With the cash stockpiles of multinationals in Asia continuing to expand, there is a growing level of interest from corporate investors in what Asia’s nascent money market fund industry has to offer. In this article, Aidan Shevlin, Head of Asia Pacific Liquidity Fund Management from J.P. Morgan Asset Management outlines the development of some of the budding key markets in the region, before offering a view on what the future trajectory of these markets might look like.
Head of Asia Pacific Liquidity Fund Management
Aidan Shevlin, Managing Director, is Head of Asia Pacific Liquidity Fund Management for J.P. Morgan Asset Management. Based in Hong Kong since 2005, Aidan is a member of the global liquidity fund management group and is responsible for managing all Asian liquidity funds and short duration bond funds. During his time in Asia, a key responsibility for Aidan has been the development, launch and management of local currency money market funds across the region.
Aidan originally joined J.P. Morgan Asset Management’s International Fixed Income group in London in 1997. In that group, Aidan had a wide range of responsibilities including managing short duration credit portfolios, European liquidity funds and Libor-based strategies. He was also previously an analyst in the fixed income quantitative research team.
Aidan obtained a B.A. in Banking & Finance from the University of Ulster. He also holds a M.Sc. in Finance and a M.Sc. in Computer Science, both from the Queens University of Belfast. He is also a CFA charter holder.
One of the key changes in Asia Pacific’s short-term investment landscape over recent years has been the growing internationalisation of the region’s money market fund (MMF) industry. Increasingly, the old local model is giving way to more international western-style MMFs.
For treasurers the timing of this development could not be more fortuitous. Cash on corporate balance sheets is continuing to pile up with repatriation taxes encouraging companies to keep liquidity in overseas subsidiaries. Traditionally, the options treasurers had for investing this surplus liquidity would have been of a very small number, limited mainly to bank deposits. But with MMFs boasting increased liquidity and size, it would appear evident that banks now have a new set of rivals competing with them for corporate cash.
Investing in Asia Pacific
Just how strong that competition is, however, still varies considerably across markets. Broadly, different stages of development can be classified into three tracks. In some of the smaller markets or less developed markets, there may be no MMF products at all; in other markets, meanwhile, there are a range of short-term investment products that would not be unfamiliar to treasurers who have worked in the US or Europe.
“When we look at Asia Pacific, we see quite developed markets in places like Australia, Japan and Singapore,” says Aidan Shevlin, Head of Asia Pacific Liquidity Management at J.P. Morgan Asset Management (JPM AM). “These are very developed economies and are large enough to support an MMF industry, especially countries like Japan and Australia, which have large populations, a huge deposit base and lots of cash in the market as well.”
Then at the other end of the scale there are markets like Indonesia and Malaysia, which Shevlin says are “not very sophisticated and not very developed; these are markets that are still in their infancy, effectively.” Perhaps of most interest to the corporate investor at the moment, however, are the markets Shevlin identifies as residing somewhere in between: chief among which is China. This is a market of great importance to the growth strategies of a large number of multinationals in the region, and the range of options open to the short-term investor here are growing by the day. “These are markets which are developing and growing quickly,” Shevlin says. For the treasurer, staying abreast of a perpetually evolving regulatory landscape and understanding the implications of such changes on the short-term investment landscape can be challenging, to put it mildly.
Rise of the redback MMF
How far China has come in such a short space of time is astonishing. It was just over ten years ago, in late 2004, that the China Securities Regulatory Commission (CSRC) established the first set of guidelines for MMFs, effectively giving the green light for asset managers to begin offering such products to investors in the country.
First, equity and balance funds begun to appear, but with interest rates being held artificially low by the People’s Bank of China (PBoC), there was growing investor demand for products, like MMFs, that could offer improved returns by investing in liberalised interest rates determined by market forces. Naturally, such funds, when they were established, proved very successful in attracting assets and in a very short space of time China had a budding MMF industry, albeit, at that time, one very much geared towards the retail investor.
It was not long before institutional MMFs arrived on the scene though. JPM AM, spotting the unmet demand for MMFs from corporates in China, began work on bringing new funds to the market for the first time but doing so was not entirely straightforward. At that time, China did not boast a AAA credit rating and, as such, an international MMF ratings framework proved excessively restrictive for Chinese markets. Collaborating with Moody’s and Fitch, JPM AM worked on developing a ratings framework based on a local scale which effectively treated China as if it were a AAA sovereign.
“That made sense because, naturally, if you are a multinational investor in China, you are already taking the sovereign risk so within the country itself you want to take the lowest risk possible; a T-bill or a policy bank bond, for example,” says Shevlin. “So that was what we launched: the first AAA rated MMF in China1. For institutional investors it was a new product which they needed time to understand. Therefore the first few years were very much a training exercise for us; trying to get clients comfortable with the instruments that were in that market, what we were doing in the fund and how we were managing it.”
The ability of MMFs to circumvent China’s regulated interest rates had, then, propagated two very contrasting styles of fund. For the retail investor, there were MMFs that prioritised yield above all other investment objectives. For the institutional investor, meanwhile, the market offered AAA constant net asset value (CNAV) MMFs emphasising security and liquidity.
Naturally, the latter have proved to be popular with treasurers investing on behalf of foreign multinationals in the country. An internationally recognised AAA rating was, of course, imperative for many such investors, given that it is commonplace for MNCs to have investment policies prohibiting deposits in unrated MMFs. Interestingly, however, institutional MMFs have been attracting a new type of client of late. “We are seeing more and more local corporates in China invest in our institutional products,” Shevlin says. “I think this is because Chinese corporates are becoming more international. The number of Chinese corporates in the last few years that have listed in the US or have shares listed in Hong Kong is growing and they need to comply with international standards. They need to be seen to be taking the best practice from different markets in how they conduct their business.” And, as any conscientious corporate investor knows, best practice is to invest company liquidity in a diversified range of investment products, of which MMFs are one.
Levelling the playing field
Yet in a country progressing incrementally from a closed, tightly regulated economy to one more greatly exposed to the oscillations of market forces, the competitive landscape in asset management was never likely to stand still for long.
In June 2015, the PBoC issued a regulation that will permit financial institutions in the country to issue large-denomination certificates of deposit (CDs). The move served as yet another indication that China’s governing authorities remain serious in their intent towards doing away with controls on interest rates, with banks having been given authority just the month before to raise deposit rates to 1.5 times the benchmark rate set by the PBoC.
This policy is likely to have significant implications for China’s MMF sector. We have already learned how, in the beginning, the disparity between the low returns banks were able to offer on deposits versus the market-rate MMFs helped give birth to an industry in China. With the elimination of that disparity it would seem reasonable to suppose MMFs will face tougher competition from banks for corporate deposits in the years ahead.
“We are seeing more and more local corporates in China invest in our institutional products. I think this is because Chinese corporates are becoming more international.”
“That removes the advantage we have from offering higher yields,” says Shevlin. “Also, we saw at the time of the last PBoC rate cut, they removed the ceiling on deposits beyond one year, although a ceiling currently remains in place for deposits of durations up to one year. This allows banks to compete more effectively not only with MMFs but also wealth management products and trust products for assets.”
But any competitive advantage the banks gain over MMFs from that policy may well be tempered by another regulatory change introduced earlier this year. In May 2015, China announced the introduction of a long-anticipated deposit insurance system. Traditionally, depositors in China have, of course, viewed all bank deposits as carrying an implicit government guarantee. Banks that have run into trouble in the past have always been able to rely on the state to stand behind them and, when necessary, provide them with an injection of capital.
With that implicit guarantee on deposits of any size now becoming an explicit guarantee on a mere RMB 500,000, corporate investors are likely to be more mindful of risk, something which could potentially make them think twice about taking all of their company’s liquidity out of MMFs and into bank deposits. “Investors are still trying to understand what this change means and to what extent has risk been reallocated from the government to investors. I think this is going to have a very big impact on investors’ allocation decisions as there is now the need to develop a heightened awareness of risk that was previously not required in China.”
Guiding the investor
The speed of change just in China – let alone Asia Pacific at large – is indicative of the challenge keeping up-to-date and understanding the range of different short-term instruments available represents for treasurers. That is why working with an experienced asset manager – like JPM AM – that understands the environment today and how it might be shaped by regulatory change going forward is vital, especially for those corporates who are new to the region.
“It is often a learning exercise when corporates first arrive in the market,” says Shevlin. These companies are, of course, investing money to build up their operations, and they are earning revenues in the country. But often they are not sure how to invest the cash piling up on their balance sheets. “That is why we do spend quite a bit of time educating clients – particularly those at headquarters who are less familiar with how things work here – as to the range of products available in each given market,” he says. “We educate them on how MMFs here work and how they are different from those which operate in western markets.”
So what advice does Shevlin offer to such clients with respect to their investment strategies in Asia Pacific? That, he explains, is very much country-by-country dependent. In the more developed markets of Australia, Singapore, Japan (and, increasingly, China), there are a reasonable range of advanced institutional MMFs available. Those venturing into markets elsewhere in the region would be advised, however, to exercise some caution around investing in MMFs. “Elsewhere in the region MMFs tend to be very retail focused,” he says. “In these markets investors need to be wary because the goals of the funds may be very different from those of the corporate. Retail investors are very focused on yield, but for the corporate the top priorities are security and liquidity.”
Beyond the normal due diligence processes treasurers should be observing prior to investing their company’s liquidity, Shevlin advises that inside China in particular, special attention should be given to counterparty risk. “The linkage between the rating and the credit spread on entities in the country may not be particularly strong. It would be prudent, therefore, for corporates to also consider the opinions of western ratings agencies where they can, and even in some instances perform their own credit analysis. For some products the risk is changing very quickly,” he says. “For MMFs I think it is a case of looking through the holdings, the reports and asking whether they are comfortable with what the fund is buying.”
The short-term investment environment in Asia has evidently come a very long way in a very short space of time, and there is little indication that this growth is about to lose momentum in the foreseeable future.
“That is why we do spend quite a bit of time educating clients – particularly those at headquarters who are less familiar with how things work here – as to the range of products available in each given market.”
On the contrary, Shevlin believes that in places like China, where MMFs assets of US$2.2trn are dwarfed by the US$120trn that is estimated to be invested in time deposits, there is still plenty of growing space for the industry. And with western multinationals continuing to look to expand in the region and Asian multinationals continuing to become more international in their outlook, demand for alternative investment products like MMFs should continue to grow in other markets too. “The pace of innovation and change across Asia is actually speeding up,” Shevlin adds. “The markets are getting bigger and everyone is getting bigger within it. These are still young markets with a lot of growth potential.”
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