by Jonathan Curry, IMMFA Technical Committee Chair
When investing cash, investors seek to preserve the security of their capital. One of the principal determinants of whether any investment is able to maintain capital value is the credit quality of that investment. With this in mind, and based upon recent experiences, investors in money market funds should now have a greater interest in credit risk and how this risk is managed.
Money market funds provide a viable means of outsourcing short-term cash management. One advantage of these funds is the dedicated resources employed by the fund manager, which will include credit analysts. The depth of these resources is often significantly greater than that which could be accessed by the investor, meaning that investors in these funds benefit from additional credit capabilities.
To understand how credit risk is managed, an investor can review the credit analysis process that is performed by the money market fund manager. Whilst the detail of any credit assessment will vary by fund manager, there are some generic aspects which are relatively consistent. An overview of these aspects is provided below, and further information on the specific process employed can always be obtained directly from any fund manager.
Credit assessment is one of the factors considered when selecting instruments for inclusion in a money market fund. Before providing an overview of the credit assessment process, let’s define what credit risk is.