0.8
0.6
%
0.4
0.2
6
4
% 2
0
1
ALTERNATIVES MONEY MARKET FUNDS
Money market funds
Money market funds vs Libor rates
3mths 6mths 1yr 3yrs 5yrs 10yrs
Money Market Funds -0.05 -0.11 0.02 0.39 1.56 2.17
1-week Libor (£) 0.15 0.31 0.6 0.7 2.65 3.54
3-month Libor (£) 0.21 0.4 0.79 1.25 3.2 3.82
6-month Libor (£) 0.23 0.48 1 1.72 3.53 3.96
Overnight Libor (£)
Source: Morningstar
0.11 0.21 0.4 0.45 1.79 2.42
Money market funds vs Libor rates – 1 year
1-week Libor (£)
0
Money market funds
Dec ’10 Feb ’11 Apr Jun Aug
Source: Morningstar
3-month Libor (£)
-2 Money market funds
Dec ’08 Jun ’09 Dec
Source: Morningstar
3-month Libor (£)
6-month Libor (£)
6-month Libor (£)
Overnight night Libor (£) (
Jun ’10
Dec
Overnight Libor (£)
Money market funds vs Libor rates – 3 yrs
Oct
1-week Libor (£ (£) £)
Jun ’11
Dec
Dec
Worth the risk?
The IMA’s new Short-Term Money Market funds
sector will give investors greater clarity over their
cash management. But what is still not clear is how
investors can generate positive returns from cash
BY CHERRY REYNARD
The IMA’s ‘short-dated’
money market sector was
introduced at the start of
2012 to sit alongside the
existing money market
sector. The introduction of
the new sector goes some
way to address the problems
that have beset money
market funds and bring the
UK definitions in line with
those that exist in continental
Europe. But will it make
money market funds inherently
more appealing as a
solution for cash weightings
in a portfolio?
The theory behind the
creation of a second shortterm
money market sector
is that these funds will only
be able to invest in a small,
highly prescribed range of
investment instruments.
The collapse of the floating
rate note and asset-backed
markets during the credit
crunch exposed the risk in
‘safe as houses’ cash funds
invested in these instruments
to enhance yield.
The Standard Life cash
fund was the most high profile
case in the UK, where
investors ultimately had to
be compensated for losses.
In the US, the Reserve
fund invested heavily in
Lehman Brothers, resulting
in it famously ‘breaking the
buck’ (i.e. falling below its
fixed net asset value of $1).
l Safety matters
Shorter-term assets are certainly
perceived as safer
and investors looking for
ultimate safety tend to
prefer shorter-term funds.
Gary Potter, joint head of
multi-manager at Thames
River Capital, says that the
only time he has invested
in a money market fund
was in 2008, when there
was significant fear about
the banks. At that point,
he sought complete safety
and therefore shorter-term
assets were preferable to
longer-term. He invested in
a fund with a substantially
shorter duration than the
then 90-day minimum.
Martin Gray, manager of
the Miton Special Situations
Fund, says: “When I am
looking to take currency
positions via money market
funds, there is a question
over whether I would
want to take the risk of
being in a term deposit or
other longer-dated assets.
In times of rising interest
rates, there would be
some benefit because there
may be uplift in yield for
investing for a longer term.
But the more investors
move away from overnight
instruments, the more risk
they are taking.”
The clarity is also welcome.
Yields in the sector
vary from 0.09% to 1.3%.
The higher yields are generally
derived from taking
more risk in longer-dated
instruments, but investors
have no means of proper
comparison. The experience
of the credit crunch
shows that capital can be
at risk in some money
market funds and the
new classifications create
transparency.
l Extraordinary times
But for many investors,
the problem with money
market funds is not necessarily
that they hold longer-duration
assets.
Robin McDonald, comanager
of Cazenove’s
Multi-Manager range, says:
“The kind of duration
risk investors are being
asked to take in a money
market fund is not that
high. The climate would
have to be very difficult for
this to make a difference
but, there again, these are
extraordinary times.”
The far greater problem
is that the returns are so
weak in a climate of lower
interest rates – most pay
around 0.5% after charges,
significantly lower than
that available on retail
bank deposits.
Potter points out that
38 PORTFOLIO ADVISER [www.portfolio-adviser.com] JANUARY 2012
To view a Ceros magazine you need to have JavaScript enabled in your browser and have the flash player 8 or higher installed. To install the latest flash player, click the icon above, install the flash plugin and then click here to refresh this page.