Insight & Analysis

Is it time for treasury professionals to consider VNAV?

Published: Nov 2017

While much attention has focused on the new LVNAV fund model in the wake of money market reform in Europe, Royal Mail’s Head of Liquidity and Investments, Auna Dunlevy, explains why treasurers may also want to consider the possibilities offered by another type of fund which is already available: the VNAV fund.

Last week, Treasury Insights reported that J.P. Morgan Asset Management had become the first major fund manager to announce its new range of funds to comply with incoming regulatory reform in Europe.

Unsurprisingly, the headline from this announcement was the launch of a new low volatility net asset value (LVNAV) fund, a fund which many asset managers believe will be the investment option of choice for many treasurers under the new European regulatory paradigm.

That being said, the incoming regulation, and the changes it is forcing upon treasurers, is giving them the chance to take a renewed look at their investment strategies and all options should be on the table, including the use of variable net asset value (VNAV) style funds.

Many options

Auna Dunlevy, Head of Liquidity and Investments at Royal Mail, has already taken the plunge: she currently uses a combination of CNAV and VNAV funds. “We started looking at VNAV funds because there was a lot of talk that CNAV funds would be subject to significant changes – for example, there were initial proposals that funds would no longer be rated and this would prove problematic in terms of our investment policy,” she explains. “What we found was that VNAV funds are not as scary as we thought. We also found that there is quite a range of funds with slightly different strategies, whereas sometimes CNAV funds all seem to be investing in the same thing.”

After conducting thorough research, Dunlevy began investing a small amount in VNAV funds and has continued to use them – albeit for specific purposes. “This is not money that we use for everyday liquidity,” she clarifies. “We like to make sure that we can leave the funds there for three months or six months.” This is possible because the organisation’s cash flows are highly cyclical: in the run-up to Christmas, the increased postal revenue generates an increase in cash within the company.

Dividends are paid out in January and July, which gives the company an opportunity to invest that cash on a three to six month basis. VNAV funds are used for the portion of this cash which is regarded as long-term cash – so, as Dunlevy notes, “we have the longest window of opportunity so that if there is any volatility within the funds, we can hopefully ride it out over that period of time rather than to have a daily call on these funds”.

Dunlevy is satisfied with the results, noting that VNAV funds tend to provide “an extra pick up in terms of return”. She adds, “We do feel that if we have the money available, it is in the best interest of the business that we achieve an appropriate return on the funds.”

Using VNAV

When using VNAV funds, Dunlevy explains that Royal Mail has historically chosen fund providers with whom the business is already familiar. “It would tend to be someone we’ve identified as a good name over the door,” she says. “We will speak to them about the fund, their investment strategy and risk management.”

She adds that they have found varying strategies amongst the VNAV funds – some funds are very similar to CNAV funds, albeit with a slightly longer duration, whereas others may have a lot of asset-backed paper. “As long as we’re happy with the underlying assets and strategy, we are generally pretty happy – although obviously we do know that this type of fund may lead to higher volatility.”

Another difference between CNAV and VNAV funds is the nature of Royal Mail’s relationship with the provider. Despite having used VNAV funds for a number of years, there is more internal scrutiny of the funds and their return: understanding the risk and return is important. “We like to keep the provider close to us,”

Dunlevy emphasises that yields are monitored daily and might involve discussions with the manager around significant movements. More detailed consultations happen each year before reinvesting.

Mix and match

However, choosing a money market fund isn’t necessarily an all-or-nothing decision. Dunlevy has continued to use CNAV funds for the most part – and looking ahead, she has also been familiarising herself with the new LVNAV and, indeed, public debt CNAV funds.

“We’re broadly happy with the idea of LVNAV because you’ve still got that 20 basis point movement before they have to mark to market and it is a product which we will use to manage our daily liquidity,” she says. “The public debt CNAV funds may be very low in terms of their return, but there may be some funds out there which are able to give a slightly better return, depending on their strategy.”

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