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Funds rise in prominence in Europe as treasurers benefit from earning an enhanced yield on surplus cash Back  
Liquidity funds have been a popular investment tool in the US for over 30 years, and the market for this niche treasury product has grown to over $2 trillion. Now, such products are becoming available in Europe, writes John O’Farrell, and are an attractive tool for treasurers looking to earn an enhanced yield on their surplus cash, whilst enjoying same day access to those funds.
Time was when those charged with managing treasury in medium and large-sized companies really did not have all that many options at their disposal. They either placed their surplus cash on deposit, accepting a negligible interest rate to ensure immediate access to their cash or locked away that cash for fixed periods to receive the benefit of a higher interest rate. However times have changed, corporate treasurers have become much more sophisticated and demanding of their banks, and the idea of the plain vanilla ‘one size fits all’ treasury product is well and truly past.
Sure, plain vanilla low interest deposits still exist, but corporate treasurers managing multi-million USD, GBP and Euro cash balances now also have a wide variety of interest rate and exchange rate-linked structured products at their disposal which are tailored to a company’s specific requirements.

Liquidity funds – a brief history
Four years ago Bank of Ireland Global Markets was the first Irish Bank to introduce an instrument which was a basic tool for corporate treasurers in the United States – liquidity funds. In essence, liquidity funds are managed funds where treasurers can place their surplus cash with the aim of earning an enhanced yield whilst enjoying same day access to those funds.

Liquidity funds have been available in the United States for more than 30 years and the market for this niche treasury product has grown to over $2 trillion. Given their success in the US, there is huge potential in the European market for liquidity funds, where currently there is c. $300 billion invested in such funds. Bank of Ireland is well positioned to support this demand for a product that satisfies three core demands- liquidity, security and yield.

The consolidation of European markets, the easing of the regulatory hurdles and the introduction of UCITS legislation has meant that European money market product providers can now bring treasury products to market with greater ease. Bank of Ireland Global Markets remains the only Irish provider of this niche treasury product for corporates, multinationals, asset managers and financial institutions.

The Bank of Ireland USD liquidity fund established in 2001, followed by the launch of the Euro and GBP funds in 2004, have performed exceptionally on a consistent basis. The USD fund’s performance was recognised when awarded iMoneyNet’s top performing fund in 2003 and achieving second place in 2004. All three funds benefit from an Aaa rating by Moodys rating agency and achieve superior yield through a proactive and experienced team of fund managers.

Using liquidity funds treasurers are able to achieve three core cash management objectives – liquidity, security and yield.

Investors in liquidity funds enjoy daily liquidity to meet immediate cash needs. At Bank of Ireland, investors in the top-performing USD fund can access their funds prior to a cut-off time of 2.00pm while investors in the more recently established EUR and GBP funds have a cut-off time of 12.30pm.

These late cut-off times are especially attractive for treasurers allowing them to manage their cash management requirements throughout the morning and then deal later in the day.

Security is achieved by the funds – which are in effect an investment in a UCITS security – through their Aaa ratings from Moody’s rating agency. These ratings are only obtained and maintained by ensuring that the management of the funds follows strict criteria. They are closely monitored by the rating agency and specifically by ensuring that the maximum weighted average maturity of the funds is less than 60 days.

Liquidity and security are hugely important factors, but they count for little unless treasurers are able to generate a higher yield than they would earn in the cash markets. There is little point putting surplus cash into a liquidity fund if the return is significantly less than can obtained in cash deposits and here investors need to closely analyse the 150-plus liquidity funds on the market to see who is providing the best return.

Bank of Ireland are pleased to announce that their USD liquidity fund is the top performing liquidity fund year to date, competing against 150 other funds– offered by most of the large global investment banks. The fund also outperforms USD 1 week LIBID, the industry benchmark. Less than a year after Bank of Ireland introduced their EUR and GBP liquidity funds, both of these funds are ranked number 2 and again offer yield pick-ups against both our competitors and against the LIBID benchmarks.

The assets in Bank of Ireland Liquidity Funds are invested in floating rate notes, fixed rate instruments, commercial paper, certificates of deposit and cash deposits. The funds are actively managed by a specialist team of dealers switching funds between the various assets to generate the optimum yield.

The future
With more than €650 million equivalent under management in our three liquidity funds – and with our team of experienced dealers consistently generating strong returns that put them in the number one and number two positions in the world, Bank of Ireland has ambitious plans for this niche treasury product.

The next target is to increase funds under management firstly to €1 billion, a landmark that would give our funds the scale and market presence where they will become a required part of many corporate treasury portfolios. From there, the target is to reach €1.5 billion funds under management by mid-2006, a figure that would consolidate Bank of Ireland Global Markets’ position as a primary provider of liquidity funds to corporates.

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