Institutional investors throughout Europe and Asia are becoming adept at wielding the money market mu...
While multinational corporations, banks, insurance companies, custodians and pension funds are not entities generally regarded as adventurous, they are quick nevertheless to recognise a good thing - and put it to work.
The fact money market funds invest in top quality, short-term instruments mean they are stable, liquid and competitive yielding. This fits all the criteria institutional investors require, thereby offering a convenient and attractive alternative to cash or bank deposits. This has been the major reason for money market fund growth that is little short of phenomenal.
Since Chase introduced its first money market fund in Europe less than four years ago, assets have increased from $500m to over $3bn. This represents a 47% increase in 1999 alone. It is also worth noting that this growth is not simply a run-up in asset value resulting from investment experience. The dividends of money market funds are paid out to investors, so this remarkable growth comes from new investors discovering the benefits of money market mutual funds.
Demand has been especially strong in the UK, the Netherlands, Germany and France among sophisticated cash managers with a global outlook. Some have been accustomed to using money market funds in their US operations while others have discovered they can get equal returns, far more efficiently, with money market funds rather than managing endless overnight investments.
Perfect fit for a range of needs
Money market mutual funds have been a staple investment of corporate treasurers in the US for nearly 30 years and now that similar funds are available outside the US, institutional investors with global subsidiaries can bring their short-term investments under one roof. A further attraction is that funds all have the same underlying philosophies and are often run not only by the same institution, but by the same professional money managers.
Consider a multinational company operating in Europe, the US and Asia. The company may have historically allowed its subsidiaries a great deal of operating independence. But more and more, such firms find it to their advantage to assert global controls on cash management. This enables them to enjoy economies of scale, finer pricing and more flexibility. The result, in effect, is an integrated solution that provides the ability to outsource cash management while still investing in virtually the same product around the world.
In addition, doing business with a bank-offered money market fund offers the parent company unique cash management benefits - sweeping excess cash into money market mutual funds on a predetermined schedule, for example, concentrating funds as required and integrating reporting at local, regional, and corporate levels.
Money Market fund uses
Banks themselves use money market funds for several purposes. The first is identical to the corporate giant - on behalf of private bank clients with trust accounts, banks sweep the excess cash into a money market fund, enhancing the customer's yield, conveniently satisfying the bank's fiduciary responsibilities, as well as providing safety, liquidity and ease of reporting.
Secondly, many smaller banks capitalise on size and standing in this market, which in Chase's case is fourth in Europe and 11th in the US, by putting their private label on money market funds and then selling the funds on to their own retail customers.
Finally, corporations that have substantial custodial activities, such as insurance companies or pension funds, pursue extremely active investment programmes. Using banks as their custodians, such companies want to optimise any cash in their accounts. So combining a sweep account with a money market fund is a natural solution.
Money market mutual funds defined
In the US money market mutual funds are regulated by the Securities and Exchange Commission (SEC) and typically invest only in A-1, P-1 rated commercial paper, short-term government bonds and short-term bank products such as certificates of deposit. The result is stable net asset value over time, combined with liquidity and competitive market rates.
These are the benefits that have made the money market mutual fund indispensable to corporate treasurers and institutional investors in the US as an important element in their overall cash management strategy. This ring-fenced investment is potentially safer, as well. No matter how strong a bank's name, clients are looking to diversify balance sheet risk.
With a money market fund, the client can use a separate product that is offered by their primary provider while still maintaining the relationship. Importantly, money market funds give investors a tool for diversifying in a niche formerly occupied only by bank deposits with a high level of security and often a better return.
The market's scope and size
In the US, 7,300 mutual funds had just over $6 trillion in assets under management as at 30 September 1999. Of that total, 25 % is in money market funds, with the retail sector at $895.2bn and the institutional sector at $600.62bn.
The potential for money market funds globally is enormous, particularly in Europe, which could easily equal the US market. Tax implications make it unappealing to sell US-registered funds offshore. It is for this reason that Chase and others have created funds specifically for the European market, denominated in dollars, sterling and euros. All invest in high quality, short-term investment grade securities - government securities and A-1, P-1 rated commercial paper.
Challenges to success
There do exist, however, challenges to this market's expansion. Foremost is creating an understanding of money market mutual funds. Even for many sophisticated treasury professionals, the c
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