Talking Heads – Money market funds: “It is worth taking care of your cash”

This is an edited transcript of the audio recording of this Talking heads podcast

Daniel Morris: Hello and welcome to the BNP Paribas Asset Management Talking Heads podcast. Every week, Talking Heads will bring you in-depth insights and analysis through the lens of sustainability on the topics that really matter to investors. In this episode, we’ll be discussing money market funds. I’m Daniel Morris, Chief Market Strategist, and I’m joined by Marc Fleury, Head of Liquidity Solutions. Welcome, Marc, and thanks for joining me.

Marc Fleury: Hi, Daniel. Very nice being here.

DM: There are times when money markets suddenly become interesting. When central banks are changing policy rates, we care more about short-term interest rates. In addition, whenever there’s market volatility as there is currently, inflows into money market funds have been in the headlines. We see investors, at least in the US, moving funds from their current accounts at banks and putting some of that into money market funds. If you look at what happened during the Global Financial Crisis, that wasn’t the case. At the time, we were worried about money market funds. It is testament to the improved regulation that investors now have more confidence in the asset class. So, what makes clients interested in money market funds? What would they be looking for?

MF: One has to think about what the purpose is of money market funds. Clients use them to park their cash safely for whatever length of time – it could be one day; it could be a couple of years. What are the clients interested in? The first thing they will always mention is liquidity. They want to be able to park their cash and get it back whenever they want, without notice, the same day. This is something they don’t have when it comes to, for example, products provided by banks. So, that’s one key thing. The second would be capital preservation, i.e., invest in something which is secure. Of course, you never have something which is 100% guaranteed, but money market funds and the way they’re managed offer a solution which offsets a lot of the risks clients may face when, for example, they’re investing directly in a bank’s term deposit account. We’re seeing that now with all the discussions around some US regional banks and even some European banks. Clients often ask us what kind of counterparties we have in our portfolio. Thanks to our strict selection process, we don’t have any of those counterparties that you’ve seen in the press, so that gives clients confidence as to how their cash is being managed. The other reason why investors tend to look even more at money market funds is because most BNP Paribas Asset Management funds have implemented sustainable investment into their investment process, including our money market funds. This is something investors can’t find in products provided by banks, because banks still don’t provide short-term solutions such as green commercial papers or green term deposits. There are green bonds, but those are long-term investments. You don’t have short-term green solutions from banks.

DM: What about the impacts that markets in general have on interest in money market funds? When do money market funds draw more or less interest from clients and investors?

MF: We see two trends. Obviously, a year ago, all the very short-term yields, whatever the currency, were around zero, even negative for the euro. So many clients were not interested in money market funds. For example, retail investors just kept their cash in their euro current account. Cash was earning nothing. Money market funds in euros were yielding around -60 basis points. Now that there is quite significant inflation, money market funds are providing yield. Depending on the currency, the yield can be between 3% and 5%. So, why would you keep your cash in your current account when you can potentially get 3% to 5%, more or less without any risk? That’s why right now, since all the central banks started hiking their rates, we are seeing not only people who were investing in money market funds and are still doing so, but also former retail and some institutional clients coming back to these funds because you’re potentially losing out by 3% to 5% a year if you don’t. Another important point is there is always an arbitrage. Some professionals at our institutional clients are splitting funds between money market funds and bank term deposits, depending on market conditions. I won’t go into detail of what market conditions are favourable for money markets, but it more or less depends on the spreads and whether the interest rate curve is steep or inverted. Money market funds can be more or less attractive compared to the returns you could get from term deposits. So, markets do have an impact on how appealing a money market fund can be versus other instruments you might want to use to park your cash.

DM: What can you tell us about the developments in the money market business at BNP Paribas Asset Management and some of your ambitions for the business in the years ahead?

MF: It’s a fast-growing business and we’re proud of our achievements . There are some ways in which we are positioned differently. For example, not many people know that BNP Paribas is ranked second when it comes to managing euro-denominated money market funds. We’re ahead of some large names in the industry. More than that, we are gaining market share on the top euro money market fund manager. When it comes to the other major part of the market – USD-denominated money market funds – we are also gaining market share, but are starting from a low position. Our ambition is to be among the top 10. That’s why our focus when it comes to growth is also to increase our US dollar money market share.

DM: Marc, thank you for joining me.

MF: Thank you, Daniel.