What are the options for managing cash in the current environment of mostly negative interest rates? Philippe Renaudin, Head of the Money-Market team at BNP Paribas Asset Management, and Patrick Barbe, Head of the Euro Bond team, believe that it is still possible to generate competitive returns through active management and opportunistic investment strategies.
What do you expect from the money and short-term bond markets in 2018?
The investment environment will likely remain constrained over the next few quarters. In Europe, the ECB is unlikely to raise its key rates in 2018, but it looks set to phase out its quantitative easing policy, which will affect the money market and the bond market. We could see a steady rise in interest rates and renewed volatility. The challenge for us is to ride the re-steepening of the yield curve by employing opportunistic strategies adapted to this environment. Investors will need to adjust their portfolio allocations to these new market conditions.
3-month EUR rate, 2007-2017 (%)
Source: Eurostat, BNP Paribas Asset Management, as of 05/02/2018
Eurozone 5-year AAA rated government bond yields, 2007-2017 (%)
Source: ECB, BNP Paribas Asset Management, as of 05/02/2018
How do you explain the interest in money-market and short-term bond funds despite negative interest rates?
The amounts of cash to be invested are substantial. Corporate and institutional investors used to be able to leave some of their cash in their current accounts. But these currently pay negative interest rates. This is pushing these investors into shifting cash into the money market and short-term bonds – especially as these markets have two advantages, risk diversification and daily liquidity. This is likely to continue through this year and even into 2019.
What should investors be looking for when thinking about investing cash in short-term bond funds?
The funds must have a solid performance track-record, which also implies good risk control. Moreover, they must be managed by experienced teams that are disciplined and rigorous in their investment process. BNP Paribas Asset Management’s team has 20 managers divided between Paris, London and New York and specialised in terms of sector and country. Each of them contributes investment strategies and the team head make the final selection.
In light of the market environment, what types of products should be overweighted in cash management?
In our view, investors should also consider actively managed investments where opportunistic strategies seek to exploit shifts in the yield curve and volatility. We run a number of cash-equivalent strategies including funds whose objective it is to take risks to obtain positive yields by actively managing the maturities of the portfolios holdings.
Enhanced cash strategies are another alternative. We run a strategy that seeks to tap all opportunities that arise in the bond market without constraints in terms of maturity, country or sector. There is just one condition: volatility must be below 0.5%.
These strategies are are all part of our ‘Liquidity Solutions’ range of strategies, which has more than EUR 75 billion in assets under management .
To better address investors’ growing need for cash management, a dedicated pan-European team has been set up.
What are the challenges of money-market reforms for this type of fund?
On the one hand, they will increase investment constraints, such as the obligation to conduct in-house credit research and stress tests. On the other hand, they will enhance transparency and reporting obligations. Investors will, in effect, have better information in selecting funds. As for us, we will be ready for the 2019 deadline with a range of strategies that, for the most part, already complies with regulatory constraints.
 Source: BNP Paribas Asset Management, as of 31/01/2018
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