The primary goal of CSAFE is to maintain $1.00 per share Net Asset Value (NAV). No investment pool or money market fund can “guarantee” a NAV of $1.00 per share. Investing in fixed income securities of any type introduces elements of risk. Among those risks are interest rate risk, liquidity risk and credit risk. In a local government investment pool like CSAFE, the task of the investment manager is to mitigate those risks so that participants and taxpayer dollars are protected.
To achieve the goal of maintaining $1.00 per share, an investment manager can implement a number of strategies, policies and investment approaches so that a stable NAV is maintained during volatile market environments. Many investment pools and money market funds are allowed to amortize the cost of any premium or discount in the purchase price using a straight line approach. The amortized cost approach ignores the effect of market and credit movements on the prices of the securities.
One rating agency states “the amortized cost method masks market risk by permitting funds to value securities as if no outside factors exist.” In a stable interest rate environment with no credit events, risks to fixed income securities are minimized. Under these conditions, the amortized cost method seems to work appropriately. However, during a sharply fluctuating market environment, changes in interest rates can cause significant swings in the prices for fixed income securities that weaken the value of the amortized cost method.
Many funds utilize the amortized cost method because it is easier to implement and less costly than pricing the portfolio frequently. CSAFE does not take this approach. CSAFE will price its portfolio on a weekly basis to determine if the pool’s NAV deviates materially from $1.00 per share and take action if a material variation exists. In fact, CSAFE has a NAV Monitoring Policy in place to guide our actions in the event that market prices change dramatically.
By following Fitch Ratings standards for an AAAmmf rated fund, CSAFE will seek to maintain its NAV to retain its AAAmmf rating. If the market value remains in this range, transactions can be executed at $1.00 per share.
Funds that fall below $0.995 are deemed to have “broken the buck”, a cardinal sin for a money market fund or stable value investment pool like CSAFE. As an AAAmmf rated investment pool, CSAFE will adhere to the strict requirements of Fitch Ratings and therefore seek to maintain a NAV of $0.9975 or higher. This includes following guidelines on weighted average maturity (WAM) of 60 days or less, limiting the amount of illiquid investments and diversifying the portfolio’s investments.