Frequently asked questions
This section answers commonly asked questions about money market funds. It is divided into 4 parts:
ABOUT MONEY MARKET FUNDS
What is a money market fund?
A money market fund is a mutual fund, authorised under the UCITS Directive, that invests in short-term debt instruments.
What is different about IMMFA members’ funds?
IMMFA represents the principal providers of money market funds in Europe. All IMMFA funds are triple-A rated by one or more of the ratings agencies such as Fitch Ratings, Standard & Poor's and Moody's Investor Service to ensure continued compliance with rating criteria. The funds therefore offer the highest level of assurance of capital preservation, and the lowest levels of susceptibility to interest rate volatility. This is recognised through the AAA/V1+ rating from Fitch, the AAAm rating from S&P and the Aaa/MR1+ rating from Moody's, with the appendage to the triple-A rating being the indication of interest rate volatility. Only this type of fund is awarded the lowest susceptibility to interest rate volatility.
IMMFA funds all maintain a constant net asset value, i.e. £1 in, £1 out. This is achieved through the use of amortised accounting, and this fund type is the only fund permitted to utilise this accounting methodology. The fund must regularly compare the amortised value with the mark-to-market value of the assets and the portfolio, and take action in the interests of investors if and when any material variance occurs.
IMMFA adopted a Code of Practice in February 2003, with the aim of ensuring that members offer a consistently high quality product and service to investors. Click here to access a copy.
There are other types of fund in operation in Europe which refer to themselves as a money market fund. Not all these funds are authorised under the UCITS Directive, and not all are triple-A rated, and none will have achieved a ‘V1+', ‘m' or ‘MR1+' rating for interest rate volatility. The structures and investment strategy of these funds all differ, and an investor should understand the intended purpose of money market funds and its objectives before investing.
Are 'enhanced cash' products the same as money market fund?
No. 'Enhanced cash' products typically seek higher yields than traditional money market funds. This is achieved through investment in longer-dated instruments, with an correspondent increase in risk. As such, these funds are not able to alter the underlying portfolio as quickly as traditional money market funds to reflect changing market conditions and investor sentiment.
Why should I invest in a money market fund?
Money market funds are designed to provide capital security - with the triple-A rating of a money market fund often being better than that attributable to a bank - and same-day liquidity with no penalty being applied. These funds can also provide a competitive yield, similar or better to that available on a bank deposit.
The combination of security of capital and same-day liquidity make them directly comparable with bank deposits. In addition, and even though yield is a secondary consideration for the money market fund manager, these funds are likely to pay a higher daily yield and enjoy a better credit rating than most daily bank deposits.
A money market fund provides an investor with diversification benefits. Whereas investment in a single bank deposit will provide credit exposure to a single institution, the diversification achieved by a money market fund - with no more than 5% of assets invested in single security - spreads the impact of any credit losses, by reducing the capacity of a single instrument to have a material impact on the portfolio in its totality.
The funds are low cost, with no up-front or redemptions fees, and allow investors access to the professional management of the wholesale money markets without incurring costs on the time or resource of the investor.
Investment in a money market fund may be treated as cash equivalent for accounting purposes, thereby assisting corporate investors in the preparation of financial statements. Further details may be obtained here.
What kind of instruments do triple-A rated money market funds invest in?
Triple-A rated money market funds invest in high-grade money market instruments. Typically these instruments will include certificates of deposit, commercial paper, floating rate notes, repurchase agreements, short-term government securities and time deposits. Managers have strict credit criteria applying to their selection of these instruments.
Commercial paper consists of short-term notes issued by a wide variety of corporations, such as domestic and foreign banks, finance companies, and specific issuers of commercial paper. Asset-backed commercial paper is a type of commercial paper, backed by a pool of assets, such as mortgages. Any commercial paper purchased by a money market fund must have received a high investment grade rating from a credit rating agency in order for the fund to maintain its triple A-rating.
Further information on ABCP conduits is available here.
The average portfolio composition of an IMMFA member's prime money market fund is shown below (figures correct as at June 2009).
What type of charges can be expected and how are they levied?
Typically money market funds levy an annual management fee but NOT an initial charge. The annual fee varies between providers. Returns are generally distributed net of this fee.
Do I own specific assets of the fund or a pro-rata share of all the fund's assets?
Money market funds are open-ended investment funds invested by a manager in a diverse range of money market instruments. As such, an investor in a money market fund has a claim on a pro-rata share of the fund’s assets in line with the number of ‘shares’ or ‘units’ that are owned.
Can money market funds be used in place of a call account for cash management?
Typically money market funds offer daily liquidity and so can be (and are) used by institutional investors for daily cash management purposes. When there is uncertainty in the financial markets, money market funds invest an increasing proportion of the fund in highly liquid instruments to ensure same day liquidity can be maintained at all times.
What is the difference between constant net asset value (CNAV) money market funds and accumulating net asset value (ANAV) money market funds?
Shares in CNAV funds are issued with an unchanging face value (such as US$1 per share). Income in the fund is accrued daily and can either be paid out to the investor or used to purchase more units in the fund at the end of the month. ANAV funds, known also as ‘roll-up’ funds, operate under the same investment guidelines as CNAV funds and income is accrued daily. However, unlike CNAV funds, income is not distributed. Instead income is reflected by an increase in the value of the fund shares
What does the ‘weighted average maturity’ of a fund mean?
The ‘weighted average maturity’, or WAM, of a fund is a measure of the length of time to maturity of all of the underlying money market instruments in the fund weighted to reflect the relative holdings in each instrument. In practice this measure is an indication of current investment strategy and is not an indication of liquidity.
The maximum WAM of an IMMFA money market fund is 60 days; the short-term nature of these funds means there is regular maturity of assets, allowing the portfolio composition to be amended quickly to reflect the needs of the underlying investors. Cashflow forecasting allows the investment manager to understand exactly when an investor is likely to need access to his cash, and thereby provide liquidity when required.
How is money market fund overseen?
All money market funds have a Board of Directors, who have overall responsibility to act in the best interests of the shareholders, and to ensure compliance with regulatory obligations. This is achieved through regular oversight and monitoring. The fund operates escalation procedures to ensure the Board is notified if and when an underlying instrument represents unacceptable credit and/or market risk to the fund. In this situation, the Board will determine the action to take which is in the best interests of the fund and its shareholders.
ABOUT THE MARKET
What is the size of the market in triple-A rated money market funds in Europe?
Assets under management for IMMFA funds were €426 billion as at June 2009, with approximately £106 billion in sterling, €108 billion in euros and US$277 billion in US dollars (figures from IMMFA Money Fund Report, published by iMoneyNet, Inc).
What level of growth has been experienced in Europe for triple-A rated money market funds?
The market in Europe has risen from under a billion dollars in 1995 to approximately US$600 billion (or €426 billion) at beginning of June 2009 (figures provided by iMoneyNet, Inc).
What is the size of the market in money market funds in the USA?
US market size at beginning of June 2009 was US$3,664 billion consisting of US$1,220 billion Retail MMFs and US$2,444 billion Institutional (figures from the Invesment Company Institute's website).
ABOUT MONEY MARKET FUND RATINGS
How is adherence to credit guidelines monitored by the rating agencies?
Although the details of monitoring procedures vary to some extent between rating agencies, there is a common underlying approach to monitoring each rated money market fund. Rating agencies require that the fund’s administrator send full details of its portfolio on a regular basis for review by rating analysts. Analysts verify that the fund’s holdings continue to comply with the credit quality guidelines.
How can a triple-A rated fund not use all triple-A rated securities?
The evaluation of credit risk involves a number of different factors, including the credit quality of individual holdings, their maturity and the diversification of fund holdings. Taking these three factors into consideration, fund managers can construct portfolios to preserve capital and protect income, and satisfy the strict criteria necessary to qualify for triple-A rating – specifically, AAA/V1+ with Fitch Ratings, AAAm with Standard & Poor's and Aaa/MR1+ with Moody’s Investor Service.
Why is a triple-A rated fund limited to a 60-day average maturity?
The weighted average maturity (WAM) of funds is specifically restricted by rating category. Triple-A rated money market funds are required to stay within a 60-day limit. The limit seeks to control exposure to shifts in interest rates and represents an optimal level derived from portfolio stress-testing analysis.
What are the diversification requirements for a triple-A rated fund?
Funds registered as UCITS must operate within the diversification requirements set out in UCITS legislation (Directive 85/611/EEC). This limits exposure to a single issuer to a maximum of 5% of fund assets (relaxed to 10% of assets in some jurisdictions, although this relaxation is subject to an overriding requirement that no more than 40% of the whole portfolio may be made up of individual holdings in excess of 5%). As part of the rating process, rating agencies regularly review the diversification of fund portfolios and will raise concerns with investment advisers should this become necessary.
ABOUT REGULATORY, LEGAL AND TAX ISSUES
Who regulates money market funds?
Non-US money market funds are not subject to a single source of regulation. Quality assurance is to a large extent provided through the fund’s rating. Money market funds that are registered as UCITS, within the EU, are subject to the requirements in UCITS legislation (Directive 85/611/EEC) and to any regulations imposed in the place of the fund’s domicile. IMMFA adopted a Code of Practice in February 2003, with the aim of ensuring that members offer a consistently high quality product and service to investors. Click here to access a copy.
What are the tax implications of using a money market fund?
The tax implications of using a money market fund will vary from user to user and depend also on the domicile of the fund. Users are urged to take expert tax advice before investing.
What is SEC rule 2-a7?
In 1983 the US Securities and Exchange Commission published regulations governing money market funds, under the Investment Companies Act 1940. The regulations, known as SEC rule 2a-7, acted to define and standardise the asset class. The regulations set detailed parameters governing credit, market and operational risk.
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