Published: June 01, 2008
In late 2006, it was probably fair to say that most people had little idea what a sub-prime mortgage was, and even less that any problems with them would cause massive knock-on problems. Today, it is difficult to avoid the subject. The sub-prime mortgage market was not necessarily the cause of today’s increased volatility, but more a symptom of a market where a combination of decreasing risk aversion and massive leverage created a fragile equilibrium.
The past twelve months have seen a marked increase in investor nervousness, particularly since the start of 2008. In this environment, investors not only tend to increase their exposure to ‘safer’ assets, but also look for reassurance that their lower-risk investments really are lower-risk.
Cash and cash-plus investments are naturally interesting at present. With the exception of government bonds, the past few months have seen falls in all major asset classes, including equities, property, corporate bonds and emerging market debt. While we believe that these falls have been indiscriminate in some areas, leading to several attractive opportunities, there will undoubtedly be further volatility and investors will be looking to minimise the impact of this on their portfolios.
However, in addition to a cyclical increase in attention, these areas are also seeing a secular increase in demand. Companies have become much smarter about maximising returns on all assets, even short-term cash holdings, and there are now a number of liquidity fund ranges that offer one-week LIBID/LIBOR-type returns. In addition, the growing use of Liability-Driven investing (LDI) strategies is also prompting demand for LIBOR-based returns vehicles, as the swaps used to hedge interest rate and inflation risks are usually funded by 3-month LIBOR.
LIBOR stands for the London Interbank Offered Rate and is the rate of interest at which banks borrow funds from each other, in marketable size, in the London interbank market. It is perhaps the most widely used reference rate for short-term interest rates.
These rates are produced by the British Bankers’ Association (BBA). The BBA maintains a reference panel of at least eight contributor banks. These banks will be selected on the basis of reputation, scale of market activity and perceived expertise in the currency concerned. The BBA takes quotes from the panel members and ranks these. The top and bottom quartiles are eliminated and the average taken of the middle two quartiles. This rate (known as a spot fixing) is the LIBOR rate. LIBOR is a short-term interest rate deposit rate and is only calculated up to a maturity of 12 months, as the liquidity in the London interbank cash market dries up after a one year maturity. [[[PAGE]]]
At Insight Investment, we recognise the growing importance of cash and enhanced cash and cash plus strategies. We are one of the largest cash management firms in the UK, looking after over £15 billion* and have developed a range of funds that offer different return profiles.
At the heart of this range are our ILF Liquidity and ILF Liquidity Plus Funds which offer investors an attractive alternative to short-term deposits by targeting 7-day LIBID or 3-month LIBID returns in sterling, euro or US dollar terms. In addition to generating an appropriate return, capital preservation and consistency of returns are key considerations. These funds hold Standard & Poor’s highest AAAm money market fund rating, and have certain constraints in terms of the instruments and exposures they can take. In April, Moody’s Investors Service also assigned its highest rating:
Aaa/MR1+ to the Insight Sterling Liquidity Fund, the Insight Euro Liquidity Fund and the Insight US Dollar Liquidity Fund.
The liquidity funds are managed by Insight’s award-winning Fixed Income team, which consists of 52 professionals with an average of 11 years’ experience. With FI assets under management of £73.9 billion*, the team manages portfolios in government bonds, corporate bonds, high yield, leveraged loans and money markets.
Using LIBOR-based strategies is about far more than cash. We also offer complementary funds that invest in a wider range of fixed income securities and derivatives and, in some instances, equities and other asset classes. The breadth and diversity of this LIBOR Range means that any investor risk / return profile can be met. Investors with longer time horizons and increased risk tolerances can therefore target returns of up to 6% over LIBOR.
In the current environment, integrated cash and cash-plus solutions offer investors an enticing prospect: a reasonable degree of capital security coupled with excess returns and low volatility. While market conditions are adding to short-term demand for these vehicles, we predict such products are only going to increase in popularity. Cash used to be an afterthought in asset allocation, but it is now seen as an additional source of alpha. At Insight, we believe that we have built the platform and scale to maximise the potential benefits of this asset class.
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