by Aidan Shevlin, Head of Asia Pacific Liquidity Fund Management, and Ben Ford, Head of Global Liquidity Sales, South East Asia and Australia, J.P. Morgan Asset Management
Corporate investors in Asia are benefiting from a broader range of investment options than ever before. While there are major differences relative to Western markets, regulatory changes and market dynamics can have similar effects on both markets, regardless of geographical location.
Since the global financial crisis, the investment and regulatory landscape for money market funds has been undergoing dramatic changes – at perhaps the quickest pace in the past forty years. Especially, in the US and Europe, the combination of exceptionally low interest rates and continuous regulatory change has created uncertainty and investment challenges for money market fund (MMF) managers and investors alike. Asian money market funds have been relatively sheltered from the challenges facing Western money market funds. However, this does not mean they are immune to global and local regulatory reforms or rapidly changing local market dynamics. Investors in Asia should be aware of these challenges and the potential impact on their investment strategies and goals.
Investor perspectives – East versus West
Treasury teams working for Western multinational or Asian-headquartered businesses share similar investment objectives: security, liquidity and yield. However, there are some important differences in how they define and pursue these objectives. For example, as Ben Ford, Head of Global Liquidity Sales, South East Asia and Australia with J.P. Morgan Asset Management notes, “In times of crisis, while global companies would follow a ‘flight to quality’ by investing in US Treasury Bills, many Asian companies would pursue a ‘flight to familiarity’, investing with local institutions perceived as strong and reliable”.
Historically, Asian corporate investors have mainly invested in time deposits for both their USD and local currency cash balances, as a lack of investment opportunities, more strictly regulated markets and close links between local banks support this choice. Meanwhile, global investors with small local currency cash balances have also been comfortable with time deposits, while sweeping larger cash balances back to their home country. However, Asian bond and money markets are developing rapidly while interest rate liberalisation and broader investment choices are creating opportunities for increasingly sophisticated Asian and Western corporate investors to diversify, boost yield and reduce their risks.
In Europe and the US, money market funds are well understood by corporate investors, regulators and the wider market. In contrast, the money market fund industry in Asia is relatively young and dynamic; however, both awareness and adoption of this relatively low-risk investment vehicle is expanding. As Ben Ford notes, “Both Western corporations that already use MMFs in other regions, as well as fast-growing, sophisticated Asian corporations that are seeking to emulate global best practice in their treasury departments, are very receptive to the development of Asian local currency money market funds”.
According to the results of the recent J.P. Morgan Global Liquidity Investment PeerViewSM 2015 survey (it surveyed over 400 treasurers, CIOs and other senior decision-makers, representing more than 400 unique entities around the world), stable net asset value (NAV) MMFs account for 34% of cash balance allocation in the Americas, 30% of cash allocation in Europe but only 11% in Asia. Yet 21% of all respondent organisations are planning to increase their allocation to stable NAV MMFs over the next twelve months.
The emerging role of MMFs in Asia
In the US and Europe, money market funds have a long history with well-established and widely understood guidelines and characteristics. Whilst standardised rules, especially for AAA rated money market funds help ensure high-quality and liquid investment vehicles, they also severely limit the potential range of returns available from different providers.
Across Asia, most countries regulators have their own unique guidelines for money market funds; typically, these guidelines are looser than Western standards and allow a wider degree of discretion and flexibility in management of the funds. In addition, the wide range of regional sovereign ratings from AAA for Singapore and Australia down to BBB- for Indonesia make it challenging to apply global rating agency standards to local money market funds.
This is not to say that regulators in Asia are complacent or behind the curve: in fact, in China, Australia and Japan, regulators are closely monitoring developments in the US and Europe, and are keen to ensure that their respective funds industry operates according to accepted international best practices. The China Securities Regulatory Commission (CSRC) recently issued draft guidelines for consultation which, when adopted, will represent the most significant change in the MMF industry since it was established in 2003. These new guidelines will align Chinese MMFs far more closely with their North America and European counterparts, with tighter concentration and duration limits, higher liquidity requirements, and more rigorous credit constraints, all of which will promote better fund liquidity and security. Finally, the size, liquidity and sophistication of local bond and money markets also play a critical and differentiating role in determining how successful local money markets can be in achieving their three objectives; security, liquidity and yield.