Counterparty selector: Part 1

Following on from our Counterparty Confidence Survey, where we attempted to measure sentiment about various banking organisations, we asked money market fund managers from Ignis Asset Management and SWIP to tell us about three of the top exposures in their liquidity funds and some of the metrics they use to determine why these organisations are right for them.

Michael Ewing, Head of Money Market Research, Ignis Asset Management

FMS Wertmanagement
FMS is a public law entity created under Germany’s Financial Market Stabilisation Fund Act. FMS is regulated and supervised by the Financial Market Stabilisation Agency, which is also a vehicle under the supervision of Germany’s Ministry of Finance. The Financial Market Stabilisation Fund is obliged to compensate for losses so that FMS can cover its due and payable liabilities at all times. Given the ownership structure of FMS we consider our ultimate exposure to be at the German Sovereign level.

Rabobank
Rabobank’s strength lies in its mutual structure. The bank is not listed and is therefore not subject to demands from shareholders for outsized returns. Despite the loss of its AAA status, Rabobank remains one of the most highly rated banks on a global basis. The bank is conservatively managed, with solid capital, liquidity, asset quality and earnings. We expect these strong traits to continue. Rabobank is one of the few banks whose access to market liquidity has generally been unhindered during the global financial crisis.

Lloyds
Were it not for the ill-fated acquisition of HBOS, we believe Lloyds would today display its historically staid financial profile. That said, Lloyds is working through a multi year strategy of cleaning up the acquisition. Despite global and domestic macro, financial and regulatory headwinds we think Lloyds management are generally delivering on their strategy to de-lever and de-risk the bank’s balance sheet and to reduce reliance on wholesale funding. On recent quarterly numbers, we think Lloyds’ balance sheet improved on most metrics. In the core bank, underlying earnings remain resilient to the UK operating environment.

Douglas McPhail, Investment Director, Scottish Widows Investment Partnership

For all counterparty approvals we take a strong view first on the sovereign strength prior to approving any issuer. This helps us keep a strict control of the price volatility of the fund by ensuring all exposures are in the strongest issuers in the strongest countries. This can be shown by the quality of the issuers detailed below.

Rabobank
Rabobank is a Dutch based cooperative financial services provider, and is currently rated Aa2 / AA Negative / AA. The bank has historically maintained a low risk profile, focussing essentially on retail banking activities and has developed a superior food and agribusiness franchise. It reported solid 2011 results with Net Income of €2.6bn and maintained very strong balance sheet metrics, and has no material exposure to the periphery. As one of the highest rated banks in the Euro area it continues to be one of the most liquid, whilst pricing remains attractive for issuance in the longer periods that the Investment Cash Fund concentrates on.

Svenska Handelsbanken
Svenska Handelsbanken is a leading Swedish financial services provider, and is currently rated Aa3 / AA- / AA-. Svenska Handelsbanken is focussed on low risk retail banking activities in the Nordic regions, and is currently building up its UK operations. It reported record Net Income of SEK4.6bn for 1Q12, and continues to maintain very strong balance sheet metrics. Like all large Nordic banks, Svenska Handelsbanken has no material exposure to the periphery. As one of the strongest non-EMU banks we like the name for its excellent liquidity in GBP market and ability to issue across the asset universe whether in CD or MTN/FRN.

Barclays Plc
Barclays is a global financial services provider engaged in retail banking, credit cards, investment banking and wealth management activities. Barclays is domiciled in the UK, and is currently rated Aa3 *- / A+ / A+ at the Bank operating level. Barclays’ profile has evolved significantly over the last 4 years, from (i) a business perspective following the acquisition of Lehman Brothers’ US operations and the sale of BGI and (ii) from a balance sheet perspective with a significant increase in capital and liquidity held on the balance sheet. Barclays continues to be one of the most traded names in the GBP space and pricing reflects why they are attractive to the ICF. Its longer dated mandate allows the fund to steer away from investments in the expensive short end of the yield curve. Barclays also provide excellent liquidity on their own paper.

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The Local Authority Treasurers’ Investment Forum September 25th, 2012, London Stock Exchange
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