Tipping the Balance: present and future for MMFs

by Helen Sanders, Editor

This month brings Remembrance Day when we think back to the victims of war over the past century. Many war memorials are engraved “Lest we forget”. Today’s conflicts in so many parts of the world suggest that we have indeed forgotten the tragedy of warfare. But as many parts of the world now start to pull out of financial crisis, are we also in danger of forgetting the lessons that we have learnt? The financial markets are returning to confidence and liquidity and some investors are starting to cast their eyes around for greater yield opportunities. For corporate investors, the past year has seen major changes, with money market funds (MMFs) proving a steadfast and reliable means of investing cash while satisfying the company’s security and liquidity objectives. Looking ahead, proposed regulation should make it easier for investors to identify the MMFs that meet their investment objectives.

MMFs remain an important investment vehicle, but investors are seeking the more balanced investment portfolio that prime funds represent.

Commentators often cite the growth in assets held  in  MMFs over the past year almost as a validation of their quality and suitability for corporate investors. This view tends to ignore the initial reaction to the Reserve Fund ‘breaking the buck’, which was to move away from MMFs, particularly in the United States, although confidence returned quite quickly. The growth of government funds (i.e., MMFs exclusively comprised of government debt) immediately following the crisis has been described as a ’flight to quality’ amongst investors as they sought investments with the lowest possible risk as the crisis shook the markets.
Duncan Thomson, Investment Director, Scottish Widows Investment Partnership summarises some of the motivation for changes in investor behaviour over the past year,

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