Tipping the Balance:
present and future for MMFs
by Helen Sanders, Editor
This month brings Remembrance Day when we think back to the victims of war over the past century. Many war memorials are engraved “Lest we forget”. Today’s conflicts in so many parts of the world suggest that we have indeed forgotten the tragedy of warfare. But as many parts of the world now start to pull out of financial crisis, are we also in danger of forgetting the lessons that we have learnt? The financial markets are returning to confidence and liquidity and some investors are starting to cast their eyes around for greater yield opportunities. For corporate investors, the past year has seen major changes, with money market funds (MMFs) proving a steadfast and reliable means of investing cash while satisfying the company’s security and liquidity objectives. Looking ahead, proposed regulation should make it easier for investors to identify the MMFs that meet their investment objectives.
MMFs remain an important investment vehicle, but investors are seeking the more balanced investment portfolio that prime funds represent.
Commentators often cite the growth in assets held in MMFs over the past year almost as a validation of their quality and suitability for corporate investors. This view tends to ignore the initial reaction to the Reserve Fund ‘breaking the buck’, which was to move away from MMFs, particularly in the United States, although confidence returned quite quickly. The growth of government funds (i.e., MMFs exclusively comprised of government debt) immediately following the crisis has been described as a ’flight to quality’ amongst investors as they sought investments with the lowest possible risk as the crisis shook the markets.
Duncan Thomson, Investment Director, Scottish Widows Investment Partnership summarises some of the motivation for changes in investor behaviour over the past year,
“We have seen a variety of changes this year which have influenced the flow of cash both into and out of MMFs. Investors have invested more in MMFs as they became more concerned about riskier assets. Others recognised that they did not have the necessary skills, time or resources to manage assets themselves, and therefore looked to pooled, outsourced investment vehicles such as MMFs. Furthermore, although investment yield has been a minor consideration during the crisis, MMF yields have compared well compared with those available on short-term investments such as deposits.
Conversely, some investors have developed a negative perception of MMFs since the collapse of the Reserve Fund in the United States, and have preferred to invest cash directly into government-guaranteed banks.”
David Rothon, Fixed Income Product Specialist, Northern Trust continues,
“Use of MMFs has increased amongst corporate treasurers for a number of reasons. As banks’ credit ratings have been downgraded, there are fewer possible investment counterparties for companies whose investment policy stipulates an ‘AA’ issuer rating, for example. There is also pressure on treasurers to demonstrate a high level of due diligence in their investment decisions. MMF providers have far greater access to credit analysis tools and resources than an individual treasury department, so it makes sense for treasurers to outsource their cash investment and use MMFs.”
Although IMMFA AAA-rated funds have grown by nearly 7% during the first three quarters of 2009 (iMoneyNet) this does not reflect the differences between funds. Using data provided by iMoneyNet, we can see some interesting trends over the period from 31 December 2008 to 30 September 2009.
USD funds remain the largest, with over $280,000m in assets under management at end September 2009, but this reflects a fall of nearly 8% since end 2008. This is not to say that MMFs per se are proving less attractive to investors, however. While the first quarter saw a continuation of the fall in assets that started in 2008, the third quarter saw gross inflows into USD funds. The statistics for USD funds are influenced strongly by government funds (i.e., funds solely comprising government debt), which emerged strongly in 2008, but assets in these funds fell by nearly 45% during the first three quarters of 2009 while assets in prime (or regular) USD-denominated funds actually increased by 11% over the same period. These statistics perhaps indicate that the ‘flight to quality’ has halted, and investors are returning to normal investment behaviour. MMFs remain an important investment vehicle, but investors are seeking the more balanced investment portfolio that prime funds represent. Security and liquidity remain vital considerations, but investors are not willing to give up opportunities to earn a yield on their cash that is comparable with deposits.