Leveraging new opportunities for managing investments

Companies across Asia are seeing significant increases in the amount of cash they are holding.

This creates a growing dilemma for treasurers and finance managers who need to find ways to invest cash that are secure and liquid. In the United States and Europe, the use of money market funds (MMFs) or liquidity funds is well-established, with many companies recognizing the benefits of a diversified, highly rated pooled investment with same-day liquidity. These products are not new in Asia, particularly for Asian subsidiaries of American or European companies. However, as this article outlines, the use of high quality, diversified funds, that offer same-day access to liquidity, has considerable potential for all companies with surplus cash.

Addressing Investment Challenges

Corporates of all sizes have become more focused on risk since the financial crisis; furthermore, as these companies have often reduced their counterparty credit limits due to credit rating downgrades, existing deposit limits are often fully utilized. Consequently, treasurers are seeking alternative investments that combine credit quality, diversification and access to liquidity. MMFs fulfill these criteria in a variety of ways:

• Inherently diversified due to the variety of assets that make up the portfolio, with typically no more than 5% of total holdings invested in one asset.
• Highly rated, typically only investing in money market securities of the highest credit quality (A1/P1 or higher), and excluding commodities, equities or derivatives.
• Offer same-day access to liquidity.
• Subject to a rigorous investment process with dedicated credit research.
• Constant net asset value (NAV) (although variable NAV funds are also permitted).

Although yield is no longer a priority, treasurers are still seeking a reasonable return on their cash, and MMFs typically offer a yield equivalent to other investment types, such as bank deposits.

Transacting MMFs in Practice

There are two potential difficulties for treasurers seeking to leverage these products. Firstly, they need to identify funds that are most appropriate for their company’s needs and subject to the most robust investment processes. Secondly, they need an efficient and convenient means of transacting MMFs to comply with internal control requirements. To address these issues, we see online dealing platforms becoming more widely available in Asia. Treasurers can transact investments online in a controlled and convenient way, with access to multiple funds from large, established providers through a single channel, covered by a single set of documentation. When such services are provided by banks such as Citi transaction and settlement can be integrated into a “one step” process, and integrated with internal systems.

Regulation for reliability

MMFs are regulated products which have proved highly resilient during the market fluctuations of recent years. However, the industry recognizes that further improvements can be made to give investors full confidence in the funds in which they are investing, as well as transparency over their holdings. Consequently, the Securities and Exchange Commission (for U.S. domiciled MMFs) and the Institutional Money Market Fund Association (IMMFA) (for European domiciled triple-A rated MMFs), have introduced changes to strengthen existing standards. Additionally, the Committee of European Securities Regulators (CESR) has taken steps to standardize the definition of an MMF. These changes are also being observed widely in Asia to standardize the industry internationally, and provide transparency and confidence to investors.

Leveraging new investment opportunities

With MMFs becoming increasingly familiar and accepted by treasurers and finance managers in Asia, new regulations offer even greater reassurance to corporate investors seeking confidence in the security and liquidity of their cash. With the growing availability of efficient and convenient online platforms, there are expanding opportunities for treasurers and finance managers seeking to invest the company’s cash in a secure, liquid and diversified product, without creating an additional resourcing burden.