Money Market Funds and Credit Research
by Mark Stockley, Managing Director and Head of International Cash Sales, BlackRock
In today’s complex and fast-changing markets, prudent risk management is more important than ever, including understanding the source of investment risk and ensuring it is appropriate for each portfolio. Credit risk is the risk that a security’s value will change due to a ratings downgrade or, in a distressed case, default of the security. For cash investors, the events of the last few years have undermined the very notion of ‘risk-free’. It has never been more important to find cash management solutions that fulfill the requirements of investors who have a highly conservative outlook for their cash.
Knowing that every holding within a money market fund (MMF) portfolio has been carefully selected and researched is key to giving investors peace of mind in this current environment. With the assistance of a strong credit analysis team MMF providers can ensure that the most conservative investments are made to meet one of the key features of MMFs – stability of principle.
There should be a collaborative process for creating the approved lists that govern how a portfolio manager can invest. To earn the place on an approved list a thorough review of each issuer should be made with restrictions imposed on maturity.
The risk management team and credit analysts must work with portfolio managers while remaining independent from them. This allows risk managers to remain unbiased in their recommendations and portfolio managers can make more precise and informed decisions. Ultimately the credit analysts have the final say and should be constantly reviewing the approved list, with the ability to easily remove a name should the situation require.
The use of a strong risk analysis technology is also key to ensuring proper credit research and investors should check their providers have this in place.