BBH is the latest manager to "go Government" and convert their Prime money market fund ahead of the October 2016 implementation of the SEC's 2014 Money Market Fund Reforms. Brown Brothers Harriman filed to convert its $1.8 billion BBH Money Market Fund into the newly named BBH US Government Money Market Fund on April 1, 2016. We review this and the overall Prime to Government trend below, and provide more color on MassMutual's plan to convert its Premier Money Market Fund to a US Government MMF. (See our Feb. 11 Link of the Day, "MassMutual MMF Goes Govt," and see our previous two "Going Govt" stories -- "American Beacon Goes Govt" (1/25/16) and "More Funds Jump on Prime to Govt Conversion Bandwagon; Mergers" (12/22/15).) Also, we briefly recap the February issue of our Bond Fund Intelligence newsletter, which was sent out to subscribers late Friday, and we review commentary from PIMCO portfolio manager Jerome Schneider, entitled, "Giving Cash Its Due."
The January 27 BBH filing says, "In connection with the amendments adopted by the U.S. Securities and Exchange Commission to Rule 2a-7 and other rules governing money market funds under the Investment Company Act of 1940, the BBH Money Market Fund intends to operate as a "government money market fund" effective on or about the date provided below. The Fund will also change its name at that time." The new name will be BBH US Government Money Market Fund and the conversion date is April 1, 2016.
The filing continues, "Accordingly, the Fund will adopt a new investment policy requiring the Fund to invest 99.5% or more of its total assets in cash, U.S. government securities, and/or repurchase agreements that are collateralized fully by cash and/or U.S. government securities. Please note that the Fund's current investment strategy permits the intended investments of the U.S. government money market fund strategy. As a result, in order to keep transaction costs to a minimum, the Fund will gradually transition its portfolio holdings from its current investment strategy to its new investment strategy and may be invested in accordance with its new investment strategy before the actual effective date of the Fund's transition."
We learned about another conversion from Fund Action, which wrote earlier this week, "Mass Mutual To Convert Prime Money Fund." It says, "MassMutual is the latest in a storm of firms planning to convert prime money market funds to government funds. According to a Securities and Exchange Commission filing, the $441.1m MassMutual Premier Money Market Fund will be rebranded the MassMutual Premier US Government Money Market Fund in May.... In total, including Mass Mutual's fund, $265bn in prime money assets are set to move to government funds, Peter Crane, president at Crane Data, told FA. He added $173bn of those assets have already converted, including the largest among them -- Fidelity Investments' $121bn Cash Reserves Fund."
The FA piece continues, "The smaller fund complexes and those firms with smaller money fund lineups are switching en masse, Crane added. "For most of these small providers that have under $1bn and use their money fund just as a convenience for their clients, it's a no brainer," he said. "The costs of converting to prime are substantial with the systems issues of dealing with a floating NAV, if they're institutional, or the gates and fees if they're retail or institutional. It's a pain for the systems. Their boards of directors don't want the responsibility of the gates and fees even though it's unlikely to happen."
The article says, "Crane added in this environment where yields are still very close to zero, investors aren't going to complain. "It's probably not going to happen anytime soon but if yields ever do go up, where they're measured in percentages and not basis points, investors may complain and they may want their higher-yielding prime funds back," he said. "In the meantime, it's an easy decision for most small players."
Fund Action concludes, "We're at the tail end of the barrage of conversion announcements, however, Crane added. This is because most fund boards determined the next steps for their money funds around year's end. "Certainly the big money has already declared," he said. A spokesman from MassMutual did not return calls for comment."
With the pending conversion of BBH and MassMutual's Prime assets, Crane Data now counts 26 firms with almost 56 funds that have decided to "go government" with some or all of their money market funds. Currently, we show $266.5 billion in Prime funds switching to government with $172.4 billion already converted to date. The next big batch of conversions comes on April 1 and April 6 when some $20 billion will shift to Government, including the American Funds, Cavanal Hill (see their new statement here), and John Hancock MMF.
Note that Fitch Ratings just released a video recap from Director of Funds and Asset Management Greg Fayvilevich, entitled, "US Money Fund Conversion Update." Fayvilevich says, "The movement of such large sums of money is impacting demand and yields in the market, evident by the spread between yields of prime and government money funds, which has recently widened near the pre-crisis average of 14 basis points."
In other news, the February issue of our Bond Fund Intelligence went out to subscribers on Friday. BFI features: a story on the pending "Segmentation of the Conservative Ultra Short Bond Fund space;" an interview with Vanguard Short-Term Tax-Exempt portfolio managers Pamela Tynan and Justin Schwartz; monthly bond fund asset flows; and a sidebar on Morningstar's Fixed Income Fund Manager of the Year, PIMCO's Jerome Schneider. We also recap the latest bond fund news, including the introduction of our new Crane BFI 100 Index, an average that tracks the performance of the 100 largest taxable bond funds. Subscribers can now access the latest and back issues of BFI on our "`Content" page (scroll down to see Bond Fund Intelligence).
Finally, PIMCO's Schneider has also penned a new Q&A, "Giving Cash Its Due". Schneider states, "In the cash markets, the reaction to the Fed's first 25-basis-point increase in December was very subdued. Treasury bill yields have lagged due to strong demand, and money market government fund yields on a net basis are basically still around zero, since some management fees have ticked up. Further, not only have bank deposit rates generally stayed put, even though many investors had expected banks to raise them, but some major banks have said they will start to charge fees on deposits for certain customers. As these trends continue, we do not expect any meaningful increase in cash yields from the Fed's next rate hike either."
He adds, "Going forward, we expect that the Fed will raise rates as economic conditions improve, and yields on the front end of the curve should increase gently. But that doesn't mean that all yields will rise. Investors should be aware that some asset classes, including money market funds and the instruments they invest in, predominantly T-bills, will continue to be structurally restrained in terms of yield. Money market reform and bank capital requirements have increased demand for these securities, which is likely to keep yields low. T-bill and agency debenture issuance is also lower than historical levels, which may put further pressure on yields."
Schneider concludes, "Structural changes are also underway this year: Money market reform is set for the third quarter, and ongoing bank regulations will continue to limit market liquidity and the availability of high quality, short-term assets. In the past, cash allocations were sometimes an afterthought for investors. But today, as more investors make cash and short-term investments an integral part of the portfolio, these allocations matter. As a result, investors need to be prepared for the changes that are underway and be proactive so they can meet their needs for both return and liquidity in the year ahead."
