This issue’s question
“Aside from bank deposits, what short-term investment options are corporates in Asia Pacific using?”
Chinchin Ma, Client Advisor, Global Liquidity, J.P. Morgan Asset Management:
Corporates in Asia Pacific are placing their short-term cash holdings in a multitude of investments, with constant net asset value (CNAV) money market funds (MMFs) and structured deposits representing the most popular choices outside of traditional bank deposits, according to the latest J.P. Morgan Asset Management Investment PeerViewSM survey.
MMFs are still the most popular short-term cash option for Asia Pacific corporate investors, with survey respondents in Asia holding 42% of their cash holdings in this category.
The growing appeal of MMFs
MMFs are still the most popular short-term cash option for Asia Pacific corporate investors, with survey respondents in Asia holding 42% of their cash holdings in this category. This is no surprise, given that the primary goals of MMFs are to preserve capital, offer a high degree of liquidity and diversify investment risk – all priorities that are shared by corporate treasurers – while offering a competitive yield. In addition, 35% of respondents to the study in Asia have also anticipated increasing the allocation of CNAV MMFs within their investment portfolio, based on the future market outlook and interest rate forecast.
The flexibility and liquidity of MMFs are helping treasurers in Asia to meet their unpredictable cash flows. This is particularly useful as only 30% of our survey respondents in Asia can accurately forecast their cash flows quarterly or beyond, compared with 60% of respondents in the US.
In addition, MMFs offer global investment diversification to Chinese financial institutions for their offshore US dollar liquidity management, reducing their reliance on tight domestic funding conditions and limited domestic counterparties.
Tailored liquidity solutions
Ultra-short duration fixed income strategies catered for reserve cash with a six month to one year investment horizon are also becoming increasingly popular. These strategies typically outperform MMFs in terms of total return, whilst minimising potential negative interest-rate sensitivity compared to longer duration strategies.
As Asian corporates tend to have a home country bias with respect to credit exposure, having a customised separately managed portfolio which invests in Asia-focused US dollar investment-grade issuers not only accommodates this bias, but also presents yield-enhancing opportunities.
Lauren Oakes, Head of International Liquidity Solutions Sales, Goldman Sachs Asset Management:
We have seen increased interest in alternatives to bank deposits, primarily driven by concerns about low rates on deposits and recognition that deposits are not risk-free due to counterparty exposure to the bank. We see two main trends among corporate treasurers looking to address these concerns.
First, money market funds have become more popular as a short-term cash investment option. Many companies have implemented investment policies for short-term cash that limit counterparty exposure and set minimum credit rating requirements for deposit-taking institutions or funds. High quality money market funds offer a convenient way to comply with these requirements since they are ring-fenced investment vehicles with high degrees of diversification, AAA ratings and intraday liquidity.
Investing strategic cash in a portfolio of highly rated securities with a slightly longer duration compared to money market funds could improve the diversification and risk-return profile of the overall cash balance.
In addition, online investment portals provide a simple and easy subscription and redemption process for money market funds, with added risk management tools and significant operational efficiencies. Finally, in a rising rate environment, banks may not be able to pass higher rates on to depositors as quickly as money market funds can to investors.
The second trend we’ve seen is that some of the more sophisticated corporates with sizeable cash balances are starting to think of their balance sheet cash in two timeframes: operational capital for day-to-day needs and strategic cash that can have a specific, longer-term duration. By identifying their cash requirements across different timeframes, they can then choose the most appropriate product for each bucket.
Investing strategic cash in a portfolio of highly rated securities with a slightly longer duration compared to money market funds could improve the diversification and risk-return profile of the overall cash balance. The portfolio can be constructed within the parameters of their investment policy, and could allow for a significant amount of customisation depending on whether it is structured as a separately managed account or in a fund format.
Historically, corporates in Asia have relied on single product strategies for managing cash, however a diversified portfolio approach to cash management is the best practice and most optimal way for corporate liquidity management, as different cash management products are complementary to each other.
Crystina Hickey, Vice President, APAC Institutional Cash Sales, Trading and Liquidity Strategies, BlackRock:
It is a unique time for corporate cash investors in Asia Pacific. Historically, most corporates have kept their cash in bank deposit products. More recently however, the convergence of two dynamics are encouraging these investors to seek alternatives to traditional on-balance sheet solutions. On the one hand, globalisation and growth are generating growing cash stockpiles held by in-region multinational and locally headquartered corporates alike. On the other side of the equation however, new regulations such as Basel III and the Liquidity Coverage Ratio are reducing the appetite for client deposits at many global and some regional banks.
As a result, many corporate cash investors are seeking to manage their cash more actively. MMFs are gaining particular popularity as a viable off-balance sheet alternative for this excess cash. For some clients, MMFs have been used to supplement time deposits for some time, but for many the product is new.
MMFs are a logical next step for those who have traditionally used banking products because like time deposits, MMFs’ primary objectives are firstly, to seek to preserve principal, and secondly to provide liquidity to meet a client’s needs. Thirdly, MMFs aim to provide competitive yield, without sacrificing the first two objectives.
Risk of principal loss has always been the critical concern of cash investors. As growth in Asia Pacific continues, and cash pools increase in size, it becomes ever harder to achieve the necessary diversification to help insulate a portfolio against credit and counterparty risks. Appropriately diversifying against these risks through laddered time deposits across local banks can be time-consuming and difficult. MMFs can provide an easy way to achieve this because they are governed by strict diversification and credit quality requirements.
Operationally, same day dealing in MMFs allows an investor on-demand access to their cash when needed, under normal circumstances. Active portfolio management and transparency also benefit the liquidity profiles of MMFs, as they are continually adjusted to keep pace with changing market dynamics.
As the Asia Pacific region continues to grow, corporate cash investors will benefit from flexibility to manage large pools of cash efficiently across various businesses, jurisdictions, currencies and needs. This is particularly true for small treasury departments at local corporates or local branches of MNCs. The standardisation and global applicability of a money market fund can provide familiarity, ease of use and consistency in an otherwise complex environment. It’s important to work with a globally experienced asset manager, ideally one which benefits from scale, diversification, a robust credit research team dedicated to short-term investments and meaningful market presence across currencies.
MMFs are a logical next step for those who have traditionally used banking products because like time deposits, MMFs’ primary objectives are firstly, to seek to preserve principal, and secondly to provide liquidity to meet a client’s needs.
As the landscape in the region continues to change, MMFs can represent a valuable tool for corporate cash investors, but there are other products emerging as well. Separately managed accounts have not yet been fully adopted in the region, but over time could provide corporate treasurers in the region with bespoke off-balance sheet solutions tailored to meet their individual requirements, particularly for those with unique currency needs. Additionally, certain exchange-traded funds are working to meet the settlement needs of cash investors.
As adoption of other off-balance sheet products gathers momentum, MMFs seem poised to continue gaining favour and providing benefits for corporate investors seeking alternatives and enhancements to traditional banking products.
“How should corporate treasurers in Asia be responding to BEPS?”
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