Investment in money market funds still strong

Based on the market outlook for next year, over 60% of respondents will continue with the same allocation to money market funds, while 22% will increase their allocations to stable NAV funds and 20% to floating NAV funds. Money market funds and bank obligations account for the majority of cash balance allocation. Nearly 40% of respondents cited money market funds as their chosen vehicle for money moved off a bank balance sheet—by far the most popular placement.

Regulatory pressures

In many ways, the regulatory arena has been transformed since our last survey, in 2015. Respondents are grappling with the implementation of money market reform in the U.S. and the approach of reform in Europe, as well as the efects of Basel III around the globe. In Europe, 44% of respondents said they need more time and/or information before they decide on their preferred money market fund structure. Among those considering new structures, 43% ranked risk of gating or a liquidity fee as the most important factor in their decision-making process.

Investment policy changes

More respondents are updating their investment policies to ensure that they provide the fexibility needed in the new rate and regulatory environment. Notably, 48% of respondent policies now permit FNAV funds, up from 32% in 2015. Nearly a third of respondents are looking to add FNAV funds to their list of allowable investments. Changing an investment policy is rarely a simple undertaking. More than three-quarters of respondents said it would take a moderate or signifcant efort to implement a change—suggesting that planning should begin well in advance.

Shifting rate environment, search for yield

In a still-low rate environment, investors continue to search for yield and reassess their appetite for risk. Nearly two-thirds of respondents said they would select money market funds for their cash investments if bank deposit rates lag. As they evaluate the impact of negative interest rates on euro—and/or sterling—denominated instruments, a large majority of respondents are considering policy changes to allow increased credit risk, more interest rate risk and the use of currency swaps.

Keener need for cash segmentation

Liquidity investors are re-evaluating their investment strategies to meet the demands—and seize the opportunities—of an evolving rate and regulatory environment. Many respondents have determined that they need to consider new investment solutions, including foating NAV funds and more customized portfolios. Cash segmentation—categorizing cash by liquidity needs—is often a key component of the re-evaluation process. More than 70% of respondents can forecast their cash fows out for a month or longer. Just under half can forecast out a quarter or longer.

Moving back into prime funds

Only 37% of U.S.-based respondents are currently invested in a prime money market fund, down from 63% in 2015. A majority transitioned assets to a government money market fund in the wake of new SEC 2a-7 rules. Fifty percent of U.S. investors who transitioned assets from a prime to a government MMF cited comfort level with foating NAV and gates/fees as the primary factor in reconsidering prime. Among respondents who transitioned assets out of prime MMFs, nearly half would consider moving back if prime ofered an excess yield of between 15 basis points and 50 basis points.

Read the full report from JP Morgan here