The Association for Financial Professionals, or AFP, hosted a webinar Thursday, entitled, "Investing in a Rising Rate Environment: Highlights from 2018 AFP Liquidity Survey." The session featured AFP's Tom Hunt, Crane Data's Pete Crane, Pacific Life's Lance Doherty, and SSGA's Christine Stokes and reviewed the recent survey, as well as the latest corporate cash investing trends. Hunt explained, "We put the survey into the field back in April and released it in July, and we had over 600 responses.... We thank State Street Global Advisors for underwriting the survey.... Some of the survey highlights: the most important objective in a cash investment policy is, no surprise, safety, with 65% [citing it], followed by liquidity at 31%, and yield at a very distant 4%. Looking at that over time, we see that safety of principal has been the number one objective [for quite some time]." (See the AFP Liquidity Survey here and our July 11 News, "AFP Releases 2018 Liquidity Survey: Bank Deposits, and MMFs, Decrease.")
He said, "Looking at the allocation of investments ... there was a small uptick in prime funds. They actually increased year over year from 2% to 6%.... That's probably the biggest offset, bank deposits have gone down.... In terms of money fund selection, [we asked], 'What are the important drivers are in the selection of a money market fund?' ... Fixed or floating NAV [was the biggest one] followed by ... investment manager for separately managed accounts, followed third by yield. This changes from time to time, but some of these primary drivers are largely [unchanged]."
Hunt continued, "Looking at the question about prime funds, 'What would [make you] come back to them again [or] entice you enough?' Fifty percent will never come back into them, according to this.... Some [23%] will want to see that NAV doesn't really prove to move all that much. Spread is also a determinant in enticing people. Then some of the regulatory things that are going on with the Investors Choice Act, such as the removal of gates and fees ... followed by balances. So, there's a little bit left on the table in terms of appetite for prime funds."
He added, "Looking at a question we asked, 'What would you invest in as an alternative aside from government money market funds?' The number one response historically was separately managed accounts (37%).... Ultrashort funds dropped off a little bit (13%). Likewise, maybe some of those 2a-7 like funds or some of the private money market funds [were another option]. The market still continues to evolve. Asking the question about returning to prime, what would be that basis point spread ... to go back to prime, predominantly 50 basis points or more won't be that bucket. Right now, I think we're at about 30 basis points."
Crane then commented, "First a couple thoughts on the survey in general. The big number that stands out to me is that 75% of short term investments are held in money funds, banks deposits, and Treasuries. Bank deposits are 49% -- almost half of short term investments -- money funds are19%, with a little bit (5%) in Treasuries as well…. I'll focus on what's going on with money market funds and bank deposits in general. [M]oney funds are slowly gaining market share back after a decade. Bank deposits are still going up, but they're really peaking and their growth is slowing, and 'alt-cash' [is] sort of a mixed bag. T-bills have had this bump up and had been looking very attractive."
He stated, "With money market funds, the average yields currently for big investors are around Fed funds, from 1.75% to over 2%. In April, when this survey was going on, you were talking about rates at 1.5% to 1.8%. This gradual climb in rates we've been seeing really has been changing the environment in general. A lot of the money fund managers and purveyors talk about the new trends being 'money in motion,' ... with cash it's really 'money in slow motion.' Cash shifts very slowly in the aggregate.... What cash investors tend to do, in my experience writing about this for 25 years, is pay down bills from unattractive buckets, which now are lower-yielding bank deposits ... and add to new, higher yield buckets."
Crane explained, "Money funds are growing by around 7% on average, and bank deposits are growing at 4-5%. Those numbers have been solid. Looking at the prime funds underneath ... the recovery has been persistent.... The ICI showed prime assets breaking over $500 billion [recently], and the SEC and Crane Data's broader collections show assets breaking over $700 billion.... Retail has really been driving a lot of that, though. You're seeing a lot of the high-end, high-net worth investors that have had money in brokerage sweeps.... They've been moving chunks of money and are starting to move."
He told AFP listeners, "Institutions have still been hesitant, but those balances are just slowly growing and there's a critical mass issue. With surveys, I joke that one of the answers to 'When will you invest in prime?' should be 'when everyone else does it.' Certainly, investors are starting to get cover again if they're thinking of going back into prime.... One other thing I'd like to point out on the asset flows in general is the seasonal nature of cash flows in general.... The aggregates with money market funds they get strong in August ... and November and December have been just insanely strong over the last five six years. So, I believe you're about to see the money market asset trends step up."
On yields, Crane said, "The zero-yield environment was brutal on anybody relying on an income stream to pay for things and on retirees in general. We were there so long I'm still in disbelief that rates are rising. In December 2015, money funds were yielding 0.05% on average. A year later they were yielding ten times as much (0.50%). Then they doubled in 2017 to 1.0%, and now we're up to 1.75%. That increase [is] tremendous, but you still talk to people about 2.0% yields and they says, 'Big whip.' Yields are much higher but they're still not psychologically at the levels where they're bringing in big torrents of cash. But the longer we're here, the higher they go, and the bigger those spreads grow, the more chance of cash flows kicking in."
Doherty told the AFP webinar audience, "We have a very conservative risk profile when it comes to cash. The preservation of capital is always number one, and we have a globally holistic credit risk. Obviously being a life insurance company, we invest a lot of money in long-term investments. If my long-term investment people have a position that is reaching our maximum credit exposure, then I take the backseat. They get to invest in it, where short term we do not.... We manage our cash in three buckets; a zero to one month, a one to three months, and then 90 days and longer. We are in all the traditional investments at this time, government money market funds, prime, deposits, CPs, Treasuries, and the last one there is working capital finance investments which I'll describe."
He continued, "How our policies work: anything that we know that we are going to have to pay in one day, or we could get a call any amount of cash whether it be cash collateral for a derivatives or futures position, or we know we have a large life insurance payout the following day, or we have a large real estate deal, that money will always be in a government money market fund. After that, when we know that it's a little longer, more than two days, that's where we'll get into the prime bucket. Or if we're running any short-term arbitrage opportunities, where we actually will issue commercial paper, we'll reinvest into prime money market funds."
Doherty added, "[Also, I'll discuss] a new opportunity that we call working capital finance investments ... we think is a great opportunity, buying a what we call firm receivables.... These are high quality corporate names where most short-term investment opportunities are usually based or finance or government exposure."
SSGA's Stokes stated, "Twenty-four percent of respondents were planning to repatriate the least some of their offshore funds.... The industry is placing repatriation estimates between $1 and $2 trillion. We've already seen some of these large flows across the industry from offshore prime funds. We've heard a variety of things from our clients. Some have already repatriated their cash flows and come into our government and prime strategies before being further deployed into their businesses onshore. We've also seen others who are still formulating their plan, and another subset who need to keep some of that offshore anyway for continued operations.... One interesting thing we've seen is an increase in onshore prime funds [which are] up 17%.... Some of this cash flow can be attributed to repatriation."
On European Money Market Fund Reform, she commented, "The most popular option with clients is the low volatility NAV fund.... This is the option that more closely resembles what your offshore prime fund looks like now. The fund type does have the potential for a liquidity-based fee or redemption gate. But the potential for redemption gates is already an element of UCITS funds. What I think is interesting and probably most helpful to clients' daily use of these funds is the ability to maintain a NAV of 1.00. This comes with guardrails of course -- a fund's shadow mark to market NAV must not deviate from one by more than 20 basis points."
Finally, Stokes added, "The new regulations and rule changes have only made money market funds safer and more resilient against price shocks in the marketplace. Looking at our own offshore prime funds' NAVs, we see no fund vary by more than 4 basis points over the 5-year period that we have been tracking the daily mark-to-market NAVs. This data is in a similar channel to the data observed in the U.S. So hopefully this gives you a little bit better idea of what the LVNAV fund structure is all about. Our European investors understand these nuances and are getting comfortable that the [LVNAV] fund will cause the least disruption for their continued ease of use and value that money market funds provide."
