Q&A: Kathleen Hughes of Goldman Sachs Asset Management on rates and Liquid Reserves Plus
0Sponsored Q&A: Goldman Sachs Asset Management is launching a new category of money market fund — Liquid Reserves Plus. Kathleen Hughes explains how the fund will offer access to a broader set of portfolio opportunities.
Kathleen Hughes
Q: What is your outlook for the UK economy and interest rates this year?
Kathleen Hughes: Following the slowdown in activity observed during 2017, growth of the UK economy appears to have stabilised at a lower level consistent with a modest erosion of economic slack. UK growth is underperforming that of its major trading partners, but the strength of the global economy is helping to cushion the impact of Brexit uncertainty and of the real income squeeze. We expect UK GDP growth to come in around 1.7% for 2018 and 1.8% for 2019.
For interest rates, the Bank of England (BoE) has embarked on a slow tightening cycle in response to the tight labour market in a context of a temporary overshoot in inflation driven by import prices, and modest increases in domestically generated price pressures. We expect to see two rate hikes this year — each of 0.25% — most likely in May and November, taking the base rate to 1%.
Q: How is this relevant for local authority treasurers and the launch of your new ‘Goldman Sachs Sterling Liquid Reserves Plus’ Fund?
KH: Since the BoE cut rates and launched large-scale asset purchase through Quantitative Easing (QE) in response to the recession brought on by the financial crisis in 2009, the consensus outlook for UK interest rates has largely been “lower for longer”, contributing to a very flat yield curve. This has posed a challenge for all UK investors, including local authorities, who have the option of “terming out” or investing their cash longer-term but have not been paid significantly to do so.
In November of last year, the Bank raised rates for the first time since July 2007, and has communicated that it will continue to hike gradually in the near term. The market is currently pricing in 0.40% of additional increases by December 2018. The BoE is in a position to pursue a more conventional monetary policy given the backdrop of inflation being above target and the strength of the global economy helping to stave off some of the impact of Brexit uncertainty. We do not expect any further emergency measures or asset purchase programs to be launched.
This provides a supportive environment to launch a new category of money market fund, “Liquid Reserves Plus”, that has more flexible guidelines and will have a wider scope to take advantage of attractive risk-reward opportunities in front-end interest rate markets. This strategy will complement our existing short-term money market funds, providing further options for investors in advance of the European money market fund regulation due to take effect in January 2019. The strategy will reflect our views on rates, credit and liquidity requirements.
Immediate scale in the Liquid Reserve Plus fund at launch will allow a broader set of portfolio opportunities to be accessed, to the benefit of the investors. Therefore, we are offering a fee incentive to those investors committing capital for the launch day.
Q: What types of clients can benefit from this new fund and what should be their considerations?
KH: Sterling Liquid Reserves Plus is designed to benefit local authority treasurers with either long-term strategic cash or those who are able to effectively forecast their cash need for some months ahead. The fund aims to provide investors with a low risk, low volatility cash management tool. It provides the same benefits of diversification and active risk management as short-term, stable NAV, money market funds while extending duration and credit guidelines to offer the potential for enhanced returns.
The fund will invest in broadly the same types of assets as the Liquid Reserves funds, but take extended positions along the maturity curve and credit spectrum, reflecting GSAM’s view of the optimal risk-reward opportunities within their wider investment universe. The Plus fund will have the ability to invest in additional instruments such as non-base currency securities to benefit from cross-currency basis (or interest rate) opportunities. Any non-base currency exposure will be fully hedged back to base currency.
Due to the fund’s longer average portfolio maturity, the product has an investment horizon of three months or longer, however will offer T+1 liquidity with no minimum notice period, and no fees for withdrawals.
Q: How has MiFID II impacted your LA clients and what other regulations are on the horizon?
KH: GSAM’s Money Market Fund (MMF) business is well established within this market with well over 100 active Local Authority clients. In January of this year all of these were switched from ‘Professional’ to ‘Retail’ status as a result of MiFID II implementation in the market. Because our existing funds (as well as our new launch) are considered ‘non-complex’ under MiFID II terminology and designed with a retail client base in mind, the disruption was limited meaning we continue to serve our LA treasury clients in much the same way we always have.
It is important that Local Authorities now think about how EU MMF reform will impact their treasury policies. All MMFs will be forced to switch into a new category as of 21st January 2019. Should any Room151 readers have questions about this, they should feel free to get in touch to discuss with us.
Kathleen Hughes is global head of Liquidity Solutions Client Business in Goldman Sachs Asset Management. Kathleen serves on the board of directors of the Institutional Money Market Funds Association, a position she has held since 2006. She is also a member of the Executive Advisory Council of the Robins School of Business at the University of Richmond. Kathleen is a committee member of the CFA UK Gender Diversity Network and a member of the Atlantic branch of the Investment Company Institute Global Policy Council. Kathleen was named one of the 100 Most Influential People in Finance by Treasury & Risk Magazine in 2011.
