Cash & Liquidity Management

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Choosing a Genuine Safe Haven for Your Cash An increased focus on security and liquidity - Until the credit crunch of late summer 2007, markets were awash with cheap money. The resulting yield compression led risk to be significantly undervalued. Now as the fallout of the recent credit crisis continues to affect the markets and the financial system, investors have rediscovered the importance of security and liquidity and are now seeking a safe haven for their cash.

Choosing a Genuine Safe Haven for Your Cash

An increased focus on security and liquidity

Until the credit crunch of late summer 2007, markets were awash with cheap money. The resulting yield compression led risk to be significantly undervalued. Now as the fallout of the recent credit crisis continues to affect the markets and the financial system, investors have rediscovered the importance of security and liquidity and are now seeking a safe haven for their cash.

Choosing the right money market fund

Triple-A rated money market funds (MMFs) that are members of the Institutional Money Market Fund Association (IMMFA) are a convenient, secure and highly liquid safe-house for corporate cash, and many more companies are recognising the advantages of these investments, evidenced by the significant asset growth of these funds (fig 1). IMMFA provides the ‘gold standard’ for MMFs in Europe, but a difficulty for investors is that the term ‘money market fund’ covers a wide range of funds which are not equivalent in their asset security, diversification and the investment process employed by the fund manager.

When considering possible money market fund investments, it is vital that investors apply a series of key criteria to selecting a provider. These include:

The size of the fund: Has the fund sufficient assets to provide daily liquidity? Few companies enjoy entirely predictable cashflow, so cash has to be readily available to cover unforeseen circumstances. Although many funds will promote same or next-day settlement, MMFs with a small asset base will not be in a position to deliver on this commitment. Investors need to be satisfied that the size of the fund is sufficient both to deliver the liquidity it promises and achieve yield-enhancement through its economy of scale.

Diversification within the fund: There are two elements of diversification which are important for investors - asset diversity and investor diversity. Investors have become increasingly focused on the assets underlying the fund since the credit crisis first hit, and are seeking greater reassurance in the quality of the assets. However, it is also essential from a liquidity and security perspective that the fund has a sufficiently diversified investor base. A fund that is too reliant on one or few large investors is inherently less attractive than a broader investor base, ideally across different industry sectors, as a narrow investor base increases the potential for large-scale redemptions that will inevitably reduce liquidity, security and performance of the fund.

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