Triple-A Ratings

Money market funds have preservation of capital and liquidity as their primary objectives.  Competitive money market returns is another key, but lesser, objective.  The ratings process methodically identifies, assesses and weighs each fund in terms of its ability to deliver on these objectives.

Broadly, the ratings criteria comprise three main areas of analysis:  credit quality, portfolio construction and fund management.  Regular post-rating inspections are a key part of the process as well.

Credit quality

The credit quality of a money market fund is evaluated on three levels.  Firstly, the ratings criteria stipulate what the fund can buy, ranging from the types and maturity of assets, the minimum credit quality and the currency of eligible instruments.  Next, the criteria specify who the money market fund can do business with, and the exact nature of this business.  This includes notions of acceptable counterparty risk for transaction-based investments.  Finally, the criteria specify who the fund can appoint for safekeeping of assets by opining on acceptable choices of custodians.

Portfolio construction

The most complex part of analysing a money market fund is judging a fund's sensitivity to changing market conditions and, therefore, gauging a measure of its ability to shield investors from adverse market swings.  All money market securities, irrespective of their rating, are subject to price fluctuations based on interest rate and credit spread movements, maturity, liquidity and supply and demand factors.  Quantifying the cumulative effect of these is crucial to assessing overall fund performance. 

Fund management

The ratings process assesses a fund manager's operations - in common parlance, the front, middle and back offices.  Key areas of interest are the fund manager's level of experience, the stated investment objectives, portfolio management techniques, risk aversion strategies, operating procedures and internal controls, including disaster recovery. 

Regular inspections

Owing to the constraints of the rating criteria and the extremely low margin of error permitted at the level of fund valuation, triple-A rated money market funds are subject to frequent scrutiny.  Rating agencies require that each fund sends full details of its holdings on a weekly basis for review by rating analysts.  Analysts verify that the fund's holdings continue to comply with the triple-A rated fund guidelines.