Some asset managers may look at investing in money market funds as similar to putting cash under your pillow and being charged for it.
With interest rates at record lows, the HSBC Global Money Funds Hong Kong Dollar (HKD), for example, returned 1.03% in 2018 on an expense ratio of 0.27%. And this is better when compared to the Premier UK Money Market (Pound Sterling) fund which returned 0.6% over the past year on an expense ratio of 0.28%.
But despite low returns, total money market funds have grown to US$3.3 trillion as of December 2018, according to data from the US Securities and Exchange Commission. Weekly total net assets of money market funds amounted to US$3.2 billion as of July 17, according to the Investment Company Institute.
In Asia, the Chinese money market fund Tianhong Yu’e Bao has become the world’s largest with assets of about 1.56 trillion yuan (US$233 billion).
The reason for the huge growth of this asset class, which has generally exhibited poor returns when compared to equities and fixed income assets, is that more investors are seeking greater capital preservation and liquidity on their assets rather than performance.
“Managing investors’ cash is all about preservation of capital and provision of liquidity. A return is important but it’s a secondary factor against those two primary objectives,” says Jonathan Curry, global CIO Liquidity & CIO America of HSBC Global Asset Management.
HSBC GAM manages a total of US$80 billion in money market funds across a range of developed market and emerging market currencies for institutional and corporate investors.
“In this asset class it is less about asset allocation decisions being driven by the macroeconomic picture. It’s less about markets being driven by geopolitical issues that might change an investor’s asset allocation. Now clearly that may have an impact on their cash allocation but that isn’t really what drives the investors to use money market funds,” Curry says.
Investors who invest in money market funds now come from a broad spectrum including multinational corporates, sovereign wealth funds, pension funds, insurance companies, hedge funds, asset managers and high net worth individuals.
“What we are seeing is a wider range of different client types that are now using money market funds as a way of managing some of their cash. In Asia, the range of users isn’t as broad as in the US but it’s growing,” Curry says.
Although there are many types of investors who invest in money market funds for various reasons, the main purposes are similar. They use money market funds to park their short-term cash.
Some corporates use money market funds as the sole tool for managing their short-term cash. Other corporates use money market funds as part of a cash management solution where they will place money in deposits, park cash that can be invested directly in securities, and hold cash that can be tapped quickly in case liquidity is needed.
“It depends on the client in terms of how they use the funds because one of the key premises about them is the provision of liquidity. You get some investors that use that liquidity frequently, so they’ll be going in and out of the fund regularly. You get others that might be building cash out for a specific purpose and then redeeming it. But that will be a long-term period where they will be holding the fund. And then you have investors that have a long-term cash allocation and they don’t have significant liquidity needs. So they will be a very stable investor in the fund,” Curry says.
Other reasons for the fast growth in the usage of money market funds are liquidity, diversification, and transparency.
In terms of liquidity, money market funds can provide same-day liquidity, next-day liquidity, weekly liquidity, or monthly liquidity depending on the market.
Also, an investor gets access to diversification through a single transaction since the money market fund has a very well-diversified set of credits as underlying assets. To get the degree of diversification that a money fund can offer would be quite challenging for an investor to do on their own. Banks which offer money market fund products traditionally have professional credit management teams which investors don’t have.
Although returns are low when compared to other asset classes, money market funds offer attractive returns relative to short-term market interest rates.
Money market funds also offer transparency in the form of daily holdings reports where investors can see every single asset that the money market fund is invested in.
“In some markets, these reports may be less frequent than daily, in some markets they may be weekly, and in some markets, they may be monthly. But I think the way the industry’s moving forward, more and more markets will move to daily reporting,” Curry says.
In Asia, money market funds have been established longer in some markets particularly Hong Kong (HKD), India (INR), and Korea (KRW).
HSBC GAM has an institutional HKD money market fund that fluctuates between HK$4-5 billion. This fund recently moved to a T+0 settlement and has been given a top Triple-A credit rating by Fitch Ratings. It also has a bigger money market fund established specifically for the Mandatory Provident Fund (MPF). The INR fund is about 60 billion rupees (US$870 million).
More recently established but fast-growing money market fund industries are in Australia (AUD), China (RMB), and Singapore (SGD). HSBC GAM’s RMB money market fund is about 16 billion yuan (US$2.33 billion) and growing steadily.
HSBC GAM’s single biggest money market fund is its US dollar European domiciled fund with US$28 billion.