In light of current challenges and continued headline issues in Washington, Commonfund has been asked a number of questions on managing liquidity, and in particular, the effect of the U.S. credit rating downgrade and a zero rate environment on Money Market Funds. As liquidity management is an important area for Commonfund, its clients, and for all non-profit organizations, we will continue to communicate updates on the changing markets, its ramifications on cash portfolios and how Money Market Fund Portfolio Managers that are on the Treasury Access cash platform are addressing the ongoing challenges. These updates can be found here.
Commonfund's point of view on investing cash remains that investors should be focused on liquidity and safety during all environments. We believe that selecting well capitalized providers that have made cash investing a priority is essential. Investors need to be comfortable with the investment teams that manage the cash programs. They also need to maintain oversight processes that are similar to those embedded into long term portfolios. Utilizing cash investment providers that meet their criteria, investors should match program type to their cash investment policies.
No. The Money Market Funds are principally focused on the short term ratings of their holdings. Long term rating downgrades do not automatically trigger downgrades to short term ratings. In fact, money market funds can hold first tier securities which equate to long term ratings from AAA all the way to A. Downgrading the U.S. Government short term rating would be the equivalent of taking its long term rating down eight steps. No Money Market Fund has been put on a negative credit watch and we do not anticipate the current issues in Washington to change the short term ratings.
No. Money Market Funds will not be required to sell Treasury securities as a result of the recent downgrade. Therefore, Money Market Funds can hold onto Treasury securities through a disorderly market and not be forced sellers. If failures in Washington continue to unsettle markets, Money Market Funds on Treasury Access and other Money Market Funds will be able to hold their U.S. securities though the turbulence and would still be liquid enough to meet investor cash flows.
We have seen investors diversifying their cash holdings at more than one provider, including bank deposit accounts, but not exiting Money Market Funds entirely. Bank deposits are an alternative to Money Market Funds; however, if the U.S. Government backing is tainted as a result of a downgrade, more focus should be placed on the underlying credit risk of the deposit bank. Also, commercial banks are charging a FDIC assessment (approximately 12 basis points annually) for deposits in non-interest bearing demand accounts. This additional charge has resulted in possible negative returns in holding excess cash in bank demand accounts.
Recent 2a-7 regulations added subsequent to the 2008 financial crisis required additional liquidity in Money Market Funds in order to be better able to meet client redemptions. Over the past months Portfolio Managers of the money market funds on Treasury Access began stockpiling cash to address current market uncertainty. Cash levels (or overnight investments) have risen to over 50% in the U.S. Government and/or Treasury-only funds, and securities maturing within one month in these funds have risen to approximately 70%. These high liquidity levels have been positioned to meet any redemption during an uncertain time. These liquidity levels are higher than fund liquidity levels during the 2008 financial crisis.
Commonfund is in frequent communication with the portfolio managers of the Money Market Funds on Treasury Access, and will continue to access the situation as we work through the ongoing issues in Washington, as well as other challenges that affect liquidity markets.
As always, please contact your Relationship Officer with any questions on Commonfund's cash investment programs.
Key Takeaways:
Diversify cash holding with multiple providers.
Oversee investment teams and be comfortable with processes and capabilities.
Understand liquidity and accessibility in cash programs used.
Understand costs associated with funds and/or demand accounts in order to preserve capital.
Statements concerning Commonfund Group’s views of possible future outcomes in any investment asset class or market, or of possible future economic developments, are not intended, and should not be construed, as forecasts or predictions of the future investment performance of any Commonfund Group fund. Such statements are also not intended as recommendations by any Commonfund Group entity or employee to the recipient of the presentation. It is Commonfund Group’s policy that investment recommendations to investors must be based on the investment objectives and risk tolerances of each individual investor. All market outlook and similar statements are based upon information reasonably available as of the date of this presentation (unless an earlier date is stated with regard to particular information), and reasonably believed to be accurate by Commonfund Group. Commonfund Group disclaims any responsibility to provide the recipient of this presentation with updated or corrected information.