8 June 2016

Groupama Asset Management anticipates high inflow for cash equivalent products over the next few months

Today's economic environment is marked by low interest rates, with Eurozone short-term rates even entering negative territory. The increasingly accommodating monetary policy of the ECB has brought all interest rates down and created an unprecedented situation in Europe.

“There is a risk that this situation will last at least 4 years,” explains Thomas Prince, Head of Money Market Management. “This is confirmed by hedging transactions, which indicate that the market does not expect rates to rise before at least 45 months.” In this unique context, corporate treasurers are confronted with a drastic drop in the returns on their investments. At the end of 2015, for example, 71% of short-term money market funds (with a maximum of 4 months weighted average maturity) were reporting negative monthly performance. At the end of May 2016, this percentage had risen to almost 90% ((Source: SIX Financial Information). “Since 2013, in order to meet their need for returns, corporate treasurers have shown a preference for cash products invested in longer term funds,” adds Thierry Goudin, Development Director. However, this money market category is also starting to remain in negative territory, with 28% of funds reporting negative monthly performance at the end of 2015 (Source: SIX Financial Information). At a time when certain banks are threatening to charge the biggest companies for their current accounts, corporate treasurers will therefore be forced to find new solutions. ”

“Cash equivalents” or “IAS7 compliant” products are among the alternatives that corporate treasurers are beginning to take seriously. Under international financial reporting standards (IFRS), these investments are considered to be equivalent to cash investments, with the same status as short-term monetary instruments. They provide a good balance between yield, liquidity and volatility. The IAS7 standard is based on 4 criteria: in order to be “cash equivalent”, an investment must be short-term, highly liquid, easily convertible into a known cash value and subject to negligible risk of a change in value. Therefore, by creating an asset management area between cash and credit, cash equivalent solutions extend the horizon of investment possibilities available in the money market.

They give investors higher expected performance than money market funds while retaining comparable liquidity and volatility: “In particular, the concept of cash equivalents includes short-term bonds, with a maturity of up to three years,” explains Philippe Floris, Treasury Manager, “for a risk budget that remains low and in keeping with the spirit of cash products. It also broadens the overall investment universe, by doubling the number of available issuers, thereby permitting better diversification of risk. ”

The Groupama Cash Equivalent Fund, launched in March 2015, makes full use of this room for manoeuvre permitted by the regulations. Since its founding, the fund has an annualized performance of +0.29% (on 31/05/2016), or a performance of 0.47% compared to its reference indicator (capitalized Eonia).

“Launched 1 year ago, our cash equivalent solutions (combining the Groupama Cash Equivalent fund and asset management mandates) reported a total investment of 1.3 billion euros. The auditors of all our corporate customers investing in the fund have validated their compliance of to the IAS7 cash flow reporting standards. We are certain that corporate treasurers will increasingly turn to these cash equivalent solutions as they see the performance of cash products entering negative territory,” concludes Thierry Goudin.