Pictet Asset Management: delivering yield, liquidity and credit quality
Amid so much volatility over the past couple of years, money market funds (MMFs) have stepped up, and continue to look resilient and appealing for investors going forward.
The flows speak for themselves. According to Fitch Ratings, for example, global MMF assets under management (AUM) increased by 15% year-over-year to $10.6 trillion by the end of June 2024, up from $9.2 billion 12 months earlier.1
The recovery has partly come after a lot of effort since 2022 among market participants to re-educate a whole generation of investors and treasurers, who had seemingly forgotten the purpose, and value, of MMFs during a prolonged era of low interest rates. “They had become used to placing their cash with custodian or commercial banks, with an agreement they would get 0% and not a negative yield,” said Philippe Billot, head of money markets at Pictet Asset Management.
Since then, the shifting macro backdrop has been a positive story for MMF assets. Even though uncertainty about global growth persists and the cycle of interest rate cuts is underway, a return to zero – or negative – yields doesn’t look likely. “Inflation should remain higher than in the past few decades, and with the prospect of tariffs under a Trump presidency… short-term yields should be higher,” explained Billot.
At the same time, with the 2023 banking crisis highlighting the importance of diversifying counterparty risk, corporate treasurers need to be more diversified via liquidity tools that can also offer a blend of capital protection and performance.
A differentiated approach to money markets
In line with this, Pictet Asset Management’s MMF strategy is rooted in a stringent investment process built on three key principles: providing liquidity; achieving capital preservation; and enhancing performance.
According to Billot, delivering this goal requires a conservative yet active style, both in terms of diversification as well as credit selection across a broad range of investment opportunities.
“The investment team also prioritises rigorous risk management practices to navigate complex market conditions,” he added.
For example, with the firm’s money market products domiciled either in Switzerland or Luxembourg, the choice is led by different factors – investment objective/horizon, risk aversion, reference currency, client domicile and account domicile – with products across different risk profiles: short-term money market funds, sovereign short-term money market funds, and enhanced liquidity funds.
Award-winning solutions
Such capabilities and experience in providing asset and liquidity solutions to the treasury community in Asia also secured Pictet Asset Management the Best for Asset/ Liquidity Solutions award in Asia Pacific, Hong Kong and Singapore in 2024 from CorporateTreasurer.
In particular, the judging panel highlighted the value on offer for clients during the awards period for the 12 months to mid-2024.
For example, the active approach to credit selection and risk management, run by an experienced team, results in a more diversified portfolio, according to judges. This increased the yield potential while being conservative, therefore meeting the three-fold objective of treasurers: preserving capital, providing liquidity and optimising returns.
Also during the award period, judges acknowledged the investments in non-base currencies as important in adding value to the portfolio, both by enhancing returns and improving the fund's credit profile – and without any foreign currency exposure. This can be seen by exposure to Swiss and Japanese T-Bills, as well as Canadian T-Bills, based on the aim to bring diversification, liquidity, yield pick-up and high-quality assets to the portfolio.
“We were able to invest at SOFR + 20bps to 40bps thanks to those investments while improving the credit quality of the fund without any foreign currency exposure,” explained Billot. Recently, the firm also added Monetary Authority of Singapore (MAS Bills) to the non-base currency investments that were particularly attractive when hedged into US dollars.
Another notable aspect for judges was the active management approach to duration risk, showing the ability to react to market conditions and responses to events such as rate cuts.
Flexible allocations and sustainability
The strategy and investment process at Pictet Asset Management has also been nimble in response to various financial market crises. In short, the flexibility can be seen in allocations between different types of assets based on market valuations and supply.
Key changes over time include increases to liquidity in the portfolios, and halts in investments in structured products like asset-backed commercial paper.
The firm has also developed reverse repo strategies, driven by a desire to reduce banking risk. “Instead of placing our daily deposits with banks, we use reverse repo,” said Billot. “We then have lower risk counterparties in the portfolio.”
The growing importance of sustainability criteria in selecting MMFs has also influenced decision making. “ESG is fully integrated in the money market strategies’ investment process based on proprietary and third-party research to evaluate investment risks and opportunities,” he added.
Helping MMFs pay off in Asia
To bring the best of breed in MMFs to treasurers in Asia, Billot said Pictet Asset Manegement ensures there is collaboration between its regional and global liquidity teams.
Performance and ratings are also key factors in this region, he added, with the firm’s credit analysis team specialised by sector and focused on diversification in portfolios and no exposure to structured products.
Ultimately, he backs short-term, diversified, AAA-rated funds to gain popularity among Asia’s treasury community, certainly before sovereign funds become popular.
Sources
1 - https://www.fitchratings.com/research/fund-asset-managers/global-money-market-fund-flows-update-1h24-30-09-2024
