F&C targets institutional investors with 'enhanced cash fund'

F&C is responding to investors' demands for higher yielding cash vehicles with the launch of the F&C Sterling Enhanced Cash Fund next week.

The Fund aims to provide higher returns than those generated by traditional money market funds, with an initial yield expected to be close to 6%. F&C predicts this vehicle will attract interest from institutional investors such as local authorities and pension funds eager to make their cash positions work harder.

Although enhanced cash funds are widely available in Continental Europe and the US, UK investors have been facing a lack of compelling investment opportunities to manage their cash balances more effectively. Compared to some liquidity funds with a 1-month LIBID target return, the new vehicle will be aiming for 3-month LIBOR plus 35 basis points gross of charges, calculated on a 3 year rolling basis.

Jason Kabel, associate director, treasury, at F&C, who will manage the F&C Sterling Enhanced Cash Fund, said: "Our fund will provide easy access for both institutional investors and investment platforms to higher yields on short dated securities. We believe our product is quite unique in the UK and a very attractive alternative to bank deposits and existing liquidity funds."

Enhanced cash products are not generally used as cash sweep vehicles as they do not provide investors with daily liquidity. Their focus is to generate a yield above the rates available in the money market by extending maturities, relaxing credit quality guidelines and capturing the available excess spread on structured finance securities. Unlike money market funds, enhanced cash vehicles are not constrained by the requirements of AAA rating, giving more freedom to the manager to try and capture credit premiums by buying AA/Aa to BBB/Baa securities.

Demand is likely to come from local authorities, pension funds and other institutions. "Due to the large size of institutional investors' portfolios, a pick up in excess of 25 basis points on their spare cash can be very significant indeed and there isn't anything else readily available in the market with the same characteristics they can jump into, "Mr Kabel said. The minimum investment will be £250,000 with the annual management fee set at 0.30%.

Simon Males, head of consultant sales at F&C, says: "We expect the enhanced cash market to grow rapidly over the next 5 years. Cash is still king, but enhanced cash could play a very important role for those investors who want to invest pockets of cash for which they may not have a immediate need with a manager that has the resources and expertise to cover the various fixed income sectors and can identify relative value opportunities. In our view, investors who are willing to sacrifice daily liquidity and can cope with the volatility related to extended maturities, may find significant benefits through a partial allocation to enhanced cash."

Given the strong historical performance of existing F&C money market products, the new fund will continue to play the short term interest rate curve, taking advantage of the credit spreads by leveraging the expertise of in-house credit and ABS analysts. It will invest up to 25% of its assets in cash or near cash instruments – money funds, certificates of deposit and commercial papers – and the rest in fixed income instruments – asset-backed securities, mortgage-backed securities, floating-rate notes, collateralised debt obligations, and short term bonds.