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Prime motivation

Money market funds have quickly become big business amid recent economic turmoil and Prime Rate Capital Management has enjoyed 600m-plus inflows in little more than a year.

According to founder Chris Oulton, most fund houses traditionally focused on real assets such as equities and bonds but cash has increasingly come to be seen as an asset class in its own right.

Merchant banks initially met this demand for active cash management but several big-name fund firms have joined the fray. After some high-profile blow-ups in recent months, Oulton believes investors are looking for specialist cash managers meeting the highest standards, which is where Prime Rate feels it can step in.

This specialisation is key during a tough time for the money market industry – last year, the US’s oldest cash fund broke the buck, which is industry jargon for returning less than investors put in. It turned out the multi-billion-dollar Reserve Primary was holding millions in Lehman Brothers debt, which was written down to zero after the bank went bust and shook confidence in the whole industry.

Initially, Prime Rate saw a gap in providing cash management for banks loathe to employ the services of rivals. But as many players have exited the market due to recent problems, it found itself competing against the big names.

Prime Rate’s core business is in AAA-rated liquidity funds, investing in cash and near cash securities although it can tailor portfolios to individual needs as required.

Not all investors need same-day access to funds, for example, and some also want enhanced cash products that introduce some interest rate risk and take longer duration bets. Its AAA product is lower risk than many peers, not buy-ing anything with longer than three-month duration and avoiding anything asset-backed.

Managers also keep 25 per cent in cash as a buffer alth-ough the requirement is only 10 per cent. Prime Rate has sterling, dollar and euro share classes and all currently offer yields above 1.2 per cent against negligible interest rates.

Oulton also highlights recent events in the banking world, with governments showing they will resort to nationalising institutions rather than letting them fail.

This effectively means credit risk has disappeared as the assets are implicitly supported by governments.

Another key selling point for Prime Rate is that its liquidity fund is onshore whereas all its rivals have offshore products. This was due to previous tax laws, which prevented so-called constant NAV money market funds from listing in the UK and forced providers offshore.

In basic terms, these funds are issued with an unchanging face value (such as US$1 per share). Income is accrued daily and can either be paid out to the investor or used to buy more units at the end of the month.

Constant NAV portfolios are allowed onshore after regul-atory changes and Oulton believes this local domicile issue remains a key factor for UK investors.

Prime Rate does have an Isle of Man-domiciled feeder fund for anyone wanting to invest offshore, offering a roll-up share class that compounds gross interest. Meanwhile, Mifid regulations introduced in 2007 also meant that intermediaries could invest client money in AAA-rated constant NAV liquidity funds for the first time.

Oulton has a 25-year background in investment markets, heading money market operations at firms including Investec and Insight before setting up Prime Rate in 2007. He was also a foun-ding member of the Institutional Money Market Funds Association in 2000 and served as deputy chair until June 2008.

Prime Rate is set up as a 50/50 joint venture with Matrix Group, using the latter’s facilities, back office and even sharing premises.

Oulton poached from previous employers to build his team, bringing in his number two at Insight Judith Benson as COO. His long-time deputy at Investec Henry Buckmaster joined as head of sales while 30-year plus market veteran Dennis Gepp came on board as CIO.

From these original four partners, the number of staff has increased to nine over the subsequent period as Prime Rate has continued to gather assets, launching the liquidity fund last year.

Oulton says it is no coincidence that growth in the US liquidity fund industry followed similar credit events in the 1980s to what we are experiencing now. He highlights clear evidence that the perception of security and access is now the top priority for institutions and retail investors when considering cash funds.


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