Fitch Ratings released a study yesterday entitled, "Assessing and Comparing Risks of Money Market Funds," which "summarizes the main risk factors Fitch Ratings considers when analyzing and surveying money market funds." The factors include: "periodic review of the fund's investment policies and procedures," "frequent reviews of other key fund metrics, including an up-to-date review of portfolio holdings," "ongoing communication with the fund's portfolio manager and support staff, including periodic formal on-site reviews," and, "consideration of the fund sponsor's role in terms of strategic commitment, operational support, and financial resources."
Fitch says about monitoring MMF Investment Policies and Procedures, "Key parameters of a fund's investment policies and procedures, as well as a description of its objectives and fundamental strategy, can normally be found in the fund's prospectus and offering documents. However, critical information often can only be acquired through direct dialogue with a fund's portfolio management team."
They add, "Market or fund-specific events may, from time to time, cause rated MMFs to deviate temporarily from internal investment guidelines and/or Fitch criteria. For example, a downgrade of a portfolio security may breach the fund's minimum credit quality guidelines or a large cash outflow may increase a fund's single obligor exposure or impair available liquidity. In such cases, Fitch communicates with the fund advisor to understand the nature of such a deviation and whether mitigating factors exist."
The publication says, "Ongoing active surveillance of MMFs is an important part of the rating process, as MMF risk profiles can change rapidly due to redemption activity and portfolio turnover or other factors. Fitch requests and reviews surveillance information, including portfolio holdings on an ongoing basis, normally weekly.... In addition, frequent monitoring highlights any shifts in portfolio composition, which may reflect changes in the investment advisor's views on credit, liquidity, or interest rate risks or shifts in investor preferences that could result in unexpectedly high redemption activity."
On "Fund Management <b:>," they comment, "Fitch seeks to evaluate the degree to which the organization has a well-defined, consistently implemented credit research, asset selection, portfolio investment processes, and operational practices. For example, a meeting with a prime MMF portfolio management team would entail a review of an approved list of issuers and counterparties, a discussion of permitted asset classes, and anticipated changes in the portfolio composition given an expected level of interest rates and credit environment."
The report adds, "Considerations related to liquidity risk management include the nature and concentration of fund shareholders, which are used to evaluate the likelihood that unexpected redemptions could lead to forced asset liquidations. Additionally, the liquidity of portfolio securities in secondary markets, as well as any alternative sources of liquidity a fund may have access to, is also considered. Alternative sources of liquidity include but [are] not limited to external credit facilities with the fund's custodian banks or other third parties and interfund lending arrangements."
Note that Fitch co-author Viktoria Baklanova will present, along with Moody's Marty Duffy and Capital Advisors' Lance Pan on "Analyzing Fund Portfolios & Holdings the afternoon of July 27th in Boston at this month's Crane's Money Fund Symposium.
