Early last week, Crane Data hosted its 9th annual European Money Fund Symposium in Edinburgh, Scotland, 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 was moderated by Dan Singer of J.P. Morgan Securities and which featured Douglas McPhail of Morgan Stanley Investment Management and Ketan Shah of Legal & General Investment Management. They reviewed the highlights and issues in European money funds over the past year and discussed their latest portfolio strategies. (Note: Thanks again to those who attended and supported European MFS! Mark your calendars for next year's show, which will be Sept. 19-20, 2024 in London, England.)
Singer says, "So a lot's happened over this past year.... During the Crane's conference last year, the UK was going through a mini budget and gilt crisis. Subsequently we've seen a significant amount of rate hikes in all three major currencies. On top of that, the failure of a U.S. bank in SVB, the failure of a European institution in Credit Suisse.... It's not been exactly the easiest year to navigate. So we're going to kick off there. Ketan, you manage a large sterling fund. Talk to us a little bit about the past year."
Shah replies, "For the past 18 to 20 months, the general feeling is that it's been a great period for money market funds, though not without its challenges, especially the client base given the rapid hiking cycle we've been through.... We've been able to pass through the rates to our clients quickly.... The lag between our benchmark, SONIA, and [our fund] is measured in weeks, so clients have been able to see that benefit quite quickly. It feels now we're coming to the end of that cycle. I think last week was a bit surprising in that the market effectively gave the Bank of England the 25 basis point hike, but they chose not to do it.... It feels like we're now at a level where we're going to stay here for long period."
McPhail comments, "In terms of the euro funds ... our client base is actually seeing the benefit of money market funds through that period. Having a single name counterparty risk in terms of having a cash at a bank obviously carries a high degree of risk. So we've seen a lot of flows coming into our portfolios from sectors of the market that we've not really seen before and from countries that we've not really seen before. They are starting to see the diversification benefits of being in a money market fund, and obviously a very competitive yield."
He continues, "We saw that in terms of overnight deposit rates, it's not really been passed on to corporate deposits, whereas money market funds have been able to pass on those rates very quickly through this hiking cycle, particularly for the euro market where you've gone through a period where the market has probably underpriced what the ECB was going to do.... So running portfolios very, very short has been definitely the way forward, targeting maintenance periods and allowing as much of the portfolio to roll into new, higher yielding assets as soon as you start a new maintenance period. This has been key because you simply aren't being compensated for taking any sort of long-term exposures with inadequate yield curve steepening ahead of these meetings."
McPhail tells us, "Going to go back to March 2020 when we saw a significant amount of market disruption, we had a lot of clients coming through that negative yielding period who were simply chasing zero or just chasing positive yields. So a lot of their cash positions were held in probably inappropriate products ... in longer-dated products, in short duration bond products. They were chasing zero effectively ... when that market kind of really blew up. You saw credit spreads widen quite significantly. A lot of those cash positions started showing significant mark-to-market losses."
He adds, "So we probably saw more cash flows coming into the portfolios off the back of that, as people realized that, ... having that shorter duration is not necessarily always a bad thing. And ... we've been able to carry our client base with us through the hiking cycle. As I said earlier, because of the lack of [diversity in] deposits ... you're starting to see jurisdictions that we've perhaps never seen in money markets before coming into our products."
On the investor base, Shah states, "I think we've just seen a renewed interest in money funds from, I guess you would call our core client types. So, you know, corporate treasuries, local authorities. I think there's just a renewed interest now that rates are ... more reflective of the interest rate environment. We've also seen -- [though] it's quite a small -- [interest in] retail funds, about L2.7 billion. That's actually gone up about 25% this year. So we are starting to see a bit of traction there as well.... I think it's a product that been on the shelf for so long, that maybe with a renewed sales focus, we might see a lot more growth there."
Singer adds, "My experience, moving to France in the last two years.... There is a significant amount of retail interest there.... For instance, when I opened up my bank account with HSBC, in terms of the suite of offerings, there is an option to put it into a money market fund.... In the U.K., it's just not as institutionalized in terms of the retail psyche.... The structure of the U.K. market, it seems a bit more, you know, the National Savings Fund or you know, the one-year fixed rate from X, Y or Zed Bank."
He comments on money funds in Europe, "We've definitely seen a greater interest from a broader range of investors -- asset managers, private banks, corporate treasuries, and also government accounts, central bank accounts for a variety of reasons. I'd say probably in the corporate treasury side it's just generally net interest.... You're starting to see a lot more diversification, I guess, in terms of the interest in in money markets as an asset class."
Finally, when asked about supply, Shah answers, "The universe for liquidity funds is quite finite. So from an overnight perspective, we have time deposits and overnight reverse repo.... I probably split it 50-50 between overnight repo and time deposits.... We're staring to see competition for overnight deposits.... That's probably a dynamic we haven't seen for ten years, so it's nice to see that dynamic come back in.... Obviously, the bulk of what we do is in CP, CD issuance, and from a credit perspective, variable rate MTNs [based off] SONIA. That market's a bit more interesting."
