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Managing Risk, Leveraging Opportunities
An interview with Kathleen Hughes, Head of Global Liquidity Management Sales, and Jason Granet, Head of International Cash Portfolio Management for Global Liquidity Management, EMEA, Goldman Sachs Asset Management
We have seen the SEC1 refining 2a-7 funds in the United States, ESMA2 (formerly CESR) issuing standard definitions of MMFs in Europe and IMMFA3 revising its COde of Conduct, partly in response tot eh crisis. What are your thoughts on these changes?
Kathleen: IMMFA and EFAMA started working on an initiative to standardise the MMF industry a few years ago, which has since been adopted and taken one stage further by ESMA. The new definitions of Short Term MMFs (of which IMMFA funds form a subset) and MMFs offer greater clarity to investors, which is a positive development for the industry. The compliance deadlines by MMF providers (1 July 2011 for new funds, 31 December 2011 for existing funds) are aligned with the implementation of UCITS IV legislation; however, local regulators in certain countries, such as Ireland and Luxembourg have already adopted these classifications into national law.Although the introduction of new, standard definitions is a positive step forward, these are still relatively high-level in terms of weighted average life (WAL) and weighted average maturity (WAM). The IMMFA Code of Conduct provides further refinement in terms of the way in which funds are managed, which in turn encourages greater investor confidence.
Jason: One of the distinctions made by ESMA is that while MMFs, according to the new definition, must have a variable net asset value (NAV), Short Term MMFs can have either a stable or variable NAV. Most corporate investors will have a preference for a stable NAV to provide greater reassurance on the return of principal. Consequently, we are seeing greater interest in IMMFA funds as investors recognise how these products contribute to their risk and liquidity objectives.
Kathleen: The new ESMA definitions have emphasised other reasons for focusing on IMMFA funds too. For example, there is a significant difference in WAM between Short Term MMFs and MMFs. While the former can have a maximum of 60 day WAM, MMFs can have a WAM of 6 months, which makes a significant difference in the way that the fund is managed, with a greater appetite for risk.
Jason: In Europe, there has been relatively little consistency across different types of MMF compared with 2a-7 funds in the United States, with the exception of IMMFA funds. We are now seeing more commitment amongst regulators and industry associations globally to achieving universally recognised standards and definitions. This is particularly important for multinational investors seeking to use similar investment products across all the regions in which they operate.
To what extent have changes to regulations and industry guidelines resulted in modifications to the way that GSAM manages its AAA-rated IMMFA funds?
Kathleen: Our leadership in cash management dates back to 1981, when the Fixed Income Division acquired management responsibilities for $2bn in two institutional money market portfolios. GSAM was formally established around this small but growing business. As we mark 30 years in global liquidity management, our assets have grown to $244bn, which is approximately a third of GSAM’s total AUM (as of 31 March 2011). In fact, 2011 is also a milestone here as we pioneered the industry in Europe 15 years ago, four years before IMMFA was first incorporated.
Throughout our history, we have always kept investors’ primary objectives to preserve capital, manage risk and deliver liquidity at the forefront of our investment strategy. Consequently, corporate investors select GSAM as they recognise our strong commitment to risk management and credit research. In addition to the research capabilities of our GSAM portfolio managers, we also leverage the resources of the Goldman Sachs Credit Risk Management and Advisory department, with over 330 credit professionals delivering separate and independent credit analysis.