- With interest rates staying higher-for-longer, money market funds are going to remain attractive.
- We like this fund owing to its great performance, while having very low risk exposures and volatility.
- Alternatively, investors may consider our USD
Auto-Sweep facility – offering the best liquidity for your investment needs.
Cash is still king amidst higher-for-longer interest rates
While there are plenty of opportunities in the markets, cash continues to be a highly viable instrument to hold for those who might prefer security. In addition to its minimal risk, with interest rates staying higher for longer, we strongly believe that money market funds would remain in favour for the time being.
Echoing the sentiments highlighted in our Fixed Income Outlook 2H24, the expectations of higher-for-longer rates are underpinned by our view of no Fed rate cuts in 2024, which is anticipated to help anchor short-end rates around the current levels. Across 2024, inflation has proven to be stickier than initially expected and we saw the markets adjust to this new reality. With certain upside risks to inflation still present – especially coming from shelter and energy, the slow progress towards curbing inflation is unlikely sufficient to motivate the Fed for a rate cut.
As such, with the short-end rates staying elevated, yields
on the USD money market funds are likely to stay lucrative for investors. For
the “cash is still king” investors, you are in luck – it will likely be a long
time before money market funds fall out of favour against other market
opportunities.
Introducing the Amundi Funds Cash USD, and its investment philosophy
The Amundi Funds Cash USD A2 is our newest favourite in the
USD money market fund space – owing to its great performance, in comparison to
its risk exposure and volatility. It utilises a conservative approach towards
investing in money market instruments, primarily focusing on four aspects:
- Liquidity – Amundi invests in liquid and
easily negotiable underlying instruments while diversifying its investment
maturities to allow for efficient management of liquidity.
- Security – The fund’s Credit Risk
department determines ex-ante (forecasted) limits on an issuer basis, limiting
the amount and maturity allowed. The limits would subsequently be reviewed and
monitored based on individual issuers.
- Transparency – Amundi sets out to have a
clearly defined investment universe and management constraints for its money
market funds. In addition to this, it ensures that the fund is valued fairly
based on a strict, continuously updated mark-to-market valuation process.
- Performance – The portfolio managers (“PMs”) seek to provide consistent performance over time for the fund, coupled with maintaining low volatility across the performance.
The fund’s cautious approach towards investing has proven well, given that the fund has not experienced any default or credit events even during the past economic crises. We observed a strong emphasis on this, especially in its latest commentary reflecting the PMs’ cautious approach towards the political context in France despite seeing a tightening of credit spreads.
While quality is important, the
performance of the fund is a critical factor as well. To optimise for returns,
the PMs additionally look into the weighted average maturity (“WAM”) of the
underlying instruments, i.e. the portfolio’s interest rate exposure. The PMs
may adjust the WAM of the portfolio in accordance with their expectations of
interest rate movement. Highlighted in the June commentary, they expect the Fed
to lower rates in the near future, and as such, the PMs have maintained the WAM
at 74 days as of 30 June 2024 – close to the maximum allowed for the fund of 90
days. This likely enables the fund to
better benefit from a downward adjustment in interest rates, if any.
More about the Amundi Funds Cash USD
The fund is registered as a Standard Variable Net Asset Value (“Standard VNAV”) money market fund under the EU MMF Regulations. This allows the fund to invest in money market instruments, deposits and short-term assets, with its NAV having to be marked to market. The fund seeks to invest at least 67% of its assets in money market instruments denominated in USD or hedged against the USD. While it may utilise derivatives to implement currency arbitrages as an additional source of alpha (subject to a strict limit of 30%), we expect negligible currency risks as Amundi will systematically hedge all its investments against the USD.
The Amundi Funds Cash USD has a sizeable Asset Under Management (“AUM”) of USD 3,986.19m as of 15 July 2024, investing into the following: (1) overnight deposits and reverse repurchase agreements (“O/N & Repo”), (2) commercial papers, (3) certificates of deposits, and (4) bonds. Commercial papers – mainly very short-term debt instruments issued by companies – represent the largest proportion of the fund’s exposure at 47.54% (Chart 1) as of 28 June, with the second largest being O/N & Repo (which are considered cash and cash equivalents within the fund) at 20.07%. Its holdings in (2), (3), and (4), are also diversified across financials (58.10%) and non-financials corporates (21.82%).
Broadly speaking, the fund is not only diversified, but also high in credit quality. Its portfolio holdings generally have short-term ratings of up to A2; they also generally have investment-grade long-term ratings. The fund mandate also allows for just a 15% hard limit for BBB- and unrated bonds. Ultimately, the fund managers see this fund as a cash management tool, and the high average credit quality reflects their priorities of risk management and daily liquidity.
Most importantly, the fund is rated ‘AAf/S1’ by Fitch Ratings, which saw an upgrade from ‘Af’ in March 2023. The credit rating upgrade was driven by the overall high credit quality of the underlying assets seen above, alongside the limited risk appetite of the fund. Amundi highlighted that the upgrade particularly showcases the fund’s minimal exposure to issuers rated BBB and below.
In the rating report as of March 2023, Fitch mentioned that the fund’s weighted average rating factor (“WARF”) was within the range of a ‘AAAf’ rating – the highest it could give for money market funds. The lowered assigned rating of ‘AAf’ was largely due to the fund’s investment mandate allowing for potential investments in unrated securities, although in practice, there were no unrated securities at the time of the assessment (January 2023).
Comparing the Amundi Funds Cash USD against its peers (Table 1), its longer-term performance stands out while the maximum drawdown and volatility are highly comparable or better than peers. Despite not having the lowest expense ratio, the fund more than compensates with its competitive net yield – likely a result of yield enhancement through investing in a small proportion of bonds. In addition to this, it offers one of the better settlement timings across the money market funds, with buying-in of funds only at T+1 days.
Chart 1: Fund’s allocation into the various instruments
Table 1: Comparison against peers and peer average
|
Name |
Amundi Funds Cash USD A2 |
BNP Paribas USD Money Market Classic Cap |
Fullerton USD Cash Fund A |
Peer Group Average |
|
1-year performance |
5.37% |
5.39% |
5.44% |
5.28% |
|
3-year performance |
3.15% |
3.18% |
3.03% |
3.01% |
|
5-year performance |
2.28% |
2.22% |
- |
2.06% |
|
5y maximum drawdown |
-0.128% |
0.000% |
-0.160% |
-0.132% |
|
3y volatility |
0.235% |
0.219% |
0.266% |
0.222% |
|
WAM (days) |
74 |
25 |
60 |
|
|
Expense Ratio |
0.46% |
0.50% |
0.20%* (~0.24%) |
|
|
Settlement |
Buy: T+1 |
Buy: T+3 |
Buy: T+1 |
|
|
Sources: Bloomberg Finance L.P., respective latest Fund Factsheets, iFAST Compilations. Data as of 22 July 2024. Performance returns have been annualised. *Fullerton USD Cash Fund raised its management fee from 0.12% to 0.16% earlier this year, an increment of 4 basis points. As such, we expect a similar 4 bps impact on its expense ratio, which was previously reported at 0.20% in its FY23 report. |
||||
Chart 2: Amundi outperforms other USD money market funds most of the time
An alternative with even better liquidity – the Auto-Sweep facilities
For investors looking for an even easier alternative to the
money market funds, fret not – the Auto-Sweep facilities will be an optimal
solution for your needs. Available in SGD, USD and also CNH, the Auto-Sweep
facilities are iFAST’s discretionary cash management accounts designed to
enhance the investing experience on our platform.
- Maximum liquidity – The key advantage of the Auto-Sweep facility is that there is no delay between your investments. You may immediately deploy your monies within the Auto-Sweep accounts for your investments via our various iFAST platforms. Although the Amundi Funds Cash USD requires a redemption period of T+4 days, both options are much faster as compared to other similarly safe instrument such as fixed deposits.
- Little risk on the Auto-Sweep investments – Both the Amundi Funds Cash USD and Auto-Sweep are similar in this aspect, offering low risk options with optimised yields. They look into investing in a small proportion of bonds for yield enhancements. Overall, these portfolios ensure a strong credit quality is maintained for the assurance of investors, while providing attractive yields.
- Enhanced yields on this facility – Not forgetting another important reason to utilise the Auto-Sweep facility, it offers attractive yields while allowing you to enjoy liquid usage of your monies. As of 23 July, the Auto-Sweep account is giving a yield of 4.645% for the USD account whereas the Amundi Funds Cash USD reflects a 1-week net yield of 5.56% (as of 22 July).
Conclusion
For investors sitting on their cash and waiting for the right opportunity, the Amundi Funds Cash USD A2 will be great for parking your idle USD. With short-end yields at more than 5%, holding cash has never been better, especially through this money market fund.
As we continue to expect interest rates to stay elevated, money market funds will likely remain attractive for a long while – best for risk-averse investors seeking maximum yields with minimal risk. Meanwhile, not forgetting the Auto-Sweep facilities – these will be great for investors looking at quicker deployment and redemption of monies, with enhanced yields.
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