Money market: cash out now?
Major trends and solutions

EDITORIAL

“The money market once again has a role to play in asset allocation strategies.”

ÉRIC BERTRAND
Deputy Chief Executive Officer,
Chief Investment Officer
OFI INVEST AM

Money-market: time to cash out? No! Keep going! This is the main message of our 18 June conference, during which our managers discussed with our clients and professional associations recent trends on the money market, in terms of both performances and regulation. Though the money market is often regarded as a risk-free investment, in reality, it requires in-depth expertise if it is to remain a safe and profitable option. It’s an asset in its own right that, when managed painstakingly and precisely, can offer beneficial diversification, while minimising systemic risks.

During our conference, we highlighted three key points. First, anybody can try their hand at money-market management, but few truly know how to do so efficiently. Proper money-market management requires a detailed analysis of credit and liquidity risks. The goal is to diversify assets sufficiently to avoid exposure to systemic risk in the event of banking default. It is this thoroughness that makes the difference between a successful money-market investment and a mere deposit.

Second, in the current market context, the money market offers a viable alternative to bonds. Its now more attractive yields has made it a worthwhile choice for investors who would rather stay conservative while still earning attractive gains.

This shift has restored the money-market’s role in asset allocation strategies, a role that it had lost somewhat in recent years.

Third, the recent phase of negative interest rates has done nothing to lessen the money-market’s importance. Quite the contrary, it remains an essential tool for companies, institutional investors and anyone seeking safe, short-term investments. The diversification that it offers lessens the risks that arise from dependence on a single financial institution, which is crucial in an uncertain economic environment.

ROUND TABLE

MONEY MARKET: CASH OUT NOW? MAJOR TRENDS AND SOLUTIONS

Eric Bertrand: With central banks now gradually shifting their monetary policies, what approach should we take to managing interest rates in money-market funds?

Cyril Merkel: Money-market funds are managed on the basis of rigorous criteria, such as weighted average maturity)⁽¹⁾. WAM is a key indicator that managers must monitor closely to manage interest-rate shifts effectively. Money-market funds in Paris currently have a very low WAM, which reduces their exposure to interest-rate shifts. Managing WAM is crucial, as it reflects the fund’s sensitivity to interest-rate shifts. A low WAM helps minimise risks of loss of value in the event of an increase in interest rates by maintaining lots of flexibility to adjust positions.

Daniel Bernardo: Managing WAM is indeed a source of performance for money-market funds. We do so by setting up a rate-trend scenario through macro and micro analysis of the markets, ECB meetings, and so on. All this helps up steer the portfolio sensitivity with precision.
To adjust WAM, we use micro or macro interest-rate swaps to hedge or expose a portfolio. These swaps give us flexibility to react and adjust to changing market conditions.

E. B.: What impact will the ECB’s rate cut have on company treasurers?

C. M.: Even with the ECB’s recent rate cuts, in June and October, we are still in positive territory. Historically, even in negative territory, money-market funds have been stable, thanks to their ability to manage various rate environments, as during the post- Covid period. Companies will continue to use money-market funds to manage their cash, as they offer liquidity and flexibility. Positive rates still make it possible to generate competitive returns for investors, while keeping risk exposure low.

D. B.: Even with lower rates, moneymarket funds will remain attractive for their safety and flexibility, which are essential qualities for treasurers. Treasurers often need secured solutions to manage their working capital requirement (WCR) efficiently.
Moreover, the combination of capital preservation and daily liquidity makes money-market funds an essential tool in managing companies’ cash actively, in a context of falling yields. Remember that during the eight years of negative interest rates (from June 2014 to July 2022, bottoming out at -0.50%) money-market funds’ intrinsic qualities – capital protection, liquidity and security – always kept AuM at rather high levels. It is for these qualities that money-market funds have been presented as strong-rooms and the -0.50% as the cost of this service.

E. B.: As we have already seen in March 2023, the banking world is not shielded from a shock, and it can be dangerous to have all your eggs in one basket. What is the AFTE’s recommendation in dealing with such risks?

C. M.: It is essential to avoid concentrating all one’s assets at a single banking institution.
Diversifying one’s investments helps minimiser counterparty risk, which can be assessed on the basis of issuers’ credit ratings. Money-market funds are particularly effective for diversifying investments in terms of issuers and maturities. This helps reduce exposure to a single type of risk.

D. B.: One of the advantages of being invested in a money-market fund is benefiting from its broad diversification in terms of granularity of investment holdings, number of issuers, sector and geographical diversification, with n overweighting of France. The Money Market Fund Regulation (MMFR ) is highly protective, as it imposes a series of diversification ratios on investments by issuer or type of product. The money-market manager can also rely on many other resources. We have a credit research team that helps manage credit and idiosyncratic risk, and sector-specialised analysts. We also have an SRI/ESG research team, a trading desk and an externalfund- selection team.

E. B.: There is no such thing as a riskfree investment. Otherwise, there would be no remuneration. The key is to manage this risk. Regarding liquidity risk, what market precautions are you taking and what recommendations are you making?

C. M.: Covid was a major test for moneymarket funds, a test they passed in dealing with massive redemptions with no major problems. Proactive management of liquidity and good relationships with investors are essential for maintaining money-market funds’ stability and performance. During the Covid crisis, funds had to manage heavy outflows while still being able to meet investors’ need for liquidity. This required thorough management of liquid assets.

D. B.: Liquidity is one of the main goals of money-market funds.
We have set up several lines of defence to maintain permanent and constant liquidity. Above all, we comply with the MMFR liquidity ratios, a daily ratio of 7.5% and a weekly ratio of 15%. There is also a bucket of no more than 10% invested in money-market funds.
We also set up a bucket invested in banks having high credit quality, accounting for 30% to 40% of net assets. The mechanism is complemented by knowledge of liabilities and a timetable adjusted to the fund’s cyclicity.
This has allowed us to manage liquidity efficiently, even during crisis periods. This infrastructure guarantees that the fund can meet large redemption requests without compromising the portfolio’s performance or stability.

E. B.: Regarding fund valuation, there are several market approaches with varying degrees of linearity or volatile. What are the AFTE’s recommendations?

C. M.: A market valuation is essential for maintaining transparency and avoiding false impressions of security. It is crucial to monitor net asset value (NAV) and fund assets on a daily basis. In the event of a meaningful deviation, it is important to contact the manager to understand the causes, which could be due to inflows or outflows. This is one of the best practices that treasurers must adopt. The market valuation allows investors to see the actual value of assets and to properly assess the risk incurred from their investments.

D. B.: Transparency in valuation is crucial for maintaining investor confidence and guaranteeing fund liquidity during phases of market stress. We undertake market valuations from the very first day, and this reflects actual market conditions. This approach reinforces investors’ confidence and allows them to take enlightened decisions on the basis of current and precise data.
Moreover, fund valuation is entrusted to dedicated teams that are fully independent of the fund managers. MMFR requires mark-to-market valuation, which keeps investors well aware of potential risks. It is important to work carefully on these subjects to prevent unpleasant surprises and to guarantee precise and transparent valuations.

E. B.: In sustainably finance, regulation is moving in the areas of SFDR and certifications. What is AFTE’s stance? Are treasurers making a greater effort to invest in sustainable money-market funds?

C. M.: Treasurers are increasingly inclined to invest in sustainable funds. Fund selection now includes ESG criteria and non-certified funds are rare. Treasurers are looking for funds aligned with their investment policies, and fund selection is often approved in advance to meet these requirements.

D. B.: At Ofi Invest Asset Management, we have pledged to maintain high standards in sustainable finance. Our range of products is fully certified, and we keep close track of regulatory trends, thanks to our ESG analyst team, in order to meet our clients’ needs.

E. B.: What could AI, and the blockchain in particular, change in money-market management?

C. M.: Technologies such as AI and the blockchain can reduce inputting errors and automate administrative tasks. To enhance the efficiency and transparency of financial transactions, we plan to set up a single platform for order-placement, reporting and settlement-delivery. At the AFTE’s Investments Committee , we focus our efforts on reducing inputting errors and the costs incurred by them, something that is especially critical in managing multiple funds, which require numerous and repetitive operations. In exploring the possibilities offered by the blockchain, we aim to move up fund cut-off times to facilitate treasurers’ transactions. These technological advances are essential for enhancing efficiency and security in the financial sector.