on an overnight or one day basis of 5% for ‘AAm’,
10% for ‘Am’ and 25% for ‘BBBm’.
To ensure that repos are properly secured,
Standard & Poor’s looks for certain written repre-
sentations from all funds investing in repos.
Regarding perfection of the fund’s security interest
in repo collateral, Standard & Poor’s seeks written
representations that the fund takes delivery of the
collateral. For additional information concerning
written representation, non-traditional repos collat-
eral, and evaluating counterparties, please refer to
the most recent Standard & Poor’s Fund Ratings
Criteria publication.
Market price exposure
The most important part of money market fund or
stable NAV pool analysis is judging a fund’s sensi-
tivity to changing market conditions. Money mar-
ket funds or stable NAV pools are required to cal-
culate periodically the market value of their assets
to determine if the fund’s actual NAV per share
materially deviates from $1.00-and to take action if
there is significant deviation. Deviations of greater
than plus or minus 0.5% create a situation in
which the fund must offer and redeem shares at a
price other than $1.00.
Although GIPs and other pooled investment vehi-
cles do not necessarily have this requirement, the
same fundamental risk principles apply.
Recognizing this small margin for error,
Standard & Poor’s focuses heavily on the potential
deviation in market value (referred to as market
price exposure). To determine each pool’s market
price exposure, the following variable are analyzed
for each pool rating:
■Weighted, average maturity (WAM)
■Liquidity
■Diversification
■Index and spread risk
■Potential dilution of a pool’s participant asset
base, and
■Security and portfolio valuation methods.
Weighted average maturity (WAM)
Determination of market price exposure starts with an
examination of a fund’s susceptibility to rising interest
rates. The portfolio’s Weighted Average Maturity
(WAM)is a key determinant of the tolerance of a
fund’s investments to rising interest rates. Standard &
Poor’s expects funds rated ‘AAAm’ to maintain a
maximum WAM of 60 days or less. However, the
actual maximum WAM depends on fund size, asset
volatility, liquidity needs and participant profile. Funds
with less than $100 million in assets and/or a highly
concentrated shareholder/participant base may be lim-
ited to a shorter WAM, unless fund management can
make a compelling argument otherwise.
Standard & Poor’s is often asked to rate small
and start-up funds that have highly concentrated
shareholder positions. Standard & Poor’s is con-
cerned about the impact that a large redemption by
one or more of the major shareholders may have on
the NAV of the fund. Consequently, until a fund
has grown to at least $100 million with a diverse
shareholder base, Standard & Poor’s will seek
assurances that the fund will maintain a shorter
WAM. Higher WAMs are considered appropriate
for funds in lower rating categories.
Liquidity
The liquidity of portfolio investments is also of crit-
ical importance in determining market price expo-
sure and maintaining a stable NAV because the
degree of liquidity can affect the market value of
investments. The liquidity of a security refers to the
speed at which that security can be sold for approx-
imately the price at which the fund has it valued or
priced. Securities that are less liquid are subject to
greater price variability. Certain securities may be
liquid one day, and illiquid the next. In determining
a fund’s rating, Standard & Poor’s considers each
fund’s liquidity needs and its ability to quickly sell
portfolio holdings if the need arises to meet cash
outflows or large redemptions. In reviewing a
pool’s liquidity, Standard & Poor’s analysts take
into consideration the types of investments, their
liquidity characteristics, and concentrations by
issuers and affiliates. The potential for sizable
declines in portfolio market value increases with the
proportion of relatively illiquid or less liquid invest-
ments in the portfolio. Longer WAMs increase the
fund’s vulnerability to interest rate movements.
Diversification
As a general rule, no single issuer should represent
more than 5% of fund assets. However, if mitigat-
ing circumstances are present, a single issuer can
represent up to 10% to 25% depending on the
maturity of the investment. ‘AAA’ rated government
issues are excluded from this condition (see section
entitled Government Agency Concentration).
Government agency concentration
Liquidity analysis is done for all issues, no matter
what their credit quality. For example, under
Standard & Poor’s ‘AAAm’ guidelines, a fund should
generally have no more than one-third of its assets
invested in the securities of any one government
agency. While the credit quality of these agencies is
not typically a concern, adverse publicity about an
agency can cause financial markets to shun its securi-
ties. This could pose liquidity problems for funds
holding large amounts of the given agency’s paper, as
such instruments’ market values may drop materially
below what the fund paid for them. Standard &http://www.standardandpoors.com 315Government Investment Pool