Investors are reassessing their short-term fixed-income investment portfolios and are looking for ways to cope with the changing regulatory environment according to a survey by JPMorgan. Some of the changes affecting investors in recent years include:
- In October 2016, new SEC rules governing money market funds (MMFs) came into force.
- Basel III regulations are continuing to drive non-operating deposits off bank balance sheets.
- The Federal Reserve raised interest rates in December 2016 and in early 2017 investors expected further rate hikes.
- MMF reform is expected to take effect in Europe in late 2018 or early 2019.
Need for flexibility
In light of this shifting landscape, investment in MMFs is still strong, according to JPMorgan's 2017 Investment Peerview, which gathered data from 378 respondents in Europe, the Americas and Asia Pacific. The report found that nearly 40 per cent of respondents cited MMFs as their chosen vehicle for money moved off a bank balance sheet – by far the most popular placement.
However, almost half of respondents plan to change their investment policy in the next 6-12 months – one of the key drivers for changing policies is that more flexibility is needed in the evolving rate and regulatory environment. One indicator of this is the increasing uptake of floating-rate funds: 48 per cent of respondents said their policies now permit FNAV funds, up from 32 per cent in 2015, while nearly a third of respondents are looking to add FNAV funds to their list of allowable investments. The majority (82 per cent) said it would take a moderate or significant effort to implement a policy change – suggesting that planning should begin well in advance.
And investors are still assessing their appetite for risk and searching for yield in the low-rate environment, with nearly two-thirds of respondents saying they would select MMFs for their cash investments if bank deposit rates do not supply the desired return. The report noted: “As they evaluate the impact of negative interest rates on euro – and/or sterling – denominated instruments, a large majority of respondents are considering policy changes to allow increased credit risk, more interest rate risk and the use of currency swaps.”
The survey also found that:
- 64 per cent of respondents said they will stay the course in stable NAV MMFs and 22 per cent will increase their allocation;
- 76 per cent of respondents will continue with current allocation to floating NAV MMFs while 20 per cent will add to allocation;
- 44 per cent of European respondents need more time and/or information before they decide on preferred money market fund structure in response to approaching European MMF reform; and
- 43 per cent of those affected investors ranked risk of gating or liquidity fee as the most important factor impacting decision-making.
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