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Liquidity Management Strategy. Helping you grow your assets with access to liquidity . In an environment where yield is low and market volatility is high, it can be challenging to find strategies that help meet your goals. We created a new strategy that seeks to help grow your assets with access to liquidity. Portfolio. Results. Experience.
Is liquidity a strategic objective? ii. What is asset-liability management? iii. How is liquidity management connected to asset-liability management? iv. What are the basic action variables of liquidity management? v. Give two examples of factors influencing the size of the liquidity requirements.
Aug 9, 2024 · What is a Liquid Asset? Liquid assets refer to assets that can be easily converted into cash without significant loss in value, time, or transaction costs. These assets are readily accessible, providing individuals and businesses with the ability to meet their short-term financial obligations promptly.
Liquidity management means ensuring that the institution maintains sufficient cash and liquid assets (1) to satisfy client demand for loans and savings withdrawals, and (2) to pay the institution’s expenses.
- July 2022
- Cash segmentation
- Cash investment policy statement
- Key characteristics of MMFs
- Capital preservation
- Liquidity
- Diversification
- Active fund management
- typical MMF portfolio
- Key securities
- Comparing MMFs to bank deposits and ultra-short duration bond funds
- MMFs vs bank deposits
- MMFs vs ultra-short duration bond strategies
- Key differences between mmfs, bank deposits and ultra-short duration strategies
- Interest rate risk
- Liquidity risk
- Credit risk
- External fund ratings
- Credit risk management
- Five key fundamental credit considerations
- 1 Strength and experience of the manager
- 2 Credit analysis capabilitie and investment process
- 3 Liquidity, investor concentration and access
- 4 Environmental, social and governance (ESG) considerations
- 5 Technology
FOR INSTITUTIONAL / WHOLESALE / PROFESSIONAL CLIENTS AND QUALIFIED INVESTORS ONLY – NOT FOR RETAIL USE OR DISTRIBUTION
With good cash forecasting an organization can segment its funds into three separate buckets depending on its need for liquidity, security and yield. Operating cash is for day-to-day needs; it is likely volatile and needs same day liquidity and high levels of security. Traditional money market funds and overnight time deposits are suitable for this...
A cash investment policy statement lets an organization define its short-term investment objectives and strategies for achieving them. It creates a sound foundation and promotes consistent, long-term discipline in decision-making through all market conditions, so that crucial liquidity and investment goals are met. An organization’s cash investment...
MMFs are highly regulated pooled mutual funds that invest in short-term, high-quality debt instruments and may be classified as cash equivalents. MMFs are structured as independent corporate entities, with a board of directors to safeguard shareholders’ interests. Each investor in an MMF becomes a shareholder and part-owner in the fund. Assets are ...
Capital preservation is paramount for liquidity investors. Investing in a diversified range of short-tenor, high-quality securities is the primary way managers of MMFs aim to protect capital. Leading MMF managers will also conduct their own credit analysis in addition to considering ratings from independent credit rating agencies. A manager’s in-ho...
A high level of liquidity is equally important for MMF investors and therefore MMFs typically offer investors same day (T+0) or next day (T+1) access to their investment. MMF portfolio managers are able to offer this facility by maintaining high levels of daily and weekly liquid assets while investing in securities that are easily liquidated, if n...
Diversification is an important feature of MMFs and is critical to preserving capital, generating returns and ensuring liquidity. MMFs hold a highly diversified range of securities from a wide range of issuers and maturities and focus on securities with the highest short-term credit ratings available. For example, a MMF is generally permitted to ho...
Active fund management is essential to ensuring the key objectives of a MMF — capital preservation, liquidity and maximizing returns — are achieved. MMF portfolio managers will actively adjust the fund’s exposure to different issuers and sectors depending on their credit outlook. Active managers will also adjust the maturity of investments and the ...
MMF aims to hold a highly diversified portfolio of short-term debt instruments from a broad range of highly-rated issuers, including governments, financial institutions and top-rated corporate organizations. Multiple securities may be held in a fund and investments typically include commercial paper, time deposits, certificates of deposit, floating...
Summary Features Highly liquid Allows diversification Corporate and financial institutions, agencies At maturity** At maturity At maturity** During term Corporate and financial institutions, agencies and supranationals Governments Banks and supranationals across diferent Highly liquid – issuing bank often willing to Liquid and highly active market ...
With a thorough understanding of MMFs, we can now compare them with other liquidity investment options, such as cash deposits or ultra-short duration bond funds, to better evaluate the benefits and risks of each.
MMFs and bank deposits are complementary, not competing products, and both belong in a treasury professional’s toolkit. Two important benefits of investing in MMFs rather than in bank deposits are investment efficiency and cost. Using MMFs relieves treasury professionals from some of the day-to-day operational activities associated with overseeing ...
With interest rates at record lows, holding all cash in liquidity funds or time deposits is no longer a viable strategy. As discussed earlier, one of the key advantages of cash segmentation is the ability to earn higher returns from the reserve cash and strategic cash buckets. An ultra-short duration bond fund is one of the first strategies investo...
Liquidity products are designed to be among the least risky of all investment choices — after all, their primary purpose is to preserve capital and remain highly liquid. However, even liquidity products are subject to inherent investing risks — just to a lesser degree than most bond or equity funds. In this section we will start with an overview of...
MMFs and ultra-short duration bond funds may be subject to interest rate risk because they invest in short-term fixed income securities that can increase or decrease in value based on changes in interest rates. If rates increase, the value of the fund’s investments generally declines, and vice versa. Securities with longer maturities typically offe...
Liquidity risk can affect any type of fund, but it is most important for MMFs because they are meant to be used for daily cash needs. There are two main types of liquidity risks: Funding liquidity risk is the possibility that a fund’s liquidity is insufficient to meet redemption calls from investors. There are a number of steps that a MMF can take ...
Credit risk, which can affect all fixed income and bank deposit products, considers the possibility that issuers or counterparties can default or be downgraded — with significant implications for investors. Default risk is the possibility that issuers or counterparties fail to repay on securities, time deposits or repurchase agreements. Downgrade r...
When selecting a liquidity product, the money market fund ratings given by the independent credit rating agencies can be a good starting point for assessing a fund’s security and creditworthiness. However, while fund ratings are important, they are not the only criteria to consider when selecting liquidity products. In fact, although most investors...
Having an experienced and independent internal credit research team is increasingly critical to avoiding downside credit risks in MMFs and ultra-short duration bond funds. Liquidity investors should therefore carefully review a fund manager’s credit research and credit risk management team and process when selecting a fund. The internal credit rese...
Capital should be tangible and appropriate relative to earnings volatility. Asset quality is assessed through the underlying credit quality and inherent liquidity of underlying assets. Management should be consistent and operate with integrity. Earnings are reviewed for consistency and quality over prolonged time periods. Liquidity is assessed thro...
Investors will want to assess the strength of a MMF manager through careful examination of the manager’s current and historic financial position, as well as considering its commitment to and the size of its liquidity business. A thorough investigation of the manager’s experience and track record — particularly through volatile markets — is critical...
Prospective investors should probe the strength and track record of the credit analysis capabilities and the investment process by asking about the structure, experience and resources of the credit team. Topics to address include how are funds stress-tested, whether anything in a portfolio has been downgraded or a fund manager has had to buy out an...
As a key goal, the liquidity conditions of a money market fund should be a priority for prospective investors. Investors should ask if the fund maintains high levels of overnight liquidity and a strong ladder of maturites to meet all potential redemptions and if there are restrictions to ensure an adequate level of client diversification. Clients s...
ESG considerations are becoming an increasingly important part of investing and the due diligence process. Investors that are seeking to incorporate ESG into their liquidity fund selection process may want to look closely at how ESG is incorporated into credit analysis and the security selection process. If the analyst believes that the ESG factors...
As an organization's treasury team moves its trading and investment decisions online, a comprehensive, secure and easily-integrated technology platform for liquidity investments has become another important consideration for treasury professionals. On average, global liquidity clients invest in at least three fund providers to ensure they have enou...
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Almost one-third of our clients assets under management are invested in short-term fixed income and managing sophisticated institutional portfolios for more than a century has made us a leading provider of liquidity solutions in the industry.
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When you have studied this lesson you should: • be able to define liquidity, cash assets and liquid assets. • understand the basic objectives of liquidity management. • have a sense of some practical liquidity issues facing microfinance institutions. Pre-Test.
