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The Keys to Investing in an Uncertain Environment

  • By Andrew Deichler
  • Published: 6/24/2015
During the closing session of the CTC Corporate Treasurers Forum, Lu Ann Katz, managing director, head of global liquidity for Invesco, provided treasury professionals in attendance with an overview of how the current interest rate and regulatory environment is reshaping the investment world.

Interest rates

There is clearly a big question of where interest rates are headed right now, on both sides of the Atlantic. “We now see a situation where we have a tale of two central banks,” Katz said. “The Federal Reserve is raising rates—maybe soon—and the European Central Bank (ECB) is still in a difficult pattern.”

An interest rate increase this year is highly likely, and it doesn’t have to be large in order to have an effect, Katz noted. “In the U.S., certainly, rates are going up, and it impacts all of our [investment] products.”

Europe is expected to follow a similar trajectory, though at a slower pace. Up until about April, Katz said, experts weren't projecting an increase for another five years, but that has changed. “Obviously, nobody knows what’s going to happen, but we’re saying in two and a half years, the market is expecting a rate increase,” she said.

Regulations

Of course, investments will undoubtedly be affected by regulatory changes, or more specifically, the reactions to regulations. “For example, a lot of our funds are rated by the rating agencies,” Katz said. “There’s a big dispersion very recently in what each agency views as risk, which wasn’t the case before. There was much more consistency. It becomes an even more complicated market now to determine where to move. It’s so volatile.”

The future of money market funds (MMFs) is really up in the air; with the Securities and Exchange Commission (SEC)’s rules passing last year. In an effort to prevent a run on MMFs like what happened during the 2008-2009 financial crisis, the SEC imposed fees and gates on prime funds, as well as a floating net asset value (NAV).

But while many treasurers have expressed their disdain for the new MMF rules, Katz stressed that the SEC pushed for these rules to protect investors, not create problems for them. “Most of the market has been spending so much time talking about the one or two things they don’t like, that they’re forgetting what’s happened in the industry,” she said. “I can tell you after 22 years in Invesco and 30 years in this business, funds are managed differently now. There’s much more transparency. There’s more diversification.”

Katz noted that investors will be able to look up a MMF on their tablet and see whether that fund will have 40 percent liquidity next year. “Where is that fund positioned with regard to risk? Where is it positioned with regard to duration? All of that is going to be very, very public,” she said.
During the crisis, Katz noted, none of this information was public. In those days, there was very little insight into what was happening within MMFs. “We’ve done a total flip,” she said.

But while regulations are intended to protect investors, they don’t always make it easy for them. Any mutual fund has the right to delay or withhold redemptions to avoid a situation like what happened in 2008. This can be very problematic for corporate treasurers and their ability to manage cash, therefore, Katz recommends that treasurers diversify their fund managers.

Had these regulations been in place at the time of the financial crisis, there would have been a lot more required liquidity and perhaps there would have been no run on the funds, Katz added. Fund managers are now keeping more liquidity to honor redemptions because that was a key part of the problem, she explained. “So it’s pretty unlikely that you will see that same event because people would be seeing the liquidity position of all the fund groups,” she said.

As for the floating NAV, Katz does not appear particularly concerned that this will have a major impact on investors. “It’s going to float very minimally,” she said. “Most fund managers are now exposing their NAVs. They have been for a couple of years. You can see the variability. It’s very minor. It all depends on how you’re managing it.”
 
In Europe, it is even more difficult to determine what is going on with MMFs because the market is creating new categories of funds. “You’ll see that they created a new public debt type of fund that’s going to be able to stay [constant net asset value (CNAV)],” Katz said. “Current funds that are out are all going to have to be [variable net asset value (VNAV)]. But if you can create a special fund—which would be a new fund that would just have government debt in it—that fund can only buy EU debt. This is very different than what some people would have hoped for, because if you take the U.S. out of the market and you see the numbers, there’s a lot of different ratings on debt throughout Europe.

But while the future of European MMFs is murky, at least one thing is clear. “Every fund in Europe is going to have fees and gates,” Katz said.

But before treasurers flee MMFs for Treasuries or bank deposits, Katz warns that there are penalties on all kinds of securities or investments. “If you look at bank deposits, if it’s a time deposit, you can’t redeem it that early,” she said. “There is normally going to be a withdrawal penalty or a fee. If you have FDIC insured deposits, they all have to even start the process of liquidation for 48 hours. So if your bank gets shut down, they don’t have to start paying out depositors for 48 hours.”

Added Katz: “I think in the days of the liquidity squeezes that we’re seeing and banking through regulations, there’s no easy fix to what [treasurers] are facing.”
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