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Asia investors undeterred by low returns on money market funds

Despite low returns, total money market funds (MMFs) ended 2018 at US$3.3 trillion, according to data from the US Securities and Exchange Commission (SEC). Weekly total net assets of money market funds amounted to US$3.2 billion as of July 17, according to the Investment Company Institute.

In Asia, the Chinese money market fund Tianhong Yu’e Bao has become the world’s largest with assets of about 1.56 trillion yuan (US$233 billion).

Although this asset class has generally exhibited poor returns when compared to equities and fixed income assets, MMFs are increasingly popular with investors seeking greater capital preservation and liquidity on their assets rather than performance, reports website The Asset.

“Managing investors’ cash is all about preservation of capital and provision of liquidity. A return is important but it’s a secondary factor against those two primary objectives,” Jonathan Curry, global chief investment officer (CIO) liquidity & CIO America of HSBC Global Asset Management, told the website.

“In this asset class it is less about asset allocation decisions being driven by the macroeconomic picture. It’s less about markets being driven by geopolitical issues that might change an investor’s asset allocation. Now clearly that may have an impact on their cash allocation but that isn’t really what drives the investors to use MMFs.”

Range of investors

MMF investors include multinational corporates, sovereign wealth funds, pension funds, insurance companies, hedge funds, asset managers and high net worth (HNW) individuals.

“What we are seeing is a wider range of different client types that are now using MMFs as a way of managing some of their cash,” adds Curry. “In Asia, the range of users isn’t as broad as in the US but it’s growing”

While there are many types of investors attracted to MMFs for various reasons, their main purposes are to use them to park their short-term cash.

Some corporates use MMFs as the sole tool for managing their short-term cash, others as part of a cash management solution where they will place money in deposits, park cash that can be invested directly in securities, and hold cash that can be tapped quickly in case liquidity is needed.

“It depends on the client in terms of how they use the funds because one of the key premises about them is the provision of liquidity,” Curry told The Asset.

“You get some investors that use that liquidity frequently, so they’ll be going in and out of the fund regularly. You get others that might be building cash out for a specific purpose and then redeeming it. But that will be a long-term period where they will be holding the fund. And then you have investors that have a long-term cash allocation and they don’t have significant liquidity needs. So they will be a very stable investor in the fund.”

Liquidity and diversification

Other reasons for the growing popularity of MMFs are liquidity, diversification, and transparency. They can provide same-day liquidity, next-day liquidity, weekly liquidity, or monthly liquidity depending on the market.

Investors also get access to diversification through a single transaction since the MMF has a very well-diversified set of credits as underlying assets. To get the degree of diversification that a money fund can offer would be challenging for an individual investor. Banks offering MMF products traditionally also have professional credit management teams.

While MMF returns are low against other asset classes, they compare well relative to short-term market interest rates, as well as offering transparency in the form of daily holdings reports where investors can see every single asset the fund is invested in.

“In some markets, these reports may be less frequent than daily, in some markets they may be weekly, and in some markets, they may be monthly,” commented Curry. “But I think the way the industry’s moving forward, more and more markets will move to daily reporting,”

In Asia, MMFs are well established in markets such as Hong Kong, India and Korea, with more recently established but fast-growing industries in Australia, China and Singapore.

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