government investment pools, Washington State's pool is setting its own guidelines in the pursuit of two goals: educating its participants and getting a money market rating.
By implementing weekly reports, limiting investments, and providing full disclosure, the treasurer's office hopes to avoid the problems of Orange County, said Doug Extine, chief investment officer for the state's $1.3 billion investment pool.
"Some of our participants are sophisticated investors and take a close look at what we do. Others don't," said Extine, of the 380 fund investors. "Many are part-time investors and have eight or 10 other duties and don't have that time or expertise to track us thoroughly."
The purpose behind the policy changes, asserted Extine, is the need to clarify investment activities at the pool, which is managed without outside advisers.
"Our state statutes talk about government agencies being eligible investments, but they don't say anything about specific products within those categories," said Extine. "So the range note, which got a lot of money funds in trouble over the last year, is eligible for public funds in this state and may be appropriate for some portfolios. I don't think it's appropriate for our pool because of the volatility in its market value."
A basic range note pays interest when an underlying index on which it is based yields within a certain range. When the underlying index's yield falls outside that range, the note earns nothing. Interest on range notes typically accrues on a day-by-day basis.
The list of allowable investments has not been decided upon yet, said Extine, but he indicated that any derivatives products would be limited to hedging uses only.
"The only derivatives we have in the portfolio right now are Treasury bill floaters and a prime-based floater, which represent about $35 million," he said. "They've performed real well. But those are defensive instruments in a bear market and are very common in money funds."
On reverse repurchase agreements, Extine said, there is a proposal to limit investments to a 90 day maximum and 20% of the portfolio. The reinvestment of the proceeds from the reverse repurchase would have to be matched within 14 days, he added.
"We don't buy a three-month bill, reverse that, and buy a year bill," said Extine.
The other reason the fund is tightening its investment policies is to get a money market rating from either Standard & Poor's Corp., Fitch Investors Service, or Moody's Investors Service. Moody's does not yet provide the ratings, but is looking into it, according to Laura Levenstein, a vice president and assistant director at the agency. A rating for the pool would give a higher degree of assurance to investors about the safety of the fund, Extine said.
"Rating agencies are starting to take a closer look at investment pools," said Extine. "We've gotten a lot of questions from participants and from people who own local government debt. Getting a short-term fund rating would answer most of those questions."
Formal investment guidelines and a standard disclosure policy would help the fund obtain a high money market rating, noted Extine.
Extine said that over the last year, the fund has consistently outperformed its benchmark, the IBC/Donoghue Index of governmental-only and institutional-only money market funds (see accompanying chart).
"We have beat the index by an average of 35 basis points over the last year," said Extine.
