As we mentioned in yesterday afternoon's "Link of the Day," BlackRock's Mark Rimmer just posted an article on European Treasury website GTNews, entitled "Guide to Money Market Funds - Part I: The Current Landscape". The piece describes events and asset growth in the U.K., European and "offshore" money market fund space, but we particularly enjoyed Rimmer's comparison of money market mutual funds vs. bank deposits.
Rimmer writes, "When the money market turbulence first erupted in August 2007, many European investors favoured bank deposits because they felt that they understood exactly where their risk lay and that the associated risk would be lower than if they invested in a triple-A rated money market fund (MMF). Some investors were nervous about MMFs without really understanding them and the benefits of the fund structure. The tide has since turned, as the recent flurry of write-downs from banks has made investors wary of the concentration risk of having their precious cash invested with a small number of banking names, preferring instead to invest in a triple-A rated MMF that spreads their exposure over a very large number of issuers (50-100)."
He adds, "As the market turbulence spread, investors looked for more secure and effective ways to manage their cash and short-term investments. This resulted in a 20% increase of assets invested in triple-A rated, treasury-style MMFs in the second half of 2007 alone."
When comparing bank deposits and money funds, Rimmer cites the following differences: "Concentration risk: Bank deposits concentrate risk 100% in one banking name while MMFs diversify risk across at least 50-100 highly rated, short-term issuers. Credit risk: An IMMFA MMF is triple-A rated by one or more credit rating agency; most banks are rated AA or lower. The credit crisis has exposed significant risk on banks' balance sheets.... The market has witnessed billions of dollars of write-downs, and expects total write-downs related to the sub-prime problem to be at least US$400-500bn, split between both investment and deposit-taking commercial banks."
In addition, Rimmer also cites these differences: Ring-fencing of assets: Most MMFs are Undertakings for Collective Investment in Transferable Securities (UCITS) compliant and are thus standalone entities in their own right. Their assets are entirely ring-fenced from their parent investment manager and from the custodian. In contrast, by investing in a bank deposit, an investor is effectively placing its cash on a bank's balance sheet." And, finally, "Independent scrutiny of portfolio: The rating agencies scrutinise a money fund's portfolio on a frequent basis to ensure the mark-to-market value could support a full redemption of assets. They also ensure that certain other investment requirements (minimum of 50% of the portfolio invested in A1+/P1, the balance in A1/P1, maximum maturity of any one security of 13 months and issuer concentration limited to 5-10%) are being followed to attain or retain a triple-A rating."
