The use of separate accounts to complement money market funds (MMFs) may help optimize risk and reward trade-offs in corporate cash management.
The investments of time and research in establishing a separate account relationship may bring just rewards in times of uncertainty.
Separate Account Simulator™ Results:
- A 50/50 portfolio of 60-day WAM may provide approximately the same yield potential as the MMF portfolio, while reducing the risk to financial issuers by 50%.
- The yield give-up of investing 100% in MMF credits vs. 100% in un-MMF™ is roughly 0.05% at a 60-day WAM.
- The exposure to the top five credits in the FundIQ® composite may be reduced from 21.4% to less than 10% by allocating 60% to the un-MMF™ portfolio.
- The MMF portfolio yield may be replicated by as little as 40% exposure to the un-MMF™ portfolio with a WAM as short as 90 days and may produce a meaningful reduction in financial risk.
Over the last four decades, treasury practitioners have come to depend on the liquidity, price stability and (relatively) attractive yield offered by money market funds. Yet, there is no denying that prime institutional money market funds entail risk. How one manages credit risk in these funds has been a topic of great interest for most practitioners since the financial crisis of 2008.
While the debate over future fund regulations may continue, it is beyond doubt that money market funds serve a vital function in the treasury community and rightfully so. Meanwhile, investing in prime funds is a calculated risk-taking activity. The ultimate goal for many practitioners is to preserve the benefits of the funds while reducing their risk. We attempt to demonstrate an approach to reduce risk by building a portfolio of securities that are not held by prime money market funds.
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