BlackRock and BofA Global Capital Management disclosed details of their plan to reorganize and merge the two companies' money market mutual fund lineups in a new SEC filing. The Prospectus Supplement for the BofA Funds Series Trust, dated Dec. 30, 2015, comes almost two months after BlackRock announced that it was buying BofA's $87 billion cash management business ($43B of which is in MMFs). (See our Nov. 3 News, "BlackRock Taking Over BofA MMFs in One of Biggest Acquisitions Ever.") When the deal is completed, possibly as soon as April 2016, BlackRock will become the second largest MMF manager (from 3rd currently). The fund reorganizations are subject to shareholder approvals. We review the filing and merger details below, and we also recap yesterday's online Wall Street Journal article, "What December Rate Rise? Most Money-Fund Yields Haven't Changed."
The BofA filing says, "As previously communicated, BofA Global Capital Management, the direct parent company of the BofA Funds' investment advisor, BofA Advisors, LLC (the Advisor), has entered into an agreement to transfer the investment management responsibilities of the Advisor to BlackRock, Inc. This transaction includes the transfer of the part of the Advisor's business that relates to the investment management of the BofA Funds."
It explains, "In connection with the Transaction, the BofA Funds' Board of Trustees has considered and unanimously approved reorganizations of the BofA Funds into funds managed by a BlackRock affiliate (each, a BlackRock Fund and, collectively, the BlackRock Funds), as listed in the table below (each, a Reorganization and, collectively, the Reorganizations). The Reorganizations were proposed by the Advisor and BlackRock."
The table shows: BofA Cash Reserves ($8.1 billion) and BofA Money Market Reserves ($20.1 billion) will merge into BlackRock TempFund (currently $63.4 billion); BofA Government Plus Reserves ($2.3B) will merge into BlackRock FedFund ($13.2B); BofA Government Reserves ($5.7B) will merge into into BlackRock Federal Trust Fund ($718M); and, BofA Treasury Reserves ($10.4B) will merge into BlackRock T-Fund ($21.1B).
BofA Funds' filing adds, "The closing of each Reorganization is subject to the satisfaction of a number of conditions, including approval by the shareholders of each BofA Fund at a joint special meeting of shareholders expected to be held in the first part of 2016. In each Reorganization, if various conditions to the closing of the Reorganization are satisfied, a BlackRock Fund will receive substantially all of the assets and assume certain of the liabilities of the BofA Fund, and BofA Fund shareholders will receive shares of the BlackRock Fund in exchange for their shares of the BofA Fund. A BofA Fund shareholder will receive shares of the BlackRock Fund with the same aggregate net asset value as the shares of the BofA Fund that such shareholder owns immediately prior to the closing of the Reorganization.... Additionally, BofA Fund shareholders will not incur any transaction charges as a result of the Reorganizations. Each Reorganization, if it is approved by shareholders and all other conditions to the closing are satisfied, is expected to occur in the first part of 2016."
The Journal's "What December Rate Rise?" piece says, "Investors in many of the largest money-market mutual funds haven't received any benefit from the Federal Reserve's Dec. 16 increase in its target short-term interest rate. Recent yields are unchanged from the levels of Dec. 15 at 13 of the 20 largest share classes of "prime" money funds for individuals, according to Crane Data LLC, a Westborough, Mass., firm that tracks money-market funds. These include funds from Bank of New York Mellon Corp.'s Dreyfus Funds, Federated Investors Inc., Charles Schwab Corp. and T. Rowe Price Group Inc."
It continues, "The major reason that many money funds' yields haven't risen along with interest rates in the market is that fund companies have taken advantage of the increase to cut back on the subsidies they had been providing to their funds over the past few years of near-zero rates. In some cases, the funds' yields continue at just 0.01%, or a mere $1 a year on a $10,000 holding. By contrast, according to Crane Data, yields have risen over the same period on some lower-expense money funds that had lower subsidies in place, or none at all. That includes the $110.3 billion "Investor" share class of the Vanguard Prime Money Market Fund, the largest prime money fund for individuals, where the yield rose to 0.37% from 0.15% according to Crane Data."
The article quotes Peter Crane, president of Crane Data, "In general, yields are lower on funds with higher expense ratios." It explains, "Expenses are the prime differentiators when it comes to the yield on money-market funds because regulations limit the pool of securities they can invest in, he says. In recent years, though, many fund companies with higher fees waived all or part of their fees to keep expenses from eating up the funds' yields and taking a bite out of investors' principal. Fund companies are clearly hungry to collect the fees they have lost out on over recent years, even as money-fund holders wish for the chance to earn more on the cash reserves they have parked in these low-risk funds."
The Journal piece continues, "Joseph Lynagh, a money-market portfolio manager for T. Rowe Price Group, says the firm hasn't earned a management fee on the $6.4 billion T. Rowe Price Prime Reserve Fund for nearly seven years. With the recent rate increase, the fund's interest earnings are now sufficient to cover part of its operating expenses. But the firm continues to waive its 0.34% management fee and to cover 0.04 percentage points of the fund's 0.19% in other expenses so that it can sustain its 0.01% yield, Mr. Lynagh says."
It goes on, "Ryan Robson, a general partner at a unit of brokerage Edward D. Jones & Co., said the firm was happy to see a rate increase from the Fed because Edward Jones Money Market Fund had been essentially fully subsidized since 2009 by its adviser, a limited partnership jointly owned by Edward Jones and a subsidiary of asset manager Federated Investors. As a result of the rate increase, he said, the adviser has been able to lower the amount of fees that it waives.... In deciding what to do with their fee waivers, fund companies are watching each other's behavior. "We certainly want to be competitive in the market and see what some of our peers are going to do," Mr. Robson said."
The WSJ continues, "Some money funds have higher fees than others to compensate financial advisers that sell them. And fees are generally higher on money funds used as "sweep" accounts in brokerage accounts. With those arrangements, excess cash in a brokerage account is regularly swept into the money fund and withdrawn from that fund when needed for securities purchases. The $40.5 billion Schwab Cash Reserves fund -- the second-largest prime money fund for individuals, according to Crane Data -- charges a higher fee than some other Schwab money funds because it is a sweep fund, said a Schwab spokeswoman. The fund's yield has remained at 0.07% since mid-December. The Schwab fund may charge as much as 0.70% in total expenses per its prospectus, but the fund company has capped the expenses at 0.66% and is currently waiving 0.39 percentage points of that."
Finally, it concludes, "The $13.7 billion Class B shares of Dreyfus's General Money Market Fund, with a continuing yield of 0.01% and expenses of 1.03% listed in the prospectus, "are sold to retail investors though financial advisers," a spokesman said. "The total expense ratio of the fund supports a variety of cash-management services including a daily automated cash sweep, check writing, debit cards and online bill payments -- all as part of a bundled fee." At the Vanguard Prime Money Market Fund, the usual fee is 0.16%. Vanguard hasn't been waiving any fees since at least December, the company has said."
