by David Rothon, Director of Cash & Fixed Income Product Management, Northern Trust
The global financial crisis resulted in an immediate ‘flight to security’, with many corporate investors seeking to invest their cash in products with the lowest possible risk. This was reflected in the growth of money market funds (MMFs) that invested exclusively or predominantly in government debt. Over the past year, these government MMFs have declined in appeal as corporate treasurers revisit their risk management policies, and seek a higher rate of return without compromising their liquidity and security objectives. Consequently, the risk-reward balance continues to be a topic of frequent discussion as treasurers determine:
- Their acceptable level of volatility, and over what period;
- The amount of liquidity that is required over the short, medium and long term, including that required to cover unforeseen events;
- The minimum credit quality that is acceptable (often AA or higher), whilst recognising that the higher the credit quality, the lower the return;
- Sovereign risk policies, in addition to credit and bank risk.
With these various factors pulling cash investment decisions in different directions, treasurers may be finding it difficult to find investment products that meet their criteria.
Appetite for investment flexibility
In addition to custom-solutions that meet their specific short to medium-term investment needs, corporate investors are also demanding a greater range of skills and capabilities from their asset managers.
The European crisis continues to encourage conservatism in treasurers’ investment approach, particularly in relation to sovereign risk. However, we are also witnessing a growing appetite for a flexible MMF product to complement prime AAA-rated MMFs, to provide enhanced yield on a portion of company cash whilst upholding treasurers’ security and liquidity requirements. An obvious question, however, is what such a product could look like, bearing in mind the regulatory changes that are in progress in the MMF industry. The likelihood is that in addition to today’s stable NAV (net asset value) AAA-rated MMFs, there will also be some demand for variable NAV MMFs.
Not all institutions will be comfortable with this, so we also see the need emerging for more flexible products that can be customised to the needs of the corporate investor. For example: if some treasurers do not need immediate access to liquidity for part of the institution’s cash, they should be compensated for this in the form of a higher return (i.e., why pay up for liquidity if it is not required?).