As we wrote about earlier this week, Crane Data recently hosted its 8th annual European Money Fund Symposium in Paris, France, which featured two days of discussions on offshore money funds denominated in USD, EUR and GBP. Today, we quote from the Senior Portfolio Manager Perspectives panel, which featured Federated Hermes' Deborah Cunningham, BlackRock's Geeta Sharma and HSBC Asset Management's Florent Vassord. Asked about supply, Cunningham tells us, "You've seen [the CP] sector growing by double digits, especially since March when the Fed began raising rates. CDs are another popular investment choice, and then ultimately across both sectors, any kind of floating rate paper that you can buy. Whether it's bill floaters, agency floaters, any type of CP floaters, bank floaters, MTNs that are floating rate and issuance, those in a rising rate environment are extremely beneficial." (Note: Thanks again to those who attended and supported European MFS! Mark your calendars for next year's event in Edinburgh, Scotland, Sept. 25-26, 2023.)
She explains, "We're missing LIBOR as a reference rate for those floating rate securities. Almost the whole government floating rate market has [moved to] SOFR. Even on the prime side, you're probably looking at, at least 70% of the issuance coming through SOFR. But it does not accomplish the same thing as a LIBOR floater used to. With LIBOR you had credit implications associated with it, in addition to a curve.... SOFR is an overnight collateralized riskless rate. It just doesn't give you the same thing. Nonetheless, it is capturing interest rates as they're going up without constant transactions in overnight securities. So, floaters are still a popular choice."
On the extensive use of time deposits in Europe, Cunningham says, "It's mostly an overnight alternative. There's not as large of a repurchase agreement market in Europe as there is in the U.S. and there's not as much of a need. The Government funds in Europe, whether it's dollar sterling or euro denominated, are much smaller than the Prime funds in those sectors. And as such, time deposits really meet the overnight demand. You need to have more from a diversification perspective, more counterparties in that regard. But there seem to be plenty of those in in Europe as well."
BlackRock's Sharma comments, "Standard money funds are trying to stay short in this environment. The alternative to move into lower credit space has been attractive investment strategy, preferring short-term carry over duration, really. So that's certainly something that we see, a slight difference in variation of supply-demand.... But this is obviously still a very fragile sort of market environment. There's a lot of uncertainty.... In that environment, you want to be compensated for rate risk. You want to be compensated for credit risk. And I think that markets are still jostling with the rate view at the moment. But, as an investor, you have to be mindful of everything."
She continues, "In terms of the rate view, I think it's evident that the central banks are focused on inflation first and foremost. I can't see that changing any time soon. There's a lot of inflation that's really out of their control. Without slowing economies, it's not really going to be something they can address. So, I think we do run the risk of seeing that play out in that way. But I think the markets might be a little bit ambitious expecting at least the US Federal Reserve to cut rates soon after getting them to a multi-decade high.... It's likely that we're going to see a slightly more elevated inflation backdrop."
Asked about the differences between U.S. domestic money funds versus Ireland domiciled offshore funds, Sharma responds, "I think, largely, they're pretty much the same. They should be similar in strategy. But there are variations. One thing that sometimes I think issuers may be less aware of or less focused on is that the investor base is different. That's important because that means sensitivity to exposures can be different at times. We've seen that prevail over the number of events that we've experienced in the last few decades. So that can mean that the underlying sort of composition of an offshore fund versus an onshore fund could be slightly different with the exposure, particularly outside of the U.S. Definitely, in the offshore space [we] are more heavily weighted or biased towards some of the offshore investment offerings. So there's that difference, but often they are quite similar. It's the same banks if you're buying banks, corporates also issuing those markets."
She adds, "One thing I've started to observe, particularly in this current cycle ... is that the construct in the U.S. funds, onshore with the variable NAV setup, can lead to slight differences in portfolio approaches because of the sensitivities. Obviously with the dominance of the government and Treasury market in the U.S., I think there's a huge comparison between funds, yield spreads, etc. That can sometimes be something that's a unique consideration for an onshore fund versus an offshore fund that may not have the same dynamic because the government funds based in the offshore markets is still quite small."
Cunningham says, "From an investor base standpoint, I oftentimes tell people, if you read the prospectuses for both products, they look almost identical. But they may be different simply because of the investor base and the concentration or diversification of those investor bases.... What that allows that portfolio to then be comfortable with from an investment perspective. While the RRP is not available for offshore products, it nonetheless benefits everybody, whether you're an eligible counterparty or not. We have 15 different products that can transact repo with the Fed's facility and 12 of our products that can't. But they benefit from the capability of those products that can. So, I think despite the Fed's very specific requirements as to who can be one of their counterparties, it has broader tentacles that spread beyond those."
Discussing Euro MMFs and supply, HSBC's Vassord tells us, "I'd say it's mainly a market which is driven by a banking issuance and to meet requirement in terms of liquidity and liquid assets, both overnight and weekly assets. As in the States we could use both repo and overnight deposits.... Currently, the yield is higher so we prefer at this time to invest into overnight deposits. But we keep an eye on the repo market.... So that's a [factor] that we have to manage until year end and probably also next year."
He states, "We tend also to buy some commercial paper as well. It's mainly driven by ECP issued by banks. We operate [within] some rating constraints. There is not so much corporate debt.... Corporates are more looking to issue longer maturities. So, it's hard for us to ... diversify a bit more and ... it's hard to find some supply.... But after that, we are also buying some bonds and, in some agencies, as well. So, we've got the full spectrum."
Asked about NAVs, Vassord answers, "Sure, we are watching NAV movements.... But that's also something that is interesting with the new regulations. When we are talking about transparency for clients, it's important for them to have that kind of data. The clients can compare NAVs.... That's some information that your clients have today in the end, which wasn't the case few years ago. That's also something that the PM's have to keep in mind when managing the funds, because at the end, your clients will always compare funds.... And if you [an outlier] then you could face redemptions in your funds. So that's something also that the PM's have to manage very carefully. And for me it's something positive with the regulation because it provides more information to your clients."
Finally, on ESG and sustainability, Sharma says, "I think that's an area that's definitely interesting.... Investors themselves want to somehow incorporate these considerations across the board into their asset allocation. I think it's important as money market participants to recognize that and sort of mobilize. As an investor, I think about investment risk. We believe that climate risk is investment risk.... So, with the companies in which we invest, it's important that we focus on what they're doing and how they are adapting their strategy over time.... I think what we're seeing in the money market space is not only the evolution of strategies, which may be some more focused on these considerations and ESG integration more broadly. But also minimizing certain risks. More recently in the last few years, we've started to see issuance that enables money market investors to participate in the mobilization of capital towards projects that are designed to achieve these goals."
