the haven and haven-nots
September 21st, 2011
When is a safe haven not a safe haven? In normal times, money market funds could have expected to be a significant beneficiary of the dislocation in equity and bond markets. As it is, in July, the sector saw some £20bn in redemptions. It picked up again slightly in August, but it is clear that while investors may be rushing to ‘safe haven’ assets, they do not currently include money market funds within that definition. There are a number of reasons for this. The first is that money market funds still bear the scars of the last credit crisis. A number were found with insufficient liquidity and fell more than their investors were expecting. There has been a huge drive by the investment industry to ensure minimum liquidity standards and improve transparency, but it cannot avoid the fact that the majority of funds use banking instruments of some kind.Those are two words unlikely to help investors sleep easily. There is another banking crisis looming in Europe as markets fret about the potentially toxic assets held by some eurozone banks – and the fact money market funds are generally only holding short-dated paper is of little consolation. Yes that may help in reality, but these crises are all about perception. Furthermore, there is simply not enough short-dated commercial paper around to support the industry so money market funds have little choice but to hold banking instruments. The irony is the alternatives people are choosing may prove far more risky. For example, a money market fund may be exposed to as many as 30 or 40 banks, which looks a lot safer than a straightforward bank deposit. Many are willing to risk their money on the long-term solvency of the US through investment in T-bills over a money market fund. Short-dated T-bills will, however, only form a small part of a money market portfolio. Of course, it may be the yield available on money market funds is also a deterrent. Funds within the IMA sector yield between 0.1% and 1.2%, which is not going to add any excitement to anyone’s portfolio. Short-dated bond funds have emerged as a potential alternative – the uplift in yield may not be much but even 30 basis points is a step in the right direction. The real problem is that no-one is that certain what constitutes a ‘safe haven’ anymore. The last credit crisis messed with investors’ perception of risk and, as we enter another difficult patch, no-one knows quite where to run for cover. It is only when everything is out in the open that investors will know where that hiding place would have been.