Funding & Investing

Choosing money market funds in Asia Pacific

Published: Nov 2016

The money market fund industry in Asia is relatively young, but the market is developing rapidly. What advantages do money market funds offer over bank accounts, and what should treasurers take into account when choosing a fund?

Kheng Leong Cheah (KLC), Head of Global Liquidity Sales, Asia Pacific, J.P. Morgan Asset Management

Kheng Leong Cheah (KLC)

Head of Global Liquidity Sales, Asia Pacific

J.P.Morgan Asset Management logo

Aidan Shevlin, Head of Asia Pacific Liquidity Fund Management, J.P. Morgan Asset Management

Aidan Shevlin (AS)

Head of Asia Pacific Liquidity Fund Management

J.P.Morgan Asset Management logo

Why should corporate treasurers in Asia Pacific consider using money market funds?

KLC: Typically corporate treasurers are attracted to money market funds because of the safety and liquidity they offer. Unlike bank deposits, where depositors are exposed to counterparty risk with a single counterparty, money market funds are usually invested in a diverse pool of high-rated assets. Money market funds can also offer convenient same day or next day liquidity.

AS: In the past, corporate treasurers did not have many options when it came to cash management in Asia as they were very dependent on working with local banks. Global treasurers new to the region typically chose to work with the largest banks in each country because the financial systems in Asian markets were not very sophisticated.

That is now changing, particularly where money market funds are concerned. Asia’s money market fund industry is relatively young – less than ten years old, compared to 40 or 50 years in the US – so relative speaking, these types of funds are not as well-known in Asia. However, the range of products and instruments available has grown and developed, while the level of market flexibility has increased; this makes money market funds a very valuable tool for corporate investors in the region. Multinational corporations (MNCs) have the comfort of a product that they are familiar with, while local corporates can move more in line with global standards.

What advantages do money market funds offer over bank deposits?

KLC: One corporate treasurer recently shared with me that he had previously only used bank deposits. This was very cumbersome as it involved calling multiple banks to check on rates, as well as taking into account counterparty exposure limits with each bank when placing deposits. When he started using money market funds to park cash, the treasurer found that he only needed to manage individual counterparty limits – which resulted in more time dedicated to investment decision making.

Money market funds also offer a yield based on very transparent market rates, with dividend yields accruing daily. It is also important to manage the tenor for bank deposits as there may be a risk of being penalised for early termination.

AS: Chasing deposits can be time consuming with considerable resources required to help analyse counterparties and determine the exposure to certain institutions. However, regional treasury departments tend to be quite small for both MNCs and local corporates. By using money market funds – especially big providers with a dedicated credit research team on hand to do this work – you can take a lot of weight off the treasury department.

KLC: As money market funds become more prevalent in Asia, we are also seeing greater automation and straight through processing. For example, our J.P. Morgan Global Cash Portal online trading platform allows users based in different locations around the world to conveniently transact and manage their liquidity investments across multiple currencies. Auto-transfer services can also be used to automate investments and redemptions based on a client’s pre-set limits, which can be beneficial for short-staffed treasury departments.

How well are money market funds understood in Asia? Are there any myths that need to be dispelled?

KLC: Money market funds are still a developing product in Asia and a number of local corporates are not so familiar with the concept. Some might be used to retail type money market funds, while some banks use their own internal bank products as money market funds, which is not in line with global practices.

AS: In the US and Europe, funds are very similar to each other – but across Asia, each market is individual, with its own regulator and its own set of rules. The characteristics and risks of money market funds can vary substantially. Corporate treasurers need to make sure they understand the differences between money market funds and how they operate in each market.

That said, the market is developing rapidly and China in particular has seen spectacular growth in the last few years. Our range of funds is growing across the region as demand from both local corporates and MNCs increases.

How much variation is there across the region in terms of the funds available or how MMFs are used?

AS: Standards are quite wide locally, but we are seeing a gradual move towards international best practices. For example, Australia previously had its own set of AAA guidelines, but is now moving to adopt international guidelines. In China, the China Securities Regulatory Commission (CSRC) has recently tightened guidelines to increase liquidity and improve security at the expense of yield, which has moved Chinese regulations closer to international best practice than they were previously. We expect this trend to continue over time.

What should investors be looking out for when selecting a fund in Asia and what questions should they be asking?

AS: Unfortunately, publicly available information relating to money market funds may be quite restricted. Companies should not necessarily opt for the largest fund with the best yield, but consider a fund which has a good track record, has been in the market a long time, in addition to having the required resources in place to provide thorough portfolio management and quality credit research.

KLC: Where investor priorities are concerned, our 2015 Global Liquidity Investment PeerViewSM report found that performance and risk adjusted returns were the top reasons for choosing an asset manager in Asia Pacific, cited by 61% of respondents in the region1. This contrasts with the Americas, where the top consideration was deemed to be firm relationships.

How are macroeconomic trends and regulatory developments impacting money market funds in Asia?

AS: Local regulators – and indeed local corporates – are looking on with interest at the regulatory changes in the US and Europe, where the industry is moving to a variable net asset value (NAV) model. We haven’t had similar developments in Asia just yet, so funds across the region continue to offer stable NAV. Regulators here can take their time and see how things develop in the US and Europe before looking at similar changes here.

The future direction of regulation is likely to focus on further tightening fund guidelines and giving investors better protection. Low interest rates are obviously affecting the region – yields were higher in the past and the low rate environment is affecting everyone. This means that treasurers are searching out every basis point of yield and squeezing every dollar to make the best returns they can. That said, while maximising yield is important, investors should still prioritise liquidity and security when considering investment options.

KLC: Quite a number of local corporates are in the process of becoming multinational corporations, so they are starting to have exposures in different regions as well. By dealing with a global asset manager, they can understand what’s happening in different regions and how these trends impact their business in Asia and beyond.

What other advantages can a global MMF provider such as J.P. Morgan Asset Management offer treasurers?

KLC: We have a comprehensive footprint across different regions, countries and currencies. We are able to support local corporates from China or other countries in Asia as they step out into different regions, as well as MNCs coming into Asia. As one of the largest cash investment solutions providers in the world, we have a very strong commitment to this business. One of the key things is to have liquidity experts on the ground who can give investors the right level of guidance and support, as well as sharing information about the latest developments in both local and global markets.

AS: I see two benefits. The first is expertise: given that we are a global provider, we have a global credit team and global financial team behind us. We are not just buying local issuers as we believe that treasurers should aim to have their funds widely diversified, rather than concentrated in a specific country or region.

Secondly, our breadth and depth of experience in the US and Europe gives us a strong foundation to cope with any changes in the markets in Asia. We are already experienced in dealing with extremely low yields in Europe and we have experience in dealing with money market funds moving to a variable NAV in the US – both of which places us in a good position to cope with regional changes in the future.

How do you see money market funds developing in Asia over the coming years?

KLC: We’ve experienced strong growth in the past few years and see tremendous opportunities for growth in Asia as markets continue to open up. Our global research shows that Asia is still some way behind other regions in terms of adoption, so there are huge opportunities going forward.

AS: The industry is continuing to develop across the region, with more issuers in Asia now issuing at the short end of the market. We are seeing more brokers dealing with issuers as well. So the overall market is growing and developing along with us.

  1. Source: J.P. Morgan Global Liquidity 2015 Investment PeerViewSM; as of 21st October 2015.


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