Federated Hermes' Deborah Cunningham writes in her latest "Month in Cash" about the Fed, coronavirus and the money markets. The piece, entitled, "Is it 'material'? The Fed must decide, on its own, if the coronavirus outbreak qualifies as such," tells us, "Early February seems like years ago. As December and January data flowed in with positive reports on manufacturing, housing, employment and retail sales, the Federal Reserve looked pretty smart saying it would refrain from policy moves unless there were 'material' changes to the economy. Well, the coronavirus may very well qualify as one. When the outbreak reached Europe this week, it hit close to home. You don't have to have your eyes glued to a screen to know this outbreak will be with us for a while and that it will have some economic impact. But will it be material and, in turn, how should the Fed react?"
She explains, "Earlier this week, Fed Vice Chair Richard Clarida acknowledged the virus likely would disrupt the global economy but it was too soon to speculate about how large that might be and how long it would last. Investors seemingly have made up their minds that it will be significant and expect a rate cut at April's Federal Open Market Committee meeting. But there is, of course, the little matter of the FOMC meeting in March."
The Federated brief continues, "We think the Fed should not lower the fed funds rate then. The Fed likely is viewing the virus like a natural disaster: it wants to get ahead of it, but not make things worse. The markets seem to want the Fed to fear the future as much as they do. Policymakers must make clear they make their own decisions -- that they indeed operate independently. And this stance needs to be true. Just like the market shouldn't fight the Fed, the Fed can't be led by it. Its job is to forge monetary policy consistent with the broadest point of view."
It states, "It is debatable just how effective a cut would be at this point, and policymakers know that. There certainly is no lack of liquidity in the marketplace. In fact, the situation might stoke higher inflation as that is often a byproduct of a supply chain disruption. Anytime you introduce inefficiencies into the marketplace, there is potential for prices to rise. The Fed might be looking for higher prices, but a cut could allow for too much. More than likely is that things will return to the abnormal normal state of low inflation once the virus abates."
Cunningham adds, "What the Fed needs to do now is to talk the market in the right direction. Former chairs Bernanke and Yellen were fluent in Fedspeak. It's not that Powell isn't, but it has been more of a challenge with the current Fed because it has dissention in the ranks. You have Rosengren talking one way in Boston, Fisher at Dallas talking a completely different way and then Kashkari with a different take in Minneapolis. Time for some solidarity."
Finally, she comments, "As a firm, we are making 'maintenance trades' to keep us within our weighted average maturity (WAM) ranges of 35-45 days for government funds and 40-50 days for prime and tax-free ones. This has not been easy because of the lack of good relative value with the London interbank offered rate (Libor) and the Treasury curves' flattening, although Sifma rates have been attractive. So we have cast our net wide, buying securities, both fixed and floating, all across the short-end of the curve without any real conviction that one area is better than another. We are positioned for further lowering of yields but also prepared for a rise when the clouds break."
In other news, online money fund portal ICD recently hosted a webinar, "ESG for Short Term Investing: ESG Data & Decision-Making," which featured ICD Portal's Sebastian Ramos, SSGA's Will Goldthwait and Fitch Ratings' Alastair Sewell. Ramos explains, "We've observed with much interest the evolution of ESG investing in the cash space over the last few years. What began as a limited number of offerings has grown into a larger movement and we're excited to see it continue to mature and become a larger component of day to day product consideration for our clients."
He continues, "Taking a look at some of the data behind the trends.... While global AUM is still predominantly non-ESG ... 34 percent ESG, 66 percent non-ESG, there is now a significant proportion of AUM that is ESG based. This is likely to continue increasing.... The proportion of asset owners who now require an ESG policy to be in place in order for a bidder to pre-qualify for selection of an asset manager has exceeded 85 percent. Similarly, when assessing the performance of their asset managers, nearly 80 percent of asset owners, in addition to financial metrics, now also use ESG criteria to measure performance of portfolios. It's particularly worth noting as well, the rapid acceleration in this trend between 2017 and 2018." (Note: We believe these statistics are for overall investments, not for money markets.)
Ramos comments, "In our 2020 [global client] survey, launched in mid-January, we have some early feedback on ESG. Of the over 100 respondents, 32 percent indicate that they are or will be investing in ESG products in 2020, so we know the interest from our client base is there." A poll conducted during the webinar asked listeners, "Would you be interest in incorporating any sustainability or ESG analysis into your short-term investment?" Sixty-four percent of listeners answered yes, 20 percent answered no, while 16% answered 'no, but reviewing now.'
Sewell tells us, "We have seen increased investor interest in ESG. If we look over a long period of time, we can see that there have been certain investors who have invested through an ESG framework for a very significant period of time. It really depends how you define ESG. For example, someone who invested in say, an ethical fund which might have excluded certain sectors which they didn't like for whatever reason, you could actually say that was an ESG fund or an ESG investment. Although, it probably wouldn't have acquired the ESG nomenclature until more recently."
He continues, "Investors and other market participants have been asking us about how we look at ESG as a credit rating agency since at least 2015. We've noticed that the level of interest, and the frequency that we're getting questions.... We're getting it from the investor side, the regulator side, and we conclude that this is a major trend.... ESG is definitely a growing and dynamic area and we absolutely see rating agencies playing an important role here. We are now defining, or demonstrating, in our ratings which environmental, social and governance risks effect an entity and we're showing whether that effect is significant in the actual end credit rating that we've assigned."
Sewell adds, "There is a strong increase in the assets under management in ESG funds. Now, the majority of those assets are in equity funds, but fixed income funds are starting to catch up.... Whilst this trend is clearly strongly positive in terms of growth, the share of these assets remains relatively low compared with the total assets in mutual funds globally. So, this started as an equity theme, it's moved into fixed income more recently, and the most recent development has been in the money market fund space, where we've seen multiple new launches or conversions of money market funds to an 'E', 'S' or 'G' framework. This started with DWS in September 2018 coming out with an ESG fund, that was a conversion, and since then, multiple other providers of money market funds have launched or converted funds."
Finally, Goldthwait states, "We spent a considerable amount of time thinking about this, as far as, converting a pre-existing fund or starting something from scratch. Ultimately, what we decided was that we would start something from scratch. We decided to do that because we felt as though it was important to start fresh, so to speak. We also realized that we wanted to be able to score every asset that went into the fund. So, the objective of the fund remains the same as our non-ESG prime money market fund, which is principal preservation, liquidity and a market rate of return as the top priorities, and then an ESG tilt as that fourth priority. One thing that's been interesting as we've tilted the portfolio is that we've noticed there is a strong correlation between stronger credits in the market, or companies that have higher ESG scores, and longer and larger term limits ... from our credit team. So, there is this idea that if you build a portfolio around an ESG tilt, you're going to ultimately have stronger underlying credit in that portfolio."
For more on ESG and Social Money Market Funds, see these Crane Data News articles: HSBC Files to Launch ESG Prime Money Market Fund; Propriety Scoring (2/19/20), Fitch Ratings, ICD Host Webinars on ESG Money Funds, Cash Investing (2/6/20), Goldman Launches Social Class; Tiedemann Adds FICA; CS Green ABCP (1/24/20), Mischler Financial Joins "Impact" or Social Money Market Investing Wave (12/5/19), BNP Insticash Adds ESG Overlay (11/29/19), Dreyfus Launches "Impact" or Diversity Government Money Market Fund (11/21/19), Goldman Adds ESG Screen (11/14/19), Aviva Investors Discusses ESG MMFs; Fitch Rates MS ESG (11/6/19), UBS Asset Mgmt Files to Launch Select ESG Prime Institutional Fund (11/4/19), BlackRock Launches First Offshore ESG MMF; ICS LEAF in EUR, GBP, USD (7/22/19) and SSGA Goes Live with ESG Money Market Fund (7/3/19).
