JPMorgan Asset Management: MMFs and the Global Financial Crisis - Kathleen Hughes
MMFs (money market funds) have been providing high levels of liquidity and security for over three decades. In light of recent market events, Kathleen Hughes, head of global liquidity EMEA at JPMorgan Asset Management, takes a look at how the recent financial market crisis has affected the industry.
Since September 2008, the escalation of the global financial crisis has had a dramatic impact on money market funds; most notably, the bankruptcy of Lehman Brothers resulting in the Reserve Fund ‘breaking the buck’ when its shares fell below their par value of $1 after writing off its Lehman-issued debt.
Since the failure of the Reserve Fund, central banks have taken extraordinary actions to inject liquidity and make capital available to the global banking system. It now appears that most banks are deemed too important to fail, particularly the large money centre banks.
Authorities in the UK were the first to propose injecting capital directly into banks, and this strategy was then followed in the US, while authorities in the eurozone made sure that unlimited US dollar funding was available for banks, and bank guarantees were also introduced in countries such as Ireland and Germany. While these guarantees have removed some of the risk of investing in bank deposits, cash investors would still need to wait in line for compensation schemes to pay out before they can get their money back.
On the other hand, money market funds not only benefit from the government guarantees (most of the securities held in JPMorgan’s money market funds are now backed by some form of government support), but their diversified portfolios and daily liquidity mean investors can always get instant access to their cash.
Our money market funds
JPMorgan enjoys a strong position of leadership among providers of money market funds and has experienced significant growth even since the escalation of the financial crisis in September. The flight-to-quality sparked by the Lehman Brothers bankruptcy has actually benefited our treasury funds as investors have sought out the added security of government paper, with our Euro Government Liquidity Fund seeing large inflows. We also recently launched a Sterling Gilt Liquidity Fund, the only AAA-rated liquidity fund investing purely in UK government securities.
Across our AAA-rated international liquidity funds our credit process has served us extremely well. Over the last year we continually reduced average maturities and removed our exposure to special investment vehicles. We also stopped unsecured lending to Lehman Brothers several months before its bankruptcy. In addition, we substantially reduced exposure to asset backed commercial paper.
Most recently, however, we have started to look at reversing this trend by increasing maturities in our AAA-rated liquidity funds as we have become more comfortable with the credit and bank risk in selected names while yields continue to look attractive as evidenced by the high spread of LIBOR over official rates. In addition to this, we have started to look at putting some of our excess liquidity to work further out in the curve to also achieve a higher level of yield within our funds.
Well established providers
Since the first money market funds were established in the early 1970s their ability to provide liquidity, security and yield has provided a valuable service for investors throughout the different stages of the economic cycle and through events such as the current financial crisis.
In recent months the larger, more established providers such as JPMorgan Asset Management, which have substantial experience, deep research, credit resources and a rigorous risk management approach, have proven that they can provide invaluable security and peace of mind for investors.
