Corporate treasurers often face the liquidity management dilemma of having to:

• obtain the best possible return on surplus cash

• while limiting risks and

• maintaining access to the cash should it be required

Bank deposits have long been the main choice for treasurers and ensure immediate access to cash. But, returns are often minimal. Time deposits on the other hand feature better returns, but the availability of cash may be restricted when funds are needed. That is why liquidity and enhanced liquidity funds have increasingly become a viable alternative to bank deposits as they have the ability to balance liquidity management objectives more efficiently.

What is a money market fund?

A liquidity or money market fund is a mutual fund that invests only in high grade short-term money market instruments. These instruments include obligations of financial institutions as well as highly-rated short-term corporate debt such as commercial paper, notes and short-term bonds.

In order to be effective within the context of an investor’s cash management objectives, liquidity funds generally fulfil several criteria:

• Security.

  They are a secure and stable form of investment. Most money market funds have a AAA fund rating and the stable value is recognised in a suffix to the rating such as AAA-MR1+ or AAAm, which is applied to the top rated and most stable funds. Different credit rating agencies use different suffixes, but they are all a measure of the same thing – the volatility of the fund’s value.

• Liquidity.

  They provide liquidity as and when the treasurer needs the funds. Generally, investors are entitled to redeem their holdings daily, within the dealing cut-off times, at no charge or penalty.

• Yield.

  Liquidity funds offer the potential of increased yields relative to time deposits.

Although all liquidity funds will aim to balance these three criteria, they may display different risk, yield and liquidity profiles.

In order to generate competitive returns while at the same time maintaining the fund’s capital and ensuring high levels of liquidity, liquidity funds are managed within specific investment guidelines. To achieve and maintain an AAA-rating, funds have to meet strict requirements in terms of asset quality, asset diversification and liquidity maintenance. In addition, they have to comply with rigorous standards concerning management, systems, controls and procedures.

The portfolio nature of the investments made by a fund has the advantage that it diversifies the risk in contrast to a bank deposit with a single bank. Investing in a liquidity fund is also relatively easy and eliminates the need to continuously track rates and monitor credit relationships.

What is an enhanced liquidity fund?

In addition to the traditional money market funds, some fund managers will offer enhanced liquidity funds. These funds attempt to offer a higher yield than conventional liquidity funds.

This can be achieved by either taking on more credit risk – which will be reflected in the fund’s own credit rating – or by extending the fund’s duration through investing into longer maturities. The latter may influence the volatility of the fund’s performance and would be mirrored by a fund’s volatility rating and reflected in the suffix to the credit rating.

Enhanced liquidity funds come in many shapes and forms and under different names such as enhanced liquidity, enhanced cash, cash plus or liquidity plus funds. Generally, enhanced liquidity funds are much more heterogenic than money market funds. They vary in terms of maturity, duration, credit quality and liquidity profiles.

A corporate investor who wants to achieve better returns than a money market fund offers, should consider enhanced liquidity funds as the portfolio nature of funds makes them less risky than a single investment. It is however important to remember that a higher yield is typically linked to more risk, albeit this risk may still be relatively small even in an enhanced liquidity fund.

The use of liquidity funds in cash management

A corporate investor seeking competitive returns for excess cash will find different investment alternatives depending on the time period for which excess cash balances are available for investment.

Short-term operational cash must be available instantly when required for working capital purposes. From a liquidity management perspective, capital preservation and liquidity are therefore the overriding objectives for this type of cash. Low-risk and highly liquid money market funds are, therefore, a suitable form of investment for any cash that is available for periods of less than three months.

Cash that can be invested for more than three months will not be used to its full potential when it is invested in a traditional liquidity fund that normally only has a maximum weighted average maturity of 60 days. Cash with a longer time horizon than three months may achieve a higher level of return and still meet the requirements of principal preservation and liquidity when invested in an enhanced liquidity fund.

These types of funds diversify outside the traditional money market instruments. They actively manage duration, typically between 90 and 365 days by using instruments such as commercial paper, floating-rate notes, asset-backed securities and short-term bonds.

When used in combination with liquidity funds, enhanced cash funds can offer a more efficient cash management solution, as the balance between risk, return and liquidity will be more in line with the investing company’s objectives.

Differences between funds

Although most liquidity funds may appear very similar, there are potentially significant differences between funds with regard to the size of the fund, liquidity, cut-off times, minimum amounts, share classes, performance and management fees. Depending on the portfolio, there can also be a marked difference in the credit quality of a fund, in particular between enhanced liquidity funds. In addition, customer service and ease of use are important criteria to distinguish between funds.

Rabo Liquidity and enhanced liquidity funds

Rabobank aims to meet the short-term cash management needs of investors through a range of AAA-rated money market funds. These include both liquidity and enhanced liquidity funds in EUR, USD and GBP, which have the objective of achieving competitive returns while preserving capital and maintaining a high degree of liquidity.

Rabobank offers its money market and enhanced liquidity funds through Robeco, a leading European asset manager that is wholly owned by the bank. It thereby seeks to combine Rabobank’s experience in the money markets with that of Robeco in fixed income asset management. The funds are domiciled in Luxembourg.

Interview

Rabobank

Ian Lloyd

Director, Liquidity Funds

How do Rabo funds differ from other liquidity or enhanced cash funds?

The funds themselves are managed by ROBECO who is a 100% owned by Rabobank and the core competence centre for asset management within the Rabobank Group. ROBECO has a long history of investment management in Europe and a very strong track record in money market investment.

In addition, all our funds including the enhanced funds have an AAA rating. Many enhanced funds are AA rated, using the more relaxed investment guidelines from the ratings agencies to boost the yield. Being a AAA rated bank it seemed right to offer AAA rated enhanced funds.

When discussing the strategy with the fund managers for our enhanced fund, it was clear that there were other performance drivers which would boost yields while achieving a AAA fund rating. This has been proven with over a year’s worth of track record showing a performance of region of three months LIBOR plus 15bp after fees.

Management fees are low, 20-25bp for enhanced and 15-20bp for the standard funds depending on the size of investment.

Service is key, we strive to ensure clients are able to invest in their preferred method. We offer internet, fax, telephone and SWIFT dealing for subscriptions and redemptions. Surprisingly, many liquidity fund providers are still not able to offer internet dealing.

In addition, it is important that our clients have access to all the information they require. Therefore, clients are able to create customised reports via the internet, while knowing they have the full support of a dedicated client service team based in the Netherlands.

Which type of investor should consider enhanced liquidity funds?

Enhanced funds should only be used by those clients who know they hold surplus cash balances for in excess of three months. The trend tends to be that clients try the SNAV² funds first and as they become more comfortable with money market funds and their investment manager, they may choose to place a proportion of their available cash into an enhanced fund. In addition, due to the vast array of enhanced style funds, it is important that as an investor you do as much research as possible, look at the different providers and make sure that you understand the nature of the product and the liquidity, the strategy and types of investments held in the portfolio.

Liquidity is important because, should you need your cash back quickly, with enhanced funds settlement can range from a T+1 to a T+7 type settlement.

However, bear in mind that if you do invest for only a month and a half you may not get the return that you would have got had you been in a SNAV fund or in another type of fund.

Rabo Liquidity Funds

Each investor in a liquidity fund is a shareholder in the fund’s diversified portfolio of money market securities.

Rabo Liquidity Funds have a Stable Net Asset Value (SNAV) of £1, €1 and $1. Shares are redeemed at par at maturity. Yields are declared daily and dividends paid monthly in arrears. If not specified otherwise in the application form, dividends will be converted into shares at the end of the month.

Rabo Enhanced Liquidity Funds

Unlike stable net asset value liquidity funds, enhanced liquidity funds are variable or accumulating net asset value funds. This means that they do not distribute their income. Assets are marked to market daily and unrealised gains and losses are translated directly into the share price. The value of the accumulating shares increases proportionately as income is retained within the fund. Investors realise returns solely through the liquidation of their shares in the fund.

Rabo Enhanced Liquidity Funds have a maximum weighted average maturity of 180 days and are designed for cash balances in EUR, USD or GBP that are available for investment for at least three months. The funds are governed by the same investment policy as the liquidity funds, but in addition, aim to increase performance by investing in longer maturity asset-backed securities and offering a duration overlay which increases exposure to the money market yield curve.

Why invest in Rabo Liquidity or Enhanced Liquidity funds?

Liquidity funds have to balance an investor’s cash management objectives and Rabo Liquidity and Enhanced liquidity funds offer competitive returns while maintaining the most stable credit and volatility ratings and ensuring maximum liquidity.

Liquidity

The ability to redeem investments as quickly as possible when invested cash balances are required, gives investors the flexibility to react efficiently to the liquidity demands of their business. The funds’ late cut-off dealing times give investors the opportunity to establish available or required cash balances before subscribing or redeeming positions in the fund. Late cut-off dealing times and same-day settlement thereby ensure that the funds are both an investment and a cash management solution for investors.

Even in the Rabo enhanced liquidity funds, in which investors will have to have funds invested for longer than in the liquidity funds to achieve competitive returns, a high level of liquidity is maintained, which ensures that investors have access to their cash within one working day (T+1).

Security

Rabo liquidity and enhanced liquidity funds are AAA-rated by Standard and Poor’s (S&P). This is the highest rating available for these types of funds. Furthermore, the enhanced liquidity funds have been assigned a volatility rating of S1+ by S&P, indicating the lowest volatility. The AAA-rating may be particularly attractive to investors with strict exposure limits to counterparties of a specific credit rating.

The credit quality of the fund’s assets is undergoing continuous analysis within strict guidelines, limiting the concentration on individual issuers to a maximum of 5% and governing the credit rating of assets that can be held by the fund. As a result, the funds are diversified with regard to issuers and cover a range of high-grade debt instruments, in particular commercial paper and asset-backed securities. The enhanced liquidity fund will also use derivatives on a limited scale and investors need to ensure that they are comfortable with the fund’s use of derivatives.

Yield

The objective of the funds is to generate competitive returns that are superior to other short-term investment instruments, such as time deposits. The funds are actively managed within the investment guidelines to achieve returns that exceed the benchmarks of 7-day LIBID for the liquidity funds and 3-month Libor for the enhanced liquidity funds.

Service

Subscriptions and redemptions can be placed using all major dealing methods, including phone and fax dealing, SWIFT and via the Rabo Liquidity Funds web-portal. Prices and yields are published on the next working day by email and can also be accessed over the internet or by calling the Rabobank client service team. The client service team also provides web-tool training as well as general assistance with any queries that might arise.

Rabobank offers two share classes, Elite and Premier, which, depending on the invested balance, incur different management fees of 15 or 20bp for the liquidity funds and 20 or 25bp for the enhanced funds. Premier shares require a minimum initial investment of 1m in €, $ or £, whereas Elite shares are allocated to larger amounts of 25 million euros or US dollars and 15 million GBP.

Conclusion

Rabo liquidity and enhanced liquidity funds combine competitive returns with the highest available credit ratings. The use of liquidity and enhanced liquidity funds, such as those offered by Rabobank, therefore represents not only a short-term investment alternative, but potentially a more efficient liquidity management solution for corporate treasurers.

1. Fees include management fee and service fee, please refer to prospectus for more details.

2. SNAV funds are the top rated most stable funds with a credit rating of AAAm.

Rabobank

The Netherlands-based AAA-rated cooperative Rabobank Group is the largest financial service provider in the Dutch market. The Group is owned by approximately 248 local banks. Outside the Netherlands, the group has 222 offices in 34 countries, giving excellent global access. Rabobank’s corporate clients are served through a network of experienced relationship managers, product specialists, industry specialists, researchers and analysts. For more information, please visit www.rabobank.com

Disclaimer

Rabobank is a trading name of Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. incorporated in the Netherlands. Rabobank is authorised by De Nederlandsche Bank and by the Financial Services Authority and regulated by the Financial Services Authority for the conduct of UK business. The information and opinions expressed here have been compiled or arrived at from sources believed to be reliable, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. This information is not investment advice and is not an offer by Rabobank to enter into a transaction. Past performance is not a guide to future performance. All parties are advised to seek independent professional advice as to the suitability of any products and to their tax, accounting, legal or Regulatory implications.