by Jonathan Curry, Head of European Cash Management, Barclays Global Investors, and James Finch, Head of Liquidity Sales, EMEA, Barclays Global Investors
The recent market turmoil, the origin of which can be traced back to the US sub-prime mortgage market, has created new challenges for clients with large cash balances to manage. As investment funds and banks around the world have been impacted, investors are becoming increasingly cautious regarding where and how their cash is invested.
Seeking safer havens
Investors in Europe have reacted swiftly to the onset of this liquidity crunch, seeking safer homes for their cash investments. Assets perceived as likely to provide a greater level of protection from the contagion have enjoyed greater demand.
The need to diversify risk within cash investments has emerged as a clear theme and has become a more significant driver of investors’ decisions. The underlying motivation is the realisation that the path of contagion has been difficult to predict. In other words, it has been difficult to foresee which assets or individual issuers could be hit next by a crisis of confidence.
As even the top-tier of the global banking sector has fallen victim to the decline in market liquidity and confidence, investors’ appetite for risk in their cash investments has moved firmly into conservative territory. Where investors had previously sought a greater yield, their focus shifted dramatically during 2007 to investing in lower-risk and more stable assets.
As a result, AAA rated money market funds, have seen a significant increase in assets under management in 2007 and 2008. This growth has been underpinned by a key characteristic of these money market funds, namely their ability to maintain stable net asset values before and, more importantly, during periods of extreme market volatility.
Maintaining a stable net asset value ensures that the capital invested in the fund is preserved and this remains the central factor motivating an investor’s decision to use this type of liquidity fund as the home for their capital.
Focus onn AAA rated money market funds
AAA rated money market funds are mutual funds that invest in a range of high quality money market instruments including overnight deposits, commercial paper, certificates of deposit, fixed and floating rate instruments.
They provide the benefits of pooled investment, as investors can participate in a more diverse and high-quality portfolio than they otherwise could individually. AAA rated money market funds are actively managed within rigid and transparent guidelines to offer safety of principal, liquidity and competitive sector-related returns.