Understanding rating agency ratings
When selecting a liquidity product, money market fund ratings given by independent credit rating agencies can be a good starting point for assessing a fund’s security and creditworthiness.
A “AAA” fund rating can give treasury professionals comfort that they are investing in the highest quality fund, which may also be helpful for satisfying internal investment policy guidelines.
Rating agency “AAA” fund rating criteria
Rating agencies carry out weekly reviews of rated money market funds and annual onsite visits to fund managers. To achieve a “AAA” rating, money market funds must meet certain investment criteria regarding maturity, credit rating and diversification of securities and issuers.
Rating agencies will also assess the ability of funds to maintain stability of principal and the fund manager’s operations, such as the investment process, level of experience, reporting and disaster recovery preparedness.
| Agency | Rating | Definition |
|---|---|---|
| Standard & Poor’s | AAAm | Extremely strong capacity to maintain principal stability and limit exposure to principal losses due to credit market and/or liquidity risks. |
| Moody’s | Aaa-mf | Very strong ability to meet the dual objectives of providing liquidity and preserving capital. |
| Fitch | AAA-mmf | Extremely strong capacity to achieve money market fund’s investment objective of preserving principal and providing shareholder liquidity through limiting credit, market and liquidity risk. |
Source: Fitch Ratings, Moody’s Investor Services, S&P Global Ratings; data as of 31 May 2021.
Ultra-short bond fund external ratings
For bond funds, including ultra-short duration bond funds, fund ratings are less common than they are for money market funds. Funds will often report the weighted average credit quality of the underlying portfolio instead.
The weighted average credit quality for many portfolios in the ultra-short duration space is in the single-A category.
Rating differences: Money market fund ratings vs. bond fund ratings
MMF ratings
- Consider the fund’s credit quality, diversification, liquidity and duration characteristics.
- Prescribe guidelines to achieve rating.
- Consider the fund managers’ experience and expertise in managing this style of fund.
Bond fund ratings
- Consider the average credit quality of the fund.
- Prescribe guidelines to achieve rating.
- Consider the fund managers’ experience and expertise in managing this style of fund.
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