Fixed Income: Money market funds see more inflows amid volatility

This article first appeared in Personal Wealth, The Edge Malaysia Weekly, on December 17, 2018 - December 23, 2018.
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Money market funds can be a useful place to park one’s cash in the light of the current volatility in the global economy and expectations of a bear market going forward. These funds can be an alternative to cash holdings for investors who are keeping an eye out for the next investment opportunity.

Tan Sze Nee, fund manager of the Phillip Master Money Market Fund, says money market funds are especially useful for those who want to implement a defensive investing strategy. “The corporate earnings of local companies, in general, are not expected to be great next year as the government is bent on tackling the national debt and there will be fewer infrastructure projects rolled out,” she adds.

“Also, there have been reports overseas saying that the market is already at its late cycle. This perception and news have prompted investors to be more cautious and defensive. Under such circumstances, money market funds could be useful for them to park their short-term cash until the market starts to turn around.”

Local fund managers point out that the inflows into money market funds in recent years have been partly due to rising market volatility. Tan says it was the low oil prices in 2016 that sparked concerns of more bond defaults in the oil and gas industry, which saw investors redeploy more of their holdings to money market funds.

Last year and this, the market volatility has been due to the trade war tensions between the US and China. “As a result, some investors may experience lacklustre performance in their equity and bond portfolios and decide to put some of their cash in money market funds. It is a good place to park money until the next investment opportunity arises,” says Tan.

According to data provided by Morningstar Inc, a global investment research and investment management firm, the inflows into local money market funds saw a sharp increase in 2016 and 2017. In 2016, inflows from institutional and retail investors reached US$1.72 billion, from US$99.27 million in the previous year.

Last year, the inflows swelled to US$6.62 billion — the highest since 2009. The second highest figure was in 2012 at US$1.76 billion.

Tan observes the same trend with the Phillip Master Money Market Fund. “Our fund doubled to RM1 billion in 2017 from RM500 million in the previous year.”


Higher liquidity, greater flexibility than FDs

The Securities Commission Malaysia requires at least 90% of the net asset value (NAV) of a retail money market fund to be invested in short-term bank deposits (of less than six months), fixed deposits (FDs, of more than six months), commercial paper and short-term corporate bonds with maturities of not more than a year. The other 10% can be invested in similiar instruments with maturities of more than a year but less than two.

Siaw Wei Tang, chief investment officer at Opus Asset Management Sdn Bhd, says investors tend to compare money market funds with FDs. The difference is that the former allows investors to better manage their cash and provides higher liquidity.

By this, he means that those who invest in money market funds do not need to conduct their own research online or shop around for the best rates as a fund manager does all the work for them.

Also, one can sell one’s units anytime and receive the principal back with the accrued interest. The accrued interest is reflected in the NAV of the fund, which is updated daily or monthly. “By comparison, investors who place their money in fixed deposits may not get the accrued interest if they withdraw their money before maturity,” says Siaw.

Returns, which are a crucial criterion investors look at when investing in equity and bond funds, are less critical when it comes to money market funds, he adds. “It is more of a secondary objective — capital preservation, cash management and liquidity are more important.”

Nevertheless, money market funds in general still aim to provide investors with equal or slightly higher returns than FDs over one to six months. This can be done by investing some of the funds in short-term corporate bonds, which are associated with higher yields but are more illiquid, says Siaw.


Awareness among retail investors remains low?

Despite the advantages of money market funds, Tan and Siaw say retail investors have yet to fully utilise the instrument. They point out that the bulk of the money in money market funds is from corporates as they are entitled to a tax exemption on interest income when investing in these funds. However, it was announced during Budget 2019 that this tax exemption would cease effective Jan 1, 2019 (see accompanying story on “No more tax exemption for corporates”).

Tan says the key reason retail investors have yet to fully utilise these funds is a lack of awareness and education. Siaw concurs, saying that many investors still have the perception that money market funds are risky. “Some of them tend to confuse these funds with equity funds. They have the perception that all unit trust funds are equity funds.”

He adds that local retail investors may not understand the benefits of money market funds and do not want to make the effort to research an investment vehicle that could provide them with potentially higher returns over a shorter term.

But Eliza Ong, regional director and managing director of RHB Asset Management Sdn Bhd, says retail investors are familiar with money market funds but find their returns discouraging. “With an annual management fee of about 0.5%, retail investors are not incentivised to put their money in money market funds as they can easily park their money in FDs [and get similar returns]. However, the advantage that these funds have compared with FDs is the liquidity they provide.”

As at Nov 30, the returns of money market funds ranged from -0.66% to 2.71% over the past six months, according to Lipper data. This is excluding the funds’ annual management fee.

A quick check online shows that the minimum investment amount of money market funds can range from RM1,000 for a retail fund to RM100,000 for a wholesale fund, which is only accessible to institutional and sophisticated investors. These funds invest mainly in short-term deposits and corporate bonds.

Going forward, some asset management firms will have a greater focus on retail money market funds. For instance, Opus Asset Management has obtained the licence to launch retail unit trust funds and has already introduced the Opus Income Plus Fund and Opus Money Plus Fund, each with a minimum investment amount of RM1,000.  “The funds also allow small and medium enterprises with total net assets of less than RM10 million to invest with us,” says Siaw.

Tan, meanwhile, expects more shariah-compliant retail money market funds to be introduced in the market. “Some investors want to put their money in shariah-compliant funds and asset management firms will provide them with such products,” she says.

However, it will take time for the awareness of these funds to build among the public, they add.

Technology will help money market funds gain traction, says Tan. “Ant Financial (formerly known as Alipay) has come out with money market funds for retail investors. That is why the money market fund size is growing in China.”



No more tax exemption for corporates

Wholesale money market funds — which are only accessible to corporations with total net assets exceeding RM10 million or sophisticated investors whose net assets exceed RM3 million — mainly receive inflows from corporates. That is because companies that invest their money in wholesale money market funds enjoy a tax exemption on interest income, provided by the government since 1999.

However, this benefit will come to an end very soon. During the Budget 2019 announcement, the finance minister said the tax exemption granted to companies with investments in wholesale money market funds would cease come Jan 1.

The news does not come as a surprise to industry players, although it will have an impact on the inflows of wholesale money market funds. An industry player who declines to be named says there were already signs in December 2016 when the Securities Commission Malaysia announced new guidelines for the tax exemption of these funds.

Among others, the guidelines impose stricter conditions on wholesale money market funds. For instance, a wholesale money market fund cannot be established specifically for a particular investor or a group of investors that are related parties.

It also specifies that these funds need to have an average of at least 15 unit holders for the past 12 months and each unit holder cannot hold more than 10% of the fund’s net asset value. “It tries to limit the fund size and number of clients who can utilise the tax exemption benefit provided by these funds,” says the industry player.

Another industry player, who also declines to be named, says the announcement during Budget 2019 did not come as a surprise. “The tax exemption was provided in the early days to develop our bond market and diversify the investor base for corporates to raise funds. It was also aimed at encouraging more investors to participate in unit trust funds. These objectives have already been met.”

Going forward, some firms could suggest to their corporate clients to put some of their money in short-term bond funds instead, says Siaw.



How to pick a money market fund?

Investors who are holding on to cash but looking to deploy it in the market within six months should look into money market funds, says Siaw Wei Tang, chief investment officer at Opus Asset Management Sdn Bhd. “Beyond six months, fixed deposits (FDs) may provide them with higher returns in general.”

Tan Sze Nee, fund manager of the Phillip Master Money Market Fund, concurs. “The fixed deposit rate for six months to one year is usually higher than the returns of money market funds,” she says.

How should investors pick a fund? Siaw emphasises that they should understand the underlying nature of each fund as some of them only invest in short-term bank deposits and FDs while others may invest more in short-term corporate bonds and other less liquid assets that could provide higher returns.

“Some funds invest in longer-term corporate bonds that are nearing the end of their tenure. These bonds could be more illiquid, but provide the funds with better returns,” he says.

Eliza Ong, regional director and managing director of RHB Asset Management Sdn Bhd, also says investors should understand the underlying nature of each fund. “Certain money market funds invest in less liquid instruments that give a slightly higher return. However, from our perspective, the single key consideration of a good money market fund is the liquidity profile rather than the return.”

Some money market funds have a shorter redemption period than others and this piece of information can be found on their fund fact sheets.

Tan says a money market fund that only invests in short-term bank deposits and FDs, such as the Phillip Master Money Market Fund, is more liquid and usually allows investors to sell their units and withdraw their money on the same day. “Our investors can get their money back on the same day if they sell their units before 10.30am. They should be able to get their money back between 4pm and 6pm.”

She points out that not all funds can provide such liquidity while some require one or two days to return the cash to investors. Investors should also look at the fund size before investing in money market funds, she adds.

“A bigger fund size provides the fund manager with more bargaining power to negotiate with bankers for better deals. Bankers call us when their banks are short of cash. They give us a number and ask if we can place a certain amount of money with them for a short period, say, RM10 million for one month, and will give us a rate of 3.7%, for example. The bigger the fund size, the better we can fulfil their demands and negotiate a better rate,” says Tan.