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Friday, 14th August 2020
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Money market funds - an alternative home for surplus cash Back  
Security, liquidity, performance and convenience are the tenors of Money Market Funds, which have seen major growth in Europe over the past couple of years. Rachel Killeen, Ulster Bank Financial Markets looks at the benefits of these AAA pooled investment companies, which have attracted enlightened corporate and institutional investors.
While Money Market Funds (MMFs) have been common place in the US since the mid 1970s, it is only recently that their popularity in Ireland, the UK and Europe has developed. With up to $1.7 trillion placed in money market funds in the US and around the globe, Money Market Funds are increasingly attractive to Irish based investors.

No, they will not render Corporate Treasurers superfluous. Yes, they are tax efficient. No, there has never been a default of an AAA-rated Money Market Fund. Yes, funds may be redeemed fast and without penalty. Reassuring answers but where do MMFs fit with your portfolio?

At a time of diminishing returns on many markets and increasing pressure on margins and profitability, corporate investors are eager to take advantage of products that offer security of capital, top investment ratings, ability to redeem funds quickly and strong returns. Money Market Funds have all those benefits and in addition they are highly convenient, offering an opportunity to outsource management of your surplus cash.

For European investors, the prime method of determining security of a MMF is the allocation of ratings - invariably triple-A. The AAAm rating means that ‘Safety is excellent. Superior capacity to maintain principal value and limit exposure to loss’. Source: Standard & Poor’s. This rating is important and is in fact higher than that of the equivalent rating of the majority of the world’s banks, giving comfort to investors. The prime objective of MMFs is to preserve the principal value. They achieve this by investing in a diversified portfolio of high grade A1 or better short-term money market instruments.

Liquidity is the second benefit. Investors have access to their funds on a daily basis, similar to overnight bank deposits - which means no penalty charges for redeeming funds when required.

According to legislation, for Irish based investors, the minimum initial investment and holding amount for a Money Market Fund is E250,000. For corporates seeking performance for amounts as small as this, MMFs are ideal - allowing a pooling of investment amounts to achieve greater returns. Even for very large treasuries, the process of diversification and performance achievement can be time consuming and MMFs overcome many of the difficulties involved in placing, monitoring and managing funds on the money market.

Probably the greatest advantage of MMFs is the convenience element. Instead of toiling over rollovers and seeking out short-term instruments, you can just park your funds in a Money Market Fund and call on the funds when you need them. Advantageous to the corporate treasurer are both the cash and time management aspects - outsourcing the investment part, but still benefiting from solid returns and regular management reports on performance of the Funds. This leaves the treasurer to concentrate on other management fundamentals - dispensing with the rate seeking, administrative function.

MMFs are promoted to all sizes of business ranging from SMEs, corporates and institutions to multinationals using the product in the US and needing to manage short-term cash abroad.

While there is little differential between Money Market Funds, distinction comes down to a few key factors. For companies wishing to invest in this product, seek a well established fund, ensure that the minimum holding and dealing amounts suit your particular needs and that the fund’s size will not restrict the levels of cash you may wish to invest. Also, Money Market Funds can be structured as either distributing or accumulating, so it will be necessary to consider the tax implications of investing in either type.

In order to achieve the AAAm rating, funds maintain an average maturity of less than or equal to 60 days and compliance with minimum diversification limits. Funds with greater than 60 day WAM are likely to carry a less secure rating, instead offering the Fund Manager greater opportunity to exploit the yield curve. The strength and reputation of the Investment Managers are also worth noting. Finally, service is important so ensure that reports are readily available and that withdrawal notice time scales meet your requirements.

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