Term deposits and Money Market Funds:  from “hibernation” to the centre stage

 

 

Allocating cash to liquidity solutions is a simple decision at first sight, but it can quickly become a very complex exercise when all the technicalities are factored in.

 

Terms such as CNAV (Constant Net Asset Value), VNAV (Variable Net Asset Value) and LVNAV (Low Volatility Net Asset Value) are certainly unfamiliar to most investors.

 

After a decade of low or even negative interest rates, the recent ECB and FED hiking cycle had the effect of putting back at the front seat of every investor attention an asset class which was, at least for retail clients, disregarded for years: term deposits and money market funds. Allocating cash to liquidity solutions is a simple decision at first sight, but it can quickly become a very complex exercise when all the technicalities are factored in. When looking at the universe of Money Market Funds for example, terms such as CNAV (Constant Net Asset Value), VNAV (Variable Net Asset Value) and the most recent LVNAV (Low Volatility Net Asset Value) are certainly unfamiliar to most investors.

“Allocating cash to liquidity solutions is a simple decision at first sight, but it can quickly become a very complex exercise when all the technicalities
are factored in.”

STEFANO TORTI

Term deposits as well, although probably perceived as one of the simplest products offered by banks, are an area where it is important to consider in the selection process factors such as interest rate expectations, the shape of the yield curve, the bank’s counterparty risk, the return after cost of alternative solutions and taxation.

While it is true that every rational investor should seek to maximise the expected return, also within the portfolio’s liquid assets, it is also true that professional advice should be present in order to make the most informed decision in an area that is in reality much more complex than it seems.

 

(Source: Delano)