David Hynes
In the past five years especially we have seen an increase in the number of institutional money market funds being managed in Europe and the UK, denominated in US dollars, sterling and in the past two years, euro.
It was in 1972 that the first money market fund appeared in the US. By 1980 some $100bn (e114bn) was invested in money market funds and by the end of 1999 the US had more than 1,300 money market funds with total assets of $1.6trn – phenomenal growth.
In Europe and the UK however, many ‘money market funds’ are directed at the retail market or are funds that invest in bonds and other short-term investments without the prime object of preservation of capital that US institutional money market funds enjoy. To get around this confusion and to ensure that institutional investors were indeed getting the products/service they actually wanted in money funds, a group of like-minded fund sponsors got together to better define and explain what money funds are, and what they can and can’t do for investors so that clients did not get nasty surprises having invested in the wrong product.
The Institutional Money Market Funds Association (IMMFA) was born from this group. IMMFA was founded to represent its members’ interests within the arena of AAA-rated, stable and accumulating net asset value institutional money market funds domiciled in European financial centres.
To best represent the interests of the 23 fund groups that are members and the three rating agencies and fund performance provider that are associate members, IMMFA set out core objectives as follows:
q to provide information about IMMFA and its members/funds to all external parties interested in institutional money market funds;
q to promote and regulate a ‘code of practice’ for banks and fund management companies offering money market funds for the purpose of cash or liquidity management to the institutional market;
q to seek to have institutional money market funds more widely accepted as a means of cash or liquidity management in the UK, Europe and elsewhere;
q to liaise with financial organisations and their professional or industry bodies on matters of funds operating principles, public ratings and all other issues pertaining to fund usage.
Whilst legislation exists in the US (Investment Company Act 1940 – Rule 2a-7) which regulates money market funds, no such legislation exists in the UK or Europe. The aim of Rule 2a-7 in the US is to ensure that investors get the preservation of capital and provision of liquidity they expected from investing in such funds. IMMFA believes the US regulations to be sensible and would like to see similar legislation this side of the Atlantic, and intends to lobby the key regulatory bodies to attain formal product recognition and regulation. In the meantime, IMMFA member funds comply with the spirit of the 2a-7 legislation and in fact invest within even tighter investment guidelines than 2a-7 would permit to ensure compliance with the rating agency’s AAA fund rating requirements.
Having decided to invest in a money market fund, the investor will want to ensure that the fund chosen will deliver decent performance. One problem all funds face is that they can’t tell you what your return will be before you invest. What the fund manager will do is to demonstrate historic performance with a risk warning to the effect that past performance is not necessarily a guide to the future. There is also a risk however that the performance chosen to be displayed flatters that fund managers track record. Furthermore, the performance statistics can be calculated in a variety of ways - and again the most flattering sample will be displayed. For these reasons IMMFA members collectively decided to have an independent money market fund performance measurement company, iMoneyNet, produce performance statistics on a consistent basis for all member funds. Performance is collated weekly to provide details of gross and net of fee yields for the last seven and 30 days for each fund. The iMoneyNet reports also provide year to date and last 12 months data as well as details of fund size, weighted average maturity, portfolio composition, cut of time and fund rating. The result of this exercise is that investors can compare funds against each other and decide which fund they prefer to use depending on their own specific requirements. In this way there is no place to hide from poor performance or other criteria that is important to the investor.
IMMFA wishes to ensure that the market place for money market funds grows and believes that setting high standards and meeting them will be the key to aiding growth. IMMFA intends to do this by:
q educating potential clients as to what money funds are;
q being open and honest about what is achievable;
q aligning performance measurement to ensure clients can compare like with like.
These are all part of the development work needed to encourage institutional investors such as pension funds to use money market funds for cash management.
The foundations are now in place waiting to be built upon to give clients a new choice for their cash management requirements.
David Hynes is chairman of the Institutional Money Market Funds Association. More information may be obtained by writing to him at IMMFA, PO Box 33200, London SW1Y 4WR