Kathleen Hughes, London-based managing director of liquidity product at Goldman Sachs Asset Management, says the division intends to expand its footprint in Asia.
The firm manages about $240 billion worldwide in liquidity products such as money-market funds, short-duration funds and managed accounts. This accounts for roughly one-third of GSAM’s entire AUM.
At present, GSAM has four sales and distribution people in Asia-Pacific dedicated to liquidity products, along with two portfolio managers based in China and one in Australia.
Because one size does not fit all in this diverse region, the firm wants to expand the breadth of its coverage. China, Korea and India are the priorities. “We have officials for GSAM in all of these markets but no one dedicated to global liquidity,” says Hughes.
The client base is also diverse. It includes Asia-based asset owners (such as sovereign wealth funds, insurance companies and central banks); local and global fund-management companies and hedge funds; financial institutions such as global custodians and prime brokers; and multinational corporations’ treasury desks.
Today the corporate treasurer comprises around 55-60% of GSAM’s liquidity business globally, but financial institutions represent the biggest growth opportunity.
In Asia, there is a need for more local-currency products, particularly for regionally based treasury officials and financial institutions. But clients are fragmented, with treasury heads facing different investment guidelines depending on their location.
“Many corporations are sitting on record levels of cash, which will gradually diminish,” Hughes says. On the other hand, insurance companies and bank treasuries face regulatory challenges such as Solvency 2 and Basel 3, which create new requirements for how liquidity is treated on their balance sheets and how they fund themselves.
For example, many banks are looking to rely less on overnight liquidity and more on longer-term funding. Insurers, meanwhile, need to enhance liquidity under Solvency 2.
Asian domiciled financial institutions, however, face a different set of challenges. They may not be subject to European rules on capital requirements but need to manage cash as they invest more across borders. (See AsianInvestor’s November edition for a report on insurance companies swapping liquidity with investment banks.)
However, the immediate opportunity for GSAM in Asia is the corporate sector.
Money market funds comprise a $2.7 trillion pool of assets worldwide, of which a third or more matures within any given week, says Hughes.
Since 2008, when the collapse of Lehman Brothers ‘broke the buck’ at Reserve Fund Management, then the biggest independent money-market fund manager in the US, global regulations around these products have tightened.
They have become more transparent, with more frequent reporting and more constraints on underlying exposures. Hughes notes the industry coped well when financial markets panicked in August and September this year.
These funds compete most directly with bank deposits, and to a lesser degree with government securities; with US Treasury short-duration real yields negative, they pose a greater risk to principal than a bank deposit.
Before the 2008 crisis, money-market funds also competed with commercial paper, floating-rate notes and asset-backed commercial paper. The crisis revealed the risks involved in these instruments, and the need for an investor to apply credit analysis to them. That has led many to prefer using a money-market fund, says Hughes.