Speakers provided a 30,000 foot view of the money fund industry at Crane's Money Fund Symposium, held June 23-25 at the Renaissance Boston Waterfront Hotel, during a session on June 24th called "The State of the Money Fund Industry." Led by Peter Crane, president at Crane Data, the session featured Debbie Cunningham, executive vice president and chief investment officer at Federated Investors and Alex Roever, managing director, J.P. Morgan Securities, discussing trends, reforms, supply, and other issues. The general mood was relatively upbeat considering all the stresses surrounding funds. (Note: Thanks to the 500 attendees, speakers and sponsors who joined us in Boston at Money Fund Symposium this week! The recordings, final conference binder and Powerpoint presentations are now available to attendees and subscribers at the bottom of Crane Data's "Content" page. Our next Symposium will take place June 24-26, 2015 in Minneapolis, Minn., and our next conference will be our 2nd annual European Money Fund Symposium, Sept. 22-23, 2014, in London.)
"Certainly it has been trying, it has been tumultuous, but one of the things I like relying on, first and foremost, are the asset levels -- that's the ultimate report card," said Crane, who founded the conference. "There's still $2.6 trillion in money fund assets. It is still a massive segment of the asset management industry." That's down from a record of $3.9 trillion in 2008 but still close to 2007 levels. Money fund assets have been essentially flat over the last three years, even going up fractionally in both 2012 and 2013, said Crane. Year-to-date through May 31, assets are down about $160 billion or about 6.0% or so but he expects assets to remain flat for the year. (Assets have shown a pattern of decline in the first half and rebound in the second the past several years.) "The fact that it hasn't moved through a zero rate environment, through this discussion of regulatory changes, that money isn't going anywhere. It's a pretty solid base in money market funds."
A cause for optimism is the amount of cash overall in the economy. "If you look at bank deposits and money market mutual funds, the total combined is over $10 trillion. If and when rates do start climbing, one would expect large segments of that $7 trillion in bank deposits to migrate their way back into money market mutual funds. We have nowhere to go but up. I believe the outlook for money market funds is bright."
"What we've seen is throughout various cycles, we've continued to make higher highs and higher lows, and that's a good thing especially in the context of where we have been from a rate environment perspective," said Cunningham. "Those higher highs and higher lows will continue to hold and our high of nearly $4 trillion should be surpassed in the next cycle."
"I do think, historically, when you've seen spikes in assets and declines in assets, they've been related to where we stand from an interest rate perspective," added Cunningham. "If the Fed is tightening, generally speaking, funds are flowing out of money funds and going into the direct market for a short period of time to capture that additional yield, and when the Fed is loosening or easing, essentially you have the reverse. That's essentially what we saw through all of 2009, with that huge buildup that occurred when the Fed began their easing process. I think it can be some degree a continuation of that next year when we do actually see the tightening process start, but I do believe it will be muted to some degree," added Cunningham.
"I think it'll be muted because a portion of the assets that seem to be very steady and sticky at this point in time seem to not have the alternative, or want the alternative, of going somewhere else in the marketplace, even if somewhere else is offering 5, 10, or 15 bps more than what they can get in a money fund." Cunningham expects the Fed tightening to come in 2015, "But you won't see that larger amount of outflow that traditionally has happened at the beginning of a tightening cycle."
Prime money market funds make up the largest portion of the money market fund pie, accounting for approximately 55% of all MMF assets (including retail and institutional). But that is down from 65% prior to the crisis. Prime institutional is still the biggest slice, making up roughly one third of money fund assets. "If the regulations come down and are more onerous or are not good news for the fund industry, you may see this big shift into government and Treasury funds and you could see some funds close," said Crane.
On the yield curve, Cunningham said: "Our expectations would be as we move into the second half of 2014 that we start to see at first the longer part of the curve, the 9-12 months sector of the curve, start to increase a little bit, with that following later on in the later part of the 2014 with the 3-6 month area of the curve potentially."
She added on waivers, "Generally speaking a 10 basis point increase in the overall yield curve would effectively reduce waivers by about 25 percent. When you get to a 75 basis point Fed funds rate, assuming again a curve that is marginally positive, you end up with the normalized waivers. The waivers that took on a life of their own in a very very low yield environment is eliminated at 75 basis points."
Roever talked about the trends in money market supply. Over the last few years, money market demand is only down about $434 billion, but over that same period, supply is down $2.5 trillion. "The story with the aggregate supply in Treasury has been our deficit is shrinking -- the Treasury doesn't need as much to fund the government so we're having a decline in bill supply outstanding. I think the underlying story of where are you going to get the product to invest is one that continues to be probably in at least a downward trend for the time being until we get some changes in the economy. A lot of what's going on behind the scenes in terms of supply is reactions to the regulatory situation both in the U.S. and outside the U.S.."
Finally, on money market reforms, Cunningham said: "I feel like we are not close to resolving it at this point. There are Commissioners who are dead set against a floating NAV and there's at least one that's dead set against the gates and fees. We have a Chair who would like to have a super majority or consensus, and it's hard to imagine we could ever get a majority at this point in time. I think there needs to be compromise. Compromise has to be the answer at this point because I don't think there's a consensus that's building around 1 or 2 of the answers that seem to have been floated out there."
She added: "Complacency from the industry's perspective -- sort of waiting and seeing -- is not the answer at this point. We need to continue to talk about what the potential compromises could be."
