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SBA INVESTMENT ADVISERS
| MONEY MARKET FUNDS, COMMERCIAL PAPER, AND YOUR INVESTMENT POLICY |
Many public entities have adopted investment policies based on
guidance from their professional associations or organizations.
These ‘sample’ policies frequently suggest that public entities
limit their exposure to commercial paper to no more than 30%
and no more than 5% of a single issuer. Furthermore, we have
also found that many public entities do not even invest directly in
commercial paper.
However, we have also found that these same entities will invest
a majority of their assets in money market funds that may
contain from 65% to 95% in commercial paper – putting their
total exposure to commercial paper well above any recommended
policy. So keep in mind that if you are purchasing commercial
paper, either directly or through your money market fund, that it
is wise to limit your total exposure to those levels required by
your investment policy.
Asset-backed commercial paper is a newer introduction to the
marketplace, and is an even higher class of risk. In today’s
commercial marketplace, conservative investors may wish to
have no exposure to these investments, either directly or through
their money market funds, at least until this “sub-prime” crisis is
over.
Asset Backed Commercial Paper
The term “Asset Backed Commercial Paper” can be very
misleading to investors. Do not confuse “Asset Backed” with
“Collateralized”, which many investors are familiar with.
“Collateralized” often refers to the backing of an investment such
as Certificates of Deposit or Repurchase Agreements with US
Government bonds.
“Asset Backed”, on the other hand, usually refers to segregating
assets owned by a bank or insurance company and ‘pledging’
those assets as security. Today those assets are often ‘sub-
prime’ loans being used for security, which is clearly a much
higher level of risk.
guidance from their professional associations or organizations.
These ‘sample’ policies frequently suggest that public entities
limit their exposure to commercial paper to no more than 30%
and no more than 5% of a single issuer. Furthermore, we have
also found that many public entities do not even invest directly in
commercial paper.
However, we have also found that these same entities will invest
a majority of their assets in money market funds that may
contain from 65% to 95% in commercial paper – putting their
total exposure to commercial paper well above any recommended
policy. So keep in mind that if you are purchasing commercial
paper, either directly or through your money market fund, that it
is wise to limit your total exposure to those levels required by
your investment policy.
Asset-backed commercial paper is a newer introduction to the
marketplace, and is an even higher class of risk. In today’s
commercial marketplace, conservative investors may wish to
have no exposure to these investments, either directly or through
their money market funds, at least until this “sub-prime” crisis is
over.
Asset Backed Commercial Paper
The term “Asset Backed Commercial Paper” can be very
misleading to investors. Do not confuse “Asset Backed” with
“Collateralized”, which many investors are familiar with.
“Collateralized” often refers to the backing of an investment such
as Certificates of Deposit or Repurchase Agreements with US
Government bonds.
“Asset Backed”, on the other hand, usually refers to segregating
assets owned by a bank or insurance company and ‘pledging’
those assets as security. Today those assets are often ‘sub-
prime’ loans being used for security, which is clearly a much
higher level of risk.
All statements made herein are the sole
opinion of SBA Investment Advisers
based on their knowledge and experience
with the investments in question. They
are in no way intended to be investment
advice or a recommendation to buy or
sell securities. If the reader has further
questions about the information on the
website, please contact Michael Kloack
of SBA Investment Advisers at
734-668-6688.
opinion of SBA Investment Advisers
based on their knowledge and experience
with the investments in question. They
are in no way intended to be investment
advice or a recommendation to buy or
sell securities. If the reader has further
questions about the information on the
website, please contact Michael Kloack
of SBA Investment Advisers at
734-668-6688.