We recently asked Mark Amberson, Director of Short-Term Investments for Russell Investments, if he had any suggestions for other money fund managers and money market investors. Below, he offers the first of what may become a new "Tip of the Month" feature on www.cranedata.com. Amberson suggest managers look into the "tactical purchase of floating rate notes". He tells us, "Look to choose a floating rate note index that is temporarily expensive vs. other money market indices. When the index reverts back to historical norms vis-a-vis other indexes, you likely will enjoy nice rate resets."
We then asked Amberson, "What are the most commonly used indexes for FRNs (floating rate notes)?" He answers, "The most common floating rate note indexes for money fund eligible FRN's are: Fed funds (effective, open, or target), one and three month LIBOR, Prime, and, to a lesser extent, 3-month Treasury bills." He explains, "A portfolio manager has to make sure that the index chosen is highly correlated with money market rates, in order to utilize the maturity shortening provisions of Rule 2a-7."
Finally, we asked Amberson about the recent brouhaha over LIBOR. He comments, "While it has dropped a lot since the late April fuss about it, it's too early to tell if there will be any long term structural changes to the calculation of LIBOR. I have seen some proposals, like a US bank-based LIBOR, but I think it's too early to say what the ultimate outcome will be. I will say that the uncertainty surrounding LIBOR makes choosing and pricing a LIBOR based FRN particularly challenging now."
