Coronation Money Market Fund experiences one day yield drop

The Coronation Money Market Fund reduced its yield over one day last week. On Wednesday November 16th the yield of the fund was 7.01% and on Thursday the yield fell to 6.25%, a very unusual fall for a money market fund. Money market funds are regarded as the most safe investments where capital is preserved at all costs.

A few alert Equinox investors called our offices on Friday 18th November and Monday 21st November after picking up an unusual drop in the yield of the Coronation Money Market Fund.

After investigation it turned out that it was not a system error, but a fall in the yield of nearly one percent due to the sale of a bond which had been downgraded.

Mark le Roux, Head of Fixed Interest at Coronation, managing the fund at the time fund manager Tania Miglietta's absence took a decision to sell the bond in order to preserve capital within the fund.

'We had a R12 million investment in Inca, a company that makes money out of supplying municipalities with long-term infrastructure, financial planning support, re-engineering and capacity building. They issue bonds to asset management companies and banks to finance these projects. When we bought the bond it had a AA- rating and just under 10 months to maturity, which is pretty safe, many banks have AA ratings. However Fitch Ratings, a global ratings company, having access to company information concluded that it may have difficulty repaying its short term debt and unexpectedly downgraded the company rating to A, which is a two-notch downgrade,' said Miglietta.

'The speed and severity of the downgrade were both unusual, typically we have indication that the rating is under review and upgrades or downgrades usually happen one notch at a time. Coronation , uncomfortable with the downgrade decided to sell the bond, and switch into a new asset on credit risk concerns. It is a very illiquid bond, so even at the best of times there are not many buyers, and particularly just after a downgrade most new investors will want to buy it more cheaply.

'Coronation had to make a decision; if Inca defaulted on the bond and failed to pay back the value of the total loan of R1.7 billion to investors in seven months time, the fund would potentially lose the whole investment rather than experience a yield reduction on the fund in the short term. It decided to switch it into something else,' said Miglietta.

The investment was equivalent to 0.8% of the value of the R1.5bn portfolio. Since all money market fund assets are calculated on an accrual basis rather than on a mark to market basis, capital fluctuations are not taken into account. Their impact is however fully accounted for on maturity or on the sale of the asset. Thus both the price effect on the capital repricing as well as the higher selling yield both resulted in an amount which reduced the income for one day.

'Both Mark and I feel that a strategic investment decision was made. Our risk management strategy resulted in an asset being removed and replaced by a new one to avoid unnecessary risk to the fund,' said Miglietta. 'By the next day the fund's yield had it had recovered to previous levels.'