Corporate treasurers have long used money market funds (MMFs) as a short-term investment vehicle. Alex Fiott, Head of Front Office, Treasury at AstraZeneca, explains that like many companies, AstraZeneca has been reliant on MMFs for a number of years. “They continue to serve us well as an investment vehicle,” he comments. “The attractive features have been the AAA credit rating status, liquidity, and the diversification benefits of investing in such funds.”
GasLog, which owns, operates and manages liquefied natural gas carriers, is another company which makes use of MMFs, as Yannis Lefas, Assistant Treasurer – Banking & Operations, explains. “MMFs provide daily liquidity, and the immediate availability of funds gives extra flexibility in times of unpredictable cash flows,” he says. “Further to that, no bank can provide you an AAA rating, which is achievable using MMFs. The various asset management companies have several instruments which provide extra security or yield, and that has made MMFs rather useful to treasurers.”
As such, Lefas says that GasLog has adopted a set of conservative MMFs as an alternative to cash balances and traditional time deposits, focusing on the company’s mandate for capital preservation. “MMFs allow us a better yield than our current accounts, but also the flexibility of daily liquidity that time deposits lack,” he says.
But despite their popularity, MMFs have been the subject of considerable scrutiny in the last ten years. The financial crisis notably triggered the collapse of the Reserve Primary Fund in the US, resulting in a run on money market funds. In the intervening years, regulators on both sides of the Atlantic have sought to strengthen MMFs, resulting in significant changes to how MMFs operate. Particular attention has been focused on the constant net asset value (CNAV) model, where funds maintain a constant share price of £1, €1 or US$1.
In the US, where funds are now required to adopt a variable net asset value (VNAV) model, the reform has resulted in significant outflows from this once-popular instrument – and many treasurers have no plans to reverse this decision. Indeed, the 2017 AFP Liquidity Survey found that 41% of respondents who had stopped investing in prime funds following the reform do not intend to resume investing in prime funds in the future.
In Europe, the upcoming reforms have taken a somewhat different direction. Regulators are replacing CNAV funds with two new categories: the Public Debt CNAV fund and the low volatility NAV (LVNAV) fund. According to research published in July by Moody’s, LVNAV MMFs are expected to attract most of the assets currently invested in prime CNAV MMFs, with the majority of MMF managers intending to offer LVNAV funds to their investors.
After years of discussion about the final outcome of the European reform, the reaction from many corporate treasurers has been one of relief. “The proposed European MMF Reforms appear a good balance between the regulators’ desire to highlight the inherent risks of a MMF while not forcing all non-government funds to automatically become VNAV Funds after a set date,” comments Fiott.
“I believe that it was eventually good news to get an MMF reform in Europe,” adds François Masquelier, Chairman of ATEL (the Association of Corporate Treasurers in Luxembourg). “In my view, the European solution, with a new category of funds (ie LVNAV), was a good and acceptable compromise to match recommendations from G20 and expectations from fund managers.”
The possibility that all funds would need to convert to VNAV was not the only potential concern: treasurers had also been worried that MMFs would be prevented from obtaining an external fund rating. “Practically speaking for investment policies that have a reliance on credit ratings to distinguish investments, the allowance that MMFs can still be rated is welcomed,” says Fiott.
Reviewing the investment policy
Masquelier notes that treasurers will need to inform their treasury and audit committees that it may be necessary to amend investment policy in order to comply with the new reform and to adapt the relevant reporting and revaluation tools. “The good news is that we have some time,” he adds. “As interest rates will remain low or negative in Europe for a while it is better to make sure that treasury can on-board several types of investment products.”
Where AstraZeneca is concerned, Fiott says that the pending money market reform – together with changes to bank regulation and continuing low and negative yields – have provided a catalyst for the company to review and update its investment policy. “It appears that cash and liquidity will increasingly require the treasurer’s focus and attention over the coming years,” he comments.
In some cases, Masquelier says that treasurers may consider adapting their strategies by segregating their cash and “allocating more appropriate tenors to the different buckets in order to extract more yield (or at least to generate and book less losses),” he says. However, Masquelier adds that he does not expect to see any major changes in companies’ investment strategies.
Time to consider VNAV?
While much attention has focused on the new LVNAV model, some treasurers may also wish to look at the possibilities offered by another type of fund which is already available: the VNAV fund.
Auna Dunlevy, Head of Liquidity and Investments at Royal Mail, has already taken the plunge: she currently uses a combination of CNAV and VNAV funds. “We started looking at VNAV funds because there was a lot of talk that CNAV funds would be subject to significant changes – for example, there were initial proposals that funds would no longer be rated and this would prove problematic in terms of our investment policy,” she explains. “What we found was that VNAV funds are not as scary as we thought. We also found that there is quite a range of funds with slightly different strategies, whereas sometimes CNAV funds all seem to be investing in the same thing.”
After conducting thorough research, Dunlevy began investing a small amount in VNAV funds and has continued to use them – albeit for specific purposes. “This is not money that we use for everyday liquidity,” she clarifies. “We like to make sure that we can leave the funds there for three months or six months.” This is possible because the organisation’s cash flows are highly cyclical: in the run-up to Christmas, the increased postal revenue generates an increase in cash within the company.
Dividends are paid out in January and July, which gives the company an opportunity to invest that cash on a three to six month basis. VNAV funds are used for the portion of this cash which is regarded as long-term cash – so, as Dunlevy notes, “we have the longest window of opportunity so that if there is any volatility within the funds, we can hopefully ride it out over that period of time rather than to have a daily call on these funds”. Dunlevy is satisfied with the results, noting that VNAV funds tend to provide “an extra pick up in terms of return”. She adds, “We do feel that if we have the money available, it is in the best interest of the business that we achieve an appropriate return on the funds.”
Using VNAV
When using VNAV funds, Dunlevy explains that Royal Mail has historically chosen fund providers with whom the business is already familiar. “It would tend to be someone we’ve identified as a good name over the door,” she says. “We will speak to them about the fund, their investment strategy and risk management.” She adds that they have found varying strategies amongst the VNAV funds – some funds are very similar to CNAV funds, albeit with a slightly longer duration, whereas others may have a lot of asset-backed paper. “As long as we’re happy with the underlying assets and strategy, we are generally pretty happy – although obviously we do know that this type of fund may lead to higher volatility.”
Another difference between CNAV and VNAV funds is the nature of Royal Mail’s relationship with the provider. Despite having used VNAV funds for a number of years, there is more internal scrutiny of the funds and their return: understanding the risk and return is important. “We like to keep the provider close to us,” Dunlevy emphasises. Yields are monitored daily and might involve discussions with the manager around significant movements. More detailed consultations happen each year before reinvesting.
However, choosing a money market fund isn’t necessarily an all-or-nothing decision. Dunlevy has continued to use CNAV funds for the most part – and looking ahead, she has also been familiarising herself with the new LVNAV and, indeed, public debt CNAV funds. “We’re broadly happy with the idea of LVNAV because you’ve still got that 20 basis point movement before they have to mark to market and it is a product which we will use to manage our daily liquidity,” she says. “The public debt CNAV funds may be very low in terms of their return, but there may be some funds out there which are able to give a slightly better return, depending on their strategy.”
Weighing the impact
Once the new rules come into effect, how will corporate treasurers proceed? For many it is too early to say until finer details emerge of how the new funds will operate. Dunlevy says that of the fund providers she has spoken to, “Information is slowly coming out on this – and a few of the funds we deal with have indicated that they are going to be LVNAV – but we haven’t heard from everybody yet.” She adds, “The working assumption seems to be that most providers will switch their CNAV funds to LVANV.”
The impact of the changes may vary depending on a company’s business model. GasLog’s Lefas points out that the EU reform will affect all money market funds domiciled, managed and marketed throughout the EU. “For us, a shipping company which is not registered in any EU country, the impact will be indirect,” he says. “We could be affected by changes in the structure, investment strategy or jurisdiction of the funds we’ve elected to use.” Consequently, Lefas says, the company needs to ensure that the MMFs used continue to serve the required purpose. “Our treasury team is therefore in close co-operation with our relationship managers and has an overview of the forthcoming changes.”
It will be some time before the full impact of the reform is understood. Indeed, the 2017 J.P. Morgan Global Liquidity Investment PeerViewSM survey found that 44% of respondents needed more time and/or information before making a decision about how they will use money market fund structures under the new rules. But in the meantime, many treasurers are optimistic about their future use of MMFs. As Masquelier concludes, “At the end of the day, I think it should not be a major issue – and we have time to prepare ourselves accordingly.”
