Justin Meadows, Head of Business Development, MyTreasury Ltd
The last 12 months have seen the European money market fund (MMF) industry mature rapidly as it faced its first real, or to be more accurate perceived, crisis since the introduction of treasury-style funds in the late 1980s. However, whether real or perceived, the simple fact is that the credit crunch has changed the landscape for both MMFs and their investors in a fundamental way that has widespread implications for both parties. The initial reaction of many investors when the potential implications of the sub-prime crisis became apparent was a review of their fund investments to decide whether they were secure or not. Some investors did not even bother to do this but simply bailed out of MMFs because key decision makers didn’t know enough to distinguish between different types of funds and weren’t prepared to delay long enough to find out.
The reaction of those who did make the time and effort to find out depended critically on the information they received. Where there were concerns about a fund’s exposure to potentially risky investments such as asset-backed commercial paper or SIVs there was typically a net outflow of funds, even if the portfolio holdings in these asset classes were at very low levels. Funds that appeared either slow or reluctant to provide detailed information about their investment portfolios also experienced a net outflow. This was hardly surprising given that these MMFs are used by treasurers precisely because they place security and liquidity right at the top of their list of objectives with yield following on very firmly in third place. The role of treasurers is to make conservative investments to protect their organisation’s capital whilst ensuring that day to day cash flow requirements are met in an efficient and effective way. They are not there to take risks and make speculative profits for their organisations. This means that the slightest perceived threat to either the security or liquidity of their investments prompts strong and immediate action.
A flight to quality
So what are the major implications of the last 12 months for MMFs? One obvious development has been the reversal of the clear trend in the first half of 2007 towards increasing investments in enhanced cash funds in which minor sacrifices in security and/or liquidity are made in return for additional yield. The ensuing flight to quality has seen a significant shift back to the traditional, more secure treasury style liquidity funds in general and in particular those that are perceived to be the most secure because they are invested in government treasuries or other government debt. The brief fling with improved yields lasted only as long as there were no concerns about security, but the race between the fund providers now is not to set up enhanced yield funds but rather funds invested only in government treasuries or other government debt that offer the highest possible levels of security. This is a rational response by fund providers to the emergence of a much more sophisticated investor base in MMFs. There is now a stark understanding by investors that not all types of funds offer the same security/liquidity/yield profile and even where funds are notionally the same type, as in the case of triple-A rated, treasury style MMFs, there can actually be fundamental differences between them.