Invesco Fixed Income Global Cash Management November 12, 2015 NOT FDIC INSURED / MAY LOSE VALUE / NO BANK GUARANTEE Invesco Distributors, Inc. US12681
Important Information An investor should consider the investment objectives, risks, fees and expenses carefully before investing. Please read the prospectus or other offering documents carefully before investing. For this and more complete information, contact your financial advisor or visit invesco.com/fundprospectus. An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in such a Fund. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. This should not be relied upon as the sole factor in an investment making decision. As with all investments there are associated inherent risks. Please obtain and review all financial material carefully before investing. Past performance is not indicative of future results. This does not constitute a recommendation of the suitability of any investment strategy for a particular investor. All data provided by Invesco, unless otherwise noted. The opinions expressed are based on current market conditions and are subject to change without notice. These opinions may differ from those of other Invesco investment professionals. Fixed-income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer s credit rating. A credit rating is an assessment provided by a nationally recognized statistical rating organization (NRSRO) of the creditworthiness of an issuer with respect to debt obligations, including specific securities, money market instruments or other debts. Ratings are subject to change without notice. Short-term credit ratings are measured on scale that generally ranges from A-1 (highest) to SP-3 (lowest) for Standard & Poor's and from P-1 (highest) to NP (lowest) for Moody's. S&P ratings will also denote those securities that possess extremely strong safety characteristics with a plus sign (+) designation. NR or blank fields indicated the debtor was not rated, and should not be interpreted as indicating low quality. For more information on rating methodologies, please visit the following Nationally Recognized Statistical Ratings Organization websites: www.standardandpoors.com and select Understanding Ratings under Rating Resources on the homepage; www.moodys.com and select Rating Methodologies under Research and Ratings on the homepage; www.fitchratings.com and select Ratings Definitions on the homepage.
Global Liquidity Investments Presentation Market Now and in the Future Changes: Concerns and Questions Investments Options 3
Current Liquidity Market Trends Long period of historically low interest rates has caused investors to search for yield Regulatory environment from multiple regulators makes for an uncertain future Growing demand for alternative cash investments For illustrative purposes only. 4
Market Update 2015: Tale of Two Central Banks The Federal Reserve is Raising Rates While the ECB is Still Easing For illustrative purposes only. 5
U.S. Rate Hike Expectations Mar 16 Expectation for First Rate Hike in US Feb 16 Jan 16 Month of First Rate Hike Dec 15 Nov 15 Oct 15 Sep 15 Aug 15 Jul 15 Jun 15 May 15 Apr 15 Nov 14 Dec 14 Jan 15 Feb 15 Mar 15 Apr 15 May 15 Jun 15 Jul 15 Aug 15 Sep 15 Oct 15 Months Source: Bloomberg L.P., as of 10/30/2015 6
Market Update United States Indicative market rates Security Type 30 Days 90 Days 180 Days Treasury Bill 0.01% 0.06% 0.19% Commercial Paper (CP) A-1+ Commercial Paper (CP) A-1 Asset Backed Commercial Paper (ABCP) 0.15% 0.21% 0.40% 0.19% 0.29% 0.49% 0.19% 0.32% 0.51% Source: Bloomberg L.P., as of 10/30/2015 Past performance is no guarantee of future results. An investment cannot be made into an index. 7
Eurozone Rate Hike Expectations Dec 19 Expectation for First Rate Hike in Europe Oct 19 Aug 19 Jun 19 Apr 19 Month of First Rate Hike Feb 19 Dec 18 Oct 18 Aug 18 Jun 18 Apr 18 Feb 18 Dec 17 Oct 17 Aug 17 Jun 17 Apr 17 Nov 14 Dec 14 Jan 15 Feb 15 Mar 15 Apr 15 May 15 Jun 15 Jul 15 Aug 15 Sep 15 Oct 15 Months 8 Source: Bloomberg L.P., as of 10/30/2015
Market Update - European Central Bank Indicative market rates Security Type 30 Days 90 Days 180 Days Govt Bill (Ger) -0.41% -0.40% -0.39% Govt Bill (Fra) -0.25% -0.26% -0.27% CP A-1+ -0.40% -0.30% -0.35% CP A-1-0.23% -0.17% -0.10% ABCP -0.02% 0.00% N/A Source: Bloomberg L.P., as of 11/03/2015 Past performance is no guarantee of future results. An investment cannot be made into an index. 9
Market Update 2015: Regulation and Reform Reform is impacting issuers and markets And money market funds globally For illustrative purposes only. 10
What are the principal regulations we are following: Source: J.P.Morgan 11
Keeping US MMF Reform Simple Three kinds of funds: Constant net asset value (CNAV) Treasury & Government optional fees & gates Open to all investor base (including natural persons) CNAV Prime & Municipal with fees & gates Limited to natural persons Floating net asset value (FNAV) Prime & Municipal with fees & gates Open to all investor base (including natural persons) Reform also includes other key components -New portfolio diversification, liquidity, stress testing, and credit process requirements -External support allowed (must be disclosed) For illustrative purposes only. 12
New Disclosure Obligations Market-based NAVs Daily and weekly liquid assets Shareholder inflows or outflows Security-specific details Detailed fund flows Public 5 days after EOM rather than current 60 days Daily Website disclosure Form N-MFP New Form N-CR SAI Disclosure Material events Insolvency Financial Support Deviation NAVs from stable price Sponsor support Imposition of fees/gates Weekly liquid assets below 30% For illustrative purposes only. 13
Global Liquidity Investments Presentation Market Now and in the Future Changes: Concerns and Questions Investments Options 14
Are Fees and Gates really new to money market funds? 15
Potential for gates or fees is not new in liquidity management world Gates and Fees Current Policy Post Reform Redemption Suspension and Redemption Gates Allows the fund s board to suspend redemptions Once board suspends redemptions, the fund must be liquidated If weekly liquid assets fall below 30%, fund s board may suspend redemptions up to 10 days in any 90 day period Withhold Redemptions and Liquidity Fees No Liquidity Fees Ability to postpone paying redemptions for up to 7 Days If weekly liquid assets fall below 30%, fund s board may impose up to a 2% fee on redemptions. If weekly liquid assets fall below 10%, fund s board required to impose 1% fee (up to maximum of 2%) on redemptions but Board may choose not to implement. Note: Gates and Fees are always at the discretion of the Board within their judgment of the best interest of shareholders 16 Source: Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 For US Institutional Investor Use Only Not for Further Distribution
Do any other instruments have Fees and Gates? 17
The terminology is new but the concept is not Examples of similar liquidity and withdrawal restrictions: Bank Time Deposit have Penalty (fee) & Bank Liquidation (gate) An early withdrawal penalty in a bank time deposit is similar to a MMF liquidity fee. Each can be avoided by continuing to hold the instrument. Banks can fail and deposits can be withheld or gated. Even an FDIC-insured deposit at a failed bank can be gated. T-Bills Price Penalty (fee) T-Bills redemption prices will be reflective of market conditions. In a illiquid market, there is a price penalty to liquidate high quality t-bills. Commercial Paper Price Penalty (fee) & No Market (gate) Liquidating commercial paper can be difficult if the issuer or secondary market is not offering a competitive price. This results in issuers and dealers failing to place a bid gate a security. For illustrative purposes only. 18
Do Money Market funds qualify as cash equivalents? 19
Answer Yes- money markets funds are cash equivalents Cash Equivalents U.S. Treasury bills Certificates of deposit Bankers' acceptances Corporate commercial paper Other money market instruments Qualification under GAAP an investment in a money market fund that has the ability to impose a fee or gate under rule 2a 7(c)(2) qualifies as a cash equivalent for purposes of U.S. GAAP. Commission s Authority the federal securities laws provide the Commission with plenary authority to set accounting standards, and we are doing so here. Source: SEC, Federal Register / Vol. 79, No. 157 / Thursday, August 14, 2014 20
Will prime money market investors move into government funds and is there enough supply? 21
Answer The markets could see some prime assets move to government funds due to reform: According to JPM, between $600b and $650b could move from prime to government funds The Federal Reserve and the US Treasury understand that Demand for Treasury bills is high and is expected to grow even more significant. Therefore, Treasury believes that it is prudent to increase the level of Treasury bills outstanding, 1 Historically prime funds have out yielded government funds: Yield % 1.4 1.2 1 0.8 0.6 0.4 0.2 0 Prime Funds Spread to Government Funds Sep 05 Mar 06 Sep 06 Mar 07 Sep 07 Mar 08 Sep 08 Mar 09 Sep 09 Mar 10 Sep 10 Mar 11 Sep 11 Mar 12 Sep 12 Mar 13 Sep 13 Mar 14 Sep 14 Mar 15 Sep 15 1-month net yields imoneynet Prime Funds (all) and Government Funds (all) Source: J.P.Morgan; imoneynet, Inc. Past performance is no guarantee of future results. 1 Quarterly Refunding Statement of Acting Assistant Secretary for Financial markets Seth B. Carpenter, 5/06/2015 22
Are Ultra-short bond funds a good alternative to money market funds? 23
Answer Investors need to have a clear understanding of the risks and potential rewards Ultra-short bond funds May suit cash investors looking for income while taking on additional risk May help to diversify and complement liquidity strategies Could under-perform in a rising rate environment Not a money market fund and net asset value is expected to fluctuate Not all ultra-short bond funds are created equal The ultra-short category is generally considered the maturity bands between money market funds and short-term bond funds Lipper and Morningstar differ on their classifications This is not a comprehensive list, investors should obtain and review all financial material carefully before investing. Past performance is not indicative of future results. This does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Diversification does not guarantee a profit or eliminate the risk of loss. 24
Global Liquidity Investments Presentation Market Now and in the Future Changes: Concerns and Questions Investments Options 25
Liquidity Considerations Safety Liquidity Yield For illustrative purposes only 26
Optimal Liquidity instruments The perfect liquidity instrument would have: Diversification Daily Liquidity Yield Low minimum transactions Low fees Zero Risk Convenience Electronic settlement Transparency Portal/Platform access For illustrative purposes only Source Treasury Strategies, How US Money Fund Regulations Impact Corporate Investment Policies, 5/21/2015 27
Liquidity Investors Toolbox Toolbox Options Treasury bills/ Agencies Bank demand deposits Time deposits/certificates of Deposit Repurchase Agreements * Variable Rate Demand Notes Commercial paper Management DIY - Do it Yourself DIY - Do it Yourself DIY - Do it Yourself DIY - Do it Yourself DIY - Do it Yourself DIY - Do it Yourself Treasury/Government money market Funds Prime money market funds Cash Plus funds Ultra short bond funds Comingled products Asset Manager Asset Manager Asset Manager Asset Manager Asset Manager Separately Managed Accounts (SMA) Asset Manager For illustrative purposes only * Involve extensive operational and legal resources Separately Managed Accounts are offered by affiliated investment advisers, which provide investment advisory services and do not sell securities. These firms, like Invesco Distributors, Inc., are indirect, wholly owned subsidiaries of Invesco Ltd. 28
Risk/Return Potential in the Short-Term Space Short-Term Bond Ultra Short Bond Cash Plus Money Markets 1 Day Investor Objectives: Safety Liquidity Yield Typical Assets: - Payroll - Checking account excess cash - Accounts payables - 30-day short-term liquidity Investor Objectives: Principal Preservation Yield Liquidity Typical Assets: - Special purpose funds - Semi-annual or annual tax escrow - Foundation cash - Long-term debt 90 servicing Day 180 Day Investor Objectives: Yield Principal Preservation Liquidity Typical Assets: - Reserve cash - Self insurance funds - Litigation escrow - Foundation cash 1 Year Investor Objectives: Yield+ Liquidity Principal Preservation Typical Assets: - Reserve cash - Special purpose funds - Semi-annual or annual tax escrow - Foundation cash - Long-term debt servicing 3 Years For illustrative purposes only. This does not constitute a recommendation of the suitability of any investment strategy for a particular investor. As with all investments there are associated inherent risks. 29
Conclusion We believe there is light at the end of the tunnel Rates likely to rise Greater differential between government and prime rates Reform will be implemented Markets will adjust New world will likely require liquidity asset allocation 30