(March 9, 2012) — Investors are risking poor performance and failing in their governance duties when selecting money market funds, as they are not conducting adequate due diligence, pensions experts have claimed.
In a session on money market funds at the National Association of Pension Funds (NAPF) Investment Conference in Edinburgh yesterday, experts in the field outlined how investors should take more care when approaching their cash allocation.
Ian Woodall, Director at Lonkal Consulting, asked: “How much though process goes into choosing a fund manager for a money market fund compared to choosing other providers, such as equity managers and custodians?”
Woodall said often a move to cash was not a planned approach and ended up being rushed by investors. He said that due diligence had to be carried out adequately and this was often not happening.
He cited the financial collapse of Iceland and other significant instances that had hit global markets that had impacted these funds and said investors should be aware of where their ‘cash’ was being held.
“It’s not just about credit ratings, investors need to look at a range of factors before choosing a fund. There are also performance benefits to due diligence.”
Jim Fuell, Head of Global Liquidity for EMEA at JP Morgan Asset Management, added that ‘all money market funds are not created equal’ and investors should be able to tackle the differences between them.
Fuell said: “Investors should understand the criteria of different ratings agencies, as each rates differently.”
He outlined how AAA-rated could take different factors into account when cited by different agencies and investors should be aware.
He added that regulation in the money market fund space meant the ‘cost of liquidity’ would go up so investors should take stock of what cash they really needed before allocating to the asset class.
Woodall at Lokal added that yield was not a key consideration when choosing a money market fund.
He said: “Hopefully, people won’t forget to look at the fundamentals and that yield isn’t a key consideration,” adding that having access to cash flow was more important than yield and prudent investors should hold themselves back rather than rushing headlong into decisions.