Treasurers’ Conference – Global perspective on cash investment

Alastair Sewell, Head of Fund and Asset Manager ratings for Fitch EMEA and APAC, discusses how the trend towards responsible investing has reached money market funds and the potential new money reforms internationally. Alistair also drills down into the issues affecting global cash investments brought about by the challenges created by the Covid-19 pandemic.
The rise in responsible investing
Responsible investment has made its way into the short-term market and into money market funds and cash investing and we’ve seen money market funds either converting to an explicit ESG strategy or new funds being launched. These funds have generated a lot of assets. The question for a cash investor is how are they making a fund ESG? The primary area of focus is that fund managers are placing more emphasis on governance. Governance has always been a key part of any credit analysis process. The ESG movement has brough the governance pillar into greater focus in the investment processes and is a significant lever for making investment decisions. This ESG focus has not been lost on regulators and there is growing regulatory attention on how fund managers are applying ESG processes in a consistent manner. What is of more immediate concern to money market fund managers and cash investors around the world is how the March 2020 market stress period may translate into new regulation for money market funds. There’s already been several fairly significant rounds of reform to money market funds following the 2008 financial crisis. The 2020 stress did affect money market funds, less than in 2008, but enough stress to trigger regulatory interest. In the US, there are regulatory reform proposals on the table and in Europe regulators are consulting on reform proposals.

Regulatory re-reform is back on the agenda
After the GFC in 2008, the US regulations moved some types of money market funds from a stable unit value per share to a variable price. In Europe, there is a suggestion that money market funds may be forced to move a to a variable price as well. This is being underpinned by investor focus on investor behaviour. They’re interested in the incentives for investors to redeem earlier. If enough investors redeemed together, this could cause issues for funds and the market. Moving to a variable price per share with some other reforms may mitigate the risks arising from this investor behaviour. From an investor perspective, and if this regulatory scenario does play out, some adaptation is likely to be needed in the relatively near future. This could happen next year certainly for the US and Europe.