Bank Interview: Travis Spence, J.P. Morgan Asset Management

Published: Mar 2012

As companies across the globe become increasingly frustrated with the low returns they are achieving on their growing cash piles, we speak to Travis Spence about the investment opportunities available in Asia. Could the China market really generate over three-quarters of a company’s global ROI, using less than a quarter of its cash?

Travis Spence

Managing Director and Head of Global Liquidity, Asia Pacific

We have been running the J.P. Morgan Asset Management Global Investment Survey since 1999. Over 13 consecutive years, the survey has grown to provide an unbroken track record and benchmark for corporate treasurers. It is also an excellent barometer for trends in the market.

The 2011 survey was the most comprehensive yet, with 487 corporates taking part from a broad range of industry sectors and geographies. Interestingly, we also saw a significant rise in the percentage of companies responding from the Asia region – which was up from 11% in 2010 to 20% last year. Not only does this reflect the growing importance of Asia internationally, but it also provides colour around the investment priorities in that region both today and looking to the future.

There are three very significant observations that emerged from this survey. The first is that the appetite for yield is returning. After several years of extremely low yields, treasurers are becoming frustrated with the returns they are able to access on their cash investments, and for the first time since the crisis began in 2007, return on investment is now the key metric for measuring investment success, with preservation of principal dropping to second place.

Counterparty risk also remains a significant focus, in particular where the choice of banking partners is concerned. Corporates are continuing to increase the number of primary banks that they use to achieve greater diversification. Rather than making their decisions based primarily on relationship though, financial strength has become the most important criterion.

Liquidity is still a key concern. Given this trend towards the return of yield though, there is a real conundrum for treasurers, as they need to trade off some of the daily liquidity while continuing to manage risks with market volatilities remaining high.

What can companies do to overcome this conundrum on a global basis? Could China hold the key for such companies to improve their ROI on cash?

I think there are two ways corporates are going to look to improve ROI. The first way is segmenting cash and taking on duration risk. The survey supported this and showed that treasurers are increasingly willing to give up daily liquidity and invest part of their stable cash reserves over a longer investment horizon. They continue to avoid taking on more credit risk in this market.

The second way is to focus on those markets where there are opportunities for business growth and where investments offer higher relative value. And that is where China comes in. China can definitely hold the key for companies to increase global ROI. More importantly they can do that with a very acceptable risk profile.

The straight relative value of yields in China to those in the developed markets is very attractive and the risk profile of the fixed income markets in China is dominated by government issues. So a corporate is essentially taking on government risk, but with a much higher relative value. What is more, China is already a market that most multinational companies (MNCs) are involved in. Global growth is going to be dominated by the emerging markets, not by the developed markets, in the foreseeable future and China is leading the way.

To really highlight the potential, take the example of a MNC that uses the US dollar as its functional currency and invests cash with an average duration of six months. Its US dollar cash would yield about 60bps, while comparable yields in China can be almost ten times the amount at 4.50 – 5.50%. With expected currency appreciation, even if that company only had 20% of its cash in China, it could achieve up to 80% of its global ROI through utilising the options available in the China market.

With that in mind, how can companies optimise their cash investments in China specifically and what is J.P. Morgan Asset Management’s (JPMAM) role here?

Historically, companies with long cash positions in China have kept cash in very short-term investments, normally deposits that are regulated by the People’s Bank of China (PBoC). Because the yields and tenors of deposits are managed by the PBoC, the rates are not necessarily aligned to real market yields, and often are lower. Such a simple investment policy may have been understandable five years ago, but there have been a number of developments since then. The fixed income market itself has grown – and is growing – much deeper in terms of liquidity, and is now the second largest market in Asia behind Japan. More and more investment options are becoming available, too.

Access is still difficult, so for most companies it has been tricky to develop a direct investment strategy, but then there are more asset management products coming to market and additional investment offerings from the banks. By way of example, if you look at J.P. Morgan Asset Management’s history in China, we started to develop investment capabilities seven years ago when we launched the first AAA rated RMB-denominated onshore money market fund (MMF)*. JPMAM has a very proven investment process in China and one of the largest funds in the industry.

We have been using our extensive experience investing in the local market firstly to help companies understand all the investment options that are available in order to ‘de-mystify’ the China market, and then to adapt their global investment policies into China. Most companies entered China with a mind-set that they are going to keep their investment policy very simple – they’ll just keep everything in bank deposits. They are now missing significant opportunities if they don’t update their policies in order to take advantage of some of the more attractive options in China.

Regulation plays a key role in the investment possibilities in China. For example, regulations are now adversely impacting structured deposits and third-party entrust loans as viable investment options. However, discretionary portfolios became feasible for corporate investors due to regulatory change at the end of 2010, and this is now becoming a credible method for companies to improve returns, while adding both diversification and flexibility in China.

Can you explain how the AAA rated RMB-denominated onshore MMF came about? Also, how has the industry developed since then and why should clients invest in such funds?

The China Securities Regulatory Commission (CSRC) issued guidelines for money market funds back in 2003. We took a different approach when we launched the first AAA rated fund – the CIFM RMB MMF* – in 2005. This was the first institutional, or corporate, focused liquidity fund and the first real alternative to bank deposits in the market. The guidelines were aligned to international money market fund standards so it fits easily within most companies’ global investment policies. China International Fund Management Co, Ltd., CIFM, is a joint venture between J.P. Morgan Asset Management and Shanghai International Trust, and the manager of the fund with regular communication with JPMAM Hong Kong.*

The market has developed rapidly. Today there are 49 MMFs in China with total assets of RMB 126 billion. However, most of those funds follow CSRC guidelines which are much broader, in terms of duration and concentration limits, than the international guidelines. Moreover, the majority of these funds also cater towards the retail market.

Corporate clients are always going to use a money market fund for security, liquidity and yield – that will be the key driver, no matter which jurisdiction you are operating in. There are additional benefits though in China. For example, the CIFM RMB MMF provides easy access to the fixed-income markets in China, which as I mentioned earlier are more challenging for corporates to invest in directly. Additional benefits include:

  • The fund provides daily liquidity, T+1 settlement.
  • It offers the highest credit quality available in China with diversification and stable net asset value (SNAV).
  • As most of the underlying risk is government risk, the fund is similar to a government money market fund in the international space.

Finally, although this depends on the client’s specific situation, there can also be a tax benefit to investing in the fund. The money market fund has been a good first step outside of deposits for many companies in China. Given the difference between market yields and regulated deposits, returns are often higher than term deposits even out to one year, so it is also a simple way to improve returns while maintaining liquidity.

In what other ways is J.P. Morgan Asset Management continuing to embrace innovation in the Asia region?

J.P. Morgan Asset Management has been a pioneer in developing short-term investment options in Asia. Our Global Liquidity business has nearly 30 personnel across the region and we have been the only manager to launch a consistent platform form of liquidity funds in local currencies in Asia. The five different currencies that we offer funds in today are RMB, JPY, SGD, AUD and CNH. In the last two years those funds have tripled in size, on the back of corporate demand.

In terms of innovation in China, the move towards discretionary portfolios that I spoke about is exciting both for corporates and for us. If, as a corporate, you don’t need to hold daily liquidity and you have a reserve cash bucket there are very limited options to take advantage of in China. Discretionary portfolios not only provide better flexibility but they also provide scalability for treasurers with cash reserves. They can utilise the full range of instruments that are available in the market, including inter-bank securities, and fully customise these to each client.

The point around scalability is important because even with money market funds now being available, clients with large balances will normally maintain a concentration cap as to how much they can invest in an individual fund. Going in through a discretionary portfolio can provide instant scalability of cash. As cash balances grow, you can still use that single investment vehicle and achieve the same amount of diversification, whilst having access to the liquidity that you need in your business.

This is exciting for us. Our investment process has such a great track record, working through our Joint Venture, that we are now helping clients to become more strategic with their cash in China. It comes back to the possibility of achieving 80% of a company’s global ROI with only 20% of its cash.

Asia is already – and will absolutely continue to be – an attractive destination for liquidity and the fixed income markets across the region are primed for significant growth. We are seeing global investors shift liquidity into the region for three main reasons. The first is that credit ratings from issuers in the region are increasing, while those in the developed markets are decreasing. The sovereign ratings are also improving. Today, Asia has 11 investment grade countries. There are three AAA rated countries: Australia, Singapore and Hong Kong. We’ve also seen some significant upgrades: China has increased five notches to AA- in the last ten years and Japan has come up six notches. That’s impressive.

The second reason is that Asian issuers are seen as less ‘tainted’ by the global volatilities and specifically the European credit crisis. And thirdly, there is the dynamic of higher relative value that we touched upon earlier. Interest rates are higher in Asia and currencies have been appreciating across the board. For these reasons, we’re seeing a clear bias towards holding local currencies, in particular over the last year. This is not only among MNC investors but local companies from Asia as well.

In addition, we are seeing cash balances which are at global highs growing faster in Asia than in other geographies. This is as a result of business growth and the continued investment into Asia. Coming back to the question around innovation, as a result of this cash coming into Asia, J.P. Morgan Asset Management has expanded its credit analyst team into Asia over the past 12 months to make sure that we can cover more Asian issuers. We are also planning this year to expand the platform that we have in Asia and develop more products in key strategic markets like China, Japan and of course the CNH market.


* AAA-rated by Moody’s/CCXI: Aaa and Fitch IBCA: AAAmmf(chn). CIFM RMB Money Market Fund is a fund managed by China International Fund Management Co., Ltd which is a joint venture between Shanghai International Trust Co. Ltd and J.P. Morgan Asset Management (UK) Ltd. This fund is not being offered through J.P. Morgan Funds (Asia) Limited. Shares of the Fund may be offered and sold only in China to (i) individuals who are Chinese citizens and residents, (ii) institutions legally organized in China and permitted by Chinese law and regulations to invest in open-end investment funds, and (iii) entities with “Qualified Foreign Institutional Investor” status in China. Please note that this document is for institutional investors’ use only. It is not for public distribution and the information contained herein must not be distributed to, or used by the public. J.P. Morgan Asset Management is the brand for the asset management business of J.P. Morgan Chase & Co. and its affiliates worldwide. This communication is issued by the following entities: in the United Kingdom by J.P. Morgan Asset Management (UK) Limited which is regulated by the Financial Services Authority; in other EU jurisdictions by J.P. Morgan Asset Management (Europe) S.à r.l., Issued in Switzerland by J.P. Morgan (Suisse) SA, which is regulated by the Swiss Financial Market Supervisory Authority FINMA; in Hong Kong by JF Asset Management Limited, or J.P. Morgan Funds (Asia) Limited, or J.P. Morgan Asset Management Real Assets (Asia) Limited, all of which are regulated by the Securities and Futures Commission; in Singapore by J.P. Morgan Asset Management (Singapore) Limited which is regulated by the Monetary Authority of Singapore; in Japan by J.P. Morgan Securities Japan Limited which is regulated by the Financial Services Agency, in Australia by J.P. Morgan Asset Management (Australia) Limited which is regulated by the Australian Securities and Investments Commission and in the United States by J.P. Morgan Investment Management Inc. which is regulated by the Securities and Exchange Commission. Accordingly this document should not be circulated or presented to persons other than to professional, institutional or wholesale investors as defined in the relevant local regulations. The value of investments and the income from them may fall as well as rise and investors may not get back the full amount invested.

For Non US Investors. Please note that this document is for professional investors’ use only. It is not for public distribution and the information contained herein must not be distributed to the public. Issued by J.P. Morgan Funds (Asia) Limited.

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