50% of U.S. liquidity investors who transitioned assets from a prime to government money market fund (MMF) cited "comfort levels with floating NAV (FNAV)" as the primary factor in reconsidering prime MMFs, and nearly half of the respondents surveyed (45%) who transitioned assets out of prime would consider moving back if prime offered an excess yield of between 15 basis points and 50 basis points according to data released today by J.P. Morgan Asset Management.
"Yield is more of a factor this year as the opportunity cost of remaining in government funds is significantly greater, driving investors to reconsider prime liquidity vehicles," said John Tobin, Head of Portfolio Management for Global Liquidity, J.P. Morgan Asset Management. "As they become more comfortable with the new parameters of prime funds, and ponder their excess yield, many are rethinking the relative attractiveness of prime vs. government MMFs, and are open to policy changes to allow them to leverage prime investments for their cash management needs."
The 2017 Global Liquidity PeerViewSM Survey data supports this claim, showing increased interest in investment policy changes focused on adding stable and floating NAV MMF and ultra-short/short-term bond funds. Since the 2015 survey there was a more than 50% increase in the percentage of investment policies that permit FNAV MMFs, up from 32% to 48%. Historically, Europe had the largest percentage of firms permitting FNAV MMFs, but in the wake of the implementation of U.S. MMF reform in October 2016—new SEC rules require institutional prime and municipal money market funds to float their market-based NAV—52% of Americas respondents permit FNAV MMFs, up 80% from the 2015 survey.
"Changes to an investment policy may be needed to take advantage of developing market opportunities, but the process takes time and, often, considerable effort," continued Tobin. "In this evolving regulatory environment, nearly half (46%) of respondents plan to change their investment policy in the next six to 12 months -- up from 38% in 2015. Among respondents considering making policy changes in the next six months to one year, 82% said it would take a moderate or significant effort."
Full research from the firm's 2017 Global Liquidity Investment PeerViewSM survey highlights the current sentiment of nearly 400 respondents, including CIOs, treasurers and other senior decision makers, representing all sectors of the global economy and more than $1.2 trillion in cash assets under management. Key findings include:
- Investment in money market funds still strong - Based on the market outlook for next year, over 60% of respondents will continue with the same allocation to money market funds, while 22% will increase their allocations to stable NAV (SNAV) funds and 20% to floating NAV (FNAV) funds. Money market funds and bank obligations account for the majority of cash balance allocation. Nearly 40% of respondents cited money market funds as their chosen vehicle for money moved off a bank balance sheet—by far the most popular placement.
- Regulatory pressures - In many ways the regulatory arena has been transformed since our last survey in 2015. Respondents are grappling with the implementation of money market reform in the U.S. and the approach of reform in Europe, as well as the effects of Basel III around the globe. In Europe, 44% of respondents said they need more time and/or information before they decide on their preferred money market fund structure. Among those considering new structures, 43% ranked risk of gating or a liquidity fee as the most important factor in their decision-making process.
- Investment policy changes - More respondents are updating their investment policies to ensure that they provide the flexibility needed in the new rate and regulatory environment. Notably, 48% of respondent policies now permit FNAV funds, up from 32% in 2015. Nearly a third of respondents are looking to add FNAV funds to their list of allowable investments. Changing an investment policy is rarely a simple undertaking. More than three-quarters of respondents said it would take a moderate or significant effort to implement a change—suggesting that planning should begin well in advance.
- Shifting rate environment, search for yield - In a still-low rate environment, investors continue to search for yield and reassess their appetite for risk. If bank deposit rates lag, nearly two-thirds of respondents said they would select money market funds for their cash investments. In the face of negative interest rates in 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.
- Increased need for cash segmentation - Liquidity investors are re-evaluating their investment strategies to meet the demands—and seize the opportunities—of an evolving rate and regulatory environment. Many respondents have determined that they need to consider new investment solutions, including floating NAV funds and more customized portfolios. Cash segmentation—categorizing cash by liquidity needs—is often a key component of the re-evaluation process. More than 70% of respondents can forecast their cash flows out for a month or longer. Just under half can forecast out a quarter or longer.
- Moving back into prime funds - Only 37% of U.S.-based respondents are currently invested in a prime money market fund, down from 63% in 2015. A majority transitioned assets to a government money market fund in the wake of new SEC 2a-7 rules. 50% of U.S. investors who transitioned assets from a prime to government MMF cited comfort level with floating NAV and gates/ fees as the primary factor in reconsidering prime. Among respondents who transitioned assets out of prime MMFs, nearly half would consider moving back if prime offered an excess yield of between 15 basis points and 50 basis points.
"We continue to observe an evolution in cash segmentation—with 70% of respondents saying they can forecast cash flows out for a month or longer—causing treasurers to become more strategic in a continued low rate environment," said Paula Stibbe, Global Head of Sales, J.P. Morgan Global Liquidity. "As our survey reveals, respondents are grappling with the implementation of money market fund reform in the U.S. and the approach of reform in Europe, as well as the effects of Basel III around the globe, and are well positioned to benefit from tactical asset allocations."
J.P. Morgan Asset Management's PeerViewSM is a program that provides a unique opportunity for firms to compare their cash investment practices to those of their peers globally, allowing clients to evaluate variances and opportunities in cash investment policies and practices. Each respondent receives a customized report that compares their responses to those of their peer groups by region, cash balance and industry.
Please view the full J.P. Morgan Global Liquidity Investment PeerViewSM 2017 findings here.
J.P. Morgan Asset Management – Global Liquidity is the largest global provider of institutional short-term fixed income solutions, with $582 billion in assets under management as of March 31, 2017. The dedicated global team of liquidity professionals, with over 30 years of money market experience through all market cycles, works with clients to build effective short-term fixed income solutions using rigorous credit and risk management combined with access to J.P. Morgan Global Liquidity's global resources and expertise.
J.P. Morgan Asset Management, with assets under management of $1.5 trillion, is a global leader in investment management. J.P. Morgan Asset Management's clients include institutions, retail investors and high net worth individuals in every major market throughout the world. J.P. Morgan Asset Management offers global investment management in equities, fixed income, real estate, hedge funds, private equity and liquidity. JPMorgan Chase & Co. (NYSE: JPM), the parent company of J.P. Morgan Asset Management, is a leading global asset management firm with assets of approximately $2.5 trillion and operations worldwide.