The Federal Reserve Board of Governers announced a reduction in its benchmarket Fed funds target rate by 0.25% to 2.00%. The Fed has reduced short-term interest rates by 3.25% since the Subprime Liquidity Crisis spontaneously began in August 2007. Money market rates, which follow the Fed, should move towards 2.25% over the next several weeks. The Fed also cut the less important discount rate to 2.25%.
The Fed's statement says, "Recent information indicates that economic activity remains weak.... Financial markets remain under considerable stress, and tight credit conditions and the deepening housing contraction are likely to weigh on economic growth over the next few quarters."
"Although readings on core inflation have improved somewhat, energy and other commodity prices have increased, and some indicators of inflation expectations have risen in recent months. The Committee expects inflation to moderate in coming quarters.... Still, uncertainty about the inflation outlook remains high. It will be necessary to continue to monitor inflation developments carefully," says the Fed.
It adds, "The substantial easing of monetary policy to date, combined with ongoing measures to foster market liquidity, should help to promote moderate growth over time and to mitigate risks to economic activity. The Committee will continue to monitor economic and financial developments and will act as needed to promote sustainable economic growth and price stability."
Standard & Poor's RatingsDirect recently released a report entitled "Capital Matters at Asset Managers," which discussed the ratings agency's "increased emphasis on capitalization for asset managers" given "recent market phenomena that are forcing some asset managers to shore up their funds." The report says, "Although we continue to focus on cash flow as the primary source of an asset manager's ability to service all obligations, we will increase our analytical focus on tangible equity regarding a company's ability to absorb unexpected losses."
S&P says, "[A] number of asset managers have provided financial support to prop up the net asset values of their Rule 2a-7 money-market mutual funds and certain cash management funds that had come under stress due to their exposures in structured investment vehicles (SIVs), mortgage-backed securities (MBS), and other less-liquid securities. These securities suffered market-value losses due to credit and liquidity problems. This support was given for 'business' reasons, not because of any contractual obligations.... Asset managers that are units of larger financial institutions, such as bank holding companies, have been able to call on their respective parent companies for support in times of trouble."
The report discusses the risk of contagion to other mutual funds should a money fund "break the buck". It says, "To prevent such an exodus, the management companies, for 'business reasons,' have supported their Rule 2a-7 money-market funds by contributing capital, securing letters of credit (LOCs), or purchasing underwater securities at or near par value. Financial support has not been limited solely to Rule 2a-7 money market funds. Asset managers, or their parent companies, have also been supporting certain cash management and stable value funds that were sold to institutional investors."
Finally, the report says, "To date, most independent asset managers have not had to pay out large amounts to support their retail money market funds or institutional cash management funds."
Tradeweb, a pioneer in the development of electronic bond and commercial paper trading owned by Thomson Reuters and a consortium of dealers, has launched a marketplace for bank deposits. The platform is geared towards the European marketplace initially, but the U.S. version is pending. Tradeweb brings institutional investors and a network of dealers together to make electronic markets in Treasuries, Agencies, Agency Discount Notes, Commercial Paper, Euro CP, Repo, and Canadian Money Markets, among other securities.
Tradeweb London's release says, "The Tradeweb Deposit marketplace supports the placement of new and maturing Deposits, initially in five currencies: Euro, Sterling, US Dollar, Swiss Franc and Yen. The marketplace also provides real-time, indicative composite rates for price discovery, and STP." Initial banks participating include: Anglo Irish Bank, Dexia, KBC, RBS and UBS. (See website Finextra.com's article.)
"The launch of this market is very timely," says President Lee Olesky, "as the credit and short-term funding market is quite difficult right now.... As our Deposit product attracts a growing number of banks and institutions from across Tradeweb's powerful network, we expect our data to become very widely used as an accurate indicator of tradable deposit rates." (FT.com also mentioned the deposits module launch, speculating that the move could "potentially provide another way of calculating funding trends, other than the LIBOR rate.")
TradeWeb also recently introduced a "Money Markets Composite" page, says its quarterly eBond Review newsletter. It includes live pricing, breakeven analysis, a Fed funds-target rate calculator, and an inventory chart for commercial paper.
It's now almost a certainty that no money market mutual funds will "break the buck" or drop below $1.00 a share due to the past 9 months of subprime and SIV liquidity crisis. While at least 20 advisors have been, or eventually likely will be, forced to take protective action to support the handful of securities that are in or threaten default, the threat from structured investment vehicle, or SIV, debt is fast receding and approaching resolution. Sigma, the last and largest of SIVs, continues to make payments and remain robust, and it sounds as if senior debtholders of Cheyne, Axon, and Orion will soon receive most, if not all, of their remaining outstanding debt.
On Federated Investors' quarterly earnings call Friday, CEO Chris Donahue said, "There's been a lot of attention on SIV investments with recent questions coming on the Sigma structure. We have continued to see the winding down of this position as the notes mature. We have received all payments, when and as due, and expect to continue to be paid in full from these investments."
Donahue continues, "Our remaining exposure is approximately $1.2 billion, and we'll be down to about $650 million by the end of May, with the remaining exposure gone by August. We continue to believe that credit quality within the Sigma structure remains strong. We remain comfortable with the credit quality of all our money market investments." In the Q&A segment, Federated added that Sigma had made "a significant payment a few days ago".
Federated's call also debunked the myth that money funds were in danger of significant lost fee revenue due to low yields, saying the company took a mere $70K charge for the quarter "from fee waivers to maintain positive yields" in Treasury & repo funds. These waivers "have not reoccurred" and are not expected to. Finally, the company took a $2.6 million charge to cover "changing prospectus language," and said that at 2.6 basis points, running the $10 billion Florida local government investment pool (LGIP) is "still profitable".
Worldwide assets in money market mutual funds totaled $4.957 trillion at the end of the 4th quarter 2007, up $293 billion from their level of $4.664 trillion in Q3, says the latest "Worldwide Mutual Fund Assets and Flows" compiled by U.S. mutual fund trade association The Investment Company Institute. New inflows accounted for $244 billion of money funds' increase, down from Q3's blistering $279 billion. Money funds increased by $1.09 trillion in 2007 and now account for 18.9% of the worldwide total of $26.2 trillion in overall mutual fund assets.
Flows into U.S. money funds were $267 billion in Q4, while "the rest of the world experienced net outflows from money funds," says the report. "European money market funds had net outflows of $19 billion in the fourth quarter versus net outflows of $27 billion in the third quarter," says ICI. While Dublin- and Luxembourg-based IMMFA-style "Liquidity" funds (see previous News story) continue to experience inflows, France, the second largest money fund market, experienced sharp outflows.
The U.S. continued to dominate the space, accounting for 62.6% of worldwide money fund assets ($3.1 trillion) as of Q4'08. France ranks second with $632.9 billion, and Luxembourg ranks third with $386.2 billion. (Ireland likely should have ranked second or third, but its total $951 billion in mutual fund assets are not broken out by asset type. We assume over half of these assets are money funds though, since Dublin is the preferred domicile for "offshore" money funds.) Australia is the next largest market, with $210.6 billion in money funds, followed by Italy's $104 billion.
Assets have undoubtedly broken above $5 trillion year-to-date in 2008, as U.S. money market assets increased by over $350 billion in the first quarter of 2008 to $3.499 trillion. If the rest of the world's money fund assets remained flat, this would push overall worldwide money fund totals over $5.3 trillion in Q108. (Click here ICI's full "Supplementary Tables".)
The London-based Institutional Money Market Funds Association (IMMFA), the "trade association for providers of triple-A rated money market funds ... outside the US," recently held its annual general meeting. For those that missed it, the organization issued a press release entitled "Money Market Funds Demonstrate Liquidity Credentials Despite Market Volatility," and releases the full text of IMMFA Chairman Donald Aiken's speach.
The release says, "Despite the current market turmoil, IMMFA funds under management here in Europe have continued to rise to new record levels, reaching almost E400 billion, a E135 billion or 50% increase from the same time last year." Aiken comments, "These record funds-under-management figures confirm the growing popularity of triple-A rated money market funds which is in marked contrast to other mutual funds, which have generally seen outflows over the past few months. So there is something about this product that investors like, which I believe is the liquidity aspect."
Aiken continues, "The current market turmoil has proven, beyond any shadow of a doubt, the strong liquidity characteristics that are inherent in this type of product. There can surely be no better stress-test or reality check for a product's credentials than the global market turmoil we are experiencing." He adds, "[I]ronically in our case the market turmoil is proving to be of great help to us at this stage of our evolution."
IMMFA triple-A rated, "U.S.-style", or "shadow 2a-7" money funds have weathered the recent storm, while other non-U.S. "money market funds," such as those in France, have experience substantial outflows and issues. Recent events have made the adoption of regulations similar to the U.S. SEC's Rule 2a-7 much more likely as resistance to these stricter standards has all but evaporated.
Yields on money market mutual funds, which have declined by half -- from just above 5.0% to just above 2.5% -- over the past 8 months, appear to be bottoming out. While betting is leaning towards another rate cut at next week's (April 29-30) meeting of the Federal Reserve Board of Governors' Open Market Committee, it's increasingly looking like another 1/4-point reduction might be it for this cycle. This would bring the Federal funds target rate to 2.0% from its current 2.25%, and would drag money fund and money market rates downward another quarter-percent.
Crane Data predicts no cut by the Fed next week, and we believe the next rate move is higher. As inflation concerns rise, and recession fears decline, the question is growing as to whether another cut is needed or helpful. Gridlock in most of the money and other markets has been broken by the Fed's repeated and innovative liquidity measures, which have included the single-tranche OMO program, the term discount window program, primary dealer credit facility and term securities lending facility.
Over the past week, money fund yields fell by 7 basis points (0.07%) to 2.52% (7-day yield as measured by the Crane 100 Money Fund Index). The broader Crane Money Fund Average fell by 6 bps to 2.36%. Our Crane Tax Exempt Money Fund Index rose by 25 bps to 1.91%.
Assets of money funds, which had declined sharply following April 15, have already begun rebounding. MFI Daily's asset collection rose by $4.1 billion in the latest week to $2.837 trillion, and rose by $5.1 billion yesterday. ICI's more comprehensive weekly totals show total assets flat (down $830 million) at $3.484 trillion. Retail assets declined by $12.2 billion to $1.250 trillion while Institutional assets rose by $11.33 billion to $2.233 billion.
While money markets experienced unprecedented turmoil in the second half of 2007, the asset composition of taxable money market mutual funds showed surprisingly little change for the year. The soon-to-be-releassed "2008 Investment Company Fact Book" will show a modest uptick in Treasuries, Government Agencies and repos, and a decline in commercial paper and corporate notes, the movements amount to less than a 10 percent overall shift in money fund allocations.
The ICI table (the current year isn't available online yet) shows U.S. Treasury Bills and Securities rising from 4.3 to 6.9%, U.S. Government Agency Issues rising from 6.8 to 8.2%, and Repurchase Agreements rising from 20.3 to 22.0%. Certificates of Deposit fell from 10.0 to 9.2%, while Eurodollar CDs rose from 4.3 to 5.2%. Commercial Paper decreased from 31.2 to 27.5%, Bank Notes rose from 1.9 to 2.9%, and Corporate Notes fell from 17.0 to 11.6%. Finally, Other Assets, which include Bankers' Acceptances and Cash Reserves, rose from 4.3 to 6.5%. The Average Maturity at yearend 2007 was 40 days, down from 45 days in 2006.
Sharp declines in the now-extinct extendible asset-backed commercial paper and the endangered species listed SIV-related commercial paper and medium-term notes would be reflected in the CP and Corporate Note declines. Meanwhile, Treasury holdings reached their highest level since 2003, but their levels remain far below the early 1990's, when Treasury holdings accounted for 17 to 18 percent of taxable money fund portfolios. Commercial paper too has seen much higher levels in prior years, while Corporate Notes and Repos appear to have been the fastest growing category over the past decade.
The world of online money market fund trading portals gets a new entrant this week as Tradefunds (www.finacorptradefunds.com) begins operations. The new site says, "Finacorp Securities has teamed with The Bank of New York Mellon to establish Tradefunds.... The Tradefunds portal provides institutional clients with direct access to over 25 leading mutual fund families and over 100 specific money market funds -- all through one account, one wire, one agreement, with one consolidated statement."
President & CEO Ed Prado tells Crane Data, "We're pretty excited. There's a lot of emphasis on the money market space, and there's been an explosion of assets." On their minority- and Hispanic-owned angle, Prado says, "Finacorp Securities works with a lot of clients that have minority mandates in place, and this platform allows them to invest and satisfy diversity goals."
Partner Bank of New York Mellon launched the first money market fund trading portal in 1997, MoneyFunds DIRECT, one of the largest online money fund trading portals. Finacorp also founded the first "online trading platform for bonds, Tradebonds.com," according to the firms's website.
Finacorp's Tradefunds joins the rapidly-growing but increasingly crowded online money fund trading marketplace. Crane Data currently tracks 20 offerings with approximately $340 billion in assets, including minority-owned Capital Network Inc. and new entrants PNC Pinacle, UBS and Wachovia Connection.
Crane Data was asked recently how companies are treating money market mutual funds given the new FASB 157 "fair value" accounting standards. Both investors and accountants seem to agree that "Tier 2" is the appropriate categorization. We, however, wonder why money market mutual funds would not be Tier 1.
The Financial Accounting Standards Board's FAS 157 "defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles (GAAP), and expands disclosures about fair value measurements." The rule establishes a hierarchy, breaking measurements of fair value into "level 1, 2, or 3" inputs, depending upon how liquid prices and markets are.
Price Waterhouse Coopers' Tony Evangelista tells us, "[B]ecause they are at amortized cost and not quoted market the consensus is that these would be level 2". He recently presented at an "Issues in Securities Valuations" conference on "FASB 157 and Fair Value". One of the questions posed was, "Will money market fund financial statements now have to report their portfolio holdings at FAS 157 'fair value' rather than amortized cost?"
While we're no accountant, we would argue that money market funds daily publication of net asset values should quality under the "Level 1" requirement of "quoted prices for identical assets and liabilities in active markets". Most money market instruments are being classified as "Level 2" inputs too, though their short maturities, high quality, and other features may call for reconsideration as "Level 1". Look for more discussion on valuation issues in the May issue of our Money Fund Intelligence.
According to Federal Reserve statistics, bank and thrift savings account assets, including money market deposit accounts (MMDAs), broke above the $4 trillion level for the first time ever at the end of March 2008. The Fed's H.6. "Money Stock Measures" shows bank savings totaling $4.018 trillion as of March 31, a gain of $88.6 for the month and $118.1 billion year-to-date (3.0%). Over the past 12 months, bank MMDAs and savings have grown by $241.3 billion, or 6.4%.
Prior to September 2007, when the Federal Reserve began a series of interest rate reductions in order to combat the effects of subprime mortgage-related turmoil in the money markets, the spread between money market mutual funds and bank savings deposit rates had peaked at a record 4.0%. While assets continued into bank savings, money market mutual funds received the lion's share of new cash assets over the past several years, particularly since mid-2006. Though the differential is shrinking along with overall short-term interest rates, the gap remains substantial. (Subscribers should see the bottom table on page 2 of our April Money Fund Intelligence.)
While both "cash" sectors are undoubtedly seeing large tax-payment related outflows in the second half of April, we expect money market mutual fund assets, which totaled $3.506 trillion at the end of March, to overtake bank savings and MMDA totals in late 2008 or 2009. Given current growth rates -- money fund assets have increased by 11.3% ($354.9 billion) YTD and by 42.8% (1.049 trillion) over 1-year -- this could happen by fall. But inflows into money funds will undoubtedly slow their torrid pace as the Fed halts, and eventually reverses, its recent series of rate cuts, and as the massive flight-to-quality eventually subsides.
Currency, demand deposits and other checkable deposits (checking accounts) total $1.375 trillion, so total "cash", including money market funds, MMDA, and savings accounts in the economy adds up to a massive $8.899 trillion. Small Time Deposits (CDs) would add another $1.216 trillion, bringing the total to $10,115 trillion.
The Investment Company Institute's latest weekly statistics on money market mutual fund assets show a huge decline, $52.0 billion, to a total of $3.484 trillion. This is no surprise given the week's inclusion of April 15, when the Internal Revenue Service pulls over $100 billion from money funds, checking accounts and other cash accounts for income tax payments. A Treasury settlement date on April 15, and higher-than-target repo rates also contributed to outflows.
Institutional funds saw $45.5 billion exit in the week ended April 16. They now stand at $2.222 trillion, representing 63.8% of all money fund assets. Retail funds saw $6.5 billion leave, falling to $1.263 trillion. Year-to-date, money fund assets have increased by $339.9 billion, or 10.8%, and over the past 52 weeks assets have grown by $1.043 trillion, or 42.7%.
General purpose institutional funds total $1.305 trillion, or 37.4% of all money fund assets, followed by general purpose retail funds with $749.8 billion, or 21.5% of all assets. Government institutional funds are the third largest segment with $733.4 billion, or 21.0%, and government retail funds (including Treasuries) totaled $210.8 billion, or 6.0%. Tax-exempt retail funds hold $301.9 billion, or 8.7%, and tax-exempt institutional funds have $183.6 billion, or 5.3%.
For the week ended Wednesday, our Crane 100 Money Fund Index fell from 2.66% to 2.59%. Our broader Crane Money Fund Average declined from 2.48% to 2.42%. The Crane Tax-Exempt MF Index fell from 1.72% to 1.66%. Yields should continue inching downward in coming days, though the majority of previous Federal Reserve short-term interest rate cuts are now reflected in funds. We could even see rates inch higher next week as Treasury and LIBOR-linked rates undergo a sharp uptick.
The latest round of earnings reports has carried additional disclosures related to previously taken support actions by money market advisors to protect their funds, and some commingled pools, from exposure to SIV and other related distressed debt. Crane Data has also stumbled across another batch of mutual fund filings that disclose support agreements, and that disclose unprotected holdings of distressed SIV CP. Our full listing and table of updated loss amounts will be published in an upcoming quarterly issue of Money Fund Intelligence Distribution Survey, but we note a couple of news items below.
First, the Victory Funds, managed by KeyBank subsidiary Victory Capital Management, disclosed in a recent N-Q quarterly portfolio holdings SEC filing (as of Jan. 31, 2008) that Victory Prime Obligations, Victory Institutional Money Market Fund, and Victory Financial Reserves own "$16 million, $15 million and $5 million" in medium-term notes of Cheyne Finance LLC. The board "has agreed that it would not be in the best interests of the Funds or their shareholders to dispose of the Cheyne securities at this time. The Funds have continued to carry the Cheyne securities in the Funds' portfolios." (Portfolio manager Mike Gabriel also recently left the company.)
Another SIV victim is RiverSource Cash Management Fund, which disclosed in its Form N-CSR that it continues to hold both defaulted Cheyne Finance LLC and Whistlejacket Capital LLC debt. It adds, "As of March 10, 2008, with the exception of Cheyne Finance LLC and WhistleJacket Capital LLC, it is still anticipated that the Fund will receive full payment on the other SIV investments." RiverSource is the former American Express Funds.
Finally, BNY Mellon disclosed in its earnings yesterday a $12 million expense related to a "capital support agreement". The release says, "During the first quarter of 2008, we executed a capital support agreement for a commingled short-term NAV fund, which is managed by securities lending in the Asset Servicing segment, of $55.5 million covering securities related to Whistle Jacket Capital/White Pine Financial, LLC. Subsequently, we executed another capital support agreement for the same CNAV Fund of $30 million covering securities related to Thornburg Mortgage Capital Resources." These actions did not involve either Dreyfus money market mutual funds or BNY Hamilton money market mutual funds.
Yesterday's Wall Street Journal contained an article, "Sweep Option Shifts at Unit of Wachovia," which claimed that Wachovia Securities will be converting clients accounts of A.G. Edwards that hold Centennial Money Market Trust, advised by Oppenheimer Funds, into A.G. Edwards bank "sweep" deposits. The Journal, which names no sources, said the conversion will start May 14, and added, "Wachovia's action is an increasingly common tactic. Wall Street firms are channeling more retail brokerage clients' excess cash toward regular bank deposits, which yield lower interest rates, for most clients, than money market funds."
This latest news in the "bankerage," or brokerage banking sector, comes on the heels of other moves by brokerages to squeeze more profit from their beleaguered cash sweep investors. (See our March 26 "Link of the Day" on WSJ's recent "Smith Barney Rolls Out New Client 'Tiers'".) Our Crane Brokerage Sweep Index shows rates declining from 1.30% to 0.61% for brokerage sweeps on $50K to $100K balances over the past 3 months, and shows rates declining from 2.67% to 1.26% on $500K to $1 million balances.
The Journal says, "The net result of the change will be to slash interest rates for less-afluent clients, particularly those with less than $1 million in assets." While A.G. Edwards is among the highest-paying brokerages on cash "sweep" balances, with rates ranging from 1.82% to 2.47%, Wachovia is among the lowest, being the sole major brokerage that refrains from posting its sweep rates publicly.
Crane Data believes that the trend of brokerages sweeping cash to banks has declined and even reversed recently. We estimate that balances have shrunk from approximately $350 to $320 billion over the past year, as the spread between the average brokerage bank account and money market mutual fund averaged over 3%. A number of brokerages are also rethinking their move into "bankerage" following severe losses from mortgages and from the reinvestment of sweep proceeds into asset-backed securities. However, as rates continue their decline, brokers are taking advantage of a renewed "desensitivity" of savers to interest rates.
Institutional Cash Distributors, or ICD, is one of the largest players and earliest entrants in the online money market trading "portal" space. Crane Data interviewed the company in our most recent MFI and discussed the genesis and state of the portal marketplace, recent liquidity events, including since-assuaged concerns over Bear Stearns, and several new initiatives underway at ICD.
How did ICD clients react to the recent near-death experience at Bear Stearns? (Bear does clearing for ICD.) ICD's Jeff Jellison says, "We were able to get information to our clients right away, and provide them with detailed information on how their assets were segregated through Bear Stearns Clearing Corp. (BSSC) and never at risk. Our corporate treasury customers are very diligent.... All of us at ICD worked through the weekend to make sure our customers had as much detailed information as possible. At the end of the day, everyone just wanted to confirm what they already knew -- that their money was segregated and safe.
Mason Martin, Director of ICD Operations, offered an analogy: "For example, if ABC Fund Advisor were to go bankrupt, what would happen to the shareholders of ABC Prime Fund? Well, obviously, the money funds themselves are independent investment companies.... So those shareholders are protected from any balance-sheet activity of the parent. They own shares of the actual investment company. Similarly, our portal client assets have always been protected under the segregated clearing model, separate from the clearing agent's parent."
ICD recently launched an alliance with Clearwater Analytics to provide portfolio reporting to clients. Clearwater's accounting and compliance "will greatly improve ICD clients' Sarbanes-Oxley management processes." Clearwater and ICD are also pushing a transparency initiative to obtain daily or weekly portfolio holdings from money market mutual funds.
ICD's Ed Baldry says, "The marketplace condition is driving the need for transparency, because we live in a client-driven universe. Our whole mantra is to get them what they need and evolve in the most rapid fashion as a company. It's one of the advantages of a small company without a massive bureaucracy." For the whole ICD interview, see our most recent Money Fund Intelligence.
The unprecedented surge in money market mutual fund ratings continues, with a new batch of AAAm's announced by Standard & Poor's. Credit Suisse Institutional Money Market Fund Government was given the highest rating assigned to money funds, 'AAAm', yesterday, while State Street Institutional Tax Free Money Market Fund was given this honor Friday. S&P had also rated the new Barclays Global Investors Euro Government Fund 'AAAm' last week.
S&P's Peter Rizzo says they've rated more than two dozen U.S. and European money funds year-to-date. He says, "We've seen a lot more interest in Treasury and government funds in Europe". The "offshore" market has seen the launch of several Euro government funds. JPM launched its now E3.0 billion JPM Euro Government Liquidity Fund in December and Goldman Sachs launched a Euro Government Liquid Reserves Fund two weeks ago. The first pound sterling "Gilt" money market funds are expected to launch soon too.
The Credit Suisse Govt fund, which had been previously rated 'Aaa' by Moody's "pursues its objective by investing exclusively in obligations issues and/or guaranteed by the U.S. government or by its agencies and instrumentalities and overnight, triparty repurchase agreements collateralized by government securities," says S&P's release.
State Street Tax Free MMF started on Feb. 7, 2007, and "seeks to maximize current income, exempt from federal income taxes, to the extent consistent with preservation of capital and liquidity and the maintenance of a stable $1.00 per share net asset value". The release says the fund, "typically invests in variable-rate demand notes, municipal bonds, and tender option bonds". It adds, "As of April 4, 2008, the fund has no exposure to monoline insurers FGIC or XL Capital."
Federated Investors reported preliminary earnings this morning, which included record growth and levels of money market mutual fund assets. Money funds overall had a record quarter in dollar growth terms, rising $355 billion, or 11.3%. This barely beat out Q3 2007's $347 billion surge, though Q307 was larger in percentage terms (13.6%). Over the past year, money fund assets overall (as measured by ICI's weekly series) grew by $1.049 trillion, or 42.8%.
Fidelity remains by far the largest money fund manager. It also showed the largest asset increase, rising $69.9 billion, or 19.2%, to $408.3 billion in the quarter (12.5% market share). No. 2 BlackRock showed the 2nd largest dollar increase, up $41.0 billion, or 18.6%, to $261.4 billion. Seventh-ranked Goldman ($186.0 billion) brought in the third-largest asset total, $39.7 billion (up 27.0%). And fourth-ranked Federated showed the 4th-largest gain, up $36.3 billion to $231.8. (Totals include only U.S. money funds tracked by Crane Data.)
JPMorgan (#3 with $253.0 billion) gained $30.5 billion, or 13.6%, and Schwab (#5 with $202.7 billion) gained $29.4 billion, or 16.3%. Vanguard (#6 with $193.0 billion) gained $15.1 billion, or 8.3%, while `Dreyfus (#8 with $168.6 billion) gained $27.3 billion, or 18.8%.
Among the 25 largest money fund managers, Lehman Brothers showed the largest percentage increase (up 36.6%), rising $8.1 billion to $30.1 billion. The next largest percentage increase was seen by Reserve, which grew by 35.6% in the quarter, up $22.0 billion to $75.5 billion. (For more detail, see the upcoming issue of our quarterly Money Fund Intelligence Distribution Survey.)
The May 2008 issue of Money Magazine, which arrived in subscribers mailboxes yesterday, features an article (p.49) entitled, "Are Your Assets Really All That Safe?" Senior Editor Walter Updegrave writes, "Remember that free lunches can be expensive. You also need to be careful about reaching for higher yields in your cash investments. There will always be investments that seem to offer fatter yields than plain old money-market funds without much extra risk."
Money cites bank-loan funds, which "have lost nearly 8% of their value" and auction-rate preferred securities, where "many owners have been unable to get out," as recent examples.
The lesson, Updegrave says, "When it comes to your cash investments -- the ones you can't take chances with -- limit yourself to secure options like short-term FDIC-insured CDs and money funds. True, money funds don't guarantee you against losses. But if you stick to funds issues by firms with solid reputations, your chances of experiencing any loss are minimal."
This month's Money also mention the "great opportunity in tax-free money-market funds" (on p.51), though the attractiveness of municipal yields is already fading. It quotes Alpine Municipal MMF manager Steve Shachat on muni bond insurer concerns, "The fears are overblown."
This month's issue of Money Fund Intelligence, our flagship monthly newsletter, profiled Utendahl Capital Management's UCM Institutional Money Fund. We interviewed veteran money fund portfolio manager and CIO Jo Ann Corkran and Sales Director Terry Prince about the challenges of running a money fund in today's market, and the opportunities available to funds affiliated with a minority-owned business. (Chairman John Utendahl started the firm after working at Solomon Brothers and Merrill Lynch.)
Corkran tells us, "Usually the main challenge is trying to keep a competitive yield ... but you have to think principal protection first, then liquidity, then yield. People tend to forget those things when times are good. You look at all the funds that have the same total expense ratio.... You don't want to force yourself to be in the top 10th percentile.... You want to show up on the screens, but you don't want to have to do the thing that makes you go out of your way to get an extra basis point."
"But recently the biggest challenge has been trying to stay one step ahead of the next thing that's going to be in the headlines.... Even if it represents minimal credit risk, it could still represent a significant amount of risk. If I'm an assistant treasurer somewhere, there's no upside for me to be involved in a fund that has any indirect subprime. Even though there's no actual credit risk, it's just easier for me to write the letter to my boss that says we have zero exposure."
Terry Prince says of UCM's distribution strategy, "We're on 4 different portals right now, and we are looking to expand.... But our history has proven that the direct sale is the most effective. That is partly because of lack of brand awareness. People aren't going to pick us ... unless they hear the story behind the investment strategy or the story behind our minority- and women-ownership structure. Those are the things that make people want to buy our fund, and those are the things they hear when we get into a direct conversation."
Does the minority-owned label help? Prince says, "It does. It's been a help when prospects say, 'We only do business with our credit banks.' Before I talk to a company, I try to research whether they have a supplier diversity initiative or another program similar to that. If they do, I'll try to steer the conversation towards that topic."
Prince adds, "The silver lining in all this market turmoil is the shift in investor focus towards quality. It's good for us because that's really how Jo Ann and her team manage the fund. We might not be the #1-performing fund. But to have the quality story that we have, that's compelling right now." (Contact Pete Crane to request a copy of the full MFI article.)
Money market mutual fund assets resumed their sharp climb in the latest week, rising $37.0 billion to a record $3.536 trillion. ICI's latest weekly numbers show retail assets increasing by $1.58 billion to $1.269 trillion, and institutional assets increasing $35.42 billion to $2.267 trillion. Assets normally jump at the start of the new quarter as dividend and bond coupon payments hit cash accounts, but assets should decline the week following the April 15 tax payment deadline.
This year, money fund assets have the added fuel of a huge flight-to-safety, plus interest-rate sensitive securities lending and financial institution cash pouring in. YTD, assets have increased by $391.9 billion, or 12.5%, and over 52 weeks assets have increased by $1.071 trillion, or 43.4%.
Institutional flows were heavily tilted towards General Purpose, or "Prime", money funds; assets here grew by $30.1 billion in the latest week to $1.328 trillion. Government institutional funds saw $4.0 billion (to $749 billion) and tax-exempt money funds saw $1.26 billion (to $189.8 billion).
Yields on money funds fell in the latest week. Our Crane 100 Money Fund Index declined by 0.12% to 2.66% (7-day yield as of April 9), and our broader Crane Money Fund Average declined by 9 bps to 2.48%. Tax-exempt money fund yields, as measured by our daily Crane Tax Exempt MF Index, fell by 26 basis points to 1.72%.
Note: This revised article corrects a previous report that Lehman had disclosed support for its money market funds. This is not the case, says the company.
Today's Wall Street Journal, in an article entitled "Lehman Liquidates 3 Struggling Funds", says Lehman Brothers Holdings had "purchased $800 million of assets," and quotes a "Lehman executive [who] said the assets were from two money-market funds and one enhanced-cash fund, a type of vehicle designed to give investors more yield than simple money market funds". Lehman's filing (search for "liquidate") also said three funds were liquidated and assets were moved onto the bank's balance sheet. However, sources at Lehman tell Crane Data that these disclosures are not related to money market mutual funds or enhanced cash funds. (Bloomberg's "Lehman Says It Bailed Out Money Market, Cash Funds" is sticking with the story that money funds were involved.)
Crane Data shows no liquidations occurring in any Lehman or Neuberger & Berman money market mutual funds, contrary to published reports. Again, the company says that these actions related to small short-duration fixed income funds, and that neither the purchases nor liquidations involve money market funds. The disclosures involve events that occurred many months ago and are not related to any potential recent support actions involving money funds (which would not have to be disclosed for months).
Lehman's filing says, "Due to market disruptions that occurred in the second half of the 2007 fiscal year and further deterioration in the 2008 quarter, certain investments held by the funds were either downgraded by rating agencies and/or experienced a decline in fair value. Accordingly, and as a result of these events: * Three funds were liquidated. The assets of those funds were purchased by the Company.... The fair value of these assets at February 29, 2008 was approximately $1.0 billion. * The Company purchased certain deteriorated assets from certain funds. The funds used the cash received from the Company to either redeem investors in the funds or make alternative asset investments. The acquired assets of those funds were then included in the Company's consolidated statement of financial condition at February 29, 2008 at an approximate fair value of $0.8 billion. * The Company agreed to waive or otherwise limit its investment management, advisory or other administrative fees charged to certain funds; however, the Company has the ability to recoup those fees from the fund at a later point in time.
Lehman Brothers is the 22nd largest manager of money market mutual funds with over $30 billion in assets. Its fund lineup appears intact, with the largest fund offerings including: Lehman Brothers Cash Mg Prm, Lehman Brothers ILF MMP Inst, Lehman Brothers ILF Prime Inst, and Lehman Brothers Prime Reserv.
Standard & Poor's today rated Barclays Global Investors Euro Government Liquidity Fund AAAm, the highest rating for a principal stability (stable NAV) fund. Barclays becomes the third fund company to offer a Government Euro money market fund option. Goldman Sachs Euro Government Liquid Reserves Fund was rated AAAm last week by S&P, and JPMorgan Asset Management was first to market (in December) with the now E3.0 billion JPM Euro Government Liquidity Fund.
S&P's BGI rating release says, "The launch of the fund is in response to increased investor appetite for money market funds to solely invest in government securities. The subfund will be offered to corporate treasurers, insurance companies, and pension funds that seek an investment return that is consistent with short-term government interest rates while maintaining a high degree of liquidity."
It continues, "The BGI Euro Government Liquidity Fund will exclusively invest in Eurozone short-term government securities, which at the time of purchase will have an initial or remaining maturity not exceeding 24 months and repurchase agreements backed by Eurozone government securities." The parent fund, BGI Cash Selection Funds PLC, is domiciled in Dublin, Ireland, and is overseen by the Irish Financial Regulator Services Authority.
Below, we list all the top-performing money market mutual funds, based on 1-year total returns, that returned over 5% as of March 31, 2008, according to our Money Fund Intelligence XLS rankings publication. As expected, Prime Institutional money funds make up the entire list of top-performers. Among the 861 taxable funds tracked by Crane Data, 813 list 1-year returns. This will likely be the last month in some time that the top 1-year performers return over 5%.
The top funds, listed with their NASDAQ ticker symbols, assets, 7-day yields and 1-year returns, are: 1) Reserve Primary Instit (RPFXX) $34,575 3.51% 5.11%, 2) Russell Money Market Fund S (RMMXX) $6,360 3.45% 5.11%, 3) DWS Daily Assets Fund Instit (DEU01) $5,123 3.25% 5.10%, 4) Oppenheimer Institutional MM E (IOEXX) $5,933 3.29% 5.09%, 5) Reserve Primary Liquid I (RPIXX) $6,220 3.48% 5.08%, 6) Morgan Stanley Inst Liq MMP Inst (MPUXX) $10,162 3.31% 5.06%, 7) Putnam Prime Money Market I (PPMXX) $11,031 3.23% 5.05%, 8) Citi Institutional Liquid Reserves A (CILXX) $12,148 3.35% 5.04%, 9) Barclays Instit MMF Inst (BGIXX) $2,860 3.18% 5.02%, 9) Credit Suisse Inst MMF Prime A (CUTXX) $6,091 3.12% 5.02%, 11) Fidelity Instit MM: MM Port Inst (FNSXX) $11,190 3.23% 5.02%, Janus Instit Cash Mgmt Inst (JCAXX) $3,190 3.11% 5.02%, Morgan Stanley Inst Liq Prime Inst (MPFXX) $23,046 3.21% 5.02%, Reserve Primary Liquid II (RES01) $519 3.42% 5.02%, 15) Fidelity Instit MM: MM Port I (FMPXX) $29,760 3.19% 5.01%, Morgan Stanley Inst Liq MMP Svc (MMRXX) $11 3.24% 5.01%, DWS MM Series Instit (ICAXX) $18,956 3.16% 5.01%, 18) Dreyfus Instit Cash Adv IA (DADXX) $37,891 3.38% 5.00%, 19) Merrill Lynch Premier Institutional (MLPXX) $31,875 3.37% 5.00%.
While most in the money fund business focus on 7-day current yield, the performance statistic that NASD requires funds to publish, longer-term returns are often a better indicator of how well a fund will do going forward. (Returns include capital gains and losses while yields do not. Money funds rarely show gains or losses, and they're almost always tiny when they do.)
The April issue of our Money Fund Intelligence and Crane Index publications show that money market fund yields continued to decline in March. The benchmark Crane 100 Money Fund Index fell 51 basis points (0.51%) to 2.76% (7-day simple yield) in the month ended March 31, 2008. This index has fallen 173 bps since Dec. 31, 2007, and has fallen 224 bps (from 5.00%) since March 31, 2007. The Crane 100 Index returned the following for March 2008: 1-month (0.25%), 3-mo (0.89%), YTD (0.89%), 1-Year (4.65%), 3-Yr (4.35%), 5-Yr (3.04%), and 10-Yr (3.60%). Its 30-Day yield was 2.96% as of month-end.
The broader Crane Money Fund Average, which tracks 861 taxable money market mutual funds, yielded 2.26% (7-day) and 2.52% (30-day) as of March 31, down 61 bps (its 7-day yield) from a month earlier and down 263 bps from a year earlier. The Crane Institutional MF Index declined 60 bps to 2.56% and the Crane Individual MF Index declined 63 bps to 2.08% in March. Our Crane Tax Exempt Index fell 50 bps to 1.86%.
During the month, the Federal funds target rate was reduced from 3.00 to 2.25 percent. Brokerage cash and bank rates also declined during the month, though the former is starting to slow its descent (due to some rates approaching zero). Our monthly Crane Brokerage Cash Index fell to 1.80% (down 29 bps), and our Crane Top Bank MM Index fell by 31 bps to 3.35%. For more details on the Crane Indexes or to request a copy of our monthly Crane Index product, e-mail Pete or call 1-508-439-4419. (You can also type "ALLX CRNI" to see the list of Crane Indexes available on the Bloomberg(r) Professional service.)
The new April issue of Money Fund Intelligence discusses money market mutual fund assets breaking the $3.5 trillion barrier and the reasons behind this stunning growth. One major contributor has been corporations shift into money market funds. We now have yet more evidence that companies have dramatically increased their holdings of money funds. New data from ICI shows business' short-term assets in money funds increasing from 24 percent in 2006 to a record 31 percent in 2007.
Short-term assets include foreign deposits, checkable deposits, time and savings deposits, money market funds, repurchase agreements, and commercial paper. The previous high had had been in 2002 (29%), but money funds' share declined to 22% in 2005. But money funds held a mere 9% in 1993 and 1994, and 14% ten years ago.
Given the surge in money fund assets year-to-date in 2008, we expect that these numbers are even higher currently. Treasury Strategies recently released a survey showing corporate holdings of money funds increasing from 29.5% as of mid-2007 to 40.7% as of Jan. 1, 2008. (The TSI survey likely covers a larger company demographic than the ICI study.)
Money market mutual funds are preparing for outflows as the April 15 tax deadline approaches. Last year, money funds saw about $31 billion flow out in the two weeks following 4/15, while the total was just under $30 billion the prior year. When tax-time approaches, investors tend to reexamine the attraction of tax-exempt investments. But beware the volatile nature of tax-free yields; over time they usually make sense only for investors in the highest tax-bracket.
Tax-exempt money fund yields have been attractive recently due to concerns over bond insurers and a bulging supply pipeline (caused by auction-rate and other securities shifting issuance into more liquid channels). But high yields are usually fleeting. Our Crane Tax-Exempt Money Fund Index averaged 1.86% as of March 31, which translates into a taxable equivalent yield (TEY) of 2.86% for investors in the 35% bracket.
Currently, the top 10 Tax-Exempt money funds, according to Money Fund Intelligence (out of 437 total), along with their 7-day yields, include: 1) Dreyfus Basic NJ Muni MMF 3.00%; 2) AIM ATST Premier Tax-Exempt Inst 2.92%, 3) American Perform Tax-Free Sel 2.69%; 4) USAA Tax Exempt MMF 2.69%; 5) Alpine Municipal MMF Y 2.68%; 6) Federated Municipal Obligs IS 2.65%; 7) Columbia Municipal Res Z 2.64%; 8) Dreyfus Municipal Cash Mg Pls Ins 2.64%; 9) Columbia Municipal Res Capital 2.64%; 10) USAA Tax Exempt CA MMF 2.60%.
ICI's money fund asset series shows a decrease of $7.2 billion to $3.498 trillion in the latest week, which breaks an unprecedented 14-week streak of inflows. Money funds normally see outflows at month-end, and these were exacerbated by a sharp rebound in repo and Treasury rates on March 31. Retail assets increased by $5.9 billion to a record $1.268 trillion, while Institutional assets decreased by $13.1 billion to $2.231 trillion.
Money funds should see inflows return temporarily next week, then tax-related outflows should send assets lower following April 15. Year-to-date, money fund assets have increased by $354 billion, or 11.3%. Over the past 52 weeks, money fund assets have increased by $1.048 trillion, or 42.8%. While we expect inflows to resume, a recovery in the broader stock and bond markets, and reduced expectations of additional interest rate cuts, should slow the growth of money funds going forward.
Year-to-date, Government money funds have grown at 3 times the rate of Prime money funds, though both sectors saw outflows this week on the Institutional side. Tax-exempt money funds have begun attracting inflows. Retail tax-exempt money funds rose $2.3 billion and institutional tax-exempt money fund assets rose by $2.8 billion.
Over the past week, our Crane 100 Money Fund Index rose by 4 basis points to 2.78%. Month-end rate pressures and a sharp rebound in Treasury and government yields temporarily delayed the impact of the Fed's 75 basis point rate cut. Yields should resume their declines next week, though it the odds of further rate cuts have been severely discounted of late. Tax-free money fund yields rose by 7 basis points to 2.46%.
At a recent Investment Company Institute conference, the SEC's Bob Plaze and Debevoise & Plimton's Ken Berman presented the topic, "Money Market Funds: Dealing With Distressed Securities." Their talk cited three types of events that would require action by advisors and boards: securities downgrades; defaults; and, excessive deviation from an NAV. A downgrade requires a "prompt reassessment by the board or adviser", and would apply "where a security ceases to be a First Tier security" and "where a fund's adviser becomes aware that any NRSRO [ratings agency] has rated a Second Tier Security below its second highest rating."
With a default, "The fund must dispose of a security as soon as practicable" if: "the security is in default, no longer presents minimal credit risks, or if there is an issuer event of insolvency". The two add, "Unless the fund board makes determination that disposal of the security would not be in the best interest of the fund."
According to Plaze and Berman, potential actions by the board or adviser include: "re-pricing shares ('breaking-the-buck'), withholding distributions (reducing yields), reducing fees (in a low interest rate period), or purchasing shares". A capital contribution, if not an affiliated transaction, or a "lift-out under Rule 17a-9" (if it's for cash and the security is no longer Eligible) are also potential actions. An SEC "no-action" letter would be required if the security remains an eligible security (a non-17a-9 lift-out), or for any other "support arrangement involving affiliates", such as an LOC from an affiliated bank, a capital support agreement, or a note swap.
Reporting of these events would take place "with specificity" in the next Form N-SAR (the semiannual report), and the Notes to Financial Statements should state the "nature and amount of payments by affiliates and how [they're] reflected". Finally, "Prompt notification [should be made] to the SEC in the event of the default of a security or an event of insolvency," and this notification should be made by telephone, fax or e-mail (to the Division of Investment Management), followed by first class mail," said Plaze and Berman.
As we've mentioned in past news briefs, the main threat to money market mutual funds from structured investment vehicles, or SIVs, is likely past. But disclosures related to previously taken support actions continue to surface. The latest, the 13th advisor to-date, comes from HSBC Holdings subsidiary HSBC Investments USA. The Securities & Exchange Commission disclosed a "no-action" letter today which details an "Indemnication Agreement" HSBC entered into with its HSBC Money Market Funds "to prevent any losses realized on the [SIV] Notes from causing the Fund's market-based net asset value per share to fall below $0.9975."
HSBC counsel Dechert's January 9, 2008 letter (the SEC has been granting confidentiality delays in releasing) asks the SEC for "no-action" on enforcement "under Section 17(a), 17(d) or 12(d)(3) of the 1940 [Investment Company] Act" to enter into an "Indemnification Agreement". The letter says, "The Fund currently holds in its portfolio notes issued by certain structured investment vehicles ("SIVs") in the amounts listed in Appendix A [including $83 million in Stanfied Victoria, $225 million in Whistlejacket, $130 million in K2, and $100 million in Links].... Stanfield Victoria was recently downgraded by Moody's ... [and are] no longer Eligible Securities under Rule 2a-7. The Board ... has determined that it is in the best interests of the Fund and its shareholders not to dispose of the Stanfield Victoria Notes at this time." It adds that "one or more of the other Notes may be downgraded and cease to qualify as Eligible Securities or may otherwise decline in value."
The letter continues, "In order to mitigate any negative impact such events may have on shareholders of the Fund, although under no obligation to do so, ISGB [HSBC] and the Trust, on behalf of the Fund, have determined to enter into the Indemnification Agreement.... The Indemnification Agreement effectively insulates the Fund and its shareholders from the risk that losses arising from the Fund's current exposure to the SIVs might cause the Fund to 'break the buck'." (Click here to see all of the SEC's "no-action" letters to-date.)
Yields on money market mutual funds continued their steep descent in February, as our Crane 100 Money Fund Index fell 51 basis points, from 3.27% on Feb. 29, 2008, to 2.76% as of March 31. Over the past 12 months, the benchmark Crane 100 has 224 basis points from its 5.00% level. The broader Crane Money Fund Average, which tracks 860 taxable money market mutual funds, declined from 2.87% to 2.26% currently. It has fallen from 4.89% as of March 31, 2007.
Over the past two days, however, money fund yields have bounced slightly, with our Crane 100 rising from 2.73% to 2.76%. This is likely temporary, though, due to rebounding Treasury rates. There are undoubtedly more declines in the pipelines based on the Fed's prior 75 bps cut. We expect money fund yields to drift downward slightly, but to stablize around 2.5% (Crane 100) and 2.0% (Crane Average), respectively. While markets are reducing expectations and we expect (and hope) the Fed to be finished, another cut or two is likely still in store.
Sweep, bank and CD yields continue lower as well. Our Brokerage Sweep Intelligence shows customers with $50K to $100K balances earning an average rate of 0.79%, those with $100K to $250K earning 1.02%, and those with $1M to $5M earning 1.97%. Brokerage CDs averaged 2.25% (3-mo), 2.43% (6-mo), and 2.53% (1-year), according to the report.
The April issue of Crane Index and Money Fund Intelligence will contain our full series of money fund and cash investment averages. The pending issue will also feature a profile of UCM Institutional Money Market Fund and discussion with manager Jo Ann Corkran, an article on online money market trading portal Institutional Cash Distributors, and of course extensive coverage of other news impacting the world of money market mutual funds.
Demand is surging for 'AAA' ratings on offshore money market mutual funds, particularly new U.S. dollar Treasury funds, and local government investment pools. Standard & Poor's today announced a flood of new 'AAAm' (money fund or "principal stability fund" rating), 'AAAf/S1+' (accumulating money fund), and 'AAAf/S1' (enhanced cash-like) ratings. Analyst Joel Friedman tells us, "Cash is king in the market." On the flurry of recent LGIP and offshore ratings, "That's where the demand is coming from."
S&P rated Prime Rate Sterling, Euro and Dollar Liquidity Funds AAAm, the ratings agency's highest principal stability fund rating. The funds are subfunds of Prime Rate Cash Management Funds, domiciled in England and Wales. Prime Rate Capital Management LLP was "established in April 2007 by Chris Oulton and the other founding partners as a joint venture with Matrix Group," says the company's website.
In the first of a number new Treasury launches offshore, S&P rated Goldman Sachs Treasury Liquid Reserves AAAm. Like most offshore "U.S.-style" money funds, the GS fund is domiciled in Ireland (Dublin) and is "a subfund of the Goldman Sachs Funds plc umbrella structure". The fund "will primarily invest in U.S. Treasury bills, notes, bonds, and repurchase agreements (repos)". Federated and BNY Mellon Universal are among the few with existing offshore USD Treasury and Government offerings currently.
Western Asset U.S. Treasury Reserves Ltd. was also rated 'AAAm' by S&P. The fund is "an open-end, diversified mutual fund incorporated as an exempted company in the Cayman Island" and its "investment objective is to provide its shareholders with liquidity and as high a level of current income from U.S. Government obligations as is consistent with the preservation of capital," says the release. Several more Dublin and Cayman Islands domiciled Treasury money market fund launches are pending.
Ratings were also announced for Invesco Euro Reserve Fund (AAAf/S1+) and Hillsborough County Investment Pool (AAAf/S1). S&P, which now rates 83 LGIPs, says, "The Clerk of the Circuit Court/Comptroller for Hillsborough County, Fla. is responsible for overall management of the approximately $2.1 billion. The Clerk/Comptroller manages the [$1.5 billion] short-term portion.... Public Financial Management has subadvised the longer term portion of the Pool's assets -- approximately $600 million -- since 2002."