More cash and falling interest rates have some corporates weighing a return to prime funds.
Many treasury teams have plenty of cash to invest but not many places to park it that offer attractive yields. That has some of them debating whether, when and how to add risk to their portfolios while preserving capital and liquidity. The challenge is figuring out “how to optimize cash in a very short portfolio,” as one member put it. Here’s some of what others said this spring at two NeuGroup virtual meetings for investment managers:
- “We’re evaluating different alternatives to pick up yield without commensurate risk—there’s not a lot of low-hanging fruit,” one assistant treasurer said. “We don’t want to get too far out over our ski tips. It’s a struggle—there’s no playbook in terms of where we’re headed here.”
- Another member asked what others are doing “to capture extra yield” given that rates at the front end of the yield curve are near zero. “I struggle with that,” responded one of his peers. “I can go out six months and get 30 basis points; is it worth it?”
- Another investment manager said his team is “balancing liquidity for the firm with taking advantage of dislocations.”
Raising capital. The economic uncertainty created by the pandemic sent many corporations racing to the capital markets to boost liquidity by issuing debt in record amounts in March and April. One member’s company raised more than $10 billion in two bond offerings. “Now we have to manage the cash,” he said, a reality mentioned by several members whose companies had done debt deals.
Time for prime? After huge outflows sparked by the pandemic, prime funds more recently have seen inflows and increased interest by NeuGroup members who dumped them to put cash in government and treasury money market funds (MMFs). The Federal Reserve’s backstop, the Money Market Mutual Fund facility (MMLF), gave some investors more peace of mind about credit risk.
- One member with cash to invest after raising capital asked if any of his peers had done “anything to find yield” and whether there was an “easy yield pickup” between prime and government MMFs.
- “We are in prime funds,” another member said later. “We find the yield benefit attractive currently and do not have operational issues supporting the NAV movements. We ‘diligence’ prime fund managers thoroughly before investing in any particular fund to ensure we are OK with their credit process.”
- Another member, who is not back in prime funds or LVNAV funds in Europe, is considering them now, in part because he likes their yields relative to bank deposits, saying he views the risk of deposits “the same or worse” as prime funds. He’s evaluating:
- Performance of the fund before, during, and after “what has so far been the peak of the market dislocation.”
- The fund’s NAV, size, any gates or fees imposed and any recapitalizations.
- “We will also look at things like the Fed’s MMLF to see how that may help in case there is a market ‘flare-up’,” he said.
Enhanced money market fund. One participant who is not invested in prime MMFs raised the interest of peers by describing an enhanced MMF she manages internally that allows her to “go out three years floating, 18 months fixed” and invest in BBB credits. Over a six-year period, she has outperformed prime funds by about 40 basis points. And the icing on the cake: “I don’t charge 15 basis points.”
