BlackRock: Making Sense of MMFs - Joanna Cound
The economic tumult of recent weeks has been a testing time for institutional investors. Throughout this time, however, investors in money market funds have continued to benefit from capital preservation, liquidity and a competitive yield, BlackRock’s Joanna Cound tells FDE.
When looking at investment alternatives for short-term cash management, investors have a variety of options, ranging from treasury funds for the more risk averse, to traditional stable Net Asset Value (NAV) money market funds, to enhanced funds for those seeking a greater return potential.
Institutional Money Market Fund Association (IMMFA) represents the providers of stable NAV, AAA-rated money market funds that are recognised as providing investors with safety for their cash – offering daily liquidity combined with preservation of capital.
These funds tend to be extremely liquid, investing in high-quality, short-dated assets, which are generally held to maturity and mature at par. Because of these factors, IMMFA funds have seen impressive growth in recent years from a little over €100 billion in 2003 to over €400 billion at the end of September 2008.
Turbulent times
Even during the unprecedented turbulence of September 2008, euro and sterling IMMFA money market funds maintained very stable flows. Dollar IMMFA funds saw greater outflows but, despite the extreme stresses in the credit markets, continued to provide liquidity and capital preservation.
The BlackRock Institutional US Dollar Liquidity Fund, for example, ended September with an AUM 55% higher than at the start of 2008.
‘Through a single investment in one of BlackRock’s Institutional Liquidity Funds, you get exposure along the yield curve. Risk is diversified across approximately 60-120 counterparties, minimising exposure to a single institution, which is important as financial markets get stressed,’ says BlackRock’s Joanna Cound.
‘We are seeing increased investment from institutions seeking to avoid exposure to the balance sheet of a single or a small number of counterparties.’
Smart investment
‘In addition, many sophisticated investors, including corporates, hedge funds and other institutional investors, have come to the conclusion that they cannot differentiate adequately between good and bad credit risk. That is, they cannot identify, measure and appropriately price credit, liquidity and spread risk,’ observes Cound.
‘Many relied on credit ratings, but realised early on in the liquidity crisis that not all A1/P1 paper behaves in exactly the same way. Therefore, they are asking more detailed questions on credit criteria and credit process and, more specifically, whether a fund has changed either of these because of the liquidity crisis.’
‘Investors should not be afraid to probe managers on their investment and credit processes in order for them to be 100% comfortable with their investment decisions. IMMFA funds attempt to avoid a single negative day’s performance – this is particularly relevant in today’s environment.’
Treasury products
In spite of the benefits of traditional stable NAV money market funds, some institutions have preferred government backed securities during troubled times. In light of this, BlackRock has launched a US Treasury Fund – which gathered over $1.5 billion in the first two weeks of launch – and will launch a European Government Liquidity Fund in the very near future.
Many institutional investors are asking questions given the various measures taken by governments across the world in the past few weeks. Cound comments: ‘BlackRock regards such measures as broadly positive as they help stabilise money markets, increase liquidity and continue to restore investor confidence.’
