Henderson Liquid Assets Fund - Henderson Global Investors

Henderson Liquid Assets Fund
Financial crisis - your questions answered
Mark Camp
Director of
Institutional
Liquidity Funds
What types of deposits do you invest in?
The Henderson Liquid Assets Fund (HLAF) invests in bank and
building society accounts, call accounts, fixed deposits and
both fixed and floating rate certificates of deposit (CDs). We
will be looking at floating rate notes at some point in the
future, but all investments are unsecured obligations of the
main issuing counterparty.
How do you choose which institutions to lend to?
The diversification of HLAF assets is a major selling point for
the fund. We currently invest in over 30 separate institutions.
The fund's triple A rating only allows us to invest in institutions
with the highest short term rating. HLAF assets have to comply
with the strict investment parameters set out in the UCITS III
approved prospectus, then with the Henderson approved
counterparty list and fund strategy, and finally with the
investment parameters set by Fitch and Moody’s as part of
their conditions for awarding the AAA and Aaa rating to the
fund. This effectively limits us to only considering banks with
long term ratings of A or better.
Further to that, all counterparties have to be acceptable to our
in-house credit specialists and approved by Henderson's Credit
Risk Committee. Naturally we take note of ownership,
guarantees, position in home economy and any other
intelligence in making day-to-day investment decisions.
Tony Andrews
Fund Manager
Surely government-issued securities are safer than
cash at the moment?
Only if the government in question has sufficient monetary
strength to fulfil its obligations. This issue is rapidly becoming a
crisis in Iceland at the moment. UK Gilts, for their part, may be
safer but offer much lower interest rates than are available
through HLAF.
What is the difference between investing in HLAF
and putting my money with any popular high street
UK bank or building society? After all, they are now
protected by the Government, aren’t they?
While a fund like HLAF does not offer a failsafe investment
guarantee, UK banks and building societies currently only offer
guaranteed protection up to £50,000 per person. HLAF also
offers investors the following additional benefits over bank
and building society accounts:-
• The fund carries a triple A rating from both Moody’s and
Fitch - meaning that from an overall risk perspective HLAF is
considered to be less risky than a one-year AAA rated bond.
There are few banks left with a rating of double A or better.
• Diversification benefits - the spread of risk within HLAF
means that if there is a problem with one of the banks it
would only affect a fraction of each pound invested. Whereas
if invested in a failed institution, or one which the
government did not have the funds to support, then all of
that pound would be deemed to be at risk.
• Daily dealing and liquidity - to achieve the same liquidity
levels within a bank, the investment would have to be held
in a current account which typically yields between 0%
and 3.0%. HLAF has consistently yielded above the UK base
rate over the last five years.
• Superior returns – HLAF provides a return which reflects
market rates only obtainable for investors tying their money
up for a considerable period, or if invested in CDs may result
in capital losses if sold to raise funds during a rising interest
rate environment.
Can I have a list of current holdings in the fund?
The top 15 holdings in HLAF are posted on the Henderson
website at the end of every month. The web address is
http://www.henderson.com/sites/henderson/institutional
/productsandcapabilities/cashinvestment.aspx
As an exception we may also disclose a full consolidated
counterparty list. See the ‘Notice to Shareholders’ letter dated
22 September 2008 on the website for more details.
Did you have any exposure to Icelandic banks?
We do not have any exposure to Icelandic Banks.
Did you have exposure to Lehman Brothers?
We do not have any exposure to non-deposit taking American
investment banks, on the grounds that their Bank Financial
Strength Ratings (BFSR) fall short of our stringent credit controls.
Why is the current yield on the fund higher than
base rates?
The main issue at the moment is one of liquidity within the
money markets. As there is more demand from banks for funds
than there is cash to fulfil the demand, the price only has one
way to go. We are able to take advantage of the fact that one
to three month interest rates are higher than the base rate at
present.
Is there any currency risk within HLAF?
The prospectus precludes the fund from taking any foreign
exchange (FX) risk.
Is the fund covered by the Financial Services
Compensation Scheme?
No. HLAF is an institutional fund, and is therefore not covered
by the FSCS, which is applicable for retail investors.

What would happen to my investment if Henderson
were to default?
HLAF is a separate and distinct company from Henderson
Global Investors Limited, the investment manager of the fund.
All fund assets are held in custody and are therefore totally
ring-fenced from Henderson and, indeed the custodian bank,
which is BNP Paribas in Dublin. However, the continuing
management of the fund would then have to be addressed.
Apart from that, no investments would be at risk if Henderson
were to default.
Henderson Group plc is a FTSE 250 company and is considered
to be well capitalised for an investment management house.
How did the move by the Treasury on 13 October to
buy stakes in UK banks affect the money markets?
The three month LIBOR rate fell slightly following the
announcement, and this continued on the 14 October. The
announcement could lead to a touch more liquidity in the
market.
A money market fund in the US managed to ‘break
the buck’. How did this happen and could the same
thing happen to a money market fund over here?
Money market funds are said to ‘break the buck’ when their net
asset value (NAV) falls below $1 or £1 a share. The US fund in
question had a significant exposure to Lehman Brothers, which
brought about the problem when the company defaulted on its
debt. It is conceivable that the same could happen to a
European-based money market fund, however as noted before
HLAF has never invested in any non-deposit taking American
investment bank. The current fund’s policy is not to invest in
derivatives. HLAF has also never invested in any mortgage
backed securities (MBS) or any asset backed securities (ABS).
Contact us
Matthew Cheek
Sales Manager
Tel: 07917 080 361
Email: matthew.cheek@henderson.com
Henry Jones
Sales Manager
Tel: 07714 415 218
Email: henry.jones@henderson.com
We consider that the institutions we invest with should be able
to find government support if they ran into difficulties. All the
banks and building societies in which we invest operate retail
deposits and are therefore centrally regulated and pivotal to the
economy.
HLAF seeks to maintain a stable NAV per share of £1. The
return on the investment is paid in the form of a monthly
dividend, gross of tax and net of fees, which can be paid in
cash or reinvested in new shares. The fund has no exposure to
sub-prime lending, structured investment vehicles or asset
backed securities.
Does Henderson guarantee the share price of the
fund will not drop?
No. There is no guarantee that the share price cannot fall below
par. However, such a scenario is unlikely given the very
conservative investment policy HLAF currently applies. To date,
apart from the Lehman Bothers Liquidity Funds, domiciled in
Dublin, no triple A rated fund run by an IMMFA* member has
ever fallen below par. There is no legal guarantee to investors
regarding the capital investment in HLAF and this is clearly
stated in the prospectus and supplement.
What’s your outlook for the next six to twelve
months?
We see the interbank market slowly recovering and LIBOR
interest rates in Sterling falling, to come closer to base rate. We
think further base rate cuts will be required to respond to any
recessionary effects felt in the UK economy. The depth of the
recession will determine how far rates have to fall, and how
quickly. A base rate in the UK of 3.0% is therefore not out of
the question.
* The Institutional Money Market Funds Association (IMMFA) is a trade
association. Most of the major fund managers, including Henderson, offering
Treasury-style money market funds are IMMFA members.
Maria Mealing
IFA Distribution Manager – Nationals & Networks
Tel: 07770 855 628
Email: maria.mealing@henderson.com
Tristan Murphy
Sales Manager
Tel: 07904 661 781
Email: tristan.murphy@henderson.com
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