Western Asset Management is the latest manager to announce updates to its money market fund lineup. In a press release entitled, "Western Asset Update on Plan for Money Market Fund Offerings: SEC Reforms Drive Proposed Changes to Product Lines," the firm laid out its roster of US Treasury/Government, Retail, and Institutional funds (including a new Prime Retail fund) and set strike times for the latter. We review this, and we also excerpt from Wells Fargo MMFs' latest "Overview, Strategy, and Outlook."
The update says, "Western Asset Management Company, an investment affiliate of Legg Mason, today announced an update to the preliminary plan for its money market mutual fund product suite's compliance with the U.S. Securities and Exchange Commission (SEC) money market fund reform rules. The initial plans were announced in April 2015, and after further consultation with both investors and distribution partners, the firm can advise the following fund line‐up and floating net asset value strike times." (See our April 8, 2015 Link of the Day, "Western Asset Keeps Full Money Fund Lineup; Adds Ultrashort Bond Funds.)
In its post-reform lineup, Western will have 6 U.S. Treasury and Government Money Market Funds, including: Western Asset Institutional U.S. Treasury Reserves, Western Asset Premium U.S. Treasury Reserves, Western Asset U.S. Treasury Reserves, Western Asset Institutional U.S. Treasury Obligations Money Market Fund, Western Asset Institutional Government Reserves, and Western Asset Government Reserves.
The release explains, "Funds will continue to seek to transact at a $1.00 net asset value and already meet the new SEC requirement to invest at least 99.5 percent of their assets in cash, government securities, and/or repurchase agreements that are fully collateralized. Legg Mason Partners Fund Advisor, LLC and Western Asset have no current intention to recommend to the Board to institute liquidity fees or redemption gates on these funds."
The firm will have 4 Retail and Tax-Exempt Money Market Funds, including the new Western Asset Prime Obligations MMF (see our October 14, 2015 Link of the Day, "Western Files for Prime Retail.") The fund's prospectus was filed in January, but we haven't seen the fund go live yet. The other Retail funds are: Western Asset Tax Free Reserves, Western Asset Institutional Tax Free Reserves (to be renamed Western Asset Select Tax Free Reserves at a later date), Western Asset California Tax Free Money Market Fund, and Western Asset New York Tax Free Money Market Fund.
Western says, "Funds will only be available to accounts beneficially owned by "natural persons." Under the new SEC money market fund regulations, these funds will be permitted to continue to seek to transact at a $1.00 net asset value. The funds will adopt policies to impose liquidity fees (up to 2 percent of redemption proceeds), as well as provide for redemption gates in times of market stress, if the Board deems it to be in the best interests of a fund." A footnote adds, "Prior to reform implementation, the funds will undertake to confirm that all existing shareholders meet the SEC definition of "natural person" or will notify ineligible shareholders that their shares will be involuntarily redeemed."
Furthermore, they will offer 4 Institutional Prime Money Market Funds: Western Asset Institutional Cash Reserves, Western Asset Institutional Liquid Reserves, Western Asset Premium Liquid Reserves, and Western Asset Liquid Reserves. The release comments, "On or about October 11, 2016, the funds will price and transact at a floating net asset value, which will reflect the current market‐based values of the portfolio securities it holds and will adopt required policies relating to liquidity fees and redemption gates. The floating net asset value price will be quoted to four decimal places e.g. $1.0001 and the funds will provide intraday liquidity by offering three net asset value strikes per day at 8:00 a.m., 12:00 p.m. and 3:00 p.m. (Eastern time). Note: Fund end of day cutoff time will be 3:00p.m. (Eastern time)."
Finally, Western adds, "Although the key SEC money market fund reforms do not come into effect until October 14, 2016, there have been a number of reporting changes in order to provide shareholders with more current information. Beginning on April 14, 2016, all 2a‐7 money market funds were required to provide the following information via N‐MFP filings and also on the fund's website. The following information is uploaded on a daily basis and includes historic 6 month rolling data: Current market based net asset value (NAV) rounded to the fourth decimal place; Daily and Weekly Liquid Assets; Net shareholder flows."
In other news, Wells Fargo's latest monthly commentary, written by Jeff Weaver, Laurie White, and Wells MMF PM team, says, "In our last commentary, we noted that, with fewer than six months until the implementation deadline of the Securities and Exchange Commission's (SEC's) revisions to Rule 2a-7, not much had changed in the world of money market mutual funds, and May seemed to continue the trend. While overall money market fund assets increased by $24 billion, that change primarily was driven by $60 billion in growth of government funds. Offsetting that, prime fund assets declined by $40 billion, with $25 billion leaving retail prime funds and $15 leaving institutional money market funds."
The piece continues, "Additionally, portfolio managers continued to shorten the maturities on their funds and to build liquidity. According to Crane Data, the WAM on prime institutional money market mutual funds dropped 5 days in May to 26 days; Crane has indicated the daily liquid assets in these portfolios remained the same at 33%, while weekly liquid assets increased from 45% to 48% in May. We still expect this trend to continue through to the implementation date, as portfolio managers prepare their prime funds for cash flows whose timing and size are unknown at this time."
Wells adds, "Over the next few months, this is what we expect investors will observe: Some money market funds will liquidate. Some fund companies have made the decision to close their prime funds or convert those funds to government strategies. Some money will flow out of the retail sector. A number of fund families currently offer multiple share classes, including institutional and retail classes, in the same fund. Since the SEC is requiring funds be designated as institutional or retail, any institutional shareholders in a retail-designated fund must leave the fund. Some of this cash will go into institutional prime funds, some will go into government funds, and some will go into fund alternatives (such as bank deposits). The mix of these flows is still uncertain."
They continue, "Additionally, some retail shareholders may face liquidation because a third party (neither the fund manager nor the beneficial owner but another individual such as a broker or trust officer) makes the decision as to whether a retail fund subject to fees/gates may be appropriate for their clientele. And finally, some money will flow out of institutional funds due to a lack of appetite for either the possibility of fees/gates being imposed or a variable NAV. In some cases, there may be operational constraints (such as a trust system that cannot handle multiple variable NAV strike times).... Add all of those up and the money flows could be very large."
Finally, Wells adds, "What is likely not to change, though, is the investment objective of prime fund managers.... Even though institutional prime and municipal funds must convert to a variable NAV, it's not clear that the underlying shareholders want the NAV to fluctuate; consequently, we expect very little change from the way portfolio managers will manage their portfolios before or after the implementation date. Between now and then, though, with portfolio managers shortening maturities, we also expect yields to decline and the spread between the gross yields of government and prime funds to compress.... Once all the moving parts come to rest and both investors and portfolio managers become accustomed to a new normal, one could reasonably expect that fund characteristics will return to pre implementation levels. Until then, this scenario probably is described best as temporary in nature and a cost of implementing regulatory change."
