Merrick Styles is co-head of investment at Amundi (UK). Money market funds (MMFs) in the UK currently offer an annual yield of zero to 0.40%, well below the Bank of England base rate of 0.50%. Short-dated fixed income (SDFI) can offer some additional pickup in yield over MMFs with only a small increase in risk. Typical yields for Sterling denominated SDFI funds are in the 0.60 to 1.00% range depending on risk appetite and duration. With some improved planning of cash needs, and by holding a small float for unexpected items, surplus cash can be invested in SDFI to improve yield. If an emergency cash call is needed, whilst not the market norm, same-day settlement is also available in SDFI markets. Tailored SDFI funds offer a level of customisation with which typical MMFs cannot compete, with the level of risk, credit quality and duration being controlled to suit the investor’s needs. Risk can also be adjusted by using derivatives to hedge or even increase it. Customisation can also be used to align an investor’s strategy and cash needs with the holdings in the fund. For example, if an investor has short-term cash needs for small amounts but knows that a large cash call will come in the future, short-term needs can be met with government securities and the later cash call with longer-dated corporate credit. Government securities offer very good liquidity, with tight bid/ask spreads and short settlement times, but the trade-off is a lower yield. Longer-dated corporate credit, whilst still very liquid, offers slightly more risk but with a much higher yield. Customisation can also be extended to socially responsible investment policies or regulatory constraints (e.g. Solvency II or local bylaws) if these impact on what is permitted within the investment universe. SDFI can also offer improved diversification. Typical MMFs have large allocations to financial commercial paper whereas SDFI can allocate to instruments such as high quality assetbacked securities, covered bonds, or the more usual government, agency, supranational and corporate bonds from across a wide range of industry sectors. Higher yielding foreign currency bonds can be purchased with the currency hedged out to reduce risk. Small allocations to longer term holdings of lower credit quality bonds can also be implemented to boost yield, with only a small impact on risk and liquidity. With default rates at extremely low levels, the additional credit risk in SDFI over MMFs is very low. The major difference in risk will come from duration. Typical MMFs are around three months, but a SDFI fund can still keep duration at less than a year and, in some cases, as low as 6 months while still offering a significant pick-up in yield. SDFI also offers mark-to-market valuation, so there are no hidden surprises if yields move and securities are sold. Short-dated fixed income is an often overlooked asset class but can offer some significant improvements in yield, customisation and risk control for many institutions.
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