Despite looming regulatory threats most companies in a new survey said they would likely stay with money market funds if they moved to a floating or variable net asset value (VNAV). However, some companies, if they stuck with MMFs, would reduce their allocations.
According to J.P. Morgan’s inaugural Global Liquidity Investment PeerView survey, 71 percent of respondents said they would stay in the funds. For those respondents who said they would reduce or eliminate their use of MMFs, most said they would put their assets into bank deposits “or other assets that have both credit and term risk.” Accounting was the main concern about for companies that would stop using floating NAV MMF, as they didn’t want to have to contend with the “uncertainty of realized or unrealized gains or losses,” which also could place them at odds with their investment policies.
US and European regulators currently are looking to add further rules – beyond the 2010 fixes – to prevent runs; this after the Reserve Primary Fund famously broke the buck in September 2008. Opponents say new rules – i.e., a floating NAV, buffers and the like – won’t prevent runs and could kill the industry. MMFs, they say, play a central role in the short-term funding of entities like banks, corporations and governments and since they use very high-quality short-term funding, already are safe enough.
“The $1.00 NAV is not some accounting gimmick that allows MMFs to misrepresent the value of their portfolios and deceive investors,” wrote Melanie Fein, a frequent critic of MMF regulation, in a letter to the Securities & Exchange Commission last week. “The $1.00 NAV represents an accurate statement of the value of a MMF’s portfolio, both on an amortized cost basis and market-based measure, rounded to the nearest penny within a narrow range of half a penny.”
Yield hunt
Overall, J.P. Morgan said, treasurers were worried about liquidity and also finding yield while keeping their investments safe. “As always, treasurers must grapple with competing forces—a need for yield on the one hand, and a mandate to control risk on the other,” J.P. Morgan said in its report on the survey. “In the current low-rate environment, these competing forces have been more intense than usual.”
In that search for yield, J.P. Morgan said companies were increasingly turning to separately managed accounts. “Approximately one in every five dollars is invested in separately managed accounts,” J.P. Morgan said, because they provide a range of securities and strategies with varying risk, return and liquidity characteristics, and thus are a “critical tool for navigating a shifting rate environment.”
“Investor demand for separately managed accounts can be seen as a clear demonstration of the need for yield,” J.P. Morgan said.
J.P. Morgan said more than 200 CIOs, treasurers and other senior decision makers from around the world participated in the survey. The strongest participation was from Asia (41 percent), followed by North America (31 percent), and Europe at (28 percent).