The Investment Company Institute released its "2016 Investment Company Fact Book," an annual compilation of statistics and commentary on the mutual fund industry. The latest edition reports that while equity and bond funds experienced outflows in 2015, money market funds had modest inflows last year. It also looks at institutional and retail MMF demand, as well as the effects of the SEC money market fund reforms. Overall, money funds assets were $2.755 trillion at year-end, comprising 18 percent of the $15.7 trillion in mutual fund assets. Households held $1.715 trillion, while institutional investors held $1.040 trillion. Among households that owned mutual funds, 54 percent owned money market funds, while 88 percent owned equity funds, 35 percent owned balanced funds, and 42 percent owned bond funds.
On "Demand for Money Market Funds," the Fact Book says, "In 2015, money market funds received a modest $21 billion in net inflows. Like demand for long-term funds, however, demand for money market funds fluctuated in 2015. In particular, money market funds experienced outflows in the first four months of 2015, with investors redeeming $162 billion, on net. Tax payments by corporations in mid-March and individuals in mid-April were likely key drivers behind these redemptions. Outflows abated and money market funds received net inflows of $183 billion over the last eight months of the year. About half of these flows went to government money market funds."
It continues, "Institutions rely more heavily on money market mutual funds to manage their cash today than they did in the early 1990s. For example in 2008, US nonfinancial businesses held 37 percent of their cash balances in money market funds, up from just 6 percent in 1990. Though this portion has declined since the 2007-2009 financial crisis -- it remains substantial, measuring 23 percent in 2015. Part of this demand reflects the outsourcing of institutions' cash management activities to asset managers. Depending on the amount of cash an institutional client wishes to invest and how the client wants the assets managed, it may invest in a money market fund or, alternatively, in a separate account -- an account wholly owned by the institutional investor and managed on its behalf by an asset manager. Institutional money market funds -- used by businesses, pensions funds, state and local governments, and other large-account investors -- had net inflows of $16 billion in 2015, following a net inflow of $37 billion in 2014."
ICI explains, "Individual investors tend to withdraw cash from money market funds when the difference between yields on money market funds and interest rates on bank deposits narrows or becomes negative. Because of Federal Reserve monetary policy, short-term interest rates remained zero throughout most of 2015. Yields on money market funds, which short-term open market instruments such as Treasury bills, also hovered near zero and remained below yields on money market deposit accounts offered by banks. Retail money market funds, which are principally sold to individual investors, saw a small net inflow of $5 billion in 2015, following a net outflow of $31 billion in 2014."
On "Recent Reforms to Money Market Funds," the Fact Book explains, "The SEC has amended Rule 2a-7, a regulation governing money market funds, several times since 1983.... In response to the 2007-2009 financial crisis, the SEC significantly reformed Rule 2a-7 in 2010. Among other things, these reforms required money market funds to hold a certain amount of liquidity and imposed stricter maturity limits."
It tells us, "One outcome of these provisions is that prime funds have become more like government money market funds. To a significant degree, prime funds adjusted to the SEC's 2010 amendments to Rule 2a-7 by adding to their holdings of Treasury and agency securities. They also boosted their assets in repurchase agreements (repos).... Prime fund holdings of Treasury and agency securities and repos have risen substantially as a share of portfolios, from 12 percent in spring 2007 to a peak of 36 percent in fall 2012. In December 2015, this share was 34 percent of prime fund assets, still more than double the value before the financial crisis and subsequent reforms."
ICI writes, "In July 2014 the SEC adopted additional rules for money market funds, precluding the use of amortized cost accounting by institutional funds that invest more than one-half of 1 percent of their assets in nongovernment securities and by requiring that such funds price their shares to the nearest one hundredth of a cent (i.e. float their NAVs). Additionally, under the July 2014 rules nongovernment money market fund boards can impose liquidity fees and gates when a fund's weekly liquid assets fall below 30 percent of its total net assets. The July 2014 rules also include additional diversification, disclosure, and stress testing requirements, as well as updated reporting by money market funds."
Furthermore, they comment, "Because the new rules will not be fully implemented until late 2016, it is not yet clear how these reforms will affect investor demand for money market funds. In late 2015, however, some money market fund sponsors altered their product offerings on the view that demand for prime money market funds, both from institutional and retail investors, will decline once the July 2014 rules are fully implemented. In late 2015, a total of $188 billion in assets migrated from prime funds into government funds through mergers with existing funds or through changes in funds' investment strategies."
They add, "As a result of these and other factors, the total net assets of institutional and retail classes of prime money market funds fell by $77 billion and $103 billion, respectively, during the last two months of 2015. As expected, these reductions were offset by the growth in the assets of government money market funds. By the end of 2015, assets in prime funds were at their lowest since 2004 and assets in government funds were at their highest level since 2008."
The Fact Book says of the "Federal Reserve's Overnight Reverse-Repo Facility," "At the end of 2015, the Federal Reserve was the repo counterparty for 54 percent of the $718 billion in repurchase agreements entered into by taxable money funds. This share has risen from 29 percent at the end of 2013, the year the program began. The rise, however, reflects a strong seasonal pattern. Money market fund repurchase agreements with the Fed tend to spike at quarter-ends, in large part because of changes in bank regulations, especially in Europe. Historically, European banks have been major repo counterparties with money market funds. Due to regulatory changes, however, European banks have generally become less willing to borrow from U.S. money market funds, especially at the end of the quarter."
The ICI's annual update also says, "Mutual funds remained the largest investors in the U.S. commercial paper market -- an important source of short-term funding for major corporations around the world. From year-end 2014 to year-end 2015, mutual funds' share of outstanding commercial paper decreased from 46 to 40 percent. Prime money market funds accounted for most of mutual fund commercial paper holdings. Consequently, mutual fund holdings of commercial paper tend to fluctuate with the total net assets in prime money market funds. In 2015, assets in prime money market funds fell $180 billion as these funds adapted to a 2014 SEC rule change that will be fully implemented in October 2016."
Finally, the Fact Book mentions money fund assets in Retirement plans. It says, "Defined contribution (DC) retirement plan and IRA assets in money market funds totaled just $356 billion, or 13 percent of the $7.1 trillion assets in DC plans and IRAs. Of that $356 billion, $216 billion of money fund assets was invested in IRAs, while $141 billion was in DC plans." (Note: ICI will hold its annual General Membership Meeting late next week in Washington (May 18-20). Crane Data will be exhibiting, so drop by to say "Hi" if you're attending.)
