increased their allocation to 1-3m maturities but decreased their 3-6m maturities. As offshore MMFs are not impacted by SEC MMF reforms, it's not obvious why they would look to reduce their WAMs and WALs. One explanation could be that the recent cheapening in the 1-3m part of the curve has provided them with better spreads even with a shorter duration, incentivizing them to allocate more here. It's also possible that given the chance of a Fed rate hike this year, funds want to shorten their maturities and minimize their duration risks."
In other news, a press release entitled, "J.P. Morgan Asset Management announces launch of Sterling Managed Reserves Fund" and subtitled, "Cash alternative investment for Sterling investors in post-Brexit low rate environment," tells us, "J.P. Morgan Asset Management's Global Liquidity business has launched a new UCITS fund, JPMorgan Funds – Sterling Managed Reserves Fund."
It explains, "Whereas traditional money market funds are designed to meet short-term working capital requirements, managed and regulated extremely conservatively to ensure capital preservation and liquidity at all times, Managed Reserves strategies incrementally extend maturities to generate slightly higher returns, but with a similar discipline on risk management. For liquidity investors with a longer investment horizon, Managed Reserves can offer an interesting cash alternative: returns above money market funds coupled with a focus on capital preservation and liquidity."
The release continues, "JPMorgan Funds – Sterling Managed Reserves Fund will seek to deliver consistent returns while preserving principal and providing liquidity. It will invest in GBP-denominated short-term debt securities, including commercial paper, certificates of deposit, bank deposits and AAA rated money market funds, as well as UK and European sovereigns, Supranationals and Agencies, corporate securities and asset- and mortgage-backed securities. The funds weighted average duration will not exceed one year."
Portfolio Manager Neil Hutchison, who will be speaking at next week's European Money Fund Symposium, comments, "Treasurers are being forced to rethink short-term investment strategies. Following Brexit the Bank of England's bank rate and corresponding cash yields are down to record lows -- and likely to go even lower -- so liquidity investors are increasingly being more strategic with their non-immediate cash. A Managed Reserves strategy, which can take advantage of higher yields in maturities slightly longer than money market funds, can be an effective supplement in this environment to AAA rated liquidity funds."
JPMAM's release comments, "The fund, which will be benchmarked to the BofAML Sterling 3-Month Government Bill Index, will target an excess return of 20 to 40 basis points, net of all fees. Lead Portfolio Manager Neil Hutchison has 18 years of industry experience."
Hutchison adds, "Having globally managed portfolios to this strategy since 2004, with $50 billion in Managed Reserves assets already under management, we've observed the evolution in cash segmentation that corporate treasurers are increasingly undertaking. Allocating a portion of non-immediate cash to Managed Reserves, often as a first step beyond money market funds, can allow cash investors to benefit from a broader investible universe with greater corporate diversity, all within a highly risk controlled environment."
