Money Market Funds (MMFs) are popular investments for those seeking safety, liquidity, and yield for their cash, whether it's corporate funds, emergency savings, or other types of liquid assets. MMFs consist of short-term assets such as Treasury bills, certificates of deposit, or commercial papers.
Two indicators are commonly used to evaluate a portfolio's composition, particularly to analyze the maturity structure of its securities: WAM (Weighted Average Maturity) and WAL (Weighted Average Life).
Let's see what these are about.
WAM and WAL: What are they?
WAM (Weighted Average Maturity) measures the weighted average maturity of a money market fund's securities based on their maturity dates. It gives an idea of the average period after which the fund will be repaid. For example, a fund with a WAM of 30 days means that the average maturity of the securities it holds is 30 days. It helps evaluate interest rate risk: the longer the WAM, the more sensitive the fund is to interest rate fluctuations. Generally, money market funds have short WAMs (typically between 30 and 180 days) to minimize this sensitivity to rate movements.
WAL (Weighted Average Life) measures the average time before the principal of a fund's securities is repaid, taking into account payments made throughout the life of the securities (principal only). Unlike WAM, which is based on the final maturity of securities, WAL focuses on when the capital is actually repaid. WAL thus allows for a more refined assessment of credit risk related to the borrowers of securities held by the fund, specifically how quickly it can recover its capital. A shorter WAL means that the fund will recover its capital more quickly, thereby reducing its exposure to the risk of borrower default.
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Regulation and transparency
The European regulatory framework imposes strict limits on money market funds to ensure their liquidity and protect them against extreme interest rate fluctuations.
Regulatory caps of the European Money Market Fund Regulation (MMFR):
- Short-term money market funds: WAM ≤ 60 days and WAL ≤ 120 days.
- Standard money market funds: WAM ≤ 6 months and WAL ≤ 12 months.
Additionally, money market funds are required to regularly publish their WAM and WAL levels to ensure maximum transparency for investors.
WAM and WAL of Spiko money market funds
Since Spiko money market funds are approved as short-term money market funds, they must comply with the regulatory requirements mentioned above, namely WAM ≤ 60 days and WAL ≤ 120 days.
In their case, WAM = WAL ≤ 60 days because they only hold Treasury bills, which are instruments that make no payments—neither principal nor interest—during their lifetime. In financial jargon, these are called "bullet bonds" to indicate that the principal repayment occurs in a single payment at maturity. They are also referred to as "zero-coupon bonds" to indicate that there are no interest payments, in the form of coupons, before maturity.
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Conclusion
WAM measures the average time until a fund's securities mature, weighting each security by its weight in the fund, and is based solely on their maturity. In contrast, WAL measures the weighted average duration, taking into account the actual principal repayment schedule of the different securities. For simple money market instruments, such as Treasury bills, which repay the entire principal at maturity without intermediate payments, the WAM equals the WAL (as is the case for Spiko MMFs). However, this equality disappears when securities offer partial repayments or regular amortizations, as the principal is recovered gradually. In these situations, the WAL is generally shorter than the WAM, thus reflecting an earlier recovery of cash flows and a lower exposure to credit risk.
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