Toby Birch

Articles:

Constructing a Rock-Solid Portfolio

By Mike Foster October 2008 wealthbulletin.com

Where to keep cash in a crisis
The financial markets crisis has taught investors many painful lessons.

Among the more surprising ones is that it matters where you keep your un-invested cash. Unless you have bank notes stuffed under a mattress, cash is on loan to someone else: a bank, money market fund, government or company.

Each is a counterparty that can, in theory, go bust or be temporarily unable to repay its debts. Lehman Brothers’ collapse last month triggered panic over the quality of investments made by US money market funds, supposedly a safe haven for cash boasting the most secure, triple-A credit ratings.

That week saw record withdrawals from the sector after the Reserve Primary Fund, the oldest money market fund in the US, confessed its value had fallen below $1 a share due to Lehman exposures. This event, known as “breaking the buck”, is as rare as it is frightening having occurred only once previously, in 1994.

Sponsors to a range of funds exposed to Lehman were forced to top them up. Others were closed temporarily or wound up. Troubled insurer AIG shut its enhanced Premier Bond product, creating potential losses for clients of wealth managers that had used it as cash tool. Institutions regarded as safe from the turmoil saw huge inflows of cash. Money market funds run by JP Morgan Private Bank took $23bn (€15.6bn) in the week Lehman filed for bankruptcy.

Investors in money market funds are reliant on the skills of managers to ensure they are sufficiently diversified across various short-term debt investments. The fact funds offer daily liquidity but invest longer term is a key issue, creating a risk investors may not be able to access their cash.

Speaking the week after Lehman collapsed, a Swiss private banker said: “I wouldn’t touch a money market fund right now. We’ve told our clients to use term loans with well-established banks like Santander, HSBC, Nomura and Credit Suisse.”

Multi-family office MaxCap Partners last month warned clients that cash funds cannot avoid counterparty risk. After reviewing a variety of triple-A rated money market funds, MaxCap said investors should diversify holdings between those managed by JP Morgan, Barclays Global Investors and Northern Trust, each yielding close to 6%.

Page 1, 2