Corporate Cash Management - Marcus Littler, Morgan Stanley Money Market Funds

The interest in money market funds is growing steadily, as corporates and institutions abundant in cash look to combine liquidity, return and capital benefits. Marcus Littler of Morgan Stanley Investment Management predicts even further growth in the next few years.

The market for AAA-rated money market funds in Europe is still growing fast, as potential investors become more familiar with how to use these highly liquid investments to their advantage. In less than a decade, these funds have seen the assets under management rise from less than $1 billion to over $300 billion in 2005. Though the value of money market funds in the US is much greater, at nearly $2 trillion, the product having first been regulated there in 1983, the European market is expected to continue its rapid growth.

‘This could easily be a trillion-dollar industry in Europe,’ believes Marcus Littler, head of liquidity fund sales for Morgan Stanley Investment Management. Currently, the Institutional Money Market Funds Association (IMMFA) is expecting a 26% compound growth rate in the European market. ‘There has been a shift in the way these products are perceived by banks, insurance companies and corporate investors,’ adds Littler. ‘There has been a lot more dialogue within the UK industry, which has developed a taste for money market funds faster than the rest of Europe.'

A DIVERSE PORTFOLIO

Money market funds are highly liquid products that invest in short-term debt instruments. They offer the benefits of pooled investment to cash-rich corporates and institutions, which can participate in a more diverse and high-quality portfolio than would be possible individually. Portfolios will typically consist of certificates of deposit, commercial paper, floating rate notes, repurchase agreements, short-term government securities and time deposits.

Liquidity funds are open-ended collective investment vehicles with no lock-in period or early withdrawal penalty for cash deposits. As such, they provide a low-cost and efficient vehicle for day-to-day corporate cash management, without compromising on yield. Shares in these funds are issued with a constant face value (such as $1 per share). Income in the fund is accrued daily and can either be paid out to the investor or used to purchase more units in the fund at the end of the month.

RISK VS REWARD

The surging interest in AAA-rated money market funds has led many banks to become service providers, making it a more competitive marketplace. Morgan Stanley entered the market for AAA-rated money market funds in 2003. Assets under management have already reached almost $11 billion.

The portfolio investment manager focuses on generating an attractive yield from diversified sources of alpha, including both credit and interest rate management, allowing him to most effectively balance risk and return across the portfolio as a whole. The belief is that a conservatively managed portfolio of liquid, high-quality money market instruments may offer the best means of maximising current income, while preserving capital and liquidity.

Credit and interest rate risk, therefore, are priorities, as is the close monitoring of liquidity. Morgan Stanley’s credit research is designed to carefully analyse each potential investment, focusing on such factors as earnings, non-performing assets and changes in net capital structure, debt service coverage ratios and cash flows. Interest rate risk is managed by the construction of a portfolio’s duration and maturity to counter any adverse interest rate trends. The portfolio is also managed to provide liquidity on a daily basis.

MATURING MARKET

Furthermore, the emergence of new products is a sign that this market is maturing. These new funds targeting lower-rated paper are designed to offer potentially higher rewards. ‘There are some new, advanced products out there, and as we move further into continental Europe, where customers are used to a higher rate of return on deposits, we will need higher-yielding products,’ notes Littler.

As products evolve and more third-party cash portal providers appear, the market in Europe will start to catch up with the US.