dynamic portfolio process consistent with its stated
investment goals. Standard & Poor’s believes that
these meetings are central to a meaningful fund rat-
ing service. Management assessment considers
experience and track record in portfolio manage-
ment, operating policies and risk preferences, credi-
bility and commitment to policies, and the extent
and thoroughness of internal controls.
Experience
Standard & Poor’s judges each fund management
team on its own merits. Focus is placed on the way
the fund is managed in relation to its shareholder
base and stated investment objectives. Standard &
Poor’s closely examines how daily operations of the
fund are conducted. This examination includes, but
is not limited to, organizational structure, oversight,
and depth of staff. An experienced fund manager
with a proven track record in money market funds
greatly enhances a fund’s safety. This manager does
not necessarily have to make every investment deci-
sion, but should be closely involved with fund over-
sight. It is also necessary to distinguish between an
experienced stable NAV pool or money market
fund manager and someone who has experience
managing long-term investments. Managing a sta-
ble NAV fund is very different from managing a
bond fund with a variable share price. Investment
policies and strategies that may be very prudent for
bond funds can be disastrous for money market
funds. The precision necessary to run a stable NAV
pool or money market fund successfully requires a
different mindset than is required in managing
other fixed-income vehicles. An experienced fixed-
income manager does not necessarily translate into
an effective stable NAV pool or money market fund
manager. Therefore, Standard & Poor’s emphasizes
the level of experience in managing money market
funds or stable NAV pools in its review of fund
management. Lack of experience can result in a
lower rating, more stringent ratings criteria (such as
a shorter WAM), or both.
Operating procedures and risk preferences
Standard & Poor’s evaluates the fund manager’s
operating procedures and risk preferences in con-
junction with each rating. A key component of this
review is the investment decision-making process.
Numerous investment decisions are made daily for
all money market funds or stable NAV pools.
Standard & Poor’s examines how these decisions are
made, who is charged with executing them, and the
oversight procedures that are in place. Standard &
Poor’s also focuses on the amount, type, and quality
of information used in making policy and invest-
ment decisions. This includes the size and capabili-
ties of the credit research staff, the access to currenteconomic data and analysis, and the types of on-line
business information services used.
Credit quality is one area that should be docu-
mented with formal written procedures. A fund
adviser should establish an approved investment list
as well as policies for adding or removing names
from that list. Additionally, a process and method-
ology for periodically evaluating the credit quality
of all approved investments should be established.
Standard & Poor’s also expects clear and explicit
investment policies for the pool including the use of
variable rate securities (VRNs), structured notes,
and derivative instruments. Fund investment poli-
cies should incorporate procedures on the approval,
risk measurement, control, and limits related to
these investments. Fund managers should be able to
present an analytical basis for determining that
such securities are indeed eligible fund investments
and have a reasonable likelihood of maintaining or
repricing to par at each reset until maturity. This
analytical basis should include a review of historical
index behavior and sensitivity analysis.
Internal controls
Standard & Poor’s closely considers the internal
controls of fund advisers and pool managers.
Included here are pricing policies, NAV deviation
procedures, depth of staff, stress-testing capabilities,
asset flow monitoring, trade ticket verification, sys-
tems backups, and disaster recovery. Accurate pric-
ing is a key factor in maintaining a stable NAV.
Standard & Poor’s expects all investment advisers
of rated money funds to have the ability to price
portfolio securities and calculate a fund’s actual
NAV in-house, and to do so periodically. Advisers
are expected to compare the market value of the
fund to its amortized cost value on a weekly basis.
In addition, managers should have built-in proce-
dures to check the pricing of outside providers and
question any discrepancies that may occur.
Investment advisers need to be able to calculate
NAV, but they also need to have explicit written
plans for dealing with any material deviation. NAV
deviation procedures are the responsibility of the
pool’s manager and the advisory board, and should
not be left to a third-party administrator.
Fund managers should also be reasonably pre-
pared for the unexpected. This entails the ability to
perform “what if” and stress test analyses. For
example, a fund manager should be able to calculate
the impact of any security purchase on the fund’s
WAM. This calculation should factor in the influence
of sudden or unexpected redemptions in conjunction
with the security purchase. In addition, fund man-
agers should have the ability to stress test both indi-
vidual securities and entire portfolios. Individual
security tests should estimate price sensitivity under318 Standard & Poor’s Public Finance Criteria 2007
Other Criteria