Top 5 money market funds by Morningstar ratings and 3-year performance
when he invested in money
market funds in 2008, they
were paying Libor while
banks were paying base
rate. Libor was substantially
higher than base rate
and, as such, there was
a yield enhancement to
investing in money market
funds over cash deposits.
This has eroded with Libor
now around 0.5% above
base rate.
John Dance, co-principal
at Vertem Asset Management
says: “Historically
we have used money
market funds for long-term
cash but, with returns so
low, we are not using any
at present. Even when
returns are marginal you
have to do a lot of due diligence,
often the funds are
making racy investments to
create meaningful returns.”
l Unattractive appeal
For many, the necessity
of this due diligence has
eroded their appeal. As
a result, money market
funds have not benefited
from investors’ recent
risk aversion. The latest
Lipper fund flows report
showed €22.5bn (£18.9bn)
in redemptions during July.
Fears of another banking
crisis in Europe have weakened
investor appetite for
even the short-term bank
deposits in which money
market funds invest.
Kathy Byrne, director of
Intelligent Cash Management,
says: “Money market
funds are paying approximately
base rate after
charges. This is an improvement
as they used to pay
just below base rate, but
many have cut their charges.
But the real problem
with money market funds is
that the wholesale or institutional
rates are so much
lower than retail rates. A
wholesale depositor might
be lucky to get 2%, while
a retail depositor could
expect nearer 3%.”
But she points out that
the options for holding
cash have also substantially
reduced in the past few
years. Banks are paying relatively
high rates on cash
deposits but many investors
fear the banks themselves
are not stable. The
compensation fund protects
holdings up to £85,000 but
many are reluctant to invest
above this.
l To what purpose?
How investors manage
their cash allocation will
depend on its ultimate
purpose. For example,
McDonald and Gray will
use it to make currency
allocations – around half
of the 10% cash allocation
in the Cazenove Multi-
Manager Diversity Fund
is held in dollar deposits,
while Gray has exposure
to a range of currencies.
With the return coming
from the currency, the key
in this situation is not to
take too much risk with
the capital.
Both Potter and
McDonald use their own
in-house treasury functions
to manage their cash holdings,
which provide them
with instant access. For
ALTERNATIVES MONEY MARKET FUNDS
Name M’star Fund 1-year 3-year 3-year 3-year 3-year 3-year Launch
Rating size (£m) chg (%) chg (%) Sharpe Sortino Alpha Beta date
Premier UK Money Market Acc ����� 116.02 0.49 1.36 1.61 9.33 0.12 2.8 21 Aug ’89
GLG Cash Institutional ����� 70.22 0.4 0.76 -0.18 -0.5 -0.28 1.57 16 Apr ’98
IP Money ���� 67.52 0.54 1.63 1.18 3.81 0.49 2.16 25 Jul ’94
Henderson Money Market UT ���� 78 0.48 1.03 0.63 2.03 -0.15 2.43 30 Nov ’98
Aberdeen Cash A Acc ���� 103.95 0.48 0.88 0.57 1.47 -0.06 0.9 17 Nov ’06
Source: Morningstar
Characteristics of money market funds
Short-term money
market funds
Money market funds
NAV Either stable or fluctuating Fluctuating
Required security � 397 days � 2 years, provided
maturity next interest rate reset
date is in � 397 days
Weighted average
maturity
� 60 days � 6 months
Weighted avg life � 120 days � 12 months
Credit ratings Instruments must hold Instruments must hold
one of the two highest one of the two highest
short-term credit ratings short-term credit
(A-2/ P-2/F2 or above) ratings (A-2/P-2/
F2 or above); in
addition, sovereign
issuances are
permitted down to
investment grade
Permitted to hold Yes, short-term money Yes, short-term money
other collective market funds only market funds or
investment
undertakings?
Source: JPMorgan
money market funds
Gray, where the decision
is more to create a longterm
defensive positioning
of the portfolio, he also
uses short-dated corporate
debt and investment grade
sovereign debt funds.
Dance has found some
alternative solutions for clients.
He says: “For one
client we have written a
bespoke structured product.
It is only a one-year
note and returns a defined
quarterly amount. It has
a lot of protection built
in but has just enough
‘oomph’ to make it more
worthwhile than a cash
account or money market
fund in this environment.
If we return to an environment
where reasonable
returns can be achieved
from either cash accounts
or money market funds,
we will revise the way we
manage cash.”
l Short is sweet
If an investor believes in
the doomsday scenario, the
distinction between shortdated
and ordinary money
market funds is meaningful.
Short-dated money market
funds will have a narrow
range of instruments so
should be safer than other
money market funds.
They also offer exposure
to a range of counterparties,
minimising counterparty
risk for cash investors.
But for many, the problems
with money market
funds are more far-reaching
and they have sought other
cash solutions.
Even when returns
are marginal you
have to do a lot of
due diligence, often
the funds are making
racy investments to
create meaningful
returns
SUMMARY
The IMA has introduced
a new Short-Term Money
Market sector to bring the
definitions of such funds in
line with continental Europe.
Hopefully the move will help
investors who are still nervous
about the security around
asset-backed and floating
note providers.
Another consideration for
investors is how best to use
an active asset allocation in
cash to generate inflation-plus
returns.
JANUARY 2012 [www.portfolio-adviser.com] PORTFOLIO ADVISER
“
”
John Dance, co-principal,
Vertem Asset Management
39
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