Invesco Global Liquidity 35th Annual SoCal EXPO … · July 2014 . SEC votes and approves rules for “Phase II Reforms” June 2013 . SEC proposes changes to Rule 2a-7, including

Invesco Global Liquidity 35th Annual SoCal EXPO

April 7, 2016

Laurie Brignac, CFA Head of Global Liquidity Portfolio Management

US3739

FOR INSTITUIONAL INVESTOR USE ONLY

Legal notice/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/fund prospectus.

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.

Invesco Distributors, Inc.

FOR INSTITUTIONAL INVESTOR USE ONLY 2

Agenda

3

History of Money Market Funds

Overview of Money Market Reform

Impact to Clients

Impact on Markets

Investment Solutions

FOR INSTITUTIONAL INVESTOR USE ONLY




5

Early Years

The SEC promulgated Rule 2a-7 in 1983 to establish risk limiting provisions regarding fund maturity, quality and diversification

The first money market fund (MMF) launched in 1971, which ironically was The Reserve Fund, which was the largest fund to “break the buck”

Asset Growth

Money market funds experienced steady growth crossing over the $2 trillion asset level in early 2001

Rule 2a-7

Amendments to Rule 2a-7

Limited amendments occurred to the Rule in 1991 and 1996 and remained unchanged until after the Financial Crisis in 2008

Source: Invesco, 2016


2,000

2,500

3,000

3,500

4,000

12/05 12/06 12/07 12/08 12/09 12/10 12/11 12/12 12/13 12/14 12/15

1Q 2009 – Industry assets peak at $3.9 trillion

Start of credit crisis 3Q 2007

Lehman bankruptcy

Current industry assets $2.8 trillion

Historical US money fund industry asset growth ($ Millions)

US Money Market Fund Assets MMFs remain a popular short-term investment vehicle

6

Source: Investment Company Institute (ICI). Data as of 2/29/2016.

Industry assets as of March 2, 2016: $2.8 trillion

Industry assets have remained relatively stable at around this level since 2010 2Q


Overview of Money Market Reform

Overview of Money Market Reform Regulators targeted four primary areas:

8

Liquidity

MMFs are also required to maintain shorter weighted average lives and also have to manage to a new weighted average life limit (2010 reform)

Money market funds (MMFs) are required to hold specific minimum levels of daily and weekly liquidity and further restricted from holding illiquid securities

Transparency

Increased disclosure has been a hallmark for MMF reform both in the 2010 and 2014 requirements

Maturity

Structure

MMFs will now have to transact at a floating net asset value (FNAV) for certain portfolios, and must have policies to implement fees & gates if needed



US Money Market Fund Reform Timeline

9

Source: Securities Exchange Commission (SEC) and Investment Company Institute (ICI)

March 2009

ICI releases Working Group report proposing changes to strengthen Rule 2a-7

June 2009

SEC proposes changes to Rule 2a-7

September 2009

Expiration of U.S. Treasury Guarantee for MMFs

January 2010

SEC releases final rules for amendments to 2a-7

“Phase I Reforms”

May 2010

Effective date of Phase I Reforms amendments, implementation scheduled for 2010–2011

November 2008

Formal establishment of ICI’S Money Market Working Group

October 14, 2016

Compliance Date:

Conformation with FNAV, fees and gates

April 2016

Compliance Date:

Diversification, stress testing, and additional disclosure

July 2014

SEC votes and approves rules for “Phase II

Reforms”

June 2013

SEC proposes changes to Rule 2a-7, including floating NAV, fees & gates

“Phase II Reforms”

2008 2009 2014 2016 2010 ////


US Money Market Fund Reform Evolution Portfolio liquidity, maturity and quality

10

Topic Pre Crisis 2010 Reforms 2014 Reforms

Minimum Daily Liquidity N/A 10% No changes

Minimum Weekly Liquidity N/A 30% No changes

Maximum Illiquid Securities 10% 5% No changes

Weighted Average Maturity (WAM) Limits

90 day 60 day No changes

Weighted Average Life (WAL) Limits

N/A 120 day No changes

Periodic Stress Tests

N/A Managers must stress the funds’ NAV to shocks such as interest rate changes, redemptions and changes in credit quality

Expanded to include: Assessment of funds’ ability to maintain 10% weekly liquid assets under stress scenario

Second Tier Securities 5% maximum with a 1% per issuer limit

3% maximum with a 0.5% per issuer limit and a maximum maturity of 45 days

No changes



US Money Market Fund Reform Evolution Portfolio transparency and structure

11

Topic Pre Crisis 2010 Reforms 2014 Reforms

Portfolio Holdings Disclosure

No website posting required

No monthly reporting to SEC

Monthly holdings must be disclosed on public website and maintained for six months

Provide detailed monthly portfolio holdings to SEC

Expanded to include: Daily disclosure

of liquidity levels Net inflows and outflows Market-based NAVs

Client Transactional NAVs N/A Requires funds to be able to process client transactions at a price other than $1.00

Required floating NAV for institutional prime and tax exempt funds to four decimal places (i.e. $1.0000 or $0.9999)

Portfolio Liquidity Fees N/A N/A Permits a 2% liquidity fee assessment on redemptions if the funds’ Weekly Liquid Assets (WLA) <30%

Portfolio Redemption Gates Board of Directors must request an order from the SEC to suspend redemptions

Permits the Board to suspend redemptions if the fund is at risk of ‘breaking the buck’ and decides to liquidate the fund

Allows a MMF Board to temporarily suspend redemptions for up to 10 days in a 90 day period if WLA <30%



US Money Market Fund Reform Key product features

12

NAV Type by Strategy CNAV

Retail & Institutions CNAV

Natural Persons/Retail FNAV

Institutions

Government

Prime

Tax-Free

Features Government CNAV

Prime & Tax-Free FNAV

Prime & Tax-Free

99.5% Government Securities & Cash

Limited to Natural Persons

Floating NAV (FNAV)

Constant NAV (CNAV)

Liquidity Fees & Redemption Gates Optional

For Illustrative Purposes Only


Impact to Clients

Types of Money Market Funds

14

For Illustrative Purposes Only

Investor Type

Portfolio Strategy Natural Person “Retail” Institutional

Government CNAV

Fees & Gates Optional

CNAV Fees & Gates

Optional

Prime CNAV Fees & Gates

FNAV Fees & Gates

Tax-Free CNAV Fees & Gates

FNAV Fees & Gates

Fund eligibility is determined by the portfolio strategy and the type of investor


15

This list was included in the SEC’s release. It is not a comprehensive list. This is strictly an example of how different investors might qualify as a retail account. Source: SEC

Definition of Retail Accounts: Examples of Retail Accounts:

A retail money market fund is a fund that has policies designed to limit ownership to ‘natural persons’:

Expected that most fund groups will rely on social security numbers to confirm ownership by a natural person

Other acceptable proof would be any government-issued identification such as a passport

Natural persons invest through a variety of tax-advantaged accounts:

Participant-directed defined contribution (DC) plans

Individual retirement accounts

Simplified employee pension arrangements

Deferred compensation plans for government or tax-exempt organization employees

College savings plans

Health savings account plans

What is a Retail Investor?

How do different investors qualify as natural persons?


16

Are Fees and Gates really new to money market funds?


Potential for fees or gates is not new in money market funds

17

Fees and Gates 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: Fees and Gates are always at the discretion of the Board within their judgment of the best interest of shareholders


18

Do any other instruments have Fees and Gates?


Fees and gates exist to a certain extent in other money market securities

19

Examples of similar liquidity and withdrawal restrictions:

Fees Gates

Bank Time Deposits An early withdrawal penalty in a bank time deposit

Banks can fail and deposits can be withheld or “gated”

Treasury Bills Treasury bills redemption prices will be reflective of market conditions

During the crisis it was difficult to find a market for even treasury bills

Commercial Paper Liquidating commercial paper can be difficult if the issuer or secondary market is not offering a competitive price.

Issuers and dealers failing to place a bid is a “gate”


20

How have clients reacted to money fund reform thus far?


Many prime MMFs funds are converting to government funds

21

Over $250 billion in money market funds have transitioned from prime funds to government funds

$0.0

$0.5

$1.0

$1.5

$2.0

$2.5

Jan-07 Nov-08 Sep-10 Jul-12 May-14 Mar-16

Prime MMF Net Assets Govt MMF Net Assets

US Money Fund Flows (trillions)

Source: Bloomberg L.P. As of March 17, 2016.


300

400

500

600

700

800

60

80

100

120

140

160

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

Dec

-10

Dec

-11

Dec

-12

Dec

-13

Dec

-14

Dec

-15

# o

f M

oney

Mar

ket

Fun

ds

# o

f M

oney

Fu

nd

Com

ple

xes

# of Complexes (LHS)

# of Funds (RHS)

Number of fund complexes and money market funds

The combination of high fee waivers and money fund reform have resulted in a wave of industry consolidation

22

Source: As of February 23, 2016; iMoneyNet, Inc.; data as of December 31 each year

• 53% of providers have exited the industry

• There are 44% fewer funds in the market


Impact to Markets


Regulation and historically low interest rates have changed the landscape for both issuers and money market funds

24

Onerous Regulation

Low interest rates for 8 years have distorted the economics of issuing and buying the front end of the curve

Institutional investors are required to hold more liquidity, increasing demand for dwindling short term supply

Post reform regulation has impacted banks, dealers, money market funds and securities settlement platforms

Zero-Interest Rate Policy

Supply Demand

Issuers are discouraged or penalized for issuing short paper and low interest rates have encouraged longer dated funding


Regulation has impacted issuers and funds

25


Issuers Banks forced to term out funding and reduce

reliance on short-term funding

Banks penalized for funding of 90 days or less

Leverage Ratio penalizes banks for facilitating funding transactions such as repos backed by government securities

Banks reducing higher-cost capital markets activities

Industrials and other non-financials are taking advantage of lower-cost financing options in the short-term market

Money Market Funds Higher daily & weekly liquidity levels while

issuers discouraged from issuing short-term paper

Increased transparency requirements beneficial to shareholders but costly to implement and maintain

Greater consolidation in the industry

Increased operating costs has resulted in smaller fund complexes selling their business or choosing to liquidate

Banks discouraging non-operating deposits has and will result in money moving from banks to money funds


60

62

64

66

68

70

72

74

76

2006

Q2

2006

Q4

2007

Q2

2007

Q4

2008

Q2

2008

Q4

2009

Q2

2009

Q4

2010

Q2

2010

Q4

2011

Q2

2011

Q4

2012

Q2

2012

Q4

2013

Q2

2013

Q4

2014

Q2

2014

Q4

2015

Q2

Perc

enta

ge

Deposits/Assets (%)

US Banks: Additional regulation is causing reduced reliance on wholesale funding

26

Source: SNL Financial. Data as of 12/31/2015.

US Banks have significantly reduced reliance on wholesale funding in favor of higher quality deposit funding

We expect this trend to continue due to regulations which penalize short-term funding reliance


$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

2008

-01

2008

-07

2009

-01

2009

-07

2010

-01

2010

-07

2011

-01

2011

-07

2012

-01

2012

-07

2013

-01

2013

-07

2014

-01

2014

-07

2015

-01

2015

-07

2016

-01

Asset-backed CP Financial CP Nonfinancial CP

2008-2015 CAGR ABCP: -14% Financial: -6% Nonfinancial: +5%

$500,000

$1,000,000

$1,500,000

$2,000,000

$2,500,000

2001

-12

2002

-09

2003

-06

2004

-03

2004

-12

2005

-09

2006

-06

2007

-03

2007

-12

2008

-09

2009

-06

2010

-03

2010

-12

2011

-09

2012

-06

2013

-03

2013

-12

2014

-09

2015

-06

Commercial Paper Outstanding ($millions) CP Outstanding, 2008–2015 ($millions)

Investable universe continues to evolve Commercial Paper

27

ABCP issuance has contracted 78% since its 2007 peak, with more complex structures falling out of favor with investors

Likewise, stricter regulation on funding sources has driven financial issuance down 40% since 2008

Nonfinancial CP, however, has grown at a steady 5% CAGR as corporate issuers take advantage of attractive funding rates

Source: Federal Reserve, January 2016


Weighted Average Maturity of US Treasury Debt US Treasury Bills Outstanding, 2007–2015 ($millions)

Investable universe continues to evolve US Treasury Debt

28

The demand for Treasury bills remains strong and is expected to increase through FY2016

The Treasury believes it is prudent to increase the level of bills over the coming quarters

In order to accomplish this, the Treasury will gradually reduce issuance size of coupon and TIPS auctions

Source: Treasury.gov, SIFMA. Data as of 12/31/2015.


Investment Solutions


Liquidity solution decision process Some considerations before moving forward

30

Identify investment objectives:

Principal stability

Credit quality

Interest rate risk

Liquidity needs

Risk Tolerances

Determine yield and return goals:

Money market yields

Libor plus additional spread

1-3 year benchmarks

Return Goals

Identify specific product requirements:

Separate account

Pooled vehicles

Registered funds

Product Needs


Liquidity solution decision process Determine investment strategy based on return versus risk budget

31

For Illustrative Purposes Only. Source: Invesco. This does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Not all products are available in all jurisdictions or to all investors.

Ultra-Short

Customized Product Solutions

2a-7 Money Funds

Private Funds

Bond Funds

Separately Managed Accounts

Sub-Advised

Short-Term

Cash Plus

Prime Tax-Exempt

Govt/Treasury

Volatility of Returns

Pote

ntia

l Yie

ld/R

etur

n

Core Fixed Income

Average maturity of less than 60 days.

Average maturity between 60 and 90 days.

Average duration between 90 days and one year.

“1-3 year” or “1-5 year” benchmark.


Liquidity solution decision process Products available in the market

32

Additional Requirements

Available Products Product Outcome

Individual Securities Separate Account

Unregistered ERISA Money Pooled Vehicle Collective

Investment Fund**

Registered with the SEC Pooled Vehicle Mutual Funds

Unregistered Non-qualified Pooled Vehicle Private Placements*

* Private funds are excluded from the definition of an investment company under the Investment Company Act of 1940 and private placements are unregistered securities offerings under Regulation D of the Securities Act

** Collective investment funds are comingled trusts that meet the criteria established by 12 CFR 9.18 This does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Not all products are available in all jurisdictions or to all investors.

Investment Management Agreement and Custodian

For illustrative purposes only


Liquidity solution decision process Specific product structure considerations

33

Mutual Funds

Private Placements*

Collective Investment Fund

Separate Account

Primary Regulator SEC Unregistered

Office of the Comptroller of the Currency (OCC)

None

Pricing Method CNAV or FNAV CNAV or FNAV CNAV CNAV or FNAV

Shareholder Requirements

Per Prospectus Minimums

Accredited Investor AND

Qualified Purchaser

Qualified Plan (ERISA) Only None

Number of Shareholders Unlimited Limited to 2,000 Unlimited N/A

Tax Reporting Form 1099 Limited Partnership K-1

Exempt Form 5500 N/A

Pros Full portfolio

transparency More liquidity

Lower costs Potentially higher

yields Lower costs

Lower costs Ability to

customize

Cons

Higher costs FNAV for some

money market funds

Generally less liquidity

Limited to ERISA assets only

Minimum thresholds

* There are several types of private placements or unregistered offerings such as 3(c)7 that are exempt from registration with the SEC. Some of these investments are not registered and are offered to qualified investors via private placements. Some products are available via affiliates of Invesco Distributors, Inc.. Not all products are available in all jurisdictions or to all investors.

For illustrative purposes only


Liquidity solution decision process Potential security selection tool kit

34

For Illustrative Purposes Only. Source: Invesco. Please see slide 39 for important information on credit ratings. This does not constitute a recommendation of the suitability of any investment strategy for a particular investor. Not all products are available in all jurisdictions or to all investors.

Credit Quality

Money Market Cash Plus Ultra-Short Short-Term

US Government Securities AA+ to AAA √ √ √ √

Repurchase Agreements Collateral Dependent √ √ √

Commercial Paper & Certificates of Deposit

A-1 √ √ √

A-2 or A-3 √ √

Corporate Bonds (Domestic & Foreign)

Investment Grade √ √ √

High Yield √

Asset Backed Securities (ABS) A-AAA √ √ √

Mortgage Backed Securities (MBS) A-AAA √ √

Security selection is defined by client’s investment policy. Securities typically available in a managers “tool kit” are highlighted in table below.


Invesco Ltd. Solely dedicated to investment management for the benefit of clients

35

Global Reach Client Focus High Performance Culture

Over 750 investment professionals in more than 20 countries

US$775.6 billion in assets under management for clients globally

Global profile that spans nine of the world’s ten largest markets

Business focused exclusively on investment management

We’re relentless in our pursuit of achieving more for clients

Our global support platform eliminates distractions and empowers our distinct investment teams with the potential to produce strong, long-term investment results

A culture of accountability and collaboration focused on helping clients achieve their investment objectives


Source: Invesco Ltd. Client-related data, investment professional, employee data and AUM are as of December 31, 2015, and include all assets under advisement, distributed and overseen by Invesco. Invesco PowerShares Capital Management LLC is the sponsor for the PowerShares QQQ and BLDRS products. ALPS Distributors, Inc. is the distributor of PowerShares QQQ, BLDRS Funds and the PowerShares DB Funds. Invesco PowerShares Capital Management LLC and Invesco Distributors, Inc. are indirect, wholly owned subsidiaries of Invesco Ltd. Invesco Distributors, Inc. is the US distributor for Invesco Ltd.’s retail products. Invesco Ltd. is not affiliated with ALPS Distributors, Inc. or Deutsche Bank. The listed centers do not all provide products or services that are available in all jurisdictions, nor are their products and services available on all platforms. The entities listed are each indirect, wholly owned subsidiaries of Invesco Ltd., except ALPS Distributors Inc., Deutsche Bank and Invesco Great Wall in Shenzhen, which is a joint venture between Invesco and Great Wall Securities, and the Huaneng Invesco WLR Investment Consulting Company Ltd. in Beijing, which is a joint venture between Huaneng Capital Services and Invesco WLR Limited. Please consult your Invesco representative for more information.

Our global perspective and local market knowledge help us uncover investment opportunities

36

Scope of fixed income platform: US$233.8 billion AUM

Depth of resources: 161 investment professionals 223 professionals Global footprint: 11 locations in key markets

Rates 19 Currency 14 Credit 72 PM 77

London

Hong Kong Tokyo

We have a well-resourced investment team with a strong global perspective

San Diego

New York

Atlanta

London

Hong Kong

Chicago Louisville

Shenzhen Mumbai Palm Harbor

Source: Invesco, as of December 31, 2015. Subject to change without notice.


Toronto

Invesco Global Liquidity Competitive advantage

37

Commitment Global liquidity is a core business of Invesco

Invesco has been managing liquidity for more than 30 years

Well defined fundamental research discipline and investment process

Scale and Reach A US $69.3 billion global liquidity franchise – US $62.6 billion in money markets – US $6.6 billion in short liquidity products

A wide range of customized products including:1

– Separate accounts – Sub-advised accounts – Private trusts – Other short-term strategies and local currencies

Knowledge Senior investment professionals have worked together since 2006

History Maintained strategy objectives through multiple credit cycles

Provided solid performance through different economic cycles

Pure Focus Invesco is solely focused on asset management

No distractions from other businesses

Data as of February 29, 2016. Subject to change without notice. 1 Some products are available via affiliates of Invesco Distributors, Inc. Not all products are available in all jurisdictions or to all investors.

Some products in various currencies may not be available to US residents. Some of these investments are not registered and are offered to qualified investors via private placements.


Invesco’s Long-term Approach to Short-term InvestingSM

Disciplined Investment Process Focus on safety and liquidity while seeking to deliver a competitive yield Comprehensive approach incorporating a top-down assessment of the market

environment and bottom-up issuer-level credit analysis High bar for evaluating minimal credit risk

High-quality products US-based prime, government and Treasury, and tax-free/exempt funds Global institutional money market funds that operate under the same

disciplined investment process1

Ability to meet the evolving liquidity needs of our clients

Distinguished Client focus Dedicated support and service groups for institutional clients Direct access to our investment team Committed to ongoing regular client communication 1 Non-US money market products may not be offered or sold directly or indirectly in the United States, its territories or possessions to US

citizens or residents, as further described in the prospectus. The Funds and the units of the Funds are not registered with the United States Securities and Exchange Commission and they are sold in the United States only in reliance on exemptions from regulation. The information contained in this publication does not constitute an offer of invitation to apply for units.

38 FOR INSTITUTIONAL INVESTOR USE ONLY

Important information

A credit rating is an assessment provided by Nationally Recognized Statistical Ratings Organization (NRSRO) of the creditworthiness of an issuer with respect to debt obligations, including specific securities, money market instruments or other debts. Long-term ratings are measured on a scale that generally ranges from AAA (highest) to D (lowest). Short-term credit ratings are measured on a scale that generally ranges from A-1 (highest) to SP-3 (lowest) for Standard & Poor's. S&P ratings will also denote those securities that possess extremely strong safety characteristics with a plus sign (+) designation. Ratings are subject to change without notice. For more information on rating methodologies, please visit the following NRSRO websites: http://www.standardandpoors.com and select ‘Understanding Ratings’ under Rating Resources on the homepage.


Thank you


Documents

Invesco Global Liquidity 35th Annual SoCal EXPO … · July 2014 . SEC votes and approves rules for “Phase II Reforms” June 2013 . SEC proposes changes to Rule 2a-7, including