BlackRock: Test of Quality - Joanna Cound and Stuart Niman

In the midst of financial market turmoil, fund managers working on behalf of corporate treasury departments must demonstrate that their triple-A rated money funds can pass the quality test, Joanna Cound and Stuart Niman, BlackRock Asset Management, explain to FDE.

The motivation for treasurers to put excess liquidity into triple-A rated money market funds has typically been to focus on security first, followed by same-day liquidity, then yield. Given the highly stressed financial markets, security has become paramount, pushing CFOs to demand that their treasurers scrutinise, explore and dig deeper to ensure that the composition of the fund in which their liquidity is housed is safe and secure.

‘More clients want to see the portfolio holdings, so we now disclose our holdings more quickly,’ says Joanna Cound, managing director and chief operating officer for the international cash business of global investment manager BlackRock. ‘They can take comfort in the quality of the names in their portfolio. Many treasurers realise that they can’t adequately identify, measure and price risk in the way that we can; as a result they have turned to triple-A rated money market funds, but have become much more probing and savvy in the questions they ask.’

BlackRock is one of the world’s largest publicly traded investment management firms with assets of US$1.26 trillion (26 September 2008). It has a large global cash business, contributing almost a quarter of total assets under management. Their cash business outside of the Americas has seen impressive growth in the last year, with assets increasing by 65% in the last year to 31 December 2008.

BlackRock’s size and reputation gives it excellent access to issuers and market information, as well as the ability to trade on a large scale. It is this combination and a cautious risk management style that enables BlackRock to provide treasurers with the security and same-day liquidity they need. BlackRock has a broad range of funds encompassing AAA-rated money market funds and enhanced cash funds, and it has recently launched some government liquidity funds.

AAA growth

The AAA-rated money market fund industry saw strong growth in 2008 as investors looked to outsource their cash management to ensure they were controlling their risk adequately.

Furthermore, there has been a trend towards nervous investors moving their enhanced funds to AAA-rated money market funds. There is a number of specific reasons for the rapid growth that BlackRock has seen in this sector, primarily because of its track record in credit analysis and risk management, as well as its proactive approach to client communication.

‘Our AAA-rated money market funds are designed for investors looking for capital preservation and we manage the funds in such a way that we only ever include very highly rated and liquid securities in the portfolio,’ says Stuart Niman, managing director and fixed income portfolio manager at BlackRock. ‘We could not have had a more extreme test than the subprime fallout and the failure of investment banks such as Lehman Brothers. We got through that intact by doing what we have always done. AAA-rated money market funds all aim to offer security and liquidity, but due to our first-rate risk management capabilities we have constantly taken a defensive approach.’

Credit clarity

Regular disclosure to clients highlights the rigour of BlackRock’s credit analysis team. Over 50 analysts worldwide look at investments across all asset classes, and unanimity on issuer and tenor is required prior to inclusion on the ‘approved list’.

‘It is not a majority vote and that is very important if you want to maintain capital,’ explains Niman.

The decisions that result in that list are based on thorough quantitative and qualitative analysis, as well as the experience of the analysts after direct communication with management teams at the issuer.

‘Our philosophy and criteria have not changed,’ adds Cound, ‘They are underpinned by the transparency we demand when we assess issuers.’