The new liquidity fund gives investors a competitive alternative to holding cash in the bank. Those targeted include UK local authorities, which following regulatory changes in April can now invest in liquidity funds, as well as major corporates with cash balances, and institutional funds.
"This is a growing sector," said Tim Lucas, head of treasury, Morley Fund Management. "We estimate that in the UK there is £10bn-£15bn invested in money market funds, but a lot more sitting in banks. In the US, by contrast, there is $2.5tr invested in similar types of fund," he told EuroWeek.
Structural changes in the market are driving growth, according to Lucas. "Banks are becoming more conscious about their return on capital and looking to shrink their balance sheets," he said. "In the medium term, we believe that this will be beneficial for money market funds as the yields available from these funds become even more attractive in comparison with bank rates."
The fund guarantees same day liquidity. "But we know that not all customers will want to take their money out on the same day, so we can pool the investments and spread them over the longer term. On average, longer term investments generate better returns than overnight. That is a major reason for our being able to offer a competitive rate compared to overnight bank deposits or call accounts. Furthermore, the fund has a triple-A rating, which very few banks have now," said Lucas.
Around 70% of assets will be investment in certificates of deposit (CD), with the rest in deposits, commercial paper (CP) and floating rate notes. "Over the medium term we believe that the CP content is likely to increase at the expense of the CD portfolio, as there is increased disintermediation in the money markets," said Lucas.
CDs are short term debt instruments issued by banks. Most have maturities of up to one year. "CDs are more liquid than CP. Bid/offer spreads of CDs might be as low as 1bp, whereas spreads on CP are in the 3bp-5bp range. The issue for us is liquidity and the ability to sell quickly at a minimal cost if we want to change our view on the market, or if interest rates move and cause us to re-evaluate where we want to be on the yield curve. We are not intending to be active traders, but we do want to be able to position ourselves on the yield curve. We have a maximum weighted average term of 60 days."
The Morley Sterling Money Market Fund is the first sub-fund to be established under Morley Liquidity Funds plc, the Dublin-based umbrella investment company. Euro and dollar denominated sub-funds are likely to follow. The Morley Sterling Liquidity Fund is aiming for growth of £250m a year.