Morgan Stanley provided some insight into its views of life after money market reforms in a recent commentary entitled, "Perspective on Recent Money Market Fund Regulatory Change Announcements." The announcement, addressed to clients, says "Recognizing that you are eager for more clarity about the future of MMFs, especially institutional prime funds, we want to provide some perspective on current events and to update you on our product development agenda." The 9th largest money fund manager, with $116.7 billion in MMF assets, discusses recent moves made by other managers, how it views 60-day funds, and its approach to new regulations. In summary, Morgan Stanley anticipates meeting the new requirements for its current MMFs, it won't impose fees and gates on its government funds, and it will be looking to develop new products to meet the needs of clients. Also, following this week's announcement by Vanguard (see our June 17 News, "Vanguard Sticks with Prime, Goes Pure Retail, Reopens Federal MMF), the Independent Adviser for Vanguard Investors had some additional insights on Vanguard's MMF changes.
In its commentary, Morgan Stanley addresses the question: Could the Launch of New "Retail" MMFs Impact Your Institutional Fund Holdings? It says, "To date, much of the conversation around the new regulations has been focused on institutional MMF shareholders' willingness to invest in prime funds that will be subject to a floating net asset value (FNAV) and gates and fees. Prime fund shareholder feedback has been mixed. Many institutional cash managers seem willing to accept FNAV, but less willing to expose themselves to the possibility of gates and fees, however remote. Recent fund company announcements are unlikely to ease shareholder concerns over the changes to institutional prime funds because they are principally focused on efforts to launch new funds that meet the definition of a "retail" MMF. A MMF qualifies as retail if its shareholder base consists of natural persons as opposed to institutional investors such as corporations and municipalities. This distinction is very important as prime and tax-exempt funds that adhere to the retail fund requirements will be able to maintain a constant $1.00 per share NAV."
It continues, "Existing "institutional" funds that have a significant retail client shareholder base -- a situation that does not exist within Morgan Stanley's Institutional prime funds -- are facing a formidable challenge. These "retail" shareholders are likely to move into "retail" prime funds, which, when created, will be able to continue using a constant NAV (CNAV). Although launching new funds is a major undertaking, it is a necessary step that managers are taking in an effort to retain as much of their AUM as possible. This transition of retail clients out of institutional funds is important because it could lead to a significant decline in the asset size of certain institutional prime funds. Moreover, the transition of retail assets from institutional prime funds is likely to happen well in advance of the October 2016 implementation deadline of FNAV. As a result, prime fund shareholders need to begin evaluating the timing and magnitude of these changes to ensure that they are comfortable with their prime fund positions relative to changing fund sizes and shareholder compositions."
Further, "At Morgan Stanley Investment Management, we already have a full suite of retail MMFs separate from our institutional funds, so we do not face the challenge of launching new funds in this area. Additionally, we have very little retail shareholder money in our institutional prime funds and, as a result, do not expect the assets of these funds to decline much, if at all, due to "retail" asset transfers. As a result, our response to the new regulations is focused on the development of products and services for our institutional clients."
The MSIM update also asks: "Is there Value in 60-Day Maximum Maturity Prime Funds?." It adds, "At least one fund company has announced their plans to introduce "60-day maximum maturity" institutional prime and tax-exempt funds. This type of fund will be offered alongside existing funds that adhere to the traditional 397-day limit on individual investments. The logic behind a 60-day maximum maturity fund is that it may reduce the potential for changes to a fund's NAV per share. Although we would not necessarily argue this point, we would highlight that this type of fund will still be subject to FNAV and will not prevent fluctuations in NAV per share. Finally, a 60-day maximum maturity fund does not eliminate the risks of gates and fees. While we question the value and practicality of a 60-day maximum maturity prime fund, we will engage clients further before we make a final decision on this option."
The missive adds that Morgan Stanley won't impose gates and/or fees on its government funds. It explains, "Under the new regulations, government and treasury MMFs are not required but can voluntarily adopt gates and fees. At this time, we have no intention to adopt gates and fees on our government and treasury MMFs and it is unlikely that we would consider such an option. Aside from gates and fees, government MMFs are receiving quite a bit of attention in response to an announcement that one of the largest retail prime funds plans to seek a shareholder vote to convert to a government fund. As government funds are not subject to FNAV and can elect not to opt into the gates and fees requirements, some have suggested that there could be a flood of MMF assets that migrate to government funds."
Morgan Stanley's piece explains, "MMF shareholders are starting to question how a large movement would impact yield and supply. Based on everything we have learned to date, there is a strong possibility of a large migration from prime funds to government funds. This migration may have much more to do with structural and operational considerations of banks and portals than corporate cash managers' aversion to FNAV or gates and fees. It is too early to tell how this will impact supply and yields, but it should be considered in the early phases of your planning process."
It answers the question: "How is Morgan Stanley Investment Management approaching the new regulations?" It says, "It is very likely that more announcements will be forthcoming from investment managers in the near future. It is equally unlikely that anyone will announce a direct substitute for today's CNAV institutional prime funds. The simple fact is that there is no direct prime fund substitute that will eliminate FNAV and gates and fees in a registered mutual fund structure. Satisfying the new regulations in a way that maintains as much of the funds' utility as possible is one of our two primary focuses. Our best estimate is that our funds will implement the FNAV and gates and fees requirements in the summer of 2016 at the earliest."
Finally, the MS update continues, "Our other primary focus is developing a broader suite of cash investment options for our clients. One thing that has become clear is that you will need more flexibility in the future. We firmly believe that trying to protect the status quo is not in our mutual best interest. As a result, we will be engaging you further in the coming months to discuss not only how our prime funds will operate, but also how we intend to deliver a number of viable alternatives."
The Independent Adviser for Vanguard Investors shed some light on Vanguard's recent MMF announcement in a story, "The Individual's Money Fund with the $5 Million Minimum." Editor Daniel Wiener writes, "The press completely missed one of the craziest parts of yesterday's announcement by Vanguard that it's re-naming and re-aligning its money market funds to keep their net asset values at a fixed $1.00 per share by avoiding the "institutional" label."
He explains, "But here's the crazy one. At the end of the year the Institutional shares of the Prime Money Market fund, with $29.5 billion in assets, will be renamed Admiral shares (Prime Money Market Institutional will become Prime Money Market Admiral) which might make you think these shares are going to become lower-cost shares for individual investors like the rest of the Admiral class. And yes, Vanguard says that the fund will "remain available to individual investors." I don't know what kinds of individuals Vanguard is talking about unless they mean Warren Buffet or Bill Gates."
Wiener continues, "You see, the fund is going to maintain its $5 million investment minimum so it's not clear to me what makes this any different from its original incarnation except for the fact that the name won't say institutional, and hence I guess won't be subject to rules requiring floating net asset values. As far as I'm concerned Prime Money Market Admiral is an institutional fund in all aspects except its name." (Note: This likely indicates that the bulk of Vanguard's "Institutional" shareholders are actually 401k or other fiduciaries with retail investors underneath. The SEC's new rules allow for the "look-through" to the underlying investors, so these investors appear to be primarily "retail".)
Finally, Fidelity Treasury MMF was merged into the Fidelity Treasury Fund on Friday (June 19), the company said in an Operational Update. The merger was announced as part of Fidelity's MMF changes, which we wrote about in our April 14 News, "Fidelity Operational Update Details More Changes."
