Last week, Crane Data hosted its latest webinar, "Asian Money Fund Symposium," which featured J.P. Morgan Asset Management's Aidan Shevlin, Goldman Sachs A.M.'s Pat O'Callaghan, Fitch Ratings' Alastair Sewell, S&P Global's Andrew Paranthoiene and Crane Data's Peter Crane. The 2-hour, 3-part event discussed money funds, money markets and investors in China, Japan and several other Eastern markets. We excerpt from the first segment below, and watch for more highlights in coming days and in the July issue of our Money Fund Intelligence newsletter. (Thanks again to those who attended and to our excellent speakers! See the recording here and Crane Data subscribers may access the handouts here. Also, register for our next webinar, "Money Fund Wisdom Product Training," which is July 20 from 2-3pm Eastern.)
Shevlin tells us, "As background, I work for J.P. Morgan Asset Management and am the Head of the International Liquidity Fund Management team. I have been based in Hong Kong for the last 15 years and previously was working in London. I moved to Hong Kong to help set up our global liquidity business here [and] launch our funds in China. We also have money market funds in Taiwan, in Hong Kong, Singapore, Australia and other types of funds.... So, we've built quite a familiarity and expertise with money markets across the region."
He explains, "Asia is now becoming effectively too big for the world and for Western markets to ignore in terms of its share of global growth, its share of global trade, the amount of bonds outstanding in Asia. It's just a massive economy now.... China is the second biggest bond market in the world; it's the second biggest equity market in the world. They're increasingly being opened to Western investors ... giving investors a huge increase in the range of ... issuers they can buy. It gives them great diversification. Asian issuers typically offer at higher yields than their Western peers, while having a higher credit quality and an equivalent or lower duration.... It's a market which everyone is now looking at. Everyone wants to get involved in and be active there."
Shevlin comments, "Across the region, we're seeing a very positive trend in terms of ratings, in terms of the growth of the market and the growth of the universe of issuers. In the past we saw most issuers in Asia were very focused on the local markets.... That's now evolving, banks across the region are now more actively using the money markets and the international bond markets to raise money, and that's raising their profile as well. And obviously there's now more investors wanting to tap into the region.... We see new issuers coming to market every year and that really helps with diversification.... We see funds across the U.S. and Europe buying Chinese issuers, we've seen more Korean issuers, more Taiwanese issuers, printing in these markets as well."
He says, "China has developed very rapidly in the last 20 years. If you just roll back the clock to 1999, if you were an investor in China and you had cash, you were a multinational company, you only one option, and that was time deposits. And it wasn't a great option, because you had to place your time deposit with a bank, every bank offered the same interest rate, every bank offered fixed tenors.... It was a very strict market with very little choice. But over time ... we've seen a huge growth in the number of different instruments and the number of different issuers, [and] the number of different markets.... But with that growth, we've also seen an increased amount of risk.... So it definitely created an environment where, as an investor in the markets, you need to be much more aware about what you're actually buying."
Shevlin adds, "One of the key successes in China over the last decade or so has been the mutual fund industry; they've been super successful. I'm sure you've all read the headlines. We're seeing massive growth, it's now over 20 trillion AUM, in remnimbi terms. One of the key drivers of that growth has been money market funds.... So, there's a massive wallet available in China, and that gives a massive opportunity for everyone to invest. And even that ... is only a small share of the total kind of investable universe, where a huge amount of money is still invested in very plain vanilla time deposits with the big banks in China. So that's where the opportunity is. That's where a lot of people are looking at where they can actually access that market and really benefit from those drivers."
He comments, "Some of the key reasons we've seen money market funds be so successful in China is basically the attractive yields they've offered. As recently as a few years ago, you could get money market funds offering 4% to 6% yield.... Also in China, we've seen very significant volatility in bond and equity markets in the past, and a lot of retail investors weren't that keen on that kind of volatility, especially when they could get a stable yield from money market funds, which was very secure. And finally, money market funds really benefited from the development of the e-commerce market in China, of the e-wallets in China, which used the money market funds as cash parking vehicles."
Shevlin states, "If we look at the split of money market funds, you can see it's really dominated by [e-wallets], it's approximately 42% e-wallets.... Then the second portion is basically the retail money market fund space, which is more traditional retail money market funds. Institutional money market funds are about 25%, that's local, corporate, institutional. And then the AAA money market fund space where JP Morgan Asset Management operates, represents only about 1% of the industry. But within that we represent about 86% of the AAA space via our joint venture partner in China, China International Fund Management, CIFM. So quite an interesting way of thinking about the funds."
Goldman's O'Callaghan says, "I lead our Client Portfolio Management efforts globally for Goldman Sachs Asset Management, for the Liquidity Solutions business based in New York. Our firm has a wide offering of onshore and offshore money market vehicles denominated in dollars, sterling, euro, and yen. In terms of our presence beyond yen in Asia at the moment, that is limited to the yen offshore product. However, we are looking to develop a few other offerings across Asia for our clients, both based locally in those markets, as well as large U.S. multinational corporations who have a currency denominated outside of the currencies that I just referenced in terms of our product offering."
He describes his clients, "You have the very large institutional type clients outside of U.S. borders, sovereign wealth funds, a very large hedge funds space abroad, you have corporates that have headquarters outside of the U.S., as well as the U.S. multinationals that have very significant regional presence across the region. So, I would say from a client diversification standpoint, it is very broad, very deep, very liquid in terms of where our clients are based, what currencies they hold and where their operations are focused in terms of managing their cash."
On Japan, O'Callaghan comments, "I would say when you think about Japanese money market funds or liquidity vehicles, really what you're focused on there would be Japanese government bonds and time deposits offered by the financial institutions that are based in the region. And so, the market is not as broad and not as deep, clearly as some of the other markets that we're engaged with, whether it's Dollars or Euro and Sterling.... When you think about negative rates, obviously we're all managing through a fairly substantial negative rate environment in Europe.... The Bank of Japan took rates negative a while back, and so that yield pressure remains across the yen products."
Shevlin adds, "An interesting note talking about Japan ... I remember when we started the business here, we had two Japanese Yen funds, onshore Japan, and at the time they were our biggest funds in Asia. China was very small at that time, and they remained quite large, even up to the point where rates went negative in Japan.... The Japanese market is actually huge, there is a ton of cash there. But unfortunately the regulations make it difficult to operate money market funds in the current environment. That's why you've seen a massive drop in the AUM of all the funds in Japan, which could directly come back if interest rates someday go positive."
He tells us, "In terms of China, ... the CSRC is the local regulator, which looks after the stock markets and money market funds in China. Overall, I think they have done a pretty solid job in regulating money market funds in China. They introduced the first regulations back in 2003, and they've progressively improved those and modified them over the years, especially during times of crisis.... The CSRC does look at what's happening in Western markets: what the SEC is doing, what Europe is doing, they look at IOSCO.... But they also adjust for local market nuances and local market liquidity conditions as well. Over the years ... we have seen regulation tighten to ensure funds are more tightly restricted in terms of liquidity and security."
Shevlin explains, "If we cast our minds back a decade ago, the deviation between the best and worst performing funds in China could be one or two percent, which is just huge when you think about the deviation between best and worst performing funds in Europe and the U.S. That over the years has declined quite dramatically to the point today, where the deviation is much smaller between the best and worst performing funds in China.... [T]hose loopholes, those ways for people to try and earn extra yield on the funds in China, because of their retail focus, ... that definitely has changed. I think that's a good thing, and it shows that the CSRC is listening to the market and aware of the risks that they face. And I think those risks are quite large."
Finally, he tells the webinar, "There are considerable credit risks in China.... A lot of people are very concerned about the level of borrowing, especially in local government [and] in corporates. And we see a lot of concern in the market ... increasing defaults, highly leveraged issuers, and opaque shadow banking markets, unique domestic rating agencies.... They all create a lot of challenges for people and investors who are used to, in the past, having government guarantees, either explicit or implicit, and those guarantees are now dissipating slightly. However, by having proper, detailed and independent credit analysis, these risks can be mitigated -- just like in any other market."
