Money market funds hit the headlines last year as investors became fully aware that not all funds invest in a similar range of instruments.
The collapse in September of Reserve Primary Fund, the mutual that held $785m (E609m) in Lehman commercial paper and was the first such fund to break the buck for 14 years, focussed attention on the underlying investments in these funds. Investors fast became aware of the differences between products and fled to the safety of Treasury and gilt funds.
“During September last year dollar-denominated money market funds in Europe lost 15 per cent of their assets under management as a response to the troubles experienced onshore,” estimates Hugh Briscoe, European product manager for GSAM’s Global Liquidity Management team.
“Around $70bn went into Treasury funds in September and October and very little of that has left. The fact that we have not seen a significant outflow from the safety of government debt tells us that investors continue to be cautious,” he explains.
Managers are now taking pains to ensure the liquidity of their funds. “What’s changed is that investors and providers are focussing on security and liquidity instead of searching for a few extra basis points,” says Jonathan Curry, head of European cash management at Barclays Global Investors.
The BGI Sterling Liquidity First Fund currently has a weighted average maturity of around 15-20 days compared with 30-50 days in normal markets, for example, while 18 months ago, around 20 per cent of GSAM’s Liquid Reserve fund was in overnight instruments, but that level has since been boosted to 37 per cent.
“We’re very conscious of the general decline in the credit quality of many issuers and this has also led us to shorten the maturity profile of our portfolios as well, of course, as continuing to ensure an intensive assessment of credit quality,” says Chris Cheetham, CEO of Halbis, the active management specialist within HSBC Global Asset Management.
“Although this approach to investment strategy has led to lower yields than might otherwise have been achieved, we strongly believe that a conservative strategy is in the best interests of our clients to whom we are committed to providing both security and liquidity,” he adds.
The more liquid funds were in a better position than their peers to handle large redemption requests last year, but for some, liquidity proved hard to regenerate in volatile markets, exacerbated by investors being able to look at the fund and see for themselves when assets would be maturing.
The majority of flows into government-only funds have been from US$ money market funds into US$ Treasury funds because dollar investors appear most nervous, says Mr Curry.
The US remains the toughest market. “A lot of the flows went to US Treasury strategies which may be seen as more secure so the assets were not necessarily lost by fund complexes,” says GSAM’s Mr Briscoe.
“But at the same time we have seen interest rates fall in Europe and the UK. The Fed Funds target rate is now very low and this is impacting US Treasury funds which may struggle to generate returns after management fees,” he explains.
The Federal Reserve last month lowered its target overnight lending rate to a range of zero to 0.25 percent. Since money funds must maintain an average maturity of 90 days or fewer, their yields respond quickly to changes in short-term rates, usually with a short lag.
This prompted Vanguard Group, for example, to close its main US Treasury $8.3bn Treasury Money Market Fund and the $27bn Admiral Treasury Money Market Fund to new accounts in late January, citing a need to protect existing shareholders as treasury yields hover close to zero. The next interesting trend will be when investors pull out of government assets in significant numbers, but that does not look like being any time soon.
“Interest rate policies are currently managed at the expense of liquidity policy - especially in the US,” says Stefan Kreuzkamp, fund manager at DWS Investment.
“In Europe, the situation is less drastic. We expect the ECB to set the rate between 1 and 1.5 per cent. In the US, interest rate policy will remain unchanged until 2010. Until then, the Fed will support the market with liquidity. A solid money market fund should produce a performance of 1.5 and 1.6 per cent.”
“In these times, it is essential to pick the right issuers which will survive the crisis,” Mr Kreuzkamp adds. “We are invested in credits from solid, well financed blue chip companies such as BASF, Unilever, Eon and Daimler. An asset class which represents substantial opportunities due to the fact that their image is tarnished are asset backed securities. Again, it is important to pick top-notch securities - and to run an analysis independent from the rating agencies.”
