Aviva Investors is a global asset management business dedicated to building and providing our clients with focused investment solutions. Our clients range from large corporate and institutional investors including pension schemes and local government organisations to wealth managers to individual investors. We have more than 1,400 employees, based in 20 offices, across 14 countries, so our investment professionals are well placed to understand the complexities of local markets.
Managing Director, Global Liquidity
Colin Cookson has been with Aviva Investors since 2007 as Managing Director, Global Liquidity and has over 12 years experience in the Money Fund industry, having previously worked for Mellon Global Investors and HSBC Asset Management. Colin has a BA Hons in Economics from the University of Wales.
Deputy Head of Liquidity Funds
Matthew Tatnell joined the investment industry in 1983 and Aviva Investors in January 1983. He is responsible for all of Aviva Investors’ money market activities and the Aviva commercial paper programme.
This month we talk to Colin Cookson, Managing Director, Global Liquidity, and Matthew Tatnell, Deputy Head of Liquidity Funds at Aviva Investors to explore why corporate treasurers should look beyond yield and fees when selecting and investing in money market funds.
In your view how should corporate treasurers evaluate money market funds?
CC – Historically many people viewed money market funds as a commodity product. To a large extent their investment decision was often driven by the name of the provider, the rating of the fund, the fee structure and the historic yields. However all funds are not the same and in these turbulent economic times an investor should be doing a lot more research into the underlying core competencies of any fund before making an investment. It’s about ‘what is the added value of a particular fund provider not which gives the best yield?’
MT – Whether an investor should be a credit expert or not is a moot point. Typically a corporate treasurer is not going to be a credit expert and will not employ a team of credit analysts. So to analyse the credit worthiness of the underlying investments held within a money market fund in great detail is probably going to be:
beyond their traditional areas of expertise,
stretch existing heavy workloads to almost impossible levels.
It’s therefore important that the corporate treasurer focuses on what they aim to achieve when investing in a money market fund. First and foremost, as Colin alluded to, it’s the outsourcing of the credit process. In terms of due diligence, I believe it is therefore critical that a corporate treasurer should look at the infrastructure of the provider/sponsor who they’re placing their money with. You could argue that the vast majority of the management fee is paying for the detailed credit analysis supplied and the corporate treasurer must be confident that they are receiving value for money.
Do you think that many corporate treasurers are carrying out due diligence on the credit analysis process before investing in money market funds?
CC – Yes, the more sophisticated investors are. There are still some investors who simply invest because it’s a ‘bank-owned fund’ and they naïvely rely on the ‘hoped for’ support of the sponsoring bank. Whether this support would actually materialise if there was another systemic crisis in the economy is debatable.
How should a corporate treasurer evaluate a credit team and their skills?
MT – First and foremost investors must look at their sponsor and ask:
Do they have expertise in this area?
Does the sponsor have a large credit team?
Do they manage long-term and short-term credit assets elsewhere?
Do they own their own credit assets?
If you’ve got an organisation with a large portfolio of its own investments then they’ve clearly got a big vested interest in getting the credit process right. If they’ve been analysing and investing in credit for some time and they’re still here after arguably the worst financial disaster of all time, it’s a good indication that they’re committed for the long term.
Then you must ask how they actually perform these tasks:
What is the credit process, how is it managed, who’s running it, who’s responsible for what, etc?
How long has the team been together?
What does the credit team look like?
Do they have an asset backed specialist?
This is key because asset backed commercial paper (ABCP) is a transparent diversifier of credit risk and it’s therefore advantageous if your provider has expertise in this area. If they have rating agency experience, this is an added benefit (they may have even rated the ABCP programme)! Get into the nitty-gritty and satisfy yourself that, logically, it makes sense. Ask for concrete examples of programmes that they’ve reviewed and what they think the positives and negatives of those programmes are. Check all the usual things that you would normally cover when performing any investment due diligence. I firmly believe it’s key that investors meet the sponsor and do their homework before they invest. Once you’re comfortable with their credit processes, you should then be able to explain it to your board, or the CEO, and they should be suitably impressed.
When it comes to how the credit team should be structured, what should a corporate treasurer be looking out for?
MT – There are two key points. Firstly, where is the credit team located? Ideally the core of the team should be in the same time zone as the fund managers to facilitate live dialogue to allow any arising issues to be resolved quickly. Second it is important to have representation from credit analysts in different locations in the major countries you’re investing in. Local knowledge makes it much easier to meet senior management in the local area, enabling more informed decisions. Ideally, the sponsor should therefore be a global player otherwise you simply don’t get that level of expertise.
On the subject of the scale of the business, big is not always best but it can give you an open door into the senior management of the counterparties you are investing in. Certainly at Aviva Investors we will have met senior board members of most of the counterparties we invest in as part of our credit process, regardless of whether we are buying money market instrument, bonds, property or equities.
It’s an interesting point. It could therefore be advantageous to invest through an organisation that is also buying the equity of companies because it maximises their leverage in terms of access?
MT – Yes. The greater the spread of your activities, the greater the depth of research you will have, the more advantage you will gain.
How are the teams structured in Aviva Investors?
MT – The liquidity portfolio managers sit within the fixed income area in London which is a team of around 60 people, with the liquidity team comprising five portfolio managers. Cash assets under management are just under £18.6 billion1. Within the London fixed income team we have four credit analysts who specialise in the financial institutional credit names that we typically hold in money market funds. In addition we have two analysts in the US, two in Paris and one in Singapore performing a similar role. In the UK, the asset-backed specialist previously worked at a rating agency. In addition to fundamental research, the portfolio managers also use quantitative (quant) research which has flagged up many issues, such as Ireland. As a result we were out of Irish stocks from a very early stage compared with many other funds.
Has it pulled you out of investing in all the PIGS economies?
MT – Spain is the exception where we do have some short dated exposures. Although we have a positive view on the two main Spanish senior bank credits we take a fairly conservative approach when it comes to all areas of peripheral Europe where we are sceptical about sovereign debt sustainability.
Is there anything else about your credit process that differentiates Aviva Investors?
MT – For us, the fundamental credit research process is key. We overlay our quant model and include factors such as live credit ratings data (which can affect price and liquidity) and finally the in-house credit process is then stress tested using a combination of third party research and fund manager flair!
How does the portfolio review process work and what is the frequency?
MT – It’s a live, ongoing process. A typical day for the portfolio management team would start with an early review of the quant model output, which has built in trigger levels highlighting issues that need to be investigated immediately with our global credit team. They will also be scanning news flows from financial news suppliers such as Bloomberg, Reuters, etc, reading daily third party research and scanning a wide selection of financial journals. Formally there is a daily credit meeting, in addition to a monthly sector meeting with a credit analyst. The Aviva Investors credit committee, chaired by our CFO meets monthly to oversee all new and existing money market investments providing a final layer of due diligence. With five managers dedicated to cash alone and a large team of credit analysts around the globe, we firmly believe we have a great infrastructure in place to provide our clients with the highest levels of expertise.
In the credit crisis some money market funds had liquidity problems and were forced to withdraw same day access. How do you manage liquidity?
MT – After credit risk, liquidity risk is our second priority before yield because we find investors sensibly want to know firstly, ‘am I going to get my money back?’ and secondly, ‘am I going to get it back now?’ and finally, ‘am I getting a competitive return?’ In contrast to many other funds we run a large amount of liquidity. In the UK sterling fund this is largely in overnight reverse repo transactions where we lend to a bank taking UK Government Gilts as collateral and on top of that receive a ‘haircut’ which allows for any price moves we incur in the unlikely event that we have to liquidate the collateral. To manage this repo process we have our own securities finance team whose expertise would be key to ensuring quick collateral sales at attractive prices in the unlikely event of a bank default. Our second area of liquidity is certificates of deposit, an area which has been consistently strong, even after the Lehman default. These two areas of liquidity mean that over three quarters of our portfolio can be converted into cash for same day value. Finally, we have investments such as asset backed commercial paper, which although slightly less liquid are used to diversify credit exposure.
CC – Post credit crisis we took the view that money market funds should go back to basics. So we are now focused on having significant liquidity and also, eliminating inappropriate asset classes, such as floating rate notes (FRNs), which do not offer the required liquidity and could return less than par (an issue highlighted with Lehman). Money market funds are not guaranteed, which is why we advise investors to lift the lid off funds and take a look at what’s underneath rather than simply looking at yield.
Following the credit crisis, many corporate treasurers are seeking higher levels of transparency. What is your response?
CC – Post credit crunch we wanted our funds to be the most transparent in the market. We believe we were the first fund provider to provide all clients with weekly reports detailing the fund portfolios. This includes information such as the investments in the portfolio, the percentage of the fund that each comprises, their rating, liquidity profile etc. We were also the first to publish Weighted Average Life of the fund daily. More importantly, although the aim of our main liquidity funds is to maintain a constant value of 1.000 we took the decision to move to Variable Net Asset Value (VNAV) pricing, calculating and communicating to clients a daily mark-to-market valuation. We believe this is a significant improvement in transparency over constant net asset value funds. In practice, due to the policies, procedures and credit analysis that Matthew’s team impose on the funds, our daily value has never moved from 1.000 in nearly three years. If the valuation was to move from 1.000 clients would be aware of it on the day it happened. For us, transparency is about giving clients as much information as possible and the adoption of VNAV Pricing is integral to this. In practice this means that our funds appeal to the more sophisticated investor. They understand our approach and rationale, whilst acknowledging that we are still targeting a stable price of 1.000.
Are you involved with IMMFA?
CC – Unfortunately not. IMMFA only represents those funds which use the constant net asset value approach. When the markets were in crisis three years ago we took this decision to publish daily mark-to-market valuations of the funds and moved to VNAV. Our aim was to provide clients with maximum transparency. As a result we were required to leave IMMFA. Should they decide to broaden their criteria and embrace alternative approaches we would happily become active members again.
Does targeting a daily mark-to-market valuation of 1.000 whilst being technically VNAV mean you have to manage the fund more conservatively than CNAV funds?
MT – Yes, we actually have a lower level of mark-to-market tolerance than a CNAV fund as our 1.000 fund price is measured to three decimal places rather than two for a CNAV fund. We think this is a major positive for investors. As a result the main difference in our investment approach from many CNAV funds is that we don’t hold any FRNs. After Lehman, FRNs became very illiquid for quite a long while and prices, even in some very high credit quality issues, proved very volatile which would have been enough alone to challenge the price tolerance for many CNAV funds who could have been in danger of ‘breaking the buck’. We believe this event could be repeated so this sort of instrument is simply not appropriate for a fund aiming to maintain a stable asset value. We also restrict the amount that we invest in longer dated investments. For example, to remain within 60 days you could invest 90% in overnight deposits and 10% in one year certificates of deposit. A significant and unexpected change in interest rates could again cause the 10% invested in longer term investments to potentially ‘break the buck’ of the whole fund. We therefore restrict the amount invested in the longer term and stress test our portfolio, using a range of scenarios where, for example, interest rates move or credit spreads change unexpectedly in reaction to a major event. This helps to ensure that even in a stressed environment our 1.000 share price would survive.
CC – In practice, we’ve returned our main liquidity funds to the traditional money market fund model, focussing on security, liquidity and yield, in that order. There are constraints on our main liquidity funds that perhaps other funds don’t have. However, we have a range of funds and if a client is looking for additional yield we have other funds which may be appropriate. So it’s a much more sophisticated approach to investing into money market funds which is neither yield nor price driven. It’s about investors understanding our depth of expertise and where our fund managers add value, over and above yield and fees.