8 January 2013

The advantages of money market funds

What is a money market fund?

Money market funds are mutual funds that invest in short term debt instruments. They provide the benefi ts of pooled investment, allowing investors to invest in a diverse and high quality portfolio.

Like other mutual funds, each investor in a money market fund is considered a shareholder of the investment pool. Money market funds are managed within rigid and transparent guidelines to seek preservation of capital, liquidity and competitive yields.

What are the types of money market funds?

There are two basic types of money market funds: constant net asset value (CNAV) – also known as stable NAV – and accumulating NAV (ANAV). Shares in CNAV funds are issued with an unchanging face value (such as US$1 per share). Income in the fund is accrued daily and can either be paid out to the investor or reinvested in the fund at the end of the month. ANAV funds, operate under the same investment guidelines as CNAV funds and income is accrued daily. However, unlike CNAV funds, income is not distributed. Instead income is refl ected by an increase in the value of the fund shares.

Why use a money market fund for your short term cash investment needs?

For a number of reasons, a money market fund is an excellent short term investment option.

Diversification: Money market funds invest in a wide range of issuers and money market sectors holding to one of the basic tenants of a conservative investment approach – proper diversifi cation.

Credit risk: An IMMFA money market fund is triple-A rated and is required to adhere to rigid credit standards to ensure the portfolio represents an acceptable level of risk.

Ring-fencing of assets: Most European money market funds are UCITS compliant and structured as standalone entities. Their investments are entirely ring fenced from the investment manager and from the funds custodian. In the event of any solvency problem with these parties the assets within the money market fund would not be impacted.

Independent scrutiny of portfolio: The rating agencies scrutinise a money funds portfolio on a frequent basis to ensure the mark-to-market value of all securities is close to par. They also ensure that other investment requirements to attain a triple-A rating are being followed.

Simplicity and flexibility: Money market funds offer flexibility in cash forecasting as there is no requirement to commit cash for a specifi c period, and there are no penalties for redemptions.

Liquidity: Money market funds are managed with very high levels of liquidity in order to offer investors same day or next day liquidity.

Fees: The fees charged by a money market fund are transparent; there are no fees to subscribe or redeem from money market funds thus allowing you the freedom to move your assets in or out of the fund as and when you need them.

Why should you choose a money market fund from BlackRock?

The 2007-2009 credit crisis has highlighted the importance of using a money market fund that is managed by a capable and highly experienced investment manager. BlackRock has managed cash portfolios for over 35 years and has US$251 billion, as at 31/12/2012, of liquidity assets under management, making us one of the largest cash management providers globally. BlackRock has successfully demonstrated both performance and safety through many interest rate and credit cycles. Experienced portfolio managers and credit analysts collaborate via a credit comittee forum to determine sectors and issuers that represent stability and value to our money market funds. Through a rigorous credit review process, BlackRock Global Credit Teams create internal approved lists of suitable securities. These lists the funds to instruments that have received appropriate ratings from the credit rating agencies and meet our high standards. We only invest in issuers that we deem money good and anticipate to be fully liquid over the life of the investment. The BlackRock credit team has an excellent record of anticipating ratings downgrades, and withdrawing securities from the approved list, on average, seven months ahead.

Website: www.blackrock.co.uk/cash