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Cash products evolve in Asia

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Cash as an asset class has prospered in the past year and money market funds have grown exponentially. In times of uncertainty, says Joanna Cound, managing director, head of European cash sales, at investment managers BlackRock, money market funds are thriving. Cash is fundamental to BlackRock - 25% of its assets under management are in cash vehicles, the vast majority triple-A rated money market funds. “Triple A funds are seen as very safe and deliver stable NAV,” she says. “The global industry has grown by 55% since last June. Distributors are coming to us with customers who have experienced losses and we are also seeing sophisticated clients who are used to investing in the market themselves realising that not all paper is created equal and they are turning to triple-A and outsourcing in a way that has not been done before.”

Cound says demand for triple-A money market funds from Asia is growing, driven by plan sponsors, sovereign wealth funds, corporates and financial institutions. “The region is moving to money market funds in a big way.”

Mark Talbot, chief executive officer, Asia ex-Japan at Barclays Global Investors says there has been a “flight to quality” in the region as investors realise a need to focus on cash funds that have a triple-A rating, large size and ability to provide liquidity and stability to clients. “Clearly the use of cash funds has been on the rise and increasingly many of the credit analyst tasks have been outsourced to professional money managers; the stand-alone credit analyst team of a money manager has become an even more important value-add.”

The credit crunch has also led to investors paying more attention to the underlying instruments of a money market fund’s portfolio, he says.

Chairman of the Institutional Money Market Fund Association (IMMFA), a trade association for providers of triple-A rated money market funds, Donald Aiken, says the popularity of such funds comes from their ability to deliver on their objectives of capital security and liquidity “at all times”. During 2007 funds under management in Europe exceeded €400 billion, an increase of 35%.

The combination of being triple-A rated and the ability to provide liquidity and capital security through the challenging market conditions of the past 10 months, says Aiken, has contributed to the success of IMMFA funds, especially in the period of prolonged volatility and testing times in the interbank money markets across the globe.

Money market funds are attractive to pension funds because in offering stability and liquidity they can help the funds meet short-term liabilities. Talbot says pension funds in the region are placing a greater focus on money fund providers with large cash assets under management, scale and stable performance. BGI has a dedicated cash client service team in Asia, and other regions, to service clients with cash fund needs in various currencies and cash return targets. The firm has more than US$2 trillion in cash assets under management globally.

Most of the large sovereign and corporate pension funds have a local currency bias, says Talbot. This means they are demanding a total investment solution that is either hedged or denominated in local currencies. “At times, this can be challenging as there aren’t that many sizeable institutional local currency cash solutions in the market with a long track record.”

Another challenge for funds in the region is keeping abreast of credit and market developments in the rest of the world. Constantly communicating with asset managers will enable pension funds to gain reliable and knowledgeable advice, he adds. In managing their cash assets, pension funds must fully understand counterparty risk.

In order to make better use of their cash holdings, pension funds should invest in well-diversified products and focus on larger providers who can deliver the full spectrum of customer support, as well as first class products. Return, risk and cost should be the three principles of performance, he says.

Talbot says cash management in the region will be focused on the stable net asset value money market fund as opposed to enhanced cash type strategies. Enhanced cash funds take more risk and as a result deliver higher returns. Expectation among investors is that such funds are highly dependable and don’t lose principal value. However some of these funds have experienced losses and investors have been pulling out. David Moffat, head of product development and new business for transfer agency International Financial Data Services, says there has been a lot of shortfall in money market funds and confusion among investors who felt they were not warned there could be a downside to money market funds.

Talbot believes in the year ahead pension funds in the region will explore and some will utilise money market funds in various currencies, and not just USD. They will also continue to focus on liquidity, principal safety and diversified investments, he adds.

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