consistent performance across the board means interest has increased in cash funds as investors selling equities look for secure vehicles
Cash funds have enjoyed renewed interest in recent months against a backdrop of falling equity markets.
As Autif requires 95% of the fund to be invested in money market instruments, such as cash, bank deposits and floating rate notes, returns from the sector are inevitably homogeneous.
The difference in returns over the three years to the end of October represent the least divergent sector performance in the mutual fund spectrum. The top performing fund, M&G High Interest, outperformed the worst performer, Abbey Global Growth and Security, by just 6.92% in that time.
Moreover, individual performance over the three-year period diverged from the mean by a maximum of just 3.12% on the upside and by 3.8% on the downside.
Credit Suisse Cash was launched back on 1 March 1999 and has outperformed in both of the full calendar years since its inception.
Managed by Andrew Dickinson, the fund primarily invests in bank deposits, floating rate notes and corporate paper.
Dickinson said divergence in performance across the sector is largely the result of the internal constraints on individual funds. In the case of Credit Suisse Cash, Dickinson added that he is restricted to investing a maximum of 10% in any one corporate issuer, 20% in any one sovereign issuer and up to 30% in floating rate notes.
Since launch, the fund has performed strongly, posting growth of 5.64% between November 1999 and October 2000 and 5.04% over the 12 months to the end of October. This compares to respective sector averages of 5.33% and 4.75%, equating to consistent top quartile performance.
The outperformance of the portfolio is in part due to the fund's strategy of investing in longer dated mispriced corporate paper and floating rate notes.
Dickinson said: 'Over the past year, interest rates have fallen significantly from 6% to 4%, which was beyond our expectations. A lot of the fund's excess return came in the last two months when the rates were cut after 11 September.'
A number of 12 and 18-month bonds maturing also helped boost returns in the past two months, while investments in Barclays floating rate notes enabled Dickinson to add 10 basis points over Libor.
The short-dated nature of floating rate notes, the coupons of which are stepped every three months, enable the fund manager to play the short end of the market. Given the current interest rate environment, Dickinson is favouring the short end of the market. He believes that if the events of 11 September had not happened, then interest rates would have bottomed at 4.75%. While, as a house, Credit Suisse feels that interest rates will rise in 2002, Dickinson said this may well not happen until the second half of the year and is largely dependent on the anticipated US recovery.
Dickinson said: 'At the moment we are very, very short because we have let a lot of our holdings mature and we feel the market is going back up. It moved up by 10-15 basis points last week.
'The three month area is looking reasonably priced if you are presuming rates are not going to increase in the short term. We are looking at a base rate of 4.5% to 4.75% by the end of next year.'
Fidelity's range of money market funds has seen huge cash inflows from risk averse investors this year, according to Andrew Wells, manager of the Fidelity Cash Fund.
While the Cash Fund itself has experienced smaller and more steady cash inflows, funds under management across the group's money market fund range have more than doubled this year from $4bn to $8.5bn, Wells said.
The fund is run to tight internal constraints as well as Autif's in order to provide an ultra low-risk offering. Wells is required to maintain a maximum weighted average to maturity of 60 days, with at least 50% of the fund in assets maturing in under two weeks, to meet his liquidity requirements.
Wells said: 'Some 50% of the assets are maturing in under two weeks, so we really look to gain outperformance from the other 50% of the portfolio.'
Wells is restricted from holding anything but the most credit worthy of assets, which rules out holding short-term bonds and deposits in those banks at the lower end of the credit pile that may pay out better rates.
Wells and his team carry out credit ratings of the major lending institutions and have cash on deposit with many of the strongest names, in terms of credit ratings, such as Dresdner Bank and Lloyds TSB.
The house strategy has been to put money as long as possible this calendar year and to that end, Wells has maintained his weighted maturity average around the maximum of 60 days.
That said, the fund's rigid adherence to liquidity constraints has led to it marginally underperforming over the 12 months to the end of October, up 4.47% compared to a sector average of 4.75%. Similarly, the fund's low risk approach, characterised by its below average beta score of 0.76%, has led to slight underperformance over three years to the end of October, up 15.72%, versus a peer group average of up 16.16%.
Moving into next year, Wells believes domestic interest rate policy may well follow that of the European Central Bank if the Government decides to make an announcement on Britain joining the euro in the near future. If this is the case, whatever the US does, the UK will not want to move greatly in a direction contrasting with that of the ECB's stance.
Head of UK intermediary distribution
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