In a recent article by CorporateTreasurerArticle published on 9 January 2024., our head of money markets, Philippe Billot, and our CEO and general manager of Pictet Asset Management Singapore, Stefan Haab, discuss the benefits of money market funds for corporate treasurers.
Money market funds (MMFs), a type of mutual fund first developed in the 1970s, have emerged as a trillion-dollar market in the US - with total assets reaching $5.9 trillion as of the end of November 2023, according to the Investment Company Institute (ICI) while in Europe, assets held in MMFs stood at €1.1 trillion ($1.18 trillion).
Moreover, according to data from EPFR, almost $1.9 trillion has been poured into US's money market funds since the beginning of this year alone.
A money market fund invests in instruments with higher liquidity and nearer terms, offering flexibility and relatively stable returns at lower risks. In the US, for example, treasury bills are often included in a MMF's portfolio.
"MMF strategies provide great benefits for corporate treasurers by providing flexible access to their cash with no constraint of investment date and size," Philippe Billot, head of money market at Pictet Asset Management, told CorporateTreasurer.
Suggesting there is plenty more work to do to convince Asia's treasurers of the benefits of MMFs, one senior Singapore-based regional treasurer of a US firm told CT that treasurers are using MMFs in Asia as part of a diversified strategy but doesn't see "a big shift in that direction".
Cash alternative
For many asset managers, MMFs function as a cash-equivalent solution. Clients including treasurers are attracted to the vehicle for its transparency compared to bank deposits, Billot explained.
"In terms of security and liquidity, MMF offers a very nice alternative to deposits," Billot said.
"In terms of security and liquidity, MMF offers a very nice alternative to deposits "
"A money market fund offers transparency of its underlying assets, while such exposure information is not available with bank deposits. And by nature, MMFs are not leveraged compared to banks' balance sheets," he added.
"After the banking turmoil early last year, counterparty risks have returned to people's sights. With bank run and yield increasing, the risk is reappearing in the market."
Apart from trade finance and loans with preferred banking partners, treasurers should explore more alternative investments to diversify portfolio and dissolve risk factors, he suggests.
"MMFs not only invest in banking certificate of deposits, but many other types of assets including treasury bills and commercial papers, and can be a lot more diversified out of the banking system," he noted.
Moreover, asset managers are also looking to diversify their portfolios by tapping into more currencies, he added.
Asia opportunity
Compared to other global markets, MMFs are relatively new in Asian allocations.
Billot said: "More market education is needed to introduce investors to money market strategies, as well as benefits and risks." MMFs are "as heavily regulated as banking", he states. For example, in July the Us Securities and Exchange Commission (SEC) "money market fund reforms" required an increase in portfolio minimum liquidity to 25% (up from 10%) and 50% (up from 30%) for daily and weekly liquid assets, respectively.
"Scrutiny from regulators is strong in this industry and accidents in the past have been very rare," he added.
"Scrutiny from regulators is strong in this industry and accidents in the past have been very rare "
"There is room in Asia's treasury practices for different types of instruments including money market funds," said Stefan Haab, chief executive officer (CEO) and general manager of Pictet Asset Management Singapore, citing a poll result at CTWeek Singapore 2023 held in late November, which suggested that one-third of treasurers who attended have incorporated MMF into their strategies.
Treasurers based in Singapore and Hong Kong will be leading the investment into money market funds in Asia, he predicted. While in North Asia, such discussions might take a while to catch up.
Showing some of the momentum of MMF funds in the region, in early November, Value Partners, a Hong Kong-headquartered asset management firm, launched a USD-denominated MMF for retail investors.
"[The launch] enables investors to utilise the fund as a cash parking tool and reinvest in the equity or fixed income markets whenever market opportunities arise," its media note suggested, citing high short-term interest rates and volatility in the equity market as drivers behind cash-equivalent solutions.
Those with MPFs in Hong Kong, the equivalent of pension funds, can also choose to place money with MMFs with their MPF providers.
Acknowledgement
Stefan Haab contributed to this article.
