Events in 2010 that Changed the Cash Investments Landscape

November ushered in chilly winds as a result of the Fed’s controversial QE2 program as longer-term interest rates shifted higher, raising questions about the unintended consequences of the program. The controversy arrives just as the nation heads into the holiday season, which traditionally is a time to reflect upon the year nearly behind us. Looking back, 2010 brought significant and lasting change to the short term cash markets. Over the past year, we have commented on several of these trends, one being the reregulation of money market funds and a second being the broader reregulation of the financial markets. Both remain works in progress from which we can expect further developments.

A third trend in the treasury world, a clear reaction to the financial crisis, is the emergence of a demand for risk transparency. While the reporting of separate account portfolio characteristics and compliance has been around since well before the crisis, we’re seeing a growing contingency of Treasurers who appear to be seeking additional transparency in money market funds. This is partly due to the huge variances in risk that can be found in money fund portfolios despite their similar credits ratings.

We believe that credit rating agencies suffer a lack of sensitivity to liquidity and structural risk and have an inability to capture more granular risk under their current NRSRO structure. In our opinion, far too many funds receive the gold standard AAA rating while carrying variances in their risk profiles that can be quite measurable. Our FundIQ service is designed to provide a gradient of risk that supports this growing need for risk transparency by assessing portfolio risk in a way that goes beyond just looking at basic portfolio characteristics. This month, I thought it would be appropriate to shine the Research Spotlight on these three trends of 2010 which will continue to change the cash investment landscape.

Best Regards,

Ben Campbell
President & CEO