http://www.standardandpoors.com 313(NAV) to their participants and are run like money
market funds.
Standard & Poor’s has analyzed stable NAV or
money market GIPs that maintain maximum
weighted average maturities (WAMs) from 60 days
to 365 days. Standard & Poor’s believes that to
provide adequate capacity to maintain principal
value and limit exposure to loss, a pool’s WAM
should be limited to 90 days or less. For a fund
with a 90-day WAM, it would take a 200-basis
point increase in interest rates (with no cash with-
drawals) to lose principal or “break the dollar.” At
a 365-day WAM, it would only take an increase of
approximately 50-basis points to put the pool’s
principal value at risk. Standard & Poor’s believes
that when the investment objective of a GIP is to
provide participants with a stable NAV (like an
SEC registered money market fund), individual
securities’ final maturities (excluding floating-rate
notes) should not exceed one year.
Standard & Poor’s refers to longer-term GIPS,
managed for a higher level of total returns, as vari-
able NAV pools since they are similar to bond
funds. For GIPs that pay out a variable NAV or
market value, longer maturities can be appropriate,
provided that proper disclosure is made to partici-
pants regarding the level of principal value at risk.
The Government Accounting Standards Board
(GASB) Statement 31 effected on June 15, 1997
requires GIPs that report amortized cost values to
follow the SEC’s Rule 2a-7 money market fund
guidelines. GASB 31 calls for GIPs to report a con-
stant NAV. GIPs that don’t follow Rule 2a-7 guide-
lines are required to report a variable NAV or mar-
ket value as bond funds report.
Pool sponsors have taken the initiative to educate
their participants on the objectives, risk levels and
liquidity of their pools. In the past, many pools
were managed like “hybrid-type funds”, that is they
were invested in a mix of short-term (less than one-
year) and long-term investments. The pools paid
out dollar-for-dollar to participants upon with-
drawals, regardless of the pool’s current market
value or current NAV. Over time, more and more
pools have opted to create a short-term liquidity
pool that are managed like money market funds
with shorter maturities and more frequent pricing
(i.e., stable NAV or money market pools). To satisfy
investors demand for a higher yielding product,
some state/counties have created short-term vari-
able NAV or longer term (bond fund-like) pools for
their participants’ longer-term investment needs.
For example, the Georgia Office of Treasury and
Fiscal Services launched the bond fund GIP called
Georgia Extended Asset Pool in July 2000 to com-
plement Georgia Fund 1, a money market GIP. The
City of Long Beach divided its pool into liquid and
longer-term portfolios. Other cities and states have
created similar two-tiered investment pools-one for
daily operating and short-term needs (liquidity
pool) and one for longer term needs.
Over the last several years, several states and
other issuers with surplus high quality, short-to-
intermediate term fixed-income assets have sought
to use these funds as back-up liquidity support for
their short-term debt issues. A public or private
credit quality and volatility rating from Standard &
Poor’s can provide the ongoing analysis of a pool’s
credit quality, liquidity, operating procedures and
management required to provide “self liquidity” for
short-term debt such as variable rate demand notes
and tax-exempt commercial paper. Several states
pools, including Texas Treasury, and other munici-
pal issuers from the Higher-Ed, HealthCare, and
Private-Foundations have requested Standard &
Poor’s to conduct ongoing assessments of the liq-
uidity of their fixed-income portfolios identified as
the liquidity source.Stable Net Asset Value (NAV) Pool Ratings Criteria
Standard & Poor’s ratings criteria for stable net asset
value (NAV) investment pools is largely the same as
its principal stability fund ratings (also know as
money market fund ratings) criteria given the simi-
larity in investment objectives of these investment
vehicles. Therefore, all references to money market
funds in the following ratings criteria article also
apply to government investment pools (GIPs) or any
other pool of assets that seek to maintain a stable
NAV. For further information and in-depth analysis
please refer to the most recent Standard & Poor’s
Fund Ratings Criteria publication.
A stable NAV or money market fund rating is a
safety rating, expressing Standard & Poor’s opinion
on the ability of a fund to maintain principal value
and limit exposure to loss due to credit, market,
and/or liquidity risk. Ratings can range from
‘AAAm’ to ‘Dm’, with the ‘m’ denoting a money
market fund.
(See table, “Principal Stability Fund Ratings
Definitions”). The ‘m’ distinguishes the money mar-
ket fund rating from a Standard & Poor’s tradition-
al debt rating. A traditional debt rating is usually
not subscripted and indicates a borrower’s ability to
repay principal and interest on a timely basis. A
money market fund rating is not directly compara-
ble to a debt rating because of differences in invest-
ment characteristics, rating criteria, and the credit-
worthiness of portfolio investments. Distinct crite-
ria were established for each rating category.Government Investment Pool