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Prudential Cash Haven Fund - News
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Prudential Cash Haven Fund
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Fund
News
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Prudential Cash Haven comment - Sep 09
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Thursday, 10 December 2009
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Fund Manager Comment
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A relatively large weighting in floating rate notes (FRNs) and particularly financial FRNs, as opposed to cash deposits, added significant value to the fund's return during the review period. Most FRNs are issued by banks and other financial institutions, meaning that better liquidity conditions and fewer worries over their balance sheets are providing support for this area of the fixed income market. In the minutes of the Bank of England's Monetary Policy Committee meeting held on 5 and 6 August, the policymaker indicated that financial market strains had eased and banks' funding conditions had improved a little.
Historically low interest rates of 0.5% in the UK have also been responsible for the good performance of FRNs versus cash over the past few months. Given that the amount of money available from cash deposits is now extremely limited, more investors are turning to FRNs as a way to generate higher returns. This was reinforced in September when interest rates were left on hold for the six-month running.
In an encouraging sign that the financial markets are returning to normality, Lloyds Banking launched a residential mortgage backed security bond in September, the first of its kind in 12 months. Given that these bonds are largely secured against financial assets, liquidity in these vehicles nose-dived during the crisis. The issue of the Permanent Master Trust 2009-1 by Lloyds therefore represents a major step for the residential mortgage backed market and potentially mortgage availability as a whole.
The Permanent deal comes with a number of structural concessions in favour of the buyer, including a put option, which means that if, after five years, the master trust does not have sufficient assets to pay the principal, investors can put the bonds to Lloyds, who will then provide the final payout. In this way, the bond eradicates extension risk and is essentially a bullet bond. The other new feature of the bond was that Lloyds replenished the master trust's reserve fund, which is the most subordinated part of the trust from 2.0% to 5.0%, thereby improving its credit enhancement.
There was a high level of interest in this new deal, which has so far performed extremely well, offering attractive spreads of approximately 1.3% above Libor. Fund manager Ben Lord participated in the issue in order to take advantage of the compelling yields on offer. At this level of funding for new mortgages, Ben believes that after a considerable period of time, the banks will be able once again to finance mortgage loans and he anticipates more deals in the coming weeks.
Having seen their prices rise strongly since March this year, Ben regards a large number of subordinated financial FRNs as overvalued. In addition, he points out that poorer quality financial FRNs, issued by banks in receipt of financial assistance from the government, still face the risk of having their coupon payments deferred and their maturities extended.
Nevertheless, Ben believes that good quality financial FRNs continue to offer attractive value but emphasises that careful stock selection remains paramount. Based on this view, 23% of the fund's assets are invested in financial FRNs. It is important to point out that the fund maintains a low risk profile with most of the portfolio's financials exposure in senior bank FRNs, in other words, issues from higher up an institution's corporate structure.
The fund does not own any Tier 1 or Upper Tier 2 financial bonds, which are legally a lower priority for the issuers of such paper to repay if they run into trouble. Also, the fund has an average credit quality rating of AA.
Portfolio activity
During the review period, the fund manager paid close attention to reducing the trust's risk levels. To this end, he trimmed exposure to financial FRNs, selling senior bank FRNs from Citigroup, Clydesdale Bank and Bank of America, for example.
He also bought some corporate floating rate notes from German car manufacturer BMW. The fund manager believes that these assets offer a more attractive yield than financial FRNs. In addition, he is encouraged by BMW's focus on restructuring and cash generation, more specifically, the management team's efforts to reduce its inventory levels in order to adjust to the decline in sales. The company's liquidity position is also relatively strong.
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Prudential Cash Haven comment - Jun 09
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Friday, 18 September 2009
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Fund Manager Comment
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Supported by genuine signs of stabilisation in the economy and the financial system, money market instruments performed well during the second quarter of 2009.
Although economic conditions remained extremely challenging and the outlook is uncertain, most of the major leading indicators of activity, particularly in the US - admittedly very weak - have stopped deteriorating. Many people regard this as evidence that a bottom in the economic cycle is close. The massive policy intervention undertaken by the Bank of England and the US Federal Reserve, most notably quantitative easing, appeared to have averted a 1930s-style depression.
Sentiment in the UK economy improved throughout the quarter, as shown by the appreciation of sterling against both the dollar and the euro. Many investors took encouragement from positive newsflow suggesting that the country's economy is not the verge of collapse, including a bigger-than-expected gain in manufacturing output for the month of March.
This more benign backdrop proved beneficial for floating rate notes (FRNs), helping them to maintain their recent good performance. The bulk of these assets are issued by banks and other financial institutions, meaning that the lack of bad news from the financial sector provided an extra boost to this area of the fixed income market. In addition, a number of banks in the UK and Europe are tendering for their subordinated debt, and although this activity tailed off towards the end of the quarter, it nevertheless remains a key driver of the strong interest in money market instruments.
The fund's weighting of approximately 27% in financial FRNs (at the start of the review period) was therefore well rewarded. With UK interest rates at a historical low of 0.5%, and the amount of income available from cash limited, we continue to believe that FRNs offer attractive value.
Reflecting fund manager Ben Lord's focus on preserving the fund's low-risk profile, most of the portfolio's financial exposure is in senior bank FRNs. The fund does not own any Tier 1 or Upper Tier 2 financial bonds, which are legally a lower priority for the bond issuers to repay if they run into trouble. Also, the fund has an average credit quality rating of AA.
Investment outlook
Portfolio activity was relatively brisk during the review period as the fund manager continued to reduce the fund's risk levels. To this end, he trimmed exposure to some of the fund's biggest holdings, selling senior bank FRNs from Citigroup and Lloyds.
In contrast, Ben increased the fund's exposure to corporate floating rate notes, buying short-dated paper from catering business Compass, water firm United Utilities and Spanish electricity provider Iberdrola. These corporate floaters offer a more attractive yield relative to financials, and given the defensive nature of their activities, the businesses are all well placed to generate strong returns throughout the economic cycle.
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Prudential Cash Haven comment - Mar 09
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Thursday, 11 June 2009
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Fund Manager Comment
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The first quarter of 2009 proved to be a challenging period for money market instruments due to a sharp deterioration in the economy and concerns over the health of financial institutions and their balance sheets.
The fund was therefore held back by a weighting of roughly 50% (as at the start of the period) in floating rate notes (FRNs) since the majority of these assets are issued by banks and other financial institutions. This meant that the portfolio was exposed to further widening in credit spreads, and as a consequence, falling prices. Former natural buyers of bank floating rates notes have been forced to exit the market and subsequent liquidations of large portfolios of these notes have been a further technical, rather than fundamental, pressure on the price of floaters in the fund.
There was a slight pick-up in confidence in the financials sector in the latter half of the quarter as investors took encouragement from governments' efforts worldwide to support the economy. In March, the Bank of England launched its quantitative easing strategy whereby the policymaker began to buy back gilts and corporate bonds in a drastic attempt to lower the real rate of interest and increase the amount of money in circulation. The US Federal Reserve was quick to follow the bank's lead and bought US Treasuries in a bid to boost money circulation. The Public-Private Investment Programme, the US policymaker's initiative to help banks restore their battered balance sheets by encouraging people to purchase toxic assets, also lifted risk appetite among investors.
In another positive development for financials, a number of banks in the UK and Europe announced that they are tendering for their subordinated debt. They have decided to buy back their bonds from investors at discounted prices. From the perspective of the issuer, this means that they avoid having to decide whether to call the bonds or skip coupon payments, preventing the outcry seen when Deutsche Bank neglected to call a Lower Tier 2 bond in December last year. By tendering for the bonds, the issuer no longer has to pay to service the debt. This activity served to boost liquidity in financial bonds and led to a small rally in subordinated bank debt.
The fund manager aims to keep a low risk profile for the portfolio. He invests in higher rated issues, with an average credit quality of low AA. Of the fund's financial exposure, approximately two thirds is in senior bank FRNs with the remaining third in lower Tier 2 bank FRNs.
With regard to portfolio activity, the fund manager focused on improving the fund's credit quality during the quarter in order to provide some insulation against falling prices. The fund manager scaled back exposure to financial companies where he has concerns over the credit quality of the business. He also started to sell the fund's positions in FRNs issued by building societies. This follows Dunfermline's buyout by Nationwide in March. Although in this instance, Nationwide has paid back Dunfermline's senior bonds, the fund manager is concerned that this might not be the case in any future takeovers and that building society bonds could get overlooked, regardless of their seniority. In addition, the fund's cash holding was raised from 50% at the start of the quarter to 58.5% at the end.
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Prudential Cash Haven comment - Dec 08
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Thursday, 19 March 2009
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Fund Manager Comment
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The fourth quarter of 2008 proved to be a challenging period for money market instruments due to persistent concerns over the economy and the health of financial institutions and their balance sheets. In particular, confidence was hurt by news that Deutsche Bank would not be calling a Lower Tier 2 bank bond.
The Fund's performance was therefore held back by a weighting of roughly 50% in floating rate notes (FRNs) since the majority of these assets are issued by banks and other financial institutions. The Fund was therefore exposed to further widening in credit spreads, and as a consequence, falling prices. In addition, former natural buyers of bank floating rates notes (SIVs and other off balance sheet conduits) have been forced to exit the market, and subsequent liquidations of large portfolios of these notes have been a further technical, rather than fundamental, pressure on the price of floaters in the Fund.
As a sign of how difficult the economic situation has become, the Bank of England lowered interest rates on three occasions during the period, taking them from 5% in October to 2.0% in December, their lowest level since 1951. Further action was taken in January when the bank made history by slashing the rate of lending to an all-time low of 1.5%. This brings the total reduction in UK interest rates since October 2008 to 350 basis points as concerns over a painful and prolonged downturn overshadow previous worries over inflation.
The cuts were seen as a necessary step to prevent the economy from entering a painful and prolonged recession. Indeed, manufacturing and services surveys released in December confirmed that the slowdown is gathering momentum. Figures from the Office for National Statistics released in December showed that UK manufacturing output dropped by 1.4% from September and by 4.9% year-on-year. This represented the eighth straight month of declining output and was worse than feared.
Tentative signs that interest rate cuts would have the desired effect of encouraging banks to lend to each and therefore improve liquidity emerged during the period. After remaining stubbornly high since the onset of the credit crunch, interbank lending rates (UBOR) fell from a high of 6.8% at the beginning of October to 2.8% at the end of December, their lowest level in more than 12 months.
Investment outlook
The recent underperformance of financial FRNs has led to a number of opportunities to purchase issues from well-capitalised banks at attractive prices. Although the Fund has suffered some capital loss recently due to the unprecedented volatility in financial markets, we believe that it offers the potential for strong returns relative to cash deposits going forward. Against today's unsettled economic backdrop, we believe that the fund will remain a suitable investment for investors who are worried about the heightened volatility suffered by bonds and equities in recent months.
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Prudential Cash Haven comment - Sep 08
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Tuesday, 25 November 2008
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Fund Manager Comment
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In an environment of deteriorating economic growth and increased risk aversion among investors, cash and money market instruments outperformed equities and bonds (with the exception of government bonds) during the third quarter of 2008. Conditions in financial markets became increasingly challenging following the collapse of investment bank Lehman Brothers and the nationalisation of several other high profile institutions in the US, the UK and Europe. The Fund underperformed the average return from its peer group, the IMA Money Market sector, during the period.
The UK economy showed pronounced signs of weakness with the housing market continuing to slow and unemployment figures rising. Although inflationary expectations were still high in the first part of the period, they had eased by the end of September owing to a significant decline in commodity prices and a growing realisation that the financial crisis might actually lead to deflation.
A relatively large weighting in floating rate notes (FRNs) acted as a major drag on performance. As at the end of the period, approximately 44% of the Fund was invested in these assets. Since FRNs are predominantly issued by financial institutions, the sector that has been affected most by the turmoil in the markets that we have seen of late, the Fund has been exposed to credit spread widening, and as a consequence falling prices.
Although the Fund does contain a degree of credit risk we aim to keep a low risk profile and as such it invests in higher rated issues from higher up a company's capital structure rather than subordinated bonds, a position that helped to minimise the effect of the dramatic events in financial markets. Roughly 40% of the Fund was invested in cash as of 30 September, which also helped preserve performance during the period.
Three-month LIBOR (London Inter Bank Market Rate) rose significantly during the period because of banks' unwillingness to lend to each other. As at the end of September, LIBOR stood at 6.3%, in other words 113 basis points above the Bank of England's base rate. LIBOR has since fallen slightly as a result of the 50 basis point cut in interest rates in early October. However, LIBOR remains at relatively high levels. Investors in the Fund will benefit from this dislocation in the interbank lending market, which supports a strong flow of income from floating rate assets.
Investment outlook
The recent underperformance of financial FRNs has led to a number of opportunities to purchase issues from well-capitalised banks at attractive prices. Although the Fund has suffered some capital loss recently due to the unprecedented volatility in financial markets, we believe that it offers the potential for strong returns relative to cash deposits going forward. Against today's unsettled economic backdrop, we believe that the Fund will remain a suitable investment for investors who are worried about the heightened volatility suffered by bonds and equities in recent months.
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Prudential Cash Haven comment - Mar 08
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Friday, 23 May 2008
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Fund Manager Comment
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Cash and money market instruments performed well during the first three months of 2008 in what turned out to be an extremely volatile time for financial markets. Following the US sub-prime mortgage debacle and the credit crunch, investors were hesitant and as fears over the global economy deepened, they moved their assets into cash and high quality fixed income products.
Economic conditions in the UK worsened during the first quarter of 2008; house prices slowed considerably, consumer spending figures for the final quarter of last year disappointed, while many analysts significantly lowered their 2008 growth forecasts. Problems in the global credit markets were still unresolved. In February, the Bank of England's Monetary Policy Committee (MPC) reduced interest rates by 0.25 percentage points to 5.25%, citing significant risks to the UK economy because of limited liquidity in the banking sector. Indeed, interbank lending rates reached a two month high in March, raising expectations of further cuts in interest rates. At the same time, inflation increased in February although this rise can be partly explained by a change in the way this measure is calculated. Without the change in methodology, consumer price inflation - the yardstick that the MPC targets when setting interest rates - would have stayed at 2.2%. Slightly higher than the bank's limit of 2.0%, inflation remains a headwind.
Unfortunately, the Fund's performance was dampened by its relatively high weighting in floating rate notes (FRNs). These instruments are effectively a higher yielding form of cash whose interest payments move in line with short-term interest rates. Although the Fund has an emphasis on high quality FRNs, issued by banks and large corporations, the distress suffered by financial markets in the first quarter of 2008 was so severe that FRNs - regardless of their quality underperformed cash.
Unfortunately, the Fund's performance was dampened by its relatively high weighting in floating rate notes (FRNs). These instruments are effectively a higher yielding form of cash whose interest payments move in line with short-term interest rates. Although the Fund has an emphasis on high quality FRNs, issued by banks and large corporations, the distress suffered by financial markets in the first quarter of 2008 was so severe that FRNs - regardless of their quality underperformed cash.
Looking ahead, the fund manager believes that the credit crisis will have a negative impact on the UK economy over the next 12 months. The threat of higher borrowing costs prevails and the housing market has slowed. Faced with this challenging environment, the Bank of England is likely to continue reducing interest rates, although its concerns about inflationary pressures may temper the number of cuts seen in 2008. Whatever the future path of interest rates, we are confident that the fund will deliver a competitive income while maintaining low levels of risk.
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Prudential Cash Haven comment - Dec 07
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Friday, 22 February 2008
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Fund Manager Comment
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The fallout from the US sub-prime mortgage crisis continued to weigh on the financial markets during the fourth quarter. Money markets have ceased to function efficiently since the summer and banks have been unwilling to lend to each other at normal rates because they are worried about who is holding what. Interbank lending rates had dipped slightly by the end of last quarter but rose again sharply during November when it became apparent that some of the world's largest financial institutions might be more severely affected by the crisis than was first expected.
Many of the world's leading central banks worked together in an attempt to drive down Interbank rates by pumping cash into the system during the quarter. The Bank of England's Monetary Policy Committee (MPC) also voted unanimously to cut the official interest rate in the UK by 0.25 percentage points to 5.5% in December. The MPC stated that the worsening conditions in the credit markets had increased the risk to economic growth. The collaborative action appeared to be successful and Interbank rates decreased quite sharply by the end of the year.
Although the issues within the money markets have had an effect on instruments such as floating rate notes (FRNs) during the second half of the year, this has presented some interesting opportunities to buy quality assets at attractive levels. FRNs form just under 50% of the portfolio and are essentially a higher yielding for of cash whose interest payments move in line with short-term interest rates.
Outlook
Recent data indicates that the global economic environment is deteriorating. Annual house price inflation in the UK for example is slowing and most measures show that prices fell during the final quarter of 2007. The Bank of England is widely expected to reduce interest rates further in the coming months. Whatever the future path of interest rates, we are confident that the fund will deliver a competitive income while maintaining low levels of risk.
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Prudential Cash Haven comment - Sep 07
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Tuesday, 30 October 2007
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Fund Manager Comment
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There was turmoil in the financial markets during the third quarter as defaults on US sub-prime mortgages led to a repricing of risk across asset classes and a crisis in the banking sector. The poor performance of assets backed by sub-prime mortgages had a knock-on effect on other types of asset-backed vehicles and the market for them became illiquid. As a result, vehicles set up by banks and others found it difficult to obtain funding through asset-backed commercial paper. This led to a sharp increase in interbank lending rates in the major economies, where banks were charging each other up to 110 basis points (bps) more than official rates for three-month money. Banks also increased their demand for cash reserves because of uncertainty within the financial markets and tried to fund these reserves by overnight borrowing from other banks. Hence the overnight rate also increased.
The liquidity squeeze eased slightly toward the end of the period as central banks pumped cash into the money markets. Even the Bank of England was active, after it had initially refused to intervene. Having previously stated that injecting liquidity merely encourages more risk taking, the bank came under heavy criticism for going back on its word. It also had to step in to provide assurance to Northern Rock depositors that their money was safe, after the drying up of the money markets meant it was unable to fund its business, prompting the first bank run in the UK for 150 years.
At the end of the period, the Fund held just under 50% of its assets in floating rate notes (FRNs). FRNs are effectively a higher yielding form of cash whose interest payments move in line with short-term interest rates. UK base rates were increased to 5.75% early in the quarter. However, secondary market pricing of FRNs was affected by the wider issues within the financial markets. Consequently bid/offer spreads widened and some issues suffered a capital loss during the period. Lower rated corporate FRNs were the most severely affected. The Fund has an emphasis on higher rated issues, which helped to minimise the effect of spread widening.
Investment outlook
Having been above the Bank of England's 2.0% target for some 14 months, inflation fell to an annualised rate of 1.8% during the third quarter. The bank raised interest rates by 0.25 percentage points to 5.75% in early July and at that time rates were expected to peak at 6.0% or more in 2008. However, the recent seizing up of the money markets effectively raised costs for all borrowers. This led to speculation that the Bank of England would follow in the US Federal Reserve's footsteps and cut interest rates at its October meeting. Rates were left on hold at that meeting as the bank continues to asses the effects of the recent market turmoil. However, the next move in rates now appears more likely to be downward.
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Prudential Cash Haven comment - Jun 07
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Tuesday, 25 September 2007
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Fund Manager Comment
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Fund manager's outlook
Cash and money market instruments continued to perform well during the second quarter of 2007 benefiting from an increase in UK interest rates, which led to an increase in the Fund's yield.
So far, there have been few signs that the interest rate rises that began in August 2006 are having the desired effect of slowing the UK economy. GDP rose to an annual rate of 3% in the first quarter of 2007, which exceeded previous estimates of 2.9%. After coming close to breaching its 3.0% upper limit in December 06, data released in April showed that UK inflation hit 3.1 % for the year to the end of March 07. For the first time since the Bank of England was given independence in 1997 its governor had to write to the Chancellor of the
Exchequer to explain why inflation was so far above target. In his letter, Mervyn King explained that the drivers of the unexpected increase were food, nonalcoholic drinks, furniture and household goods.
In the face of this robust data, the bank's Monetary Policy Committee (MPC) voted unanimously to raise interest rates to 5.5% in May. This was the first time since the MPC's August 2004 meeting that all members were in agreement. It acknowledged that certain risks to inflation remained and this prompted speculation of a further rise in the near future. Indeed, rates were increased to 5.75% shortly after the end of the period.
At the end of the period, the Fund held just under 50% of its assets in floating rate notes (FRNs). FRNs are effectively a higher yielding form of cash whose interest payments move in line with short-term interest rates. This position therefore added to the Fund's performance during the quarter as interest rates were increased. FRNs pay a premium depending on the financial strength of the issuing company - the riskier the company, the greater the premium. We aim to keep the Fund as a low risk investment and consequently the portfolio's FRN holdings are primarily issued by highly rated companies such as banks and building societies. If any of the underlying issuers show signs of credit deterioration we will seek replacements.
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Prudential Cash Haven comment - Mar 07
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Monday, 28 May 2007
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Fund Manager Comment
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Cash and money market instruments continued to perform well during the first quarter of 2007. The Bank of England unexpectedly increased interest rates to 5.25% in January. This move was explained a few days later by the official release of consumer price inflation data, which showed an increase to 3.0% for the year to the end of December 2006. Any higher and the bank's governor Mervyn King would have had to write to the Chancellor, Gordon Brown to explain why inflation had been allowed to breach the 3.0% upper limit (something he later had to do as inflation climbed to 3.1 % shortly after the end of the period).
After a dip to 2.7% in February, inflation climbed again in March. These fresh inflationary concerns prompted speculation that the bank would raise interest rates faster than previously expected.
Continued strength in the UK housing market also exerted upward pressure on money market yields. Data released by Nationwide at the end of the period showed that UK house prices rose for the 13th consecutive month in March. In addition, banks approved more mortgages than predicted in February, suggesting that the housing market will remain buoyant over the next few months.
The Fund currently holds approximately 40% of its assets in floating rate notes (FRNs). FRNs are effectively a higher yielding form of cash whose interest payments move in line with short-term interest rates. This position therefore added to the Trust's performance during the quarter as interest rates were increased. FRNs pay a premium depending on the financial strength of the issuing company - the riskier the company, the greater the premium. In order to minimise risk, the Fund invests primarily in FRNs issued by highly rated companies such as banks and building societies.
The Fund also invests in asset and mortgagebacked FRNs, which tend to pay higher yields than standard FRNs, for little, or sometimes even less, additional risk.
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Prudential Cash Haven comment - Dec 06
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Wednesday, 14 March 2007
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Fund Manager Comment
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Cash and money market instruments performed well during the final quarter of 2006. Market interest rates rose steadily throughout the period as the UK economy outpaced most people's growth expectations - an annualised rate of 2.8% for the third quarter was the quickest pace in two years. The Bank of England increased interest rates to 5.0% in November.
Consumer price inflation rose to 2.7% for the year to November, which was the highest level in more than 10 years. In addition, data released shortly after the review period ended showed an increase to 3.0% for the year to the end of December 2006. Any higher than 3.0% and the Bank of England's governor Mervyn King would have had to write to Gordon Brown to explain why. The strength in the UK economy was further evidenced by UK retail sales, which rose to a two-year high in December, suggesting that UK consumers still have plenty of money to spend. The housing market also advanced, with the rate of annual house price inflation quickening, and the number of mortgage approvals rising to its highest level in nearly three years.
The Fund currently holds approximately 45% of its assets in floating rate notes (FRNs). FRNs are effectively a higher yielding form of cash whose interest payments move in line with short-term interest rates. This position therefore added to the Fund's performance during the quarter as interest rates were increased. FRNs pay a premium depending on the financial strength of the issuing company - the riskier the company, the greater the premium. In order to minimise risk, the Fund invests primarily in FRNs issued by highly rated companies such as banks and building societies.
The Fund also invests in asset and mortgage backed FRNs, which tend to pay higher yields than standard FRNs, for little, or sometimes even less, additional risk.
Investment outlook
The near-term outlook is little changed from the end of the previous period. Whilst the Bank of England may be worried about signs of weakness in the US economy, on the domestic front it must keep inflationary pressures under control. Falling oil prices have helped but inflation remains worryingly above target. In a largely unexpected move, the bank increased interest rates to 5.25% shortly after the period ended. The market expects further rate rises in the coming months and we would concur with this view.
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Prudential Cash Haven comment - Sep 06
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Tuesday, 28 November 2006
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Fund Manager Comment
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Rising interest rates is a theme of the global economy at present. Of the 19 central banks in the OECO countries, 16 increased their policy rates since May. In the US, the Fed paused following 17 consecutive hikes, but further rises are possible since inflation remains a concern. The European economy is undergoing a period of strong growth. The European Central Bank increased rates four times in 2006 and may well continue tightening monetary policy into 2007.
The Bank of England Monetary Policy Committee (MPC) voted unanimously to keep interest rates on hold at 4.5% in July. The MPC's decision was the result of little change in the medium-term inflationary outlook since its previous meeting. However, data released later that month revealed that inflation had increased from 2.2% to 2.5% for the year to end June, largely because of higher energy prices. Following the pick-up in inflation, the MPC elected to raise interest rates to 4.75% at the beginning of August.
The Fund currently holds 45% of its assets in floating rate notes (FRNs). FRNs are effectively a higher yielding form of cash whose interest payments move in line with short-term interest rates. FRNs pay a premium depending on the financial strength of the issuing company - the riskier the company, the greater the premium. In order to minimise risk, the Fund invests primarily in FRNs issued by highly rated companies such as banks and building societies.
The Fund also invests in asset and mortgagebacked FRNs, which tend to pay higher yields than standard FRNs, for little, or sometimes even less, additional risk. Asset and mortgage-backed FRNs are growing areas of the market, and one in which our expanding team of analysts have special ist expertise.
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Prudential Cash Haven comment - Jun 06
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Wednesday, 16 August 2006
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Fund Manager Comment
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Global interest rates continued to rise in Q2. In the US, the Federal Reserve implemented the 17th consecutive interest rate rise in response to strong economic growth and inflation fears. The story was no different in Europe. Again, economic growth was surprisingly firm and the European Central Bank (ECB) raised interest rates during the period. The UK economy also remained strong with robust manufacturing and service sector data. Growth in Q1 was 2.3% (up from 1.8% in Q4 2005) and available indicators suggest that the pace of GDP growth in Q2 will be at least as strong. Inflation rose to 2.2% largely as a result of higher gas and electricity prices. Despite the recent pick-up, inflation remains close to the Bank of England's 2.0% target.
Cash and money market instruments performed better than fixed interest securities during the review period. The Fund holds around 50% of its assets in floating rate notes (FRNs). FRNs are debt instruments whose coupons move in line with short-term interest rates. FRNs pay a premium depending on the financial strength of the issuing company - the riskier the company, the greater the premium. In order to minimise risk, the Fund invests primarily in FRNs issued by highly rated companies such as banks and building societies.
The Fund also invests in asset and mortgage-backed FRNs, which tend to pay higher yields than standard FRNs, for little, or sometimes even less, additional risk. Asset and mortgage-backed FRNs are growing areas of the market, and one in which our expanding team of analysts have specialist expertise.
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Prudential Cash Haven comment - Mar 06
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Thursday, 11 May 2006
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Fund Manager Comment
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Global interest rates are on the rise. The new chairman of the Federal Reserve, Ben Bernanke, continued where Alan Greenspan left off by taking US interest rates to 4.75% in March, the 15' consecutive rise. European interest rates were also increased, on the back of a strengthening euro area economy. Japanese interest rates were kept at 0.1 %, but are likely to rise this year. In the US, and particularly in Europe, we anticipate more interest rate rises than is currently priced into the market.
The UK economy is expected to pick up in 2006, following a lacklustre growth rate of 1.8% in 2005, the weakest level since 1993. Consumer spending has proven to be more robust than many were predicting, industrial production is improving and the housing market is enjoying a mini-revival. As at the end of March, the market had begun to price in the chance of an interest rate rise by the end of 2006.
The principal challenge is to identify investments offering a more attractive level of (income than that available from short-term deposits. Floating Rate Notes (FRNs) offer a premium over LlBOR - the London Inter Bank Offer Rate, which is the rate banks charge each other for three-month loans and is directly linked to Bank of England base rates and therefore short-term deposit rates. The Fund continues to favour asset and mortgage-backed FRNs, which tend to pay higher yields than standard FRNs, for little, or sometimes even less, additional risk. Asset and mortgage backed FRNs are growing areas of the market, and one in which our expanding team of analysts have specialist expertise.
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Prudential Cash Haven comment - Sep 05
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Wednesday, 26 October 2005
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Fund Manager Comment
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At the start of Q3 the consensus was that the Bank of England could afford to begin reducing interest rates in order to prevent further weakness in the economy. Indeed the market was expecting two interest rate cuts by the end of 2005. The decision to cut base rates by 0.25% (to 4.50%) in August was taken despite a dramatic surge in oil prices, which saw the cost of Brent crude reach nearly US$68 per barrel at the end of August. Inflation, as measured by the Consumer Prices Index (CPI) climbed to 2.4% by the end of the review period.
The principal challenge for us as portfolio managers is to identify investments offering a more attractive level of income than that available from short-term deposits. Floating Rate Notes (FRNs) offer a premium over LlBOR - the London Inter Bank Offer Rate. The Fund continues to favour asset and mortgage-backed FRNs, which tend to pay higher yields than standard FRNs, for little, or sometimes even less, additional risk. Asset and mortgage-backed FRNs are growing areas of the market, and one in which our expanding team of analysts have specialist expertise.
Outlook
Interest rate futures indicate that the market is expecting rates to stay on hold for the remainder of the year, with a strong possibility of an interest rate cut in March/April2006. While UK economic growth has fallen slightly below trend, the housing market appears to have stabilised and manufacturing is giving off some positive surprises.
Domestically-generated inflation pressures appear subdued, but the surging oil price is putting a bit of pressure on the inflation rate, and the Bank of England will not cut rates until inflation shows signs of falling back to target level. The Bank of England has an unblemished record of targeting inflation since its independence in 1997, and we firmly believe that inflation will remain subdued in the medium- and long-term. However, with inflation rising from 2.3% to 2.4% in September, it would be a big surprise if rates were cut in the coming months.
The US is also a cause for concern. The Federal Reserve has increased interest rates in 11 consecutive meetings, but is still struggling to control the housing market and inflationary pressure is building slightly. The full impact of Hurricane Katrina isyet to be seen (almost 1 % could be knocked off US GDP in the next year). but the Federal Reserve's tone suggests there are more rate hikes in the pipeline.
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Prudential Cash Haven comment - Jun 04
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Thursday, 16 September 2004
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Fund Manager Comment
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Fund manager's feedback
The Bank of England instigated successive 0.25% interest rate hikes during May and June. Several factors influenced the Central Bank's decision to speed up the pace of monetary tightening, although undoubtedly the culture of borrowing against a backdrop of historically low interest rates is the primary concern. A spike in oil prices also led to some nervousness about the build up of inflation, although at 1.5%, CPI is still below its 2% target.
However, throughout June economic data pointed to a potential cooling of house prices, a welcome outcome for the Central Bank, which had made no secret of its desire to slow the market. Oil prices slid, further easing the pressure on inflation, and the market perception is that after successive monthly rate rises, the Bank of England will now resume its policy of 'gradual' tightening. At its most bearish, the sterling market had priced in a rise in interest rates of up to 5.5% by the end of 2004, but expectations are now a more modest 5.1% by the year end, rising to 5.25% one year from now.
Our principal challenge is to identify investments offering a more attractive level of income than that available from short-term deposits. Floating Rate Notes (FRNs) offer a premium over LIBOR - the London Inter Bank Offer Rate, which is the rate banks charge each other for three month loans and is directly linked to Bank of England base rates and therefore short term deposit rates. The Fund continues to favour asset and mortgage-backed FRNs, which tend to pay higher yields than standard FRNs, for little, or sometimes even less, additional risk. Asset and mortgage-backed FRNs are growing areas of the market, and one in which our expanding team of analysts have specialist expertise. Asset backed issuance has been extremely healthy throughout the year to date and the pipeline remains strong, affording ample opportunity to seek out new investments offering attractive yields.
The Fund also invests in cash deposits with leading banks for time periods ranging from overnight to two weeks. Although returns from short-term deposits are low by historic standards, we have been actively securing favourable rates.
Investment Outlook
There is no doubt that the interest rate cycle has turned, and now that the global economy is growing at its fastest rate for two decades, the excess capacity that was keeping inflation in check is steadily being used up. Inflation shows little sign of rising, although it seems only a matter of time until wage inflation builds given that the level of UK employment stands at a record high.
Following the market's reassessment of its view on interest rates, we now feel that rates will move in line with expectations, with a risk that rates could rise even more quickly should the consumer continue to finance spending through debt. However, regardless of the degree of interest rate movements over the coming year, we are confident that the portfolio will continue to achieve its aim to deliver higher income return at low levels of volatility.
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Prudential Cash Haven comment - Mar 04
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Monday, 10 May 2004
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Fund Manager Comment
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On the macro economic front, the Bank of England voted unanimously for a 0.25% hike in interest rates in early February. Inflation remains relatively benign at just 1.4%, still 0.6% below the long-term target of 2.0%, although in its quarterly inflation report, the Bank of England said that it expects inflation to rise towards this target because import prices are likely to rise given accumulating pressures on supply capacity.
Earlier doubts about the sustainability of the economic recovery have been replaced by concerns of future inflation, as global economic recovery became more firmly entrenched during the quarter. Despite recent rate hikes, the UK consumer continues to borrow heavily either on credit or through mortgage equity withdrawal. The knock-on effects are that corporate earnings continue to show signs of improvement and lead indicators suggest strong economic growth for the remainder of the year. Inevitably, this has led to expectations that the Bank of England will raise interest rates by a further 0.25% in its May meeting. However , this is not a foregone conclusion however, since the recent strength of sterling and some weak manufacturing data makes a case for a relaxation of policy.
The principal challenge for us as portfolio managers is to identify investments offering a more attractive level of income than that available from short-term deposits. Floating Rate Notes (FRNs) offer a premium over LIBOR - the London Inter Bank Offer Rate, which is the rate banks charge each other for three month loans and is directly linked to Bank of England base rates and therefore short term deposit rates. The Fund continues to favour asset and mortgage-backed FRNs, which tend to pay higher yields than standard FRNs, for little, or sometimes even less, additional risk.
Asset and mortgage-backed FRNs are growing areas of the market, and one in which our expanding team of analysts have specialist expertise. Asset backed issuance has been extremely healthy throughout the year to date and the pipeline remains strong, affording ample opportunity to seek out new investments offering attractive yields.
The Fund also invests in cash deposits with leading banks for time periods ranging from overnight to two weeks. Although returns from short-term deposits are low by historic standards, we have been actively securing favourable rates.
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Prudential Cash Haven comment - Dec 03
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Monday, 9 February 2004
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Fund Manager Comment
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The Bank of England saw fit to raise interest rates by 25 basis points in November, citing international influences and growing consumer debt burdens. Most economic indicators have either remained strong or improved in recent months, both globally and in the UK. The Bank of England and the Treasury are forecasting above-trend levels of economic growth for 2004, and investors are anticipating a build up in inflationary pressure and a consequent rise in interest rates. While it does indeed seem that the UK is in the midst of an economic recovery, we have argued over the past few months that the market's anticipation of a 1.5% interest rate rise over the course of 2004 is excessive.
In December, the market's view came a little more into line with our own, and interest rate futures for the end of December 2004 currently stand at 4.6%, compared to the 5.3% that was discounted by the market following the sell-off in the bond market during the previous quarter. However, this is still above our view. We think the market is discounting an overly optimistic view of economic growth going forward. We are still in a world where there is huge overcapacity, where China is keeping the disinflationary trends intact by flooding markets with cheaply produced goods, and where bubbles exist in housing markets and in personal sector debt thanks to our love affair with the credit card. Central Banks are likely to remain more concerned about deflation than inflation, which is not exactly the recipe for a series of interest rate hikes. Indeed, core inflation in the US in November was negative, the first time this has been the case in over twenty years.
In his pre-budget speech during the fourth quarter, Chancellor Gordon Brown announced that in future the UK will use the Harmonised Index of Consumer Prices (HICP) measure of inflation rather than the current RPIX measure (HICP is the index that is used by the European Central Bank). The market perception is that this shift has raised long-term inflationary expectations in the UK from 2.5% to 2.75%, giving scope for interest rates to remain lower for longer.
The principal challenge for us as portfolio managers is to identify investments offering a more attractive level of income than that available from short-term deposits. Floating Rate Notes (FRNs) offer a premium over LIBOR - the London Inter Bank Offer Rate, which is the rate banks charge each other for three month loans and is directly linked to Bank of England base rates and therefore short term deposit rates. The Trust continues to favour asset and mortgage-backed FRNs, which tend to pay higher yields than standard FRNs, for little, or sometimes even less, additional risk. Asset and mortgage-backed FRNs are growing areas of the market, and one in which our expanding team of analysts have specialist expertise. Asset backed issuance has been extremely healthy throughout the year to date and the pipeline remains strong, affording ample opportunity to seek out new investments offering attractive yields.
The Trust also invests in cash deposits with leading banks for time periods ranging from overnight to two weeks. Although returns from short-term deposits are low by historic standards, we have been actively securing favourable rates.
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Prudential Cash Haven comment - Jun 03
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Wednesday, 13 August 2003
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Fund Manager Comment
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Although interest rates were left on hold throughout Q2, economic data, both domestic and international, remained weak. Indeed a cut in UK interest rates to just 3.5% in early July served to re-emphasise the risks that remain to the global economy. Central Banks are clearly concerned about disinflationary forces and whilst the spectre of deflation looms, it is impossible to rule out more cuts both in the UK and also in the US and Europe.
In a low interest rate environment, the chief challenge is to identify investments offering a more attractive level of income than that available from short-term deposits. Floating Rate Notes (FRNs) offer a premium over LIBOR (the London Inter Bank Offer Rate), which is the rate banks charge each other for three month loans and is directly linked to Bank of England base rates and therefore short-term deposit rates. The Fund continues to favour asset and mortgage-backed RNs, which tend to pay higher yields than standard FRNs, for little, or sometimes even less, additional risk. Asset and mortgage-backed FRNs are growing areas of the market, and one in which our team of analysts have specialist expertise. Asset backed issuance has been extremely healthy throughout the year to date and the pipeline remains strong, affording ample opportunity to seek out new investments offering attractive yields.
The Fund also invests in cash deposits with leading banks for time periods ranging from overnight to two weeks. Although returns from short-term deposits are low by historic standards, we have been actively securing favourable rates.
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Prudential Cash Haven comment - March 2003
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Friday, 25 April 2003
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Fund Manager Comment
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The Bank of England's Monetary Policy Committee (MPC) cut UK interest rates to 3.75% in early February 2003, their lowest level for 55 years. This came despite a pick up in inflation brought about by higher fuel costs, weaker sterling and continuing strength in the domestic housing market.
The fact that the central bank cut rates in this environment suggests that it is unconcerned about long-term inflation and is prepared to take some short-term risks in order to stimulate the economy. The ongoing war in Iraq has tended to overshadow some extremely weak economic data in recent weeks but, once the war is over, investors will switch their focus back to economic fundamentals, the decline in consumer confidence and the implications of this for Corporate UK. We would expect inflation to peak around June and then fall back towards, and possibly below, the central bank's 2.5% target. Given this view, we would not rule out a further cut in interest rates in the near-term.
In a low interest rate environment, the chief challenge is to identify investments offering a more attractive level of income than that available from short-term deposits. Floating Rate Notes (FRNs) offer a premium over LIBOR - the London Inter Bank Offer Rate, which is the rate banks charge each other for three month loans and is directly linked to Bank of England base rates and therefore short-term deposit rates. The Fund currently favours asset-backed and mortgage-backed FRNs, which pay even higher yields than standard FRNs, for little, or sometimes even less, additional risk. Asset-backed and mortgage-backed FRNs are growing areas of the market and one in which our team of analysts have specialist expertise. The expected pipeline for new asset backed deals is extremely healthy, which provides us with ample opportunity to seek out new investments offering attractive yields.
The Fund also invests in cash deposits with leading banks such as Barclays, Bank of America and Lloyds, for time periods ranging from overnight to two weeks. Even though interest rates and consequently short term deposit rates remained low, we have been actively securing favourable rates.
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Prudential Cash Haven comment - September 2002
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Wednesday, 30 October 2002
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Fund Manager Comment
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The threat of military action against Iraq continues to cast a cloud of uncertainty over financial markets and with UK equities enduring their worst quarter since the infamous crash of 1987, Q3 was all about protecting capital.
In addition to the poor performance of equities, the balance of economic data was negative over the quarter. Inflation remained at the lower end of the Bank of England's target range, with only healthy demand for property and services masking deflation in goods sectors. Hitherto buoyant consumer spending showed some signs of tailing off, although figures remain inconclusive.
Against this backdrop, expectations of a near term rise in UK interest rates disappeared with the market now pricing in a quarter point cut instead. Indeed some observers believe it unlikely that the Bank of England's Monetary Policy Committee will have cause to raise interest rates for some time to come. Earlier concerns about the re-emergence of inflation have proven unfounded, with corporate profitability remaining poor and only the strength of household consumption and the buoyant housing market preventing price deflation. Although we do not see deflation in the UK as a likely scenario, it is very much an undesirable one and is likely to preoccupy the thoughts of the MPC whilst inflation remains at current low levels.
The Trust invests just under 50% of its capital primarily in Floating Rate Notes (FRNs) and to a lesser extent, Certificates of Deposit. FRNs are bonds whose yield is linked to the three month London Inter Bank Offer Rate (LIBOR). This rate is readjusted every three months, and is directly linked to Bank of England base rates. In a quarter in which rates and expectations of future rates remained at very low levels, the challenge was to locate higher yielding assets which would boost income. To this end several mortgage-backed FRNs including European Loan Conduit 5XA and Preferred Residential Securities, which pay a higher yield than standard FRN's for little added risk were added to the Fund.
The remaining 50% of the Trust's assets are invested in cash deposits with leading banks such as Barclays, Bank of America and Lloyds, for time periods ranging from overnight to two weeks. Even though interest rates and consequently short term deposit rates remained low, we have been actively securing favourable rates.
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