Controlling Risk in a New Environment

Since August 17, 2007 there have been more than 40 separate measures announced by the Fed and Treasury designed to stabilize the credit markets. The most recent programs follow a similar remediation course to that of past credit bubbles that required direct government investment in banks and deposit guarantees by sovereign governments. These recent measures, while unparalleled in size and global scope, have successfully contributed to nascent signs of stability. The three month Libor rate has dropped 196 basis points from its highs and the 90-day Treasury bill yield has climbed 37 basis points from its lows as some flight to quality pressures have begun to ease.

Whether stability continues to emerge or not, everyone must adjust to a new reality in the credit markets and the likelihood that the long-term economic impact of the credit fallout is only just beginning to develop. What were once considered safe havens or low risk options for cash investments must be reevaluated in this new environment. Faith in everything from the safety of money market funds, to unwavering reliance in the rating agencies has been completely shaken (not just stirred).

Given that the inherent flaws in many short term investment options have been brought to light by the credit crisis, this month we wanted to explore the intricacies of evaluating risks in money market funds, likely the most common short term investment option available to treasurers. As specialists in separate account cash management for institutions, Capital Advisors Group is certainly prejudiced against many commingled solutions that, by design, cannot allow for the surgical control of credit and liquidity risk in cash portfolios. We prefer to focus on the risks we know, versus the unpredictability of cash flows associated with the pooled assets of money funds or commingled enhanced cash products. That being said, we also understand money funds can be a valuable portion of an overall cash investment portfolio strategy. As such, best practices in money fund selection, paired with the control offered by separate account management, can offer the best of both worlds.

This month we’ve prepared a review of best practices in the selection, use and monitoring of money market funds along with a candid look at the potential drawbacks of these popular investment vehicles. The full article can be downloaded in our Research Spotlight section to the left.

Best Regards,

Ben Campbell
President & CEO