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The Continuing Popularity of Constant NAV Money Market Funds

by Joanna Cound, IMMFA Distribution Committee Chair

Money market funds are used by institutional investors as a treasury management solution for short-term cash balances. They are designed to deliver security of capital and liquidity, and allow investors to benefit from professional cash management services. Their usage tends to increase when investors need greater security or certainty of the liquidity of their investment. In Europe and the US, total balances invested in money market funds peaked in Q2 2009 and Q1 2009 respectively. Since that time, there has generally been a steady outflow of cash, as the appetite of investors for yield returns, and banks have begun to actively seek additional deposits. However, contrary to this general outflow, balances invested in the money market funds represented by the Institutional Money Market Funds Association (IMMFA) funds have continued to increase. Indeed, since the inception of the Association in 2000, the total assets managed by IMMFA funds have increased every year. Whereas other parts of Europe have been witnessing an outflow of assets since Q2 2009, IMMFA funds have grown by 9%. How can that be? What makes IMMFA funds so different from their continental counterparts?

Benefits to investors

Money market funds have increased in size over the years because of the fundamental benefits they provide to investors. All money market funds seek to provide security and liquidity, and the provision of these two objectives is partly achieved through the diversification of risk which a collective investment delivers. Money market funds therefore provide a viable short-term cash management solution, with access to professional cash managers. Constant net asset value (NAV) money market funds also have an additional benefit: by maintaining a constant value, the accounting and taxation rules which are applicable to any investment in such a money market fund are simplistic, more so than any investment which changes in value. If a treasurer invests a pound in a constant NAV money market fund, the proceeds upon redemption should be exactly that: a pound. This simplicity eases the administrative burden on investors, thereby increasing their attractiveness.

Constant NAV money market funds offered by IMMFA members also benefit from having a triple-A rating from one or more of the independent credit rating agencies (Fitch Ratings, Moody’s Investors Service and Standard & Poor’s). This rating is an independent opinion on the ability of the fund to provide security and liquidity, with the triple-A rating being the highest which can be awarded. This is further supporting evidence that IMMFA funds are able to deliver against their objectives.

Global coverage

Given these benefits which IMMFA funds provide, they are used by a variety of investors from across the globe. This breadth in both the type and location of investors is testament to the success of the product in delivering against its objectives.