Accountants, ‘VNAV’ a problem

In the first of a two part series, Jo Tura examines the potential impact on local authority treasurers of a proposed move by regulators to variable net asset values for money market funds. Next week a closer look into the regulation itself and the likely reaction from treasury advisers.

Money market fund regulators look set to implement a change to funds, making them all variable net asset value (VNAV) or floating Nav funds.

Recommendations by the International Organisation of Securities Commissions (Iosco) last month included the proposal for the switch to VNAV from CNAV (constant net asset value) as one of the measures for preventing runs on systemically important funds at times of market turmoil.

Treasurers are not keen on the concept of VNAV money market funds, as they add complexity in accounting, and some question the liquidity of funds within this structure. “I think certainly that a lot of authorities might pull out of money market funds,” said Bridget Uku, treasurer at the London Borough of Ealing. “For us we like to have a constant NAV. One, it makes accounting easier, you’re not marking to market so it is a cash equivalent from that perspective. And two, even though most people accept that with a constant net asset value somewhere in the background they mark it to market to make sure that it stays within the ranges, you still feel that at least it is constant and stays that way. The reality is that most floating net asset value funds generally stay around the £1/ $1/ 1€ value but we just like the idea of having that CNAV.”

At Investec, which runs a number of MMFs, fixed income portfolio manager Andrew Farrell agreed that investors don’t like floating net asset value. “They like the concept of a constant NAV on their balance sheet,” he said. “Moving to variable could incur accounting and tax implications that could make these funds less attractive to corporate treasurers.” Constant NAV does hide the fact that the value of the fund may go up or down but variable pricing is fairer for investors, said Farrell, reflecting the underlying risk in the portfolio from credit quality, diversification, market and liquidity risk.

Paul Reddaway, London Borough of Enfield’s head of treasury and pensions commented that while money market funds in general have work to do in terms of offering an attractive enough yield for treasurers, the accounting problem posed by VNAV funds was less worrying. “In terms of any accounting issues we’ve got no real concerns. We’ve got the expertise to account for them properly so if we have to do it, we have to do it. From a purely accounting perspective it’s something we’d be able to work round” he said.

Treasurers’ money could be subject to volatility under a change to VNAV, according to Arlingclose’s Andrew Larkin. “This would not prevent them from withdrawing their cash, although this has been a concern for many in the industry,” he said.

Furthermore fund management houses have had success in changing funds to VNAV. Aviva changed over in late 2008 and have maintained the NAV at a constant £1 since. “Despite initial withdrawals investors have maintained support,” said Larkin.

Aviva fund manager Matthew Tatnell told Room 151 that VNAV funds not providing same day liquidity was a common misconception. “The Aviva Investors Sterling Liquidity, Euro Liquidity and Government Liquidity Funds are all VNAV, AAA rated funds and have provided same day liquidity to all our investors every working day for almost 4 years,” he commented. “[They] comply with the same regulatory requirements and follow the same accounting principles as a CNAV fund.”