In a lower for longer interest rate environment, corporate investors that want some return on non-immediate cash are having to look beyond money market funds. Asset managers are responding to the demand for alternatives with new product innovations.
Industry experts have been saying for a long time that the coming regulatory shake up for money market funds (MMFs) in Europe is very likely to preclude a growth in new short-term fund products for institutional investors. They were not wrong.
At the same time as industry consolidation is making the investors’ choice of asset manager narrower, the range of short-term investment products they have to choose from appears to be getting a lot bigger. In the last couple of years, we have indeed seen the launch of numerous new fund products from the likes of Northern Trust, and UBS Asset Management, amongst others.
The latest addition comes from J.P. Morgan Asset Management Global Liquidity business, which earlier this month announced the launch of a new UCITS fund, the Sterling Managed Reserves Fund (MRF). And one of the things that is interesting about this product is that it shows the proliferation of new fund products is not being driven by regulation alone; it is also very much a response to cash investors evolving priorities in the lower for longer rate environment.
For liquidity investors that can accept a longer investment horizon, JPAM says that the sterling MRF – which has a T+3 settlement cycle – offers returns above MMFs while maintaining the same focus on cash preservation and liquidity. After the Bank of England’s decision to cut rates to new historic lows in August this year, the asset manager expects to see a lot of interest.
“We are in a lower rate environment and there now is the potential for it to get even lower still,” says Neil Hutchison, Portfolio Manager, Sterling Managed Reserve Fund, J.P. Morgan Asset Management. “When net returns are getting close to zero, solutions like this provide low volatility incremental returns and obviously become a much more exciting proposition for clients.”
To generate that additional return, the fund will take on slightly more interest rate and credit risk, and will invest in corporate, asset and mortgage backed securities as well as more traditional money fund instruments. S&P has assigned an AA bond fund rating to the product. “It might sound a bit racy,” Hutchison admits, “but it is not. The strategy sits firmly within our Global Liquidity business, and its aim is to provide strategic or segmented cash solutions for corporate clients looking for low volatility, incremental returns over an AAA-rated liquidity fund. We have the same credit risk approach and the same approach to principal preservation.”
With clients now giving ever greater attention to the weighting of their core, operational and strategic cash buckets, Hutchison believes the new MRF could be an effective supplement for investors in sterling AAA rated MMFs. “We are certainly seeing a greater focus on cash segmentation, because in a low to negative rate environment that becomes a very fruitful exercise. They are finding that they don’t need to have cash sitting at minus 20bps and, for those clients, a fund like this certainly would certainly provide a lot of benefit in terms of yield pick-up.”
J.P. Morgan Asset Management Global Liquidity’s new Sterling Managed Reserve may not be appropriate for every cash investor, and certainly not all types of cash. But all in all, the launch of new products like this does mean much greater choice for the corporate investor – and in the current climate, that can only be a good thing!