Henderson Liquid Assets Fund
Financial crisis - your questions answered
Mark Camp Director of Institutional Liquidity Funds Tony Andrews Fund Manager
What types of deposits do you invest in? The Henderson Liquid Assets Fund (HLAF) invests in bank and building society accounts, call accounts, fixed deposits and both fixed and floating rate certificates of deposit (CDs). We will be looking at floating rate notes at some point in the future, but all investments are unsecured obligations of the main issuing counterparty. How do you choose which institutions to lend to? The diversification of HLAF assets is a major selling point for the fund. We currently invest in over 30 separate institutions. The fund's triple A rating only allows us to invest in institutions with the highest short term rating. HLAF assets have to comply with the strict investment parameters set out in the UCITS III approved prospectus, then with the Henderson approved counterparty list and fund strategy, and finally with the investment parameters set by Fitch and Moody’s as part of their conditions for awarding the AAA and Aaa rating to the fund. This effectively limits us to only considering banks with long term ratings of A or better. Further to that, all counterparties have to be acceptable to our in-house credit specialists and approved by Henderson's Credit Risk Committee. Naturally we take note of ownership, guarantees, position in home economy and any other intelligence in making day-to-day investment decisions. Surely government-issued securities are safer than cash at the moment? Only if the government in question has sufficient monetary strength to fulfil its obligations. This issue is rapidly becoming a crisis in Iceland at the moment. UK Gilts, for their part, may be safer but offer much lower interest rates than are available through HLAF. What is the difference between investing in HLAF and putting my money with any popular high street UK bank or building society? After all, they are now protected by the Government, aren’t they? While a fund like HLAF does not offer a failsafe investment guarantee, UK banks and building societies currently only offer guaranteed protection up to £50,000 per person. HLAF also offers investors the following additional benefits over bank and building society accounts:• The fund carries a triple A rating from both Moody’s and Fitch - meaning that from an overall risk perspective HLAF is considered to be less risky than a one-year AAA rated bond. There are few banks left with a rating of double A or better.
• Diversification benefits - the spread of risk within HLAF means that if there is a problem with one of the banks it would only affect a fraction of each pound invested. Whereas if invested in a failed institution, or one which the government did not have the funds to support, then all of that pound would be deemed to be at risk. • Daily dealing and liquidity - to achieve the same liquidity levels within a bank, the investment would have to be held in a current account which typically yields between 0% and 3.0%. HLAF has consistently yielded above the UK base rate over the last five years. • Superior returns – HLAF provides a return which reflects market rates only obtainable for investors tying their money up for a considerable period, or if invested in CDs may result in capital losses if sold to raise funds during a rising interest rate environment. Can I have a list of current holdings in the fund? The top 15 holdings in HLAF are posted on the Henderson website at the end of every month. The web address is http://www.henderson.com/sites/henderson/institutional /productsandcapabilities/cashinvestment.aspx As an exception we may also disclose a full consolidated counterparty list. See the ‘Notice to Shareholders’ letter dated 22 September 2008 on the website for more details. Did you have any exposure to Icelandic banks? We do not have any exposure to Icelandic Banks. Did you have exposure to Lehman Brothers? We do not have any exposure to non-deposit taking American investment banks, on the grounds that their Bank Financial Strength Ratings (BFSR) fall short of our stringent credit controls. Why is the current yield on the fund higher than base rates? The main issue at the moment is one of liquidity within the money markets. As there is more demand from banks for funds than there is cash to fulfil the demand, the price only has one way to go. We are able to take advantage of the fact that one to three month interest rates are higher than the base rate at present. Is there any currency risk within HLAF? The prospectus precludes the fund from taking any foreign exchange (FX) risk. Is the fund covered by the Financial Services Compensation Scheme? No. HLAF is an institutional fund, and is therefore not covered by the FSCS, which is applicable for retail investors.
What would happen to my investment if Henderson were to default? HLAF is a separate and distinct company from Henderson Global Investors Limited, the investment manager of the fund. All fund assets are held in custody and are therefore totally ring-fenced from Henderson and, indeed the custodian bank, which is BNP Paribas in Dublin. However, the continuing management of the fund would then have to be addressed. Apart from that, no investments would be at risk if Henderson were to default. Henderson Group plc is a FTSE 250 company and is considered to be well capitalised for an investment management house. How did the move by the Treasury on 13 October to buy stakes in UK banks affect the money markets? The three month LIBOR rate fell slightly following the announcement, and this continued on the 14 October. The announcement could lead to a touch more liquidity in the market. A money market fund in the US managed to ‘break the buck’. How did this happen and could the same thing happen to a money market fund over here? Money market funds are said to ‘break the buck’ when their net asset value (NAV) falls below $1 or £1 a share. The US fund in question had a significant exposure to Lehman Brothers, which brought about the problem when the company defaulted on its debt. It is conceivable that the same could happen to a European-based money market fund, however as noted before HLAF has never invested in any non-deposit taking American investment bank. The current fund’s policy is not to invest in derivatives. HLAF has also never invested in any mortgage backed securities (MBS) or any asset backed securities (ABS).
We consider that the institutions we invest with should be able to find government support if they ran into difficulties. All the banks and building societies in which we invest operate retail deposits and are therefore centrally regulated and pivotal to the economy. HLAF seeks to maintain a stable NAV per share of £1. The return on the investment is paid in the form of a monthly dividend, gross of tax and net of fees, which can be paid in cash or reinvested in new shares. The fund has no exposure to sub-prime lending, structured investment vehicles or asset backed securities. Does Henderson guarantee the share price of the fund will not drop? No. There is no guarantee that the share price cannot fall below par. However, such a scenario is unlikely given the very conservative investment policy HLAF currently applies. To date, apart from the Lehman Bothers Liquidity Funds, domiciled in Dublin, no triple A rated fund run by an IMMFA* member has ever fallen below par. There is no legal guarantee to investors regarding the capital investment in HLAF and this is clearly stated in the prospectus and supplement. What’s your outlook for the next six to twelve months? We see the interbank market slowly recovering and LIBOR interest rates in Sterling falling, to come closer to base rate. We think further base rate cuts will be required to respond to any recessionary effects felt in the UK economy. The depth of the recession will determine how far rates have to fall, and how quickly. A base rate in the UK of 3.0% is therefore not out of the question.
* The Institutional Money Market Funds Association (IMMFA) is a trade association. Most of the major fund managers, including Henderson, offering Treasury-style money market funds are IMMFA members.
Contact us
Matthew Cheek Sales Manager Tel: 07917 080 361 Email: matthew.cheek@henderson.com Henry Jones Sales Manager Tel: 07714 415 218 Email: henry.jones@henderson.com Maria Mealing IFA Distribution Manager – Nationals & Networks Tel: 07770 855 628 Email: maria.mealing@henderson.com Tristan Murphy Sales Manager Tel: 07904 661 781 Email: tristan.murphy@henderson.com
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