• Home
  • About
  • Subscribe
  • Conference
  • Events Calendar
  • Webcast151
  • MOTB
  • Log In
  • Register

Room 151

  • Treasury
  • Technical
  • Funding
  • Resources
  • LGPS
  • Development
  • 151 News
  • Blogs
    • David Green
    • Agent 151
    • Dan Bates
    • Richard Harbord
    • Stephen Sheen
    • James Bevan
    • Steve Bishop
    • Cllr John Clancy
    • David Crum
    • Graham Liddell
    • Ian O’Donnell
    • Jackie Shute
  • Interviews

J.P. Morgan Asset Management Q&A: Assessing the alternatives for investment portfolios

0
  • by Guest
  • in Treasury
  • — 2 Nov, 2016

With regulatory reforms expected in the money market funds industry and Basel III regulations redefining global standards for bank capital, liquidity and leverage, treasures  are having to re-think their short term investment strategies. Jason Straker, of J.P. Morgan Asset Management’s Global Liquidity Group discusses how investment portfolios are changing and what clients need to know before using alternative investment vehicles.

This article was sponsored by J.P.Morgan Asset Management.

Photo (cropped): Numbers and Finance, Flickr

Photo (cropped): Numbers and Finance, Flickr

What does J.P. Morgan’s Global Liquidity Investment PeerView Survey tell us about the way in which investment portfolios have been changing over recent years? How are treasurers adjusting in the face of recent regulatory and market changes? 

Jason Straker (JS): One of the most telling responses we had in the Global Liquidity PeerView Survey came when we asked what changes respondents are likely to make to their investment portfolio in the next year. For each type of cash investment made by treasurers, we saw a high number of increases and decreases in the cash that treasurers plan to invest. Significantly, that includes bank deposits and stable Net Asset Value (CNAV) MMFs, which are obviously important instruments for European treasurers in particular.

So, treasurers are evidently thinking about their investment policies; thinking about what to add and what to remove, much more than they have ever done in the past. I think that is a positive development. Given that there is so much happening at the moment, in the market and around regulation and the emergence of new investment products, I would recommend that investors look at and review their policies on an annual basis at the very least. They should not be updated too often, of course, but we are seeing some large investors updating their policies more frequently in reaction to deteriorating credit ratings, particularly in the financial sector.

What alternatives to MMFs are treasurers now showing greater interest in? 

JS: The use of separately managed accounts (SMAs) is definitely on the increase. If we look again at the survey responses, nearly a quarter of respondents with considerable cash on balance sheet are considering an increased use of SMAs in the next year. The growing appetite for SMAs is really a reflection of the fact that investors are searching for yield. They are giving more attention to cash segmentation, so that a portion of their cash can be allocated to products – like SMAs – with longer investment horizons. This ensures that they are not paying for liquidity they do not need.

As an investment vehicle, SMAs represent a good first step beyond MMFs. I think the trend also demonstrates the fact that investors are becoming more sophisticated. After all, SMAs do require a higher level of understanding of the risk-return relationship and the different types of individual investment within a given portfolio. That requires thinking about what specific guidelines make sense. As investors become more accustomed to those investment types they can then take a view on what they feel is appropriate for their own portfolio.

jpmam-chartHow is J.P. Morgan Asset Management’s own product portfolio evolving to meet the needs of investors in this new short-term investment environment? 

JS: Our aim is to offer our clients a range of investment products that sit across the risk and return spectrum. In addition to SMAs, we offer products such as Managed Reserve Funds (MRF) that can work for clients as they continue to move out of MMFs in the search for additional yield.

And our portfolio of products is constantly evolving. For example, in August we launched a new Sterling MRF; this is a bond fund which will invest exclusively in short-term investment grade sterling securities. So, for sterling investors the launch of this product really comes at quite an opportune time, given that post-Brexit we are now facing the prospect of lower interest rates in the UK. We will certainly be continuing to talk to our clients about alternatives like MRFs and help them better understand what it means to move into such products away from more familiar instruments like MMFs.

We also expect to see an evolution in our portfolio of MMF products. When we finally see the details of the forthcoming regulatory changes in Europe it is very likely that we will need to look again at the funds we offer to investors in the region. That could include the proposed Low Volatility (LVNAV) MMF. Should LVNAV MMFs indeed become a reality, we could look at launching or even converting our existing funds to be able to offer the product.

The short-term universe is certainly growing and it is not just the European and US regulatory changes driving this – it is also factors like Basel III and interest rate environment. Of course, this means greater choice for the investor, but the downside is that investors will need to pay more attention to due diligence when using some of these new products as there will be marked differences between them. MMFs are heavily regulated and mostly AAA-rated, so the differences between them from a portfolio standpoint are typically quite small. But when we look at ultra-short bond funds, for example, we see much larger differences between providers, and for investors who wish to use these products it is absolutely necessary for them to understand precisely how they differ.

So what should a treasurer do differently when evaluating potential alternative investment products relative to how they would traditionally go about evaluating a MMF investment? 

JS: I think it is important to look at the history of the provider, the resources that are available to the firm and the management of the particular product, including portfolio managers, traders and, perhaps most importantly, credit analysts (who, after all, are responsible for managing the most important type of risk within these products, the credit risk). A good RFP questionnaire, will request information around the track record of the fund, the ability of the team, and the approach to risk management.

With respect to evaluating track records, it is important to look at how different funds have reacted in times of stress. That is often a key differentiator: how a fund manager acted in times when the effective management of risk is critical. When the markets are calm, there will be only a slight difference in returns between managers, but when the markets become more volatile, that is when differences in performance become more apparent. Whether changes were made to the portfolio to avoid credit or liquidity issues is an item that should be of particular interest. Even though one should not simply extrapolate past performance and expect it going forward, it is certainly informative to look at how managers have reacted to different market conditions throughout the interest rate and credit cycle. This sort of analysis can also be performed before investing in SMAs, with investors looking at a composite that represents all the portfolios managed to a particular investment strategy.

Investors should also be cognisant of differences in the way alternative products are treated by the ratings agencies. The rating on a MMF is unique as there is a liquidity component. Ratings agencies will look at some aspects of the fund such as shareholder concentration and the amount of overnight liquidity. That is different to a bond fund rating, which has a much larger subjective or qualitative component. For bond funds, the ratings agencies consider factors such as the stability of the team, the resources and the credit research track record. So it is important to understand how the ratings differ. Typically, MMFs will have a AAA-rating, whilst ultra-short bond funds, like the AA-rated sterling MRF we recently launched, will have a rating based on slightly different criteria.

Outside of the asset management industry, what other short-term investments are being considered by treasurers? What would you say are the main attractions for investors of these products?

JS: One of the investment vehicles treasurers with very large cash balances are taking a lot more interest in lately is reverse repurchase agreements or repo. The first benefit of trading repo is that, because it is not a security or a fund, the accounting of the value of the investment can be stable. There is no need to mark-to-market repo, as the value does not change from one day to the next. That makes life a bit easier for treasurers, from an accounting perspective. The treasurer can simply book the investment and book the interest or yield received at maturity.

There are a number of drawbacks to trading repo for treasurers though. Firstly, they will not normally be offered overnight repo since most counterparties would prefer longer- term deposits. In the post-Basel III world, less than three months is not especially attractive to banks. A second disadvantage is the ever diminishing availability of high quality collateral. Even though central banks around the world have been issuing more debt, the demand for sovereign debt has increased to the extent that the availability of those securities for repo has reduced significantly. Consequently, what tends to happen is treasurers will be offered other types of collateral instead, such as corporate bonds, or what we would call ‘non-traditional’ collateral.

Direct investment into securities, meanwhile, is less in vogue. Five years or so ago, perhaps, it was fairly common to see treasurers buying commercial paper directly themselves. But our Global Liquidity PeerView Survey shows that respondents expect to be reducing, rather than increasing, the use of these instruments. In the current environment, where credit events do occur, that is becoming less popular.

What are asset managers such as J.P. Morgan doing to help clients better understand alternative short-term investment products – what advice would you give treasurers around using such products? 

JS: One of the things we do at J.P. Morgan Asset Management to help our clients better understand the differences between various investment products is provide discussions around how each vehicle performs in different market conditions. We demonstrate how the products have performed during periods of market stress, for example, or in an environment where interest rates are rising. And on top of that, we provide forward-looking analysis to discuss with the client how we believe different products will perform going forward in different market outlooks.

Supplementing that, we also provide a large amount of educational material detailing the different investment types particular funds make. It is not always obvious to cash investors what particular investments a cash fund makes, and therefore such material can be very useful in terms of helping the investor understand why we believe that type of investment is suitable for a low-risk fund.

Finally, in our conversations with clients we are encouraging them to rethink how they define their investment objectives. Although the key objectives of preservation of principle, liquidity and then yield remain intact – and rightly so – we feel that the realities of today’s short-term investment environment require some new thinking around what these objectives should mean. Take, for example, the objective of preserving principle. Should that mean preserving principle from one day to the next or, perhaps, over one week or one month? Similarly, when thinking about liquidity, treasurers might wish to consider whether they require liquidity on any given day or over a period of, say, one month.

This approach allows the treasurer to alter those two measures of risk, to drive the level of yield that they feel is appropriate. That is something we are seeing more of and it is an approach we would certainly urge our clients to consider taking.

Jason Straker

Jason Straker

Jason Straker, is client portfolio manager, Global Liquidity Group, J.P. Morgan Asset Management.

Share

You may also like...

  • Scottish councils fail to explain budget variations Scottish councils fail to explain budget variations 9 Jan, 2020
  • Struggling tourist attraction causes council cashflow problems Struggling tourist attraction causes council cashflow problems 25 Jul, 2019
  • Letter corrects FT “​Only one money market fund ‘​broke the buck'” Letter corrects FT “​Only one money market fund ‘​broke the buck'” 5 Jan, 2012
  • David Green: Scanning the regulatory horizon David Green: Scanning the regulatory horizon 3 Aug, 2017

Leave a Reply Cancel reply

You must be logged in to post a comment.

  • Register to become a Room151 user

  • Latest tweets

    Room151 1 day ago

    All three days of #LATIF & FDs' Summit are available on our webcast channel gotostage.com/channel/room151

    Room151 4 days ago

    FDs’ Summit experts defend councils as MPs label property investment ‘risky’: As Room151’s FDs’ Summit conference explores local government’s investment in commercial property MPs once again lable it a “significant risk to government”. Once again MPs… dlvr.it/Rr7lZx pic.twitter.com/jPvcZjDAS4

    Room151 4 days ago

    Global macro outlook: Virus versus vaccine: Sponsored article: Salman Ahmed argues monetary policy, a global vaccine rollout and fiscal stimulus are likely to put “upward pressure” on bond yields. Much like the latter half of 2020,[...] dlvr.it/Rr60nt pic.twitter.com/qsymBWmKmV

    Room151 5 days ago

    ‘Chasing yield’ not the best strategy as negative rates loom: Recent speculation that the UK may be heading toward negative interest rates prompts questions for treasury officers managing local authority funds at LATIF. Speculation is rife that the UK… dlvr.it/Rr3Mrj pic.twitter.com/wtxYAB20PO

    Room151 1 week ago

    Will new public procurement rules offer the best commercial results?: The government has issued a green paper on reforming procurement rules. Helen Randall and Rebecca Rees examine the proposals and argue they may not go far enough. The Cabinet… dlvr.it/Rqtw6T pic.twitter.com/9GiVTkL08U

    Room151 2 weeks ago

    The vaccine may help settle cash flows but inflation remains a risk: Sponsored article: Lauren Sewell examines the prospects for long-term borrowing as Brexit settles and vaccines are deployed against Covid-19. On the 9th October 2019 Whitehall sent… dlvr.it/RqZXCr pic.twitter.com/PzgOZOGQ0k

    Room151 2 weeks ago

    ESG in liquidity: Sponsored article: Gavin Haywood looks at the integration of ESG in Federated Hermes’ money market funds. Federated Hermes has over 300 public sector clients invested in our AAA rated money[...] dlvr.it/RqZX5f pic.twitter.com/E87sBXsay8

    Room151 2 weeks ago

    New realities of investing cash and liquidity: “What to do now?”: Sponsored article: Brian Buck looks at the “unique challenge” for cash management strategies. As investors assess the ongoing impact of the pandemic on their business, levels of cash and… dlvr.it/RqVbk9 pic.twitter.com/ZElVASmEUV

    Room151 2 weeks ago

    Extra finance promised by the government receives a broad welcome: Sponsored article: The financial pressures facing local authorities this year continue to pose challenges for council treasurers. While the launch of the UK’s Covid-19 vaccination… dlvr.it/RqTzTF pic.twitter.com/HCjH0pyHR5

    Room151 2 weeks ago

    A savvy approach to managing your cash: Sponsored article: Caroline Hedges examines the need for active cash management to achieve a higher than average return. Last year saw the already mountainous pile of negative-yielding debt around the[...] dlvr.it/RqTzMK pic.twitter.com/uP0RQYTJLt

    Room151 2 weeks ago

    Putting alternatives at the heart of multi-asset portfolios: Sponsored article: Nick Edwardson looks at the assets that provide the “most attractive opportunities”. We believe that asset allocation is the primary driver of investment returns and that the… dlvr.it/RqQ2Qt pic.twitter.com/WLBzvRRRUQ

    Room151 2 weeks ago

    Thriving in the pandemic: Avoiding the stragglers: Sponsored article: George Crowdy looks at the sectors providing opportunities for sustainable investment. Throughout much of 2020, we talked about why sustainable investing has thrived in the pandemic,… dlvr.it/RqQ2NQ pic.twitter.com/dxiPWKFsPl

    Room151 2 weeks ago

    The development of CCLA’s mental health benchmark: Sponsored article: Amy Browne examines the importance of investing in mental health in the workplace. We are living through a public health emergency in more ways than one. Physical health[...] dlvr.it/RqQ2Jx pic.twitter.com/o6yRSCX3oF

    Room151 2 weeks ago

    Brexit: What the EU trade deal means for the UK economy: Sponsored article: Hetal Mehta looks at the impact of Brexit on economic prospects. Four and a half years after voting to leave the EU, on Christmas Eve the UK finally[...] dlvr.it/RqLBDt pic.twitter.com/No62srfE8h

    Room151 2 weeks ago

    Cash dethroned: The quest for liquid yield: Sponsored article: Peter Hunt and George Carne ask how treasury departments can balance the need for yield and liquidity. The massive stimulus and waves of liquidity provided by central banks[...] dlvr.it/RqLBDj pic.twitter.com/05g6Zhu1kU

    Room151 2 weeks ago

    Richard Harbord: Delayed “capital determinations” make section 25 opinions a new crunch point: The severe pressure on local government budgets now means section 151 officers confront a tricky call on  whether they can make a judgement on the robustness… dlvr.it/RqLBDV pic.twitter.com/vTAbDKFzkI

    Room151 1 month ago

    PWLB Consultation: Analysis straight from Dickens: Helen Radall and Paul McDermott present a legal examination of the new PWLB borrowing rules as Charles Dickens might have imagined it. Free and easy PWLB (“Marley” to his friends)[...] dlvr.it/RnmwLq pic.twitter.com/yFxcPrQqEG

  • Categories

    • 151 News
    • Agent 151
    • Blogs
    • Chris Buss
    • Cllr John Clancy
    • Dan Bates
    • David Crum
    • David Green
    • Development
    • Forum
    • Funding
    • Graham Liddell
    • Ian O'Donnell
    • Interviews
    • Jackie Shute
    • James Bevan
    • Jobs
    • LGPSi
    • Mark Finnegan
    • Recent Posts
    • Resources
    • Richard Harbord
    • Stephen Fitzgerald
    • Stephen Sheen
    • Steve Bishop
    • Technical
    • Treasury
    • Uncategorized
  • Archives

    • 2021
    • 2020
    • 2019
    • 2018
    • 2017
    • 2016
    • 2015
    • 2014
    • 2013
    • 2012
    • 2011
  • Previous story David Green: Surveying the TMS landscape
  • Next story £5bn global equity fund launched by Local Pensions Partnership

© Copyright 2021 Room 151. Typegrid Theme by WPBandit.

We use cookies to ensure that we give you the best experience on our website. If you continue without changing your settings, we'll assume that you are happy to receive all cookies from this website.OK