Fidelity Fixed Income President Nancy Prior spoke last week on "Money Market Funds: The New Reality" in a session at the Association for Financial Professionals annual meeting in Denver. Prior discussed Fidelity's second phase of changes to its money market fund lineup and a number of issues related to pending money fund reform-related changes, including the shift towards government funds, ultra-short bond funds and other alternatives. (See the recent "Fidelity Money Market Mutual Fund Changes" update, and our Oct. 15 News, "Fidelity Details Retail vs. Inst MMF Changes; Only One Floating Fund.") Fidelity also just released an update entitled, "Fidelity Money Market Fund Designations Q&A."
At AFP, Prior stated, "MMFs survived a very long and difficult regulatory process, and will continue to exist in a form we all recognize. That survival was not a given through a series of ups and downs of a regulatory process that lasted more than five years. One result of the regulation, however, is that the current value proposition of prime MMFs -- stability, liquidity, and a competitive market yield -- has been diminished. In fact, investors will no longer be able to maximize all three with any single MMF product. There will be tradeoffs between the different types of funds, and investors will have to choose which features are most important to them."
She said, "For many of you here, prime MMFs have traditionally been a great cash investment option. They met your needs by providing all three elements -- stability, liquidity, and a competitive yield. But going forward, prime funds may or may not meet your specific needs. You may choose to stay in a prime fund, or choose an alternative type of MMF, or even select a combination of funds for your cash management.... I want to reiterate our commitment to the institutional MMF business. Fidelity is the market leader in MMFs, and we are dedicated to meeting the needs of all our money fund customers, and continuing to offer our institutional clients a broad range of options."
Prior continued, "From my own conversations with many, many clients over the past year, I know you were hopeful a "silver bullet" would arise: a solution that complied with the new rules while offering everything prime MMFs have historically offered. Well, I'm afraid to say there is no silver bullet.... With over 11 million MMF customers, Fidelity felt a responsibility to act quickly and lead the industry in proactively educating our shareholders, and to move promptly and decisively to realign our product lineup. We solicited feedback via surveys, investor forums, and direct client outreach to figure out what our MMF product lineup should look like in order to meet the specific needs of each of our customer segments. In response, we have adjusted our product lineup in many ways. Throughout the process, we were driven by the idea of keeping things as simple as possible for our customers."
Further, she said, "Based on what we heard, we have done the following: First, we chose to convert three prime funds to government funds -- including the Cash Reserves Fund which, with $116 billion in assets, was used predominantly as a brokerage core account. We heard strong sentiment from institutional and retail investors that liquidity fees and redemption gates, though a very remote possibility, were unacceptable in these funds, so these conversions, which are now approved and soon to be completed, will keep customers from being subject to either of those redemption restriction features. Second, we are in the process of merging six funds to rationalize and simplify our product lineup. And third, just last week, we announced the final element of our product response plan, designating funds as retail or institutional."
Prior stated, "So the decisions, on our end, have been made. And now, we will begin the process of working with all of you to help you understand where you are and what you need to do. With last week's announcement, all of our clients know how each Fidelity MMF is categorized a year in advance of the compliance deadline. Most importantly -- and again, I want to really emphasize this -- we will continue to offer a broad suite of MMFs: institutional and retail, prime and municipal funds, along with government and Treasury funds.... The decisions you make going forward will be informed by how you value the different features of money funds -- NAV stability, daily liquidity and yield. Once again, you can no longer maximize all three in any single fund."
She commented, "It is clear at this point that a lot of assets will be gravitating toward government funds.... What stands out immediately is how large the government supply bar is when compared to the size of government MMF assets. You can see that the total supply of MMF-eligible government securities currently stands at approximately $6.6T."
Prior added, "Over the next year, several factors will keep the money moving within the market, including: 1. Fund manager decisions. So far, fund management firms have announced about $200 billion of prime funds that will convert to government, and this figure may continue to rise. 2. Individual investor decisions. Currently, there is a total of $1.6 trillion in prime MMFs, and $1 trillion in institutional prime funds; it is possible that a significant portion of this money eventually will be re-allocated as institutional investors evaluate the advantages and disadvantages of prime and government funds. 3. Defined Contribution plan sponsor decisions. The defined contribution market currently holds $75 to $100 billion in MMF assets. Based on conversations and insights we have gained from Fidelity's DC clients, we believe many of these assets also may move from prime to government funds; and finally, 4. Corporate cash decisions, those that all of you will be making over the next year."
She added, "So a lot of money is, and will be, moving toward government funds. However, as I said, the government securities market is enormous, at close to $7T. So each $100B in incremental demand represents just 1.5% of the available supply. Even if we see a total of $400 billion to $500 billion of assets convert to government securities before next October -- that represents only about 6% to 7% of the total available supply. Standing where we stand now, we believe that the converted MMF prime assets within the industry will have no trouble finding investments in the government market, though potentially at a lower yield. Despite the significant migration to government funds, we believe that prime funds -- which, historically, have enjoyed a yield advantage over government funds -- remain an attractive solution for corporate treasurers. But, importantly, the redemption gates are only applicable under extreme market conditions that result in a prime fund's weekly liquidity falling below the designated 30% threshold."
Prior concluded, "With the revamped product lineups of Fidelity and other asset managers coming into focus, now is the time for corporate decision-making. Your three primary options are government MMFs, prime MMFs, and ultra-short bond funds. In addition to those options, some investors may consider customized solutions, including separately managed accounts and other non-registered alternatives. Of course, bank deposits are a further option, but they may or may not be readily available. In the end, your decisions will depend upon your priorities regarding time horizon, liquidity, yield, and tolerance for price volatility. With last week's announcement, Fidelity has completed the updating of our product lineup and is ready to work with you.... The near- and long-term future will not be without continued challenges, but I believe that MMFs, as a vehicle, have the potential to emerge as strong as ever. Our true north as an industry remains our mutual commitment to ensuring the safety, stability and viability of the money market product for all of our customers."
Finally, during the Q&A portion, Prior was asked about same day settlement for floating NAV funds after October 2016 and the amount of times per day floating NAVs might price. "The answer right now is it's too soon to say," she said. Prior said the key is trying to balance the desire to have as many settlements in the day, as late in the day, as possible, with the reality of being able to get in pricing. "There have been industry calls that have ranged from one settlement period a day, all the way up to three or four settlements per day, ranging in times from 9 am to 11 am to 2 pm and 3 pm," Prior explained. "We just don't know the answer yet," but she added that they have been consulting with pricing vendors to arrive at the right solution. She added, "Because the last thing we want to do is push this to the limit, so that we're not able to meet the commitments that we set out for our customers."
At the end of January, Fidelity announced phase one of its money fund lineup changes (see "Fidelity Announces Major Changes to MMFs; Staying Stable, Going Govt"), which involved merging 6 money funds into funds with similar strategies, and converting 3 Prime Retail funds into Government funds, including the largest money fund, the $111 billion Fidelity Cash Reserves. Then Fidelity recently announced that it will convert its $65.5 billion Fidelity Institutional Money Market Portfolio to Prime Retail and its $2.2 billion FIMM Tax Exempt Portfolio to Retail. The largest MMF manager will retain just one Prime Institutional fund, the $47.8 billion FIMM Prime Money Market Portfolio.
