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A Deeper Look: Establishing Proper Due Diligence for Liquidity Investment

Establishing Proper Due Diligence for Liquidity Investment

by Kathleen Hughes, Head of Global Liquidity EMEA, J.P. Morgan Asset Management

All funds are not the same

Over the past decade, money market funds have gained significant ground across Europe as a flexible, secure and rewarding alternative to bank deposits. Over the last five years alone, annual net inflows have averaged EUR52bn a year, with uptake dominated by financial institutions, corporates, sovereign wealth funds and pensions (source: iMoneyNet, 30 April 2009).

During this period of growth, money market funds have – like deposits themselves – largely been treated as a commodity. Yield has often been viewed as the key differentiator, followed by a fund’s credit rating. Beyond this, little attention has been generally paid to the internal mechanics of funds or the institutions that manage them.

But as recent events in credit markets have shown, all liquidity funds - even AAA-rated ones - are not built the same. Factors such as what a fund invests in, how it is constructed and who it is managed by, have been shown to have a real and significant impact on the performance, liquidity and security of investor capital.

Credit rating agency Moody’s reports that, in the US, 36 money market funds registered under SEC Rule 2a-7 had to be supported by their sponsors in 2007/08 to avoid their net asset value (NAV) falling below USD 1/share as the value of certain underlying investments were wiped out.