Introduction
The short-term fixed income universe features many options for investors looking for liquid and secure alternatives to holding deposits. The two main liquidity products are money market funds (MMFs), also known as liquidity funds, and ultra-short duration bond funds, also called managed reserve funds at J.P. Morgan Asset Management.
Many institutional investors and treasury professionals choose these liquidity products because of the benefits that pooled funds, such as MMFs, can offer over conventional deposits or direct investments in money market securities.
MMFs were first launched in the early 1970s in the US. Since that time, they have become popular with investors not only in the US but across Europe, Asia and other fast-developing markets. The global MMF industry has grown to over USD 5.3 trillion, with institutional investors accounting for USD 3.9 trillion.1
The Chinese MMF industry has rapidly grown to USD 1.23 trillion,2 driven by both institutional and retail investors.
In this brochure, we focus on providing a thorough overview of MMFs, while also highlighting situations where a step-out to ultra-short duration bond funds may be appropriate. We begin with a discussion about cash segmentation and identifying various needs for cash, to help determine appropriate liquidity product options. We then explain the key characteristics of MMFs, look closely at their structures and holdings and explore how they can be used to meet investment objectives.
MMFs are among the least risky investment options and are supported by increasingly rigorous regulatory and industry standards. Even so, MMFs are not risk free and can vary significantly in terms of liquidity, security and yield. We take a close look at the main risks and the ways that these risks can be managed, including external ratings, internal credit risk management and rigorous oversight.
A solid understanding of the fundamental characteristics of MMFs can help investors better differentiate between MMF options, as well as step-out strategies, such as ultra-short duration bond funds, before making a selection. We conclude with considerations for carrying out due diligence, including the emerging importance of technology in liquidity investing.
1 Source: iMoneyNet as of 31 December 2020.
2 Source: Wind data as of 31 December 2020.
Contents
- Introduction
- Choosing a liquidity product
- Cash segmentation
- Key characteristic of MMFs
- Structure of MMFs
- A typical MMF portfolio
- Comparing MMFs to bank deposits and ultra-short duration bond funds
- Evaluating and managing risks
- External und ratings
- Credit risk management
- Regulation
- Due diligence
- Conclusion
- Glossary
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