Reflecting On the 2007 Money Fund Debacle

Executive Summary

The concurrent use of commingled and separate accounts may help in
optimizing corporate cash management.
In corporate cash management, separate account management has a
limited following – about 20% vs. 76% in money funds and 22% in
other funds.
Six Advantages of Separately Managed Accounts:

1. Tailored Risk Management
2. Transparency
3. Higher Return Potential
4. Free from “Hot Money”
5. Income and Capital Gains Management
6. Versatile Reporting

Investments in time and research in a separate account relationship may bring just rewards in times of uncertainty.

Introduction

One of the lessons gleaned from the 2007 subprime credit crunch by corporate treasurers may be that money market funds, despite their appearance of safety and liquidity, are not completely without credit risk. In addition to disclosure of exotic commercial paper investments in several large money fundsi, supposedly conservative “yield-plus” and “ultra-short” funds suffered reported losses of as much as 37%. This evoked more uneasiness among treasury professionals who routinely use such commingled investment vehicles as mainstay cash management toolsii.
Whether to use a commingled asset pool like a mutual fund or an investment manager in a separate account format is an age-old debate among investors in different disciplines. Few would dispute the benefits of a constant $1 share price and the daily liquidity offered by an SEC-regulated money market fund today; however, an investor in a separate account with specific investment guidelines might have avoided the recent collateral damage from some of the poorly conceived investment strategies in commingled vehicles. Frustration from the inability to assess and remedy undesirable credit exposures in a fund by the individual investor was perhaps more agonizing than the severity of actual credit risks.
The recent growth of web-based portals took the popularity of fund investing to a new level. The events of the past summer, however, brought the argument for separate account management back to the front-burner for many corporate investors. In this paper, we point to a number of advantages of a separately managed account (SMA) relationship to further this discussion. We believe that the right answer is not an “either-or” decision, but rather the simultaneous use of both strategies in optimizing cash management solutions for the corporate investor.
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