Money Market Investment Process
In keeping with our risk-managed investing philosophy, our money market process focuses on capital preservation and liquidity – the key ingredients most investors demand from a short-term cash management account.
An Emphasis On Safety
We believe investors look to money market funds primarily to safeguard their cash. Therefore, we concentrate on safety and liquidity, along with a strong emphasis on generating a competitive yield.
We believe the best way to preserve principal and maintain liquidity is to manage our money market funds to extremely high credit-quality standards. Money market securities are not without risk, particularly in the corporate market, where yields tend to be higher in exchange for slightly higher risk. Our responsibility is to evaluate and manage those risks in an effort to safeguard and protect our shareholders’ assets.
Top Tier Securities
The composition of our money market funds reflects our commitment to quality. We only invest in government-backed money market securities, top-tier commercial paper rated “A” or better by Moody’s Investors Service and Standard & Poor’s, and other high-quality instruments. Our guidelines typically exceed the industry standards for money market mutual funds. We constantly monitor our “buy” list and will move securities to a “watch” list or remove them altogether if conditions warrant.
Diversification
In addition to focusing on high credit quality, we manage our money market funds to higher diversification standards. We limit corporate issues to a stated dollar amount, which is typically less than the five percent single-issuer maximum allowed by all money market funds. In doing so, we seek to further reduce the credit risk of any single issuer.
Implementing The Analysis Process
Our money market management process is a disciplined five-step methodology.
Step 1: Evaluate interest rate trends
Yields on money market securities track short-term interest rates, such as the federal funds rate. Therefore, it is important to evaluate key economic indicators, Federal Reserve policy and government fiscal strategy to derive a forecast for short-term interest rates.
Advantages: Our focus accounts for the key influence interest rates have on money market yields. If our forecast for short-term rates is correct, we can operate with the wind at our backs, in which interest rates work in our favor.
Step 2: Identify Attractive Sectors
We begin with a hypothetical portfolio consisting entirely of overnight repurchase agreements – among the safest securities available – and gauge the relative attractiveness of other sectors, such as Treasury bills and commercial paper, on a “value added” basis. When we believe the value is there, we’ll invest in these sectors to capture higher yields.
Advantages: Thoroughly evaluating each sector allows us to take advantage of what we believe are the most attractive short-term securities, based on safety, liquidity and yield, and enables us to avoid sectors we deem unattractive.
Step 3: Determine Maturity Structure
The yield curve graphically depicts the relationship between yields and maturities: as maturities increase, yields increase and the curve slopes upward. We attempt to balance yield and maturity by evaluating the slope and dynamics of the curve and pinpoint areas that we believe offer the most attractive yields at the best price, while staying within our average maturity guidelines of 90 days or less.
Advantages: Monitoring the yield curve helps identify the most attractive yield and maturity opportunities. For example, we may group or exposure at the long and short ends or the curve, or we may spread our exposure across the curve in an effort to capture yield advantages without taking on excessive maturity risk.
Step 4: Select Securities
We look for specific fixed and variable rate money market securities that meet our sector and maturity guidelines while adhering to our stringent quality requirements. When selecting corporate securities, we conduct a thorough analysis of the issuer’s short- and long-term credit ratings as rated by Standard & Poor’s or Moody’s Investors Service. Only corporate issuers with top-tier commercial paper ratings and long-term debt ratings of “A” or better are considered for investment. Our corporate holdings are also diversified across various industries to further limit risk.
Advantages: Our process helps identify the highest-quality money market securities. This attention to quality promotes share price stability while generating a competitive yield for our shareholders.
Step 5: Invest
The final step of purchasing securities is the culmination of our work in the previous four steps. Along with our interest rate, maturity and credit analysis, we further ensure our money market portfolios remain broadly diversified. We limit our corporate exposure to a fixed dollar amount based on long-term credit ratings, rather than a percentage of the fund size.
Advantages: By adhering to our stringent credit-quality and examining dozens of security-specific factors, we strive to promote share price stability, liquidity and a competitive yield in our portfolios. In addition, our higher-than-average diversification standards may help reduce investment risk.
To understand how we put our investment process to work in our money market portfolios, we invite you to read about our Money Market fund family:
- Cavanal Hill Cash Management Fund seeks to maintain a stable share price by investing in high-quality, short-term corporate and government securities. The average maturity of the Fund will not exceed 90 days.
- Cavanal Hill U.S. Treasury Fund seeks to maintain a stable share price by investing exclusively in short-term U.S. Treasury securities, repurchase agreements and other securities backed by the full faith and credit of the U.S. government. The average maturity of the Fund will not exceed 90 days.
- Cavanal Hill Tax Free Fund seeks to maintain a stable share price by investing at least 80% of portfolio assets in high-quality, short-term municipal obligations, diversified across top-tier securities, issuer types and state allocations, which are exempt from federal income taxes. The average maturity of the fund will not exceed 90 days.