Mikaël Pacot (AXA IM): A highly liquid approach to cash and long-term treasury management
An interview with Mikaël Pacot, Head of Money Markets & Euro rates at AXA IM
M. Majerus, Sales Manager - M. Pacot, Head of Money Markets & Euro rates - E. Dendauw, CEO AXA IM Benelux
Short term interest rates topped in 2023 to their highest level since 2008, creating a supportive environment for Money Market Funds (MMFs), which experienced strong inflows. What can we expect for the remaining months of this year?
It is true that after more than 10 years of adverse market conditions due to low or negative interest rates, we are back to a much more supportive environment for short term investments. With an absolute level of yields very attractive on an historical basis (currently at 3.75%) the momentum has been very positive, with significant inflows into the money market asset class. As inflation is expected to progressively converge toward the 2% target in 2025, the ECB has started to cut its policy rates early June, taking the deposit rate to 3.75%. Still, if we listen to what the ECB is saying, it remains highly data dependant as wage growth is still strong and service inflation is robust. The cutting cycle should be slow. We expect two more cuts this year and two or three in 2025. This means that the deposit rate should be at about 3.25% at the end of the year and at or above 2.50% in 2025.
Why could now be the time for corporate treasurers to start investing in MMFs?
Market wise and despite an ECB turning more dovish, we still think that it is a good time to consider investing in MMFs as investors will continue to benefit from attractive absolute levels of yields and from an inverted yield curve that makes the remuneration of the short end of the curve quite appealing versus longer maturities while maintaining a low-risk profile thanks to the stability and security associated with this asset class. MMFs are mutual funds investing in short-term, high-quality debt instruments, such as government securities, commercial papers, short term bonds, reverse repurchase agreements or overnight deposits, aiming to preserve the capital invested and designed to provide investors with a low-risk investment. European MMFs have specific rules governing the quality, maturity, and diversity of their investments to ensure stability and safety for investors. MMFs offer returns in line with money market rates with a potential for higher yields compared to traditional savings accounts. Additionally, MMFs are an easy-to-invest-in and liquid asset class. Their liquidity with the possibility of a rapid conversion of shares into cash, allows European treasurers to easily access and withdraw their money at any time with just a few limitations, facilitating cash flow management and making them well-suited for investors with short-term financial goals or emergency savings needs.
How would you describe your investment process in general and the steps taken to mitigate risk?
Our investment process is underpinned by a transparent framework that follows a prudent approach and adheres to strict internal guidelines aimed at safeguarding liquidity thresholds. Through active portfolio management, we can proactively respond to market movements. Furthermore, our commitment to ESG considerations is evident in all our funds, aligning with the SFDR Article 81 regulation and holding the French ISR Label2, reflecting our high level of ESG integration and enabling treasurers to invest in alignment with their organizations’ values and sustainability goals. Diversification is crucial in mitigating credit risk in MMFs. MMF managers seek to reduce the impact of potential credit events associated with any single issuer by spreading investments on different levels, including instruments, issuers, industry sectors, countries, and maturities. One of AXA IM’s flagship funds, AXA IM Euro Liquidity SRI3, for example, is invested in over 50 issuers spread over 15 different countries and representing 12 different sectors. The portfolio with a total AUM of over €10 bn3, has more than 150 positions with maturities ranging from 1 day to maximum 2 years. Furthermore, a prudent internal credit quality assessment procedure has been put in place. Our Fundamental Credit Research Analysts, specialized by sector, carefully review the credit quality of the issuers in which we intend to invest. Our MMFs are subject to strict internal rules that limit, among other things, the exposure to any individual issuer. Risk management is an integral part of our investment philosophy and is fully embedded in our operational and investment processes.
Contact
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