Although US dollar institutional money-market funds have leveled off and actually decreased somewhat after rising over the past 12 or so months, the erosion of assets under management is happening at a much slower rate, according to JP Morgan. This suggests larger companies are parking cash for use in the future.
“Relative to the average over 2013-2017 period cumulative net outflows from USD MMF are running about $50bn less, suggesting more money is staying in MMF, either because yields are higher or because corporates are using the MMF as a half-way house between the fixed income market and future payments to shareholders,” JPM said in a recent note to clients. According to NeuGroup peer research, that money may also go toward paying down debt.
The buildup in cash is also a result of companies holding back from buying the short end of the curve (despite its positive performance driven by a rising rate environment) again in anticipation of payouts to shareholders, JPM said. Another impetus for sitting on offshore cash is that the dust has yet to settle on new tax laws that allow them to bring the cash home at a lower rate.
This was a point brought up at a recent meeting of NeuGroup’s Treasurers’ Group of Mega-Caps where a tax expert from KPMG told members, “It’s not as easy as you may have hoped to get the cash back that was trapped outside the US.” One treasurer said hoped the market understands that some cash will still be trapped and that the US tax code is not the only factor determining what cash can be repatriated and when. In addition, despite the cheering from the business community, the new US tax rules were hastily-written and contain errors as well as conflicts with the existing code governing international taxation. Thus, bringing back cash may not be so simple. Another treasurer called repatriation “a bit of mixed bag” because of the expense of bringing cash back and changing ownership structures.
So as companies await the go-ahead to deploy their trapped cash, they are apparently parking it, not only in MMFs but also in money market instruments within separately managed accounts or SMAs, JPM said. SMA’s are also where they are benefiting from the short-end’s solid performance. “In general, we don’t think the major corporate cash holders involved in repatriation are major investors in ultrashort or short-term bond funds,” JPM said. “However, we know that many of them invest via privately administered SMA using similar strategies and generating similar returns.”