Introduction of new types of funds
Other slightly more strategic responses to the mounting pressures facing the MMF industry have been based on attempts to introduce new types of funds, principally focused on trying to deliver better returns in a very low interest rate environment. Obviously there are a limited number of ways to achieve such an objective, principally focused on extending the maturity profile or reducing the credit quality of a fund’s portfolio holdings.
Attempts to gain improvements from extending duration have included the development of fixed return funds where by agreeing to leave their money invested for a guaranteed period of time investors have benefited from the increased yields that fund managers were able to achieve by investing a higher proportion of assets further down the curve. However, whilst liquidity is ranked second behind security in the investment priorities for most corporate treasurers it is still ranked ahead of yield and it appears that most treasurers are still uncomfortable with sacrificing liquidity for a relatively small uptick in yield. This situation probably wasn’t helped by the fact that these types of funds could not be easily added to MMF portals given their fundamentally different operational processes and hence they were not available for electronic trading. In the case of fixed return funds it is likely that this had only a limited impact but as the use of portals continues to grow at such a fast pace there will almost certainly come a point when the ability to trade particular funds on portals will be a significant factor in ensuring the success of new offerings.
Those with a good memory will remember the rise of the ‘enhanced cash funds’ in the period running up to the 2008 financial crisis. Due to some difficulties with these funds at the time they disappeared from sight and in many cases from the fund ranges of most providers. However, the growing dissatisfaction of investors with the continuing low yields being delivered from their current investments has recently given an added impetus to the reappearance of ‘enhanced’ funds offering higher returns by investing in assets of slightly reduced credit quality and in some cases longer duration. At MyTreasury we are increasingly being asked whether we know of any enhanced funds and whether we have any plans to make them available on the platform. The answer is that we are aware of an increasing number of these funds and we bring them on board where there is sufficient client demand.
This particular development has been reinforced by a substantial increase in the number of approaches we have received from providers of other types of funds that have typically not appeared before on any MMF portals. Particularly interesting is the fact that the pending regulatory change in Europe has encouraged the providers of the unrated French Fonds Commun de Placement (FCPs) to consider putting them onto MMF platforms for the first time to take advantage of what they see as the possible break up of the hegemony of AAA-rated CNAV MMFs for institutional investors outside France. There is a perception amongst many fund providers in the offshore space that a combination of both regulatory change and the continuing low interest rate environment is encouraging investors to look more widely for improved performance whilst reducing the perceived barriers to considering anything other than the AAA-rated CNAV funds. The growing interest in ultra-short bond funds and even some ETFs are other examples of this shift in thinking. There is a long and sometimes difficult path between investors commencing market research on alternative fund offerings and securing board approval to begin investing in new types of funds with different risk profiles. However, the emerging view amongst investors appears to be that if they are going to have to secure board approval for using the new version of their traditional MMFs they might as well look at alternatives and seek approval for these as well.
Whatever the outcome of the current developments, MMF portal providers have to be prepared for significant changes that may come along and investors want to select portals that are going to be fit for purpose in a few years’ time and not just today. In view of this the MMF portal industry is currently awash with technology and business development activity designed to allow a broader range of fund types to be offered. It has already reached the position where it doesn’t really matter what the outcome of regulatory change will be as investors have already started to look at broader potential investment opportunities and now have alternative fund types firmly in their focus.