State Street Global Advisors recently published its "2019 Global Cash Outlook," which discusses rates, credit, Prime, ESG and technology. Subtitled, "Innovations in Cash," the introduction says, "Over the past year, US dollar cash investors have benefitted from multiple Federal Reserves (Fed) rate hikes, high liquidity and stable credit conditions. In 2019, this benefit will likely continue but at a more balanced pace from the overarching global theme of tightening monetary policy. This will support gradually rising yields in US dollar money market funds. Upward pressure on short-term rates though, may also prompt the Fed to stop rolling government debt off its balance sheet in 2019; this could fuel a widening yield differential between government and prime funds."
Pia McCusker, Senior Managing Director, Global Head of Cash Management, explains, "Over the past 12 months, investors have increasingly moved cash into prime funds, and we believe there are compelling reasons for more investors to consider the shift going forward. US dollar assets under management has risen from $372 billion, when money market fund reform took effect in November 2016, to $536 billion in the fourth quarter of 2018. This trend has been driven by yield differentials that have, over time, more than compensated for net asset value fluctuations."
She adds, "Finally, in this year's Global Cash Outlook, we consider innovations in cash management. We look at the potential for filtering cash investments for ESG factors, while satisfying the safety, liquidity, yield and regulatory demands of money market fund management. We also examine emerging trends, including artificial intelligence in cash management and a Fed initiative that could lead to deadline-free, 24-hour money market funds. These could be exciting innovations for the industry to ruminate in 2019."
SSGA Portfolio Strategist Will Goldthwait discusses, "The Cash ESG Challenge." He writes, "Cash and short duration strategies operate under regulatory and investor-driven requirements to maintain high levels of liquidity and security. As such, they seek the safest, most liquid, short-term assets that offer market yield. In addition to sovereign debt, prime funds hold significant concentration in about 30 AA- or A-rated global banks that access the market daily."
It continues, "This raises challenges in both scoring bank debt and in constructing the portfolio. As part of our core commitment to responsible investing, State Street has deep ESG research expertise, particularly in the areas of ESG scoring and building portfolios using ESG filters. Our research is ongoing, however, our team recognizes some challenges that are inconsistent with our credit process and has reached the following interim conclusions: While it's feasible to score a bank's ESG performance, the score would depend heavily on governance, as it is difficult to accurately differentiate the environmental and social factors for the global bank assets that MMFs hold."
SSGA tells us, "Applying an ESG filter may mean limiting or excluding a handful of banks from the MMF's approved list. Given the small universe and the regulatory need to limit issuer concentration to 5% of holdings, the fund would likely need to boost exposure to other prime instruments, such as asset-backed commercial paper (ABCP) or alternative repurchase agreements (repo) that are secured by non-governmental collateral and municipal securities. While these assets are attractive diversifiers, they pose other ESG monitoring challenges.... Our research team is continuing to investigate these and other challenges, to ensure that an ESG cash portfolio would truly reflect responsible investing principles while satisfying core money fund requirements."
They add, "We are also investigating whether potential filters would produce a durable and significant difference when compared to the MMF universe. Finally, we are seeking input from clients regarding which ESG factors matter most to them.... In the meantime, companies with significant cash balances that seek an ESG cash strategy can satisfy this need through a separately managed account. When only a single investor is subscribing and redeeming funds, an ESG filter can be applied with more meaningful results and less concern about the impact on liquidity, security and yield."
Goldthwait also comments on, "The fourth industrial revolution -- fusing the digital and physical worlds -- is coming to cash. We believe that short-term fixed income and cash investment management are poised to evolve rapidly over the next few years, perhaps even more so than it has over the past two decades. On a basic level, new features will include centralized trading platforms and enhanced liquidity and risk monitoring. In this paper, we address two major developments in cash management. First, we consider why money market funds (MMFs) must close each business day; is it possible, instead, to offer global, non-stop services the way retail banking does? Second, we explore how artificial intelligence and robotic investing are transforming MMFs."
He explains, "MMFs emerged in 1972 as a better way to manage excess cash left in brokerage accounts, using an accounting method that would enable a market rate of return. Since then, they have served investors looking for extra yield or seeking diversification away from banks. But institutional MMFs have not offered clients the same flexibility as retail banking.... [I]nstitutional cash investors must wait to transact during business hours. Why? The main limitation is the Federal Reserve's (Fed's) payment system, which serves as the financial plumbing of the MMF business."
The section adds, "In an October speech, Fed Governor Lael Brainard announced a Fed proposal that would address the 'growing gap between the transaction capabilities we need and expect in the digital economy -- fast, convenient, and accessible to all -- and the underlying settlement capabilities.' The new system would introduce 'real-time gross settlement.'
Finally, SSGA writes, "Artificial intelligence (AI) and robo advisors are the talk of today's asset management industry.... What does this mean for cash investments? We know that rules-based investing can help take the emotion out of investment decisions.... But algorithms and AI can assist on a more fundamental level, simplifying mundane tasks like trade entry, and eliminating the potential for human error.... What about the more complex tasks? Portfolio managers digest large quantities of information every day; AI is now helping sort that information, so they quickly see what's most important. Legal departments are using AI to dramatically reduce the time it takes to handle credit agreements."
They add, "Managing cash flows within a MMF is the portfolio manager's single biggest challenge.... AI is helping with this as well, analyzing current and historical data to help them make better investment decisions.... [But] we don't think the human element of portfolio management will ever be eliminated. It will be complimented by AI to further boost client outcomes."
