A flurry of money market mutual fund articles appeared over the past week, with more are on the way. The trend, not coincidentally during one of the slowest news weeks of the year, was led off by Bloomberg's "Volcker Says Money-Market Funds Weaken U.S. Financial System". The article that managed to stir up the heretofore lop-sided (in favor of gradual instead of dramatic change) debate ahead of the expiration of the SEC's request for comments on its Money Market Mutual Fund Reform Proposals (Sept. 9), ahead of the release of the President's Working Group on Financial Markets, and ahead of the expiration of the Treasury's Guarantee Program for Money Market Mutual Funds. Two new articles, Investment News' "Sleeping giant: Investors' $3.5 trillion in cash ready for a wake-up call" and The New York Times' "It's Time to Admit That Money Funds Involve Risk" reflect the good and the bad of how reporters have been covering the topic, either rationally or sensationalistically.
Investment News' piece writes, "Cash management should get a lot more interesting over the next few weeks as government protections for money market funds expire and new rules are considered. Cash remains the sleeping giant ... about $3.5 trillion in cash still sits on the sidelines in money market mutual funds. Given the size of that cash stockpile, which may reflect everything from a skittish institutional investor base to the gummed-up credit markets, the future of money market funds affects most investors."
The article explains, "The first big change comes Sept. 19, when the Department of the Treasury's 12-month money market fund guarantee program expires. The program has been insuring money fund assets since the Reserve Primary Fund, advised by Reserve Management Co. Inc. of New York, broke the buck last fall. After that date, other safeguards will remain in place, including a program that allows money market fund advisers to borrow from the Federal Reserve against asset-backed commercial paper in the portfolios."
They quote our Peter Crane, "The chances of any kind of a run on money funds that would force them to sell is still remote, but the die is cast and the new playbook has been written." Investment News adds, "Mr. Crane is among those who believe the raft of swift new government support programs, combined with proposals still on the table, will continue to eliminate many of the risks associated with money market funds. Last week's report that Reserve Fund investors could end up getting back as much as 99 cents per share, plus a return in the 4% range, 'will help shift the perception of risk in the money market space,' he said."
The NY Times article says, "In all the inevitable hoopla surrounding the coming anniversary of 'Lehman weekend' -- those fateful days in mid-September 2008, when the financial world seemed on the brink of collapse -- here's an important event that will almost surely be overlooked: On Sept. 18, just a few days after the anniversary, the Treasury Department will end a program that essentially gave the same kind of protection to money market investors that the Federal Deposit Insurance Corporation gives to bank depositors. The government guaranteed that investors wouldn't lose a penny."
It adds, "Here we are a year later, and the money market fund business seems back to normal. No other money funds have broken the buck. The amount of money in money funds today is not at all different from what it was before Lehman weekend. Investors have, once again, come to think of them as a supersafe, yet turbocharged, bank account. Even the Reserve Fund, which is liquidating, reported a few days ago that, if all goes well, it expected to be able to return to investors 99 cents on the dollar.... Not bad for a fund that supposedly 'collapsed.' And yet, in other ways, things aren't at all like they used to be."
The mutual fund industry's trade association, the Investment Company Institute released both its monthly asset totals and data for July 31, 2008, and its latest weekly money fund asset series late yesterday. The "Portfolio Holdings of Taxable Money Funds" supplemental tables (not available publicly) show repurchase agreements surging in July at the expense of Treasury bills and Government Agency securities, though WAMs (weighted average maturities) extended (evidence of "barbelling" in funds) to 55 days on average. Assets rebounded slightly in the week ended August 26, though they continued their 5-month slide in July.
U.S. Government Agency Securities remain the largest component with taxable money funds holding $699.1 billion, or 22.1%. Certificates of Deposits rank as the second largest holding when the $100 billion in Eurodollar CDs is included in the total with $634.7 billion, or 20.1%. Repos have rebounded to third with $577.6 billion, or 18.3%, while Commercial Paper continued its painful retreat. Treasury Bills and Securities held by money funds total $441.1 billion, or 14.0% of assets, while Corporate Notes and Bank Notes make up a combined 6.7% and Other assets account for 2.5%.
Money funds now hold $514.8 billion in CP, 48.3% of the total $1,065.7 billion in commercial paper (using the Fed's totals as of late July). CP holdings by money funds have declined by $168.5 billion, or 24.7%, over the past year, but funds overall share of the CP market has increased sharply as the CP market contracted sharply. `ICI Chief Economist Brian Reid showed a chart at our recent Money Fund Symposium indicating that this total has risen sharply. (Crane Data is now offering a PDF version of the MFS conference binder to non-attendees for $250.)
ICI's monthly "Trends in Mutual Fund Investing: July 2009" says, "Money market funds had an outflow of $47.14 billion in July, compared with an outflow of $116.42 billion in June. Funds offered primarily to institutions had an outflow of $18.13 billion. Funds offered primarily to individuals had an outflow of $29.01 billion." Total assets declined by $46 billion to $3.6 trillion in July and have declined by $225.6 billion since Dec. 31, 2008, according to ICI. Money funds now represent 34.5% of the total $10.43 trillion in mutual funds.
The weekly ICI series says, "Total money market mutual fund assets increased by $1.62 billion to $3.579 trillion for the week ended Wednesday, August 26.... Taxable government funds increased by $1.51 billion, taxable non-government funds increased by $2.95 billion, and tax-exempt funds decreased by $2.85 billion. Assets of retail money market funds decreased by $6.51 billion to $1.168 trillion.... Assets of institutional money market funds increased by $8.13 billion to $2.411 trillion."
Wells Fargo Advantage Funds' David Sylvester spoke Monday at Crane's Money Fund Symposium and discussed ideas recently proposed his recent paper, "Money Fund Reform: A Third Way." He suggested the possibility of a third option between the incremental reforms of the ICI and the radical and dangerous changes proposed by some with the concept centering on the creation of a Fed liquidity facility similar to the AMLF.
Sylvester says in his paper, which is reprinted in our Symposium conference binder, "Money funds have historically been popular choices for conservative investors seeking safety of principal and liquidity. The global credit crunch over the past year-and-a-half has exposed two main risks in the current model for 2a-7 money market funds that previously had been discounted as being muted or non-existent heretofore: credit risk and liquidity risk. These risks continue to worry investors, fund managers and regulators, and they also pose systemic risks to the entities that rely on money funds for credit, and to the banking system as a whole. This awareness and concern has prompted proposed reform of the current 2a-7 money fund model. Current reform efforts are centered on two proposals. In this paper, David Sylvester, head of money markets at Wells Capital Management, outlines his ideas for a 'third way,' with the intention of promoting further discussion in the industry on this very important topic of money market reform."
He explains, "All money funds attempt to balance their primary objectives of a stable NAV and liquidity to meet shareholder demands, and a competitive yield. Different types of shareholders place a different degree of emphasis on each of these objectives. Furthermore, the importance of each objective can change quickly in the mind of each shareholder and, perhaps more important, within different classes or types of shareholders. When market conditions are unsettled, these shifts can occur rapidly, perhaps almost instantaneously. Attempts by money funds to reposition their portfolios in order to address these shifting priorities can trigger systemic risks that endanger funds, investors, and borrowers. A look at the events of the past year-and-a-half reveals how quickly these systemic risks can arise."
Sylvester describes the existing reform proposals, saying, "The Group of Thirty proposal would destroy the money fund business as it now exists, though some might argue that is their point. The alternatives suggested by the Group of Thirty -- banks and variable NAV funds -- exist now. Surveys and empirical data suggest that investors want the stability of a constant net asset value (CNAV) money fund as an investment choice. The demise of money funds would lead to other undesirable systemic risks. Many investors who previously favored money funds would choose to move their money into insured deposits in U.S. banks, shifting the credit risk from the investors to the government, at the expense of those sectors to which the money funds now offer credit, such as foreign banks and the ABCP market. It is likely that U.S. banks would receive the bulk of this inflow of funds from money funds in the form of insured deposits. This would not be a universally desirable outcome from the banks' standpoint, as some are already flush with deposits while others might not want to raise the additional capital against the loans made with these monies at a time when their need to raise capital is already posing a challenge."
He continues, "The ICI proposals change little and largely codify the existing practices of many large money funds today. The 5 percent/20 percent liquidity requirements suggested by the ICI pale against the 35 percent drop that was seen in prime money fund assets in the month following the Lehman collapse. As to 'best practices' for credit risk assessment, it was the large fund complexes after which these practices are modeled that bought SIVs and Lehman paper. It is simply not clear to us that one can make bad credit decisions go away through increased regulation."
Sylvester concludes, "The ICI proposals provide a good initial starting point, and they should be adopted to the extent that they relate to credit, price and maturity risk. Money funds should shorten their WAMs, standards should be set for WAM to final maturity, Second Tier (A2/P2) paper should be prohibited, and portfolios should be appropriately tested under a variety of scenarios. However, the ICI proposals regarding liquidity do not seem to address the systemic risks associated with liquidity in money funds and bear closer scrutiny."
He says, "The ultimate backstop is for money market funds to be given access to the central bank. A secured lending facility at the Federal Reserve Bank, modeled on the discount window for depository institutions and the Primary Dealer Credit Facility, would allow U.S. money funds to obtain secured financing from the Federal Reserve by pledging their assets and paying a rate set by the Fed.... Typical, low risk, money fund investments, such as First Tier commercial paper, CDs and government securities, could be pledged to the Fed as collateral, with an appropriate haircut, in return for advances made at a market rate for the purpose of funding shareholder redemptions.... The introduction of a permanent credit facility through the Fed would undoubtedly lead to additional regulation of money funds that some may resist, but as long as the regulators' activities are complementary and not contradictory, this should be seen as an acceptable trade-off to the stability and safety provided by such a facility."
Note: For those that were unable to attend, a full PDF document of the Powerpoints and papers that were distributed at the Money Fund Symposium will be available for sale to non-attendees for $250 starting tomorrow. Contact us to purchase copies or more details.
We mentioned this past weekend in a "Link of the Day" that the Vanguard Group had posted the first serious comment letter on the SEC's Money Market Reform Proposals. Now, industry leader and heavyweight Fidelity Investments has added an extensive comment letter on the potential changes to money fund regulations. Fidelity supports the new liquidity provisions, though it argues that fixed-rate government securities, repo and other money funds be included and that retail and institutional funds be defined by an objective standard (same day liquidity), supports the spread WAM, supports the continued use of amortized cost accounting, and supports monthly portfolio disclosure proposals. But it opposes a shorter WAM, opposes a ban on second-tier securities, opposes a floating NAV, and opposes the disclosure of market prices.
The letter says, "Fidelity Investments, the largest manager of money market mutual funds with over $500 billion in assets, appreciates the opportunity to comment on the Securities and Exchange Commission's proposed amendments to certain rules that govern money market mutual funds under the Investment Company Act, issued in Release No. IC-28807. Fidelity recognizes the thoughtful approach and significant work undertaken by the staff at the SEC in preparing the Release, and supports the Commission's goal of increasing the resilience of money market mutual funds to market disruptions such as those that occurred in 2008. In responding to the Commission's proposals, Fidelity is committed to strengthening market integrity and confidence, mitigating systemic risk, ensuring robust market discipline and promoting appropriate regulatory oversight."
It continues, "Fidelity believes that financial markets, including money markets, function most effectively with a combination of market discipline and prudent government oversight. Both need to improve, but we urge the Commission to strike the right balance in adopting final rules relating to money market mutual funds. Money market mutual funds represent a success story of financial innovation and regulatory oversight. Individual and institutional investors have expressed their confidence in the management and regulation of money market funds by investing over $3.6 trillion in these products."
Fidelity says, "Money market mutual funds provide critical funding for federal, state and local governments in the United States as well as corporations around the world. Rule 2a-7 has been an effective regulation benefiting investors and issuers alike. Our goal in this letter is to recommend enhancements to Rule 2a-7 that further strengthen the money market industry and broader financial markets. Fidelity generally supports the Commission's proposals. In certain areas, we make some alternative suggestions to strengthen money market mutual funds and reduce the risk of unintended consequences for issuers and investors. In others, we believe that the current rule adequately mitigates potential risk and recommend that the Commission make no changes."
It continues, "Fidelity manages money market mutual funds with a focus on stability, liquidity and shareholder return, in that order. We believe that the Commission's proposal as amended by our proposed changes will promote stability and enhance liquidity while also limiting the potential negative impact on shareholder returns. The Commission estimates that its proposed changes to Rule 2a-7 'would decrease the yield that a money market fund is able to achieve in the range of 2 to 4 basis points'. However, we estimate that the potential yield reduction could be as high as 25 to 43 basis points for an institutional non-rated fund, 19 to 32 basis points for a rated institutional fund and 14 to 31 basis points for a retail fund.... Based on a survey recently commissioned by Fidelity, money market mutual fund investors view these potential yield impacts as significant. However, if the Commission adopts the suggestions in this letter, we estimate that the potential yield impact would be reduced to 13 to 20 basis points for an institutional fund, whether or not rated, and three to seven basis points for a retail fund."
Fidelity's summary of recommendations says, "Fidelity supports the new liquidity proposals, including different requirements for retail and institutional funds, with a suggestion to include Government Securities as Liquid Assets. Fidelity also supports the inclusion of a five percent Daily Liquid Assets requirement for all tax-exempt money market mutual funds. Fidelity believes that Rule 2a-7's current weighted average maturity requirement of 90 days appropriately limits interest rate risk" "supports the introduction of a weighted average life test," "believes that it is appropriate to continue to permit a money market mutual fund to invest up to 10% of its assets in securities that represent minimal credit risk but do not meet the Commission's definition of 'liquid'," and "believes that second tier securities that represent minimal credit risk continue to be an appropriate investment for money market mutual funds" They add, "Fidelity is also concerned that elimination of the ability of money market mutual funds to purchase second tier securities will have a negative impact on first tier securities that may be at risk of downgrade."
The letter adds, "Fidelity favors monthly money market mutual fund holdings disclosure on a fund sponsor's website with a five business day lag." And, "Fidelity opposes moving money market mutual funds to a floating NAV and believes that a floating NAV will cause significant shareholder outflows, destabilizing money market mutual funds and the overall money markets." Finally, the fund company "supports the continued use of amortized cost accounting for money market mutual funds and believes that public disclosure of market value pricing will only serve to confuse shareholders and undermine the integrity of money market mutual funds."
Bloomberg's Chris Condon writes in an article today, "Volcker Says Money-Market Funds Weaken U.S. Financial System", which says, "Paul Volcker, the former Federal Reserve chairman who is an adviser to President Barack Obama, said money-market mutual funds undermine the strength of the U.S. financial system and should be regulated more like banks." Condon was one of a handful of reporters attending the first annual Crane's Money Fund Symposium in Providence, R.I., on Monday.
He quotes Volcker, "Banks remain the functioning heart of the financial system, and they are protected and regulated. To the extent they have competitors that have different ground rules, kind of free-riders in my view, weakens the financial system."
The piece also quotes Anthony J. Carfang, a partner at Treasury Strategies Inc., "They are an absolutely huge source of cash for high-quality borrowers.... They're highly efficient and very transparent, reducing the cost of capital."
Bloomberg says, "Volcker has been a vocal advocate of imposing bank-like requirements on money funds, to the dismay of asset managers as they wait for the Obama administration to issue new rules for the industry." It adds, "His proposals 'would eliminate money funds as we know them,' Paul Schott Stevens, head of the Investment Company Institute."
The article also says, "Fidelity Investments, based in Boston, is the largest manager of U.S. money-market mutual funds, with $506.3 billion as of July 31, according to Crane Data LLC, a research firm in Westborough, Massachusetts. Fidelity and other independent asset managers, including New York-based BlackRock Inc. and Vanguard Group Inc. of Valley Forge, Pennsylvania, oversee about half of the industry's assets. The rest is managed by fund companies owned by banks, led by JPMorgan Chase & Co., which has $390.3 billion in money-fund assets."
Bloomberg says, "Money-fund managers dodged the possibility of radical change on June 24 when the SEC proposed rules changes largely in line with industry recommendations. Another hurdle approaches on Sept. 15 when the President's Working Group on Financial Markets, a government advisory body, is set to issue a report on the industry. The group was directed by the Obama administration in June to consider whether money-market funds should be forced to abandon the practice of maintaining a $1 net asset value, or NAV, or be required to set up 'emergency liquidity facilities'."
They add, "Volcker said he isn't involved directly with the President's Working Group and wouldn't speculate on what regulatory proposals may result. "I don't know. I'm sure the money-market funds have a very powerful lobbying machine," he said.
Both Carfang and Maloney also spoke at Crane's Money Fund Symposium on Sunday in Providence. Look for more comments from the conference in coming days and in the September issue of Money Fund Intelligence.
Approximately 150 money market mutual fund managers, marketers, suppliers, servicers, investors, and regulators descended on Providence, Rhode Island this weekend for the inaugural Crane's Money Fund Symposium at the Renaissance Hotel, which began Sunday afternoon. Speakers, sponsors and attendees will undoubtedly spend much of their time discussing the SEC's Money Market Fund Reform proposals, as well as a host of challenges, including ultra-low interest rates, potential consolidation, and competition from bank and other fixed-income products. But while participants have concerns, money fund managers will also just be happy to be there, still very much alive at $3.6 trillion in assets, following what was no doubt their most traumatic year in history. "Best of Times, Worst of Times" was an understatement for money funds in 2008.
Sunday's kickoff featured "Welcome to Money Fund Symposium" comments from host Peter Crane, then a series of sessions, including: "Washington & Money Market Funds" with Federated Investors' Eugene Maloney; "What's Driving Corporate Investors?" with Treasury Strategies' Tony Carfang; "ICI Market Update & Money Fund Issues" with ICI's Brian Reid and Invesco AIM's Bill Hoppe; and "The Future of Money Funds Discussion" with Fidelity Investments' Michael Morin, Standard & Poor's Peter Rizzo, and Cachematrix's George Hagerman.
Monday's agenda includes: "State of the Money Fund Industry" by Peter Crane; "Money Fund Managers' Current Strategies" with Federated's Debbie Cunningham, SSgA's Jeff St. Peters, and Wells Fargo Advantage Funds's Dave Sylvester; "Talking Treasury & Government Funds" with Western Asset's Kevin Kennedy and UBS's Rob Sabatino; "Municipal Money Market Update" with Neuberger & Berman's Kristian Lind; "Economic Update from SVB Asset Management's Joe Morgan; "Money Market Securities: What's New?" with JPMorgan Securities' Alex Roever and Bank of America Merrill Lynch's Mike Cloherty; "Institutional Investor Perspectives" with Capital Advisors Lance Pan and MWAA's Nancy Edwards; "Offshore & European Money Market Update from IMMFA's Travis Barker; and, "Revamping AAA Money Fund Ratings with Fitch Ratings' Viktoria Baklanova, Moody's Henry Shilling, and Standard & Poor's Joel Friedman.
Tuesday's Symposium sessions include: "Update on SEC's MMF Reform Proposals" featuring the SEC's Bob Plaze and Reed Smith's Stephen Keen; "Accounting Concerns & Mark-to-Market" by PriceWaterhouse Coopers' Tony Evangelista; "Grow or Die: Distribution Strategies by DB Advisors' Kevin Bannerton and Traibar Associates' Mark Steinberg; and "New Developments in Online MM Portals" with Citibank Online Investments' John Carter and Matrix MM Portal's Michael Rice.
Crane Data would like to thank all of our Money Fund Symposium sponsors and exhibitors, including: Bank of America Merrill Lynch, Federated Investors, Fidelity Investments, Cachematrix, J.M. Lummis, Wells Fargo Advantage Funds, Standard & Poor's, Capital Advisors Group, Fitch Ratings, Matrix Financial Solutions, Moody's Investors Service, Invesco AIM, Western Asset Management, Bank of Ireland, Bank of New York Mellon, and Citi Online Investments.
Crane's Money Fund Symposium was created as an affordable (registration is $500) new venue for exchanging ideas, networking, and learning about the latest investment strategies, business tactics, and news impacting money funds. To see the agenda click here. Next year's event is `tentatively scheduled for July 25-28, 2010, in Boston. Check back for updates from the conference in coming days, or see you in Providence!
Money fund assets fell for the fourth week in a row, their ninth decline in the past 12 weeks. ICI's weekly "Money Market Mutual Fund Assets" report says MMMFs declined by $12.07 billion to $3.581 trillion in the week ended Wednesday, August 19. This level represents a year-to-date decline of $249 billion, or 6.5%, and it marks the lowest level for MMF assets since October 2008 and almost exactly the same level as Sept. 10, 2008, the week prior to Reserve Primary Fund's "breaking the buck".
From their record level of $3.922 trillion, set January 14, 2009, money fund assets have declined by $339 billion, or 8.6%. Over the past 52 weeks, money fund assets have increased a mere $8 billion, or 0.2%. However, over the past two years (104 weeks), money funds assets remain up by a breathtaking $880 billion, or 32.6%. And assets have still more than doubled from their level of 10 years ago and have grown to more than eight times their size of 20 years ago ($428 billion at the end of 1989).
ICI's weekly release says, "Assets of retail money market funds [32.8% of total assets] decreased by $2.96 billion to $1.176 trillion. Taxable government money market fund assets in the retail category decreased by $720 million to $189.03 billion, taxable non-government money market fund assets decreased by $1.64 billion to $729.63 billion, and tax-exempt fund assets decreased by $600 million to $257.01 billion." Retail money funds have accounted for the bulk of year-to-date asset declines, falling $179 billion, or 13.2%.
It continues, "Assets of institutional money market funds decreased by $9.11 billion to $2.406 trillion [67.2% of all assets]. Among institutional funds, taxable government money market fund assets [including Treasury funds] decreased by $15.89 billion to $984.75 billion [27.5% of assets], taxable non-government [prime] money market fund assets increased by $6.01 billion to $1.234 trillion [34.5% of all assets], and tax-exempt fund assets increased by $770 million to $186.58 billion." Institutional assets have declined by $80 billion, or 3.2%, YTD.
Combined retail and institutional "prime" money fund assets, which total $1.964 billion in the latest week, have increased by $69 billion year-to-date, while total Government (including Treasury) money fund assets have fallen from $1.454 trillion as of Dec. 30, 2008, to $1.174 trillion. Tax-exempt money fund assets have declined from $489 billion to $444 billion YTD.
Over the past week, money fund yields have declined by 1 basis point (0.01%). The Crane 100 Money Fund Index, the average 7-day yield of the 100 largest taxable money funds, fell from 0.14% to 0.13%, while the broader Crane Money Fund Average fell to 0.08% from 0.09%. Our Crane Tax Exempt Money Fund Index was unchanged at 0.l4% in the week ended August 19. (See our Money Fund Intelligence Daily for daily asset totals and changes and for yield average and changes.)
In addition to their study on prime money funds (see yesterday's News, "Fitch Study on Prime MFs Shows Bank Products, CP, Agencies Dominate"), Fitch Ratings also just released "Tax-Exempt Money Market Funds Avoid Direct California GO Exposure, Face Other Challenges." The study by Fitch's Fund & Asset Manager Rating Group and written by Analyst Viktoria Baklanova and others, summarizes, "Fitch-rated tax-exempt money market funds hold no direct exposure to general obligation (GO) bonds issued by the state of California" and "maintained a nearly constant level of investments in variable-rate demand notes (VRDNs) between June 2008 and June 2009."
The summary warns, "However, exposure is concentrated among a smaller universe of VRDN letter of credit (LOC) providers and guarantors as compared with the same period of the past year, given the deteriorating financial condition of a number of such providers. The number of LOC and guarantee providers found in Fitch-rated tax-exempt money market fund portfolios decreased to 102 from 116, including the addition of 21 LOC and guarantee providers not previously utilized in connection with VRDN issuance."
Fitch adds, "Given the very short weighted average maturities (WAMs) of tax-exempt money market funds, they find themselves challenged to deliver yield in excess of fund expenses while not compromising portfolio credit quality in the current low interest rate environment. In June 2009, the average WAM of Fitch-rated tax-exempt money market funds was 20 days, and the average net seven-day annualized yield was 0.32%."
The company explains, "Tax-exempt money market funds normally seek to achieve as high a level of current income exempt from federal income tax as is consistent with preserving principal and providing liquidity. Investment portfolios of such funds are usually invested in tax-exempt obligations issued by U.S. states and subdivisions with remaining maturities of 13 months or less. As of June 30, 2009, Fitch rated the following seven tax-exempt money market funds [all rated 'AAA/V1+'] with total assets under management of approximately $41.0 billion: Alpine Municipal Money Market Fund, BlackRock Liquidity Fund: MuniFund, Evergreen Institutional Municipal Money Market Fund, Federated Tax-Free Obligations Fund, Federated Municipal Obligations Fund, Morgan Stanley Institutional Liquidity Fund Tax Exempt Portfolio, and AIM Tax-Free Investments Trust Tax-Free Cash Reserve Portfolio.
Finally, on California, Fitch says, "Fitch reviewed rated tax-exempt money market fund portfolios to determine the magnitude of exposure to GO bonds and certain lease appropriation bonds issued by the state of California concurrent with the heightened budgetary and cash flow pressures facing the state. As of June 30, 2009, Fitch-rated funds no longer had any investments in such securities. Such funds retained exposure to securities of other municipal issuers within the state of California, although these entities are typically more highly rated than the state GOs and/or are further supported by credit enhancement and liquidity facilities from an appropriately rated bank or financial institution.... [F]unds' allocation to issuers in the state of California increased to 4.7% in 2009 from 2.1% in 2008. However, the increase reflects investments in VRDNs backed by LOCs or guarantees by highly rated entities, and not direct exposure to California state GOs."
Fitch Ratings just released a study of the portfolios of the 19 U.S. prime money market mutual funds rated 'AAA/V1+' by the agency, which account for nearly $600 billion, or almost half of all prime money fund assets. The report, entitled, "U.S. Prime Money Market Funds: Managing Portfolio Composition to Address Credit and Liquidity Risks," "summarizes the trends in credit quality and liquidity of these funds over the last nine months, including: General flight to quality resulting in significantly increased allocation to U.S. Treasury and government agency securities.... A reduced universe of eligible investments given credit deterioration of certain issuers and consolidation among others. [R]educed exposure to ABCP programs sponsored by banks and financial institutions. A preference for foreign bank products versus U.S. bank products in the form of certificates of deposits (CDs), bank notes, and time deposits (TDs). Decline in fund yields given the low interest rate environment.
Fitch says on background, "Prime money market funds faced unprecedented credit and liquidity stress during the second half of 2008, stemming from the default or credit deterioration of a number of major financial institutions and the net asset value impairment of one of the largest U.S. prime money market funds. Challenged by these events, prime money market funds have sought to preserve a high level of portfolio liquidity to be better positioned to withstand the potential risk of future increased redemptions while reducing direct and indirect exposure to financial institutions expected to face additional pressure. In addition, money market funds decreased their exposure to insurance companies by putting back funding agreements and allowing maturing notes to roll off."
They continue, "From year-end 2008 to the end of May 2009, U.S. prime money market funds have steadily reduced allocation to corporate securities and increased investments in government-issued or government-guaranteed securities. U.S. government securities have acted as a safe haven for investors seeking to avoid the credit risk of corporate/financial securities while serving to stabilize fund net asset values.... [A]llocation to corporate unsecured notes and ABCP decreased to approximately 25% of total assets in May 2009 from approximately 40% of total assets at the end of 2008.... ABCP holdings ... decreased to 10% of total assets of U.S. prime money market funds in May 2009 from 22.3% of total assets at the end of 2008."
The report adds, "While a number of U.S. prime money market funds invested in commercial paper and notes issued by financial institutions under the terms of TLGP [the FDIC's Temporary Liquidity Guaranty Program], Fitch identified 12 of the 19 funds it rates that did not purchased TLGP paper during the observed reporting periods. This may be explained by the untested nature of the TLGP facility and uncertainty as to the settlement/redemption procedures for such securities in the event of default of an underlying issuer. The FDIC has guaranteed these issues but there was concern by a number of market participants as to the ability of the FDIC to step in and provide immediate repayment since the FDIC is not a regulator of holding companies."
Fitch continues, "Historically, U.S. prime money market funds have allocated a significant portion of their portfolios to various bank products, including CDs, bank notes, and TDs.... U.S. prime money market funds increased their investments in these types of securities to 44.4% in May 2009 from 35.3% of total assets as of Dec. 31, 2008.... Driving the overall increase in U.S. prime money market funds' investments in bank products is a continued preference for exposure to non-U.S. bank holdings versus U.S. bank holdings. Specifically, holdings of non-U.S. bank CDs increased to 34% of total assets in May 2009 from 25.7% as of Dec. 31, 2008.... [C]ertain money market funds may already have reached their internal single issuer or counterparty limits on individual U.S. financial institutions with strong stand-alone ratings."
"Money market funds remain focused on managing liquidity risk through the maintenance of overnight investments in repurchase agreements, TDs, and shares of other money market funds, among others. Aggregate exposure to such sources of overnight liquidity has remained at approximately 15% of total assets over the last six months.... Individual fund investments in overnight instruments varied from under 5% of total assets in two funds to close to 50% of total assets in one fund. The variance in overnight allocations may be explained by the nature of individual fund's shareholder bases and expected future redemption activities," says the study.
Finally, Fitch says, "The portfolio rebalancings undertaken by prime money market funds over the last six to nine months are largely viewed positively, reducing credit and liquidity risks. These actions, in combination with the presence of meaningful support facilities from the U.S. government, have served to stabilize investor outflows and leave funds well positioned to withstand further credit and liquidity stress.... Despite negative economic consequences of the prolonged low interest rate environment on fund economics, fund advisors appear primarily focused on preserving stability of principal and liquidity at the present time. If current trends persist, Fitch would expect the likelihood of fund closure and asset consolidation to increase."
Hot on the heels of last week's "Advance Notice Of Proposed Criteria Change: Principal Stability Fund Ratings Criteria," Standard & Poor's released another research piece, "Methodology For Evaluating Fund Management In Principal Stability Fund Ratings," which discusses the role management and potential parental support plays in a fund's rating. The "RatingsDirect" piece says, "Understanding the strengths and weaknesses of fund management is an essential part of Standard & Poor's Ratings Services' principal stability fund ratings (PSFRs).
It continues, "When we analyze a fund, we evaluate fund management's effectiveness in implementing a dynamic investment process consistent with the fund's stated goals, objectives, and PSFR category. When we assign a PSFR, we seek to determine fund management's level of risk tolerance. Management's willingness and ability to operate the fund within a set of risk tolerances are important components of our ratings evaluation. From time to time circumstances will cause a fund to exceed its own defined risk tolerances."
S&P says, "We are providing more clarity on our PSFR methodology so market participants better understand our approach to analyzing how fund management responds to issues that temporarily (e.g., usually one to five business days) move a fund beyond the quantitative criteria for our PSFRs. These temporary issues have included an unexpected lengthening of a fund's weighted average maturity (WAM), unforeseen deterioration in the credit quality of an investment, and volatility of a fund's net asset value (NAV)."
"As each of these situations arises, we determine whether rating changes are needed based on the severity and impact on the fund's NAV and potential for further decline in light of the fund management's responsiveness. Historically, fund management has quickly and proactively dealt with a majority of these instances. Although many of these circumstances have been addressed within five business days, under certain circumstances a longer period of time may be consistent with maintaining a current PSFR. However, if the situation impairs the fund's NAV, it is likely to result in a negative rating action," says the ratings agency.
S&P explains, "We conduct weekly surveillance of a rated fund's statistical information and portfolio holdings. The methodology and procedures outlined below are part of the initial and ongoing dialog we maintain with each rated fund. This report is intended to explain how we apply our qualitative PSFR criteria when analyzing a particular fund that falls outside or does not fully meet the quantitative PSFR criteria for a given PSFR rating category. This report includes answers to frequently asked questions posed by users of our ratings."
Finally, they say, "The criteria for Standard & Poor's 'AAAm' PSFRs are characterized by, but not limited to, the following: Maximum WAM of 60 days or less; Minimum of 50% in 'A-1+' securities, and maximum of 50% in 'A-1' securities; Maximum final maturity of floating-rate securities is two years; and Daily marked-to-market NAV (per share) range of $0.9975 to $1.0025." S&P explains, "Our assessment does not rely on a fund sponsor's willingness and/or ability to support a rated fund's NAV. However, we will review and assess the measures a sponsor chooses to take to support its NAV during times of market stress or when a fund sponsor decides to take action to support the fund's NAV or liquidity."
The following is excerpted from the August issue of our Money Fund Intelligence newsletter: Crane Data recently surveyed MFI subscribers and readers of our website at www.cranedata.com about the SEC's recent Money Market Fund Reform Proposals and issues facing money funds. The responses indicate that ultra-low interest rates have surpassed regulatory changes as the most important issue facing money funds, and that the proposals overall are rated relatively favorably. (For the full survey questions and our previous website story, see our July 30 article, "Money Fund Intelligence Conducting Survey on SEC MMF Proposals".)
MFI e-mailed the brief survey questions to its 800+ readers ... [and asked them to] rate the SEC's proposals on a scale of 1 to 10, with 10 being the highest. The average score was 6.3. The SEC proposals overall got '8' scores (the highest) from 7 respondents and '1' scores from two. (See the August MFI for a summary of the full survey results.) We then asked, "Which of the SEC's proposed MMF Reform amendments do you think would do the most good?" The most popular option, "Adding liquidity mandates," was chosen by 48.3% of respondents. This was followed by "Other" (20.7%), where the majority of write-in options cited the 120-day maximum 'spread WAM' as likely the most effective mandate.
The next question asked, "Which of the SEC's Proposed MMF Reform Amendments do you think would do the most harm?" Responses were widely distributed with "Moving WAM from 90 to 60 days" garnering the most votes (27.6%), followed again by "Other." This time the write-ins included: "introduction of Floating NAV," "differentiating between retail/institutional funds, as it relates to liquidity requirements (30% 7 day punitive!)," and "showing the shadow price to investors."
MFI then asked, "What are the most important issues facing money market mutual funds in the coming months?" "Ultra-low interest rates" ranked [as] the most important issue (1.7), followed by "Regulatory changes" (2.2), "Competition from banks or new products" (3.6), and "Rising rates" (3.8). "Consolidation" trailed in importance (3.9) followed by "Other" (4.3), where a couple of write-in responses included the, "threat of floating NAV."
We asked readers to "Rate the attractiveness of a floating NAV." Though the overall average of 3.5 indicates this concept's unpopularity among the money fund community, there were some surprising pockets of support for the idea. Ten of our 26 respondents rated the concept a '1' (plus one who went off the scale with a zero), while 4 respondents gave the concept a '10'. One respondent commented, "potential changes to accounting treatment make it less desirable."
We then asked, "If you could add or remove a change, what would it be?" Survey takers' comments included: "Change liquidity mandates," "I would nix removal of illiquid securities," "Remove floating NAV from comment consideration," "In addition to the punitive 30% 7 day liquidity bucket for institutional funds (should be lower) the 'maturity limit for other portfolio security' should not be reduced from 397 days," "Removing second tier securities," "2nd tier reinstated," "Removing illiquid securities," "Liquidity mandates," "Limit FRNS longer then 12 months and limit the % of FRNs in the fund," and "don't change illiquid bucket."
Finally, we asked, "Are there any other important issues you think Crane Data should address in a comment letter or in an article?" Readers said: "US government support in the form of liquidity backstop would help the industry. Not an FDIC insurance but a perpetual program to buy securities, or lend against them in the event of market disruptions," "The notion of having to distinguish between retail and institutional funds for determination of liquidity requirement," "Definitely have concerns with publicly publishing actual security prices. Eliminating illiquid securities could potentially stifle innovation -- why not have a low max of say 5%?"
Look for more comments on the SEC's website and industry feedback following Crane's Money Fund Symposium, which begins this Sunday, August 23, in Providence (and lasts through Tuesday, August 25). Crane Data's inaugural conference will feature a number of discussions involving the SEC's Money Market Fund Reform Proposals.
Standard & Poor's Ratings Services is preparing to propose changes to its money market mutual fund, or principal stability fund ratings (PSFRs) criteria. On Thursday, the company released a document entitled, "Advance Notice Of Proposed Criteria Change: Principal Stability Fund Ratings Criteria," which details the potential fund ratings changes. It says, "The review will likely result in changes to certain of our assumptions and methodologies, reflecting the heightened stress that the funds market has experienced during the past 18 months. During the next several weeks, we expect to publish a more detailed discussion of the proposed changes to our PSFR criteria in a request for comment."
S&P explains, "Revisions would apply to funds domiciled in the U.S., France, U.K., Bermuda, Cayman Islands, Channel Islands, Ireland, Isle of Man, Luxembourg, and possibly other countries. However, the effect of any such changes on the ratings on any particular existing funds will depend on the final criteria adopted, our analysis of the underlying securities, and certain other factors. The proposed PSFR criteria updates we are contemplating relate to asset maturities, floating-rate securities, limited liquidity/illiquid investments, credit quality, diversification, and stress testing."
The release says, "[W]e are considering reducing the maximum portfolio weighted average maturity (WAM) ... for 'AAm' and 'Am' rated funds. We are not currently considering any changes to the 60-day maximum WAM criteria for 'AAAm' rated funds. Second, we are considering adopting spread WAM criteria for all PSFR categories.... Third, we are considering removing all exceptions to the 397-day maximum final maturity guidelines per individual security except for those in place for sovereign floating-rate securities."
Possible changes include: "[F]or an investment-grade PSFR we are also considering the feasibility of requiring floating-rate investments to reset to indices that we view as highly (i.e., more than 95%) correlated with Libor, in addition to fed funds.... [W]e are considering reducing the maturity of 'nonmarketable' securities that count toward the limited liquidity/illiquid basket from greater than seven days to greater than one business day."
"We are also considering a 10% concentration limit for uncollateralized overnight deposits with an 'A-1' or better rated depository institution or sovereigns.... Second, we are considering creating more detailed and consistent counterparty exposure criteria for repurchase agreements and collateralized certificates of deposit. Third, we are contemplating criteria to limit exposures to any one 'issuer group' to 10% to be eligible for an investment-grade PSFR. Lastly, to qualify for an investment-grade PSFR, we are contemplating reducing the maximum exposure that any one rated fund invests in another rated fund to 5% from 25%," says S&P.
Finally, they say, "We are considering establishing criteria stating that ... all funds must conduct weekly stress testing and submit sample results at our annual review meetings. Since 1984, we have assigned PSFRs, which express our opinion regarding a fund's ability to maintain principal stability and to limit exposure to losses due to credit, market, and/or liquidity risks. We currently assign PSFRs to more than 500 money market-type funds in the U.S., Europe, and offshore jurisdictions. PSFRs are based on a detailed quantitative assessment of fund investments and an in-depth qualitative assessment of fund management. The rating categories range from 'AAAm' (extremely strong capacity to maintain principal stability and to limit exposure to principal losses due to credit, market, and/or liquidity risks) to 'Dm' (failure to maintain principal stability resulting in a realized or unrealized loss of principal)."
Note that two of the S&P report's authors, Peter Rizzo and Joel Friedman, are scheduled to speak later this month at Crane's Money Fund Symposium in Providence R.I. Rizzo will be on "Future of Money Funds Discussion on Sunday, August 23, while Friedman will be on a "Revamping AAA Money Fund Ratings" panel on Tuesday, August 25. We expect to hear more about possible changes in triple-A ratings for money funds then.
Williams Capital Government Money Market Fund, managed by Williams Capital Management, has become the second fund family monitored by Crane Data to commit to regular daily publication of the new WAL, or weighted average life metric, alongside the commonplace WAM, or weighted average matutity. The minority-owned firm also recently announced that its flagship money fund broke the $1 billion barrier and that the company received a large investment mandate (see Williams Capital to Manage $1 Billion for Goldman Sachs).
President Dail St. Claire wrote to shareholders recently, "July 30, 2009 was a significant day in the growth of our firm. The Williams Capital Government Money Market Fund total assets grew past $1 billion for the first time. Total firm assets, including our cash management and short-term fixed income accounts, total over $2 billion. We are fortunate to work with you and greatly appreciate the opportunity to manage your assets."
The letter continues, "Williams Capital Management continues to manage your assets in a manner consistent with the maintenance of liquidity and capital preservation. We are also committed to providing the highest degree of transparency in the Williams Capital Government Money Market Fund. In recognition of this objective, we are providing the portfolio holdings on a daily basis. We are now pleased to announce that next week the Williams Capital Government Money Market Fund will begin reporting the Fund's Weighted Average Life (WAL) daily. The WAL will be included in the Fund's Daily Rate Sheet along side the traditional Weighted Average Maturity."
It explains, "WAL is a metric that adjusts the Fund's WAM to reflect all securities' stated (or legal) final maturity or the date on which the Fund may demand payment of principal and interest. WAM allows money market funds to use the interest rate reset dates of variable- and floating-rate securities under certain circumstances as a measure of their maturity. Recently, the U.S. Securities and Exchange Commission proposed new regulations designed to make money market fund more resilient to certain short-term market risks."
"Under the proposed regulations, Rule 2a-7 money market mutual fund portfolios will be required to have a maximum WAL of 120 days. Williams Capital Management believes that WAL is a critical risk metric and a better gauge of a money market fund's liquidity than a fund's WAM which can take advantage of maturity shortening features for variable and floating rate securities. We also believe it will become a standard reporting metric," the company says. (See also our previous article on WAL, "Morgan Stanley Adds Weighted Average Life Metric to Daily Yields".)
The SEC's "Division of Investment Management Staff No-Action and Interpretive Letters" web page, which has been housing the "no-action" letters that have documented the majority of advisor support actions involving money funds over the past two years, posted several new entries recently. The Hartford Mutual Funds, Mount Vernon Securities Lending Trust, and Victory Institutional Money Market Fund, Victory Financial Reserves Fund, and Victory Prime Obligations Fund letters all involve extensions and modifications of prior support actions, though Crane Data previously had not listed Hartford on our "bailout" list (which brings the total to 26 advisors).
The SEC's response to The Hartford's letter says, "You state that the Fund holds notes issued by Lehman Brothers Holdings, Inc., and that Lehman obtained an order for relief under the Bankruptcy Code on September 15, 2008, which is an Event of Insolvency under rule 2a-7(a)(II) under the Act. You also state that the Fund has a receivable for amounts due from the Primary Fund, a series of The Reserve Fund.... In September 2008, the Trust and Support Provider entered into a capital support agreement for the benefit of the Fund. The Original Agreement obligates Support Provider to make a cash contribution ... to the Fund sufficient to restore the Fund's net asset value to a specified minimum permissible NAV if certain triggering events occur."
It continues, "The Trust and Support Provider now seek to amend the Original Agreement, and a form of the Amendments was provided to the staff. The principal changes the Trust and Support Provider propose to make to the Original Agreement are to extend the termination date from March 15, 2009 to October 31, 2009, to explicitly permit the Fund's Board of Trustees to cause the Fund to sell the Receivable in certain circumstances described further below, to alter the maximum amount that the Support Provider is required to contribute to the Fund, and to eliminate references to the Notes, which will be purchased by Support Provider in accordance with rule 17a-9 under the Act."
The Mount Vernon Securities Lending Prime Portfolio letter says, "You state that the Fund holds notes issued by Lehman Brothers Holdings, Inc., and that Lehman obtained an order for relief under the Bankruptcy Code on September 15, 2008, which is an Event of Insolvency under rule 2a-7(a)(II) under the Act. You also state that the Fund has a receivable for amounts due from the Primary Fund, a series of The Reserve Fund, and that the Primary Fund is currently in liquidation and it is uncertain when, and to what extent, the Receivable will be paid."
It adds, "In September 2008, the Trust and Support Provider entered into a capital support agreement for the benefit of the Fund. The Original Agreement obligates Support Provider to make a cash contribution ... to the Fund sufficient to restore the Fund's net asset value to a specified minimum permissible NAV if certain triggering events occur.... The Trust and Support Provider now seek to amend the Original Agreement, and a form of the Amendments was provided to the staff. The principal changes the Trust and Support Provider propose to make to the Original Agreement are to extend the termination date from March 15, 2009 to October 31, 2009."
The Victory "no-action" letter says, "You state that as of March 2009, the Victory Institutional Money Market Fund had approximately 0.57 percent of its assets, or $10.5 million, invested in medium-term notes issued by Cheyne Finance LLC, the Victory Financial Reserves Fund had 0.54 percent of its assets, or $3.5 million, invested in medium-term notes issued by Cheyne, and the Victory Prime Obligations Fund had 1.51 percent of its assets, or $11.2 million, invested in medium-term notes issued by Cheyne.... Cheyne is a structured investment vehicle. As a result of downgrades ... they ceased to be Eligible Securities, as defined in rule 2a-7 under the Act."
It adds, "[T]he adviser previously informed the Commission of a default and Event of Insolvency, as defined in rule 2a-7, with respect to the Cheyne Notes. In November 2007, ... KeyCorp established an irrevocable letter of credit.... The term of the letter of credit was extended in July 2008 and, in connection with that extension, was expanded to cover the Prime Obligation Fund and the Reserve Fund.... The Trust, the Adviser, and KeyCorp now seek to amend the Letter of Credit.... The principal change the Trust, the Adviser, and KeyCorp propose to make to the Letter of Credit is to extend the termination date from March 31, 2009 to November 6, 2009."
In this month's Money Fund Intelligence, we spoke with DB Advisors, the institutional asset arm of Deutsche Asset Management and manager of the $70 billion-plus DWS Money Market Funds. We interviewed Joe Benevento, Head of the Liquidity Management Investment Group, Americas, and Joe Sarbinowski, Managing Director and Global Head of Institutional Liquidity Distribution, and discussed the challenges of managing in today's market, the companies' money fund 'transparency' and FDIC insured product initiatives, and thoughts on the future of money market funds.
We first asked, "What is the biggest challenge in managing a money fund?" Benevento told us, "I think from the investment side, it's quickly adapting to change. This is the biggest challenge that we face every day, whether it's crisis times or not -- adapting to changes in the credit cycles and changes in credits, adapting to new regulatory change, etc. Customer sentiment is also very important, adapting to what customers' likes and dislikes are.... You'll see that whether it's a rising rate environment or a declining rate environment. Adapting to the custumer and their sentiment is extremely important."
Sarbinowski responded, "Clients certainly thirst for a greater amount of information than before. It used to be kind of just 'check the box,' send the prospectus. Now it's RFI-, RFP-type inquiries; it's much more in depth. We're in favor of this, though, because we think we show very well when we're able to talk through all of that. But it's meeting the ongoing thirst for knowledge about what's going on in the industry, which we try to satisfy through webcasts and meetings."
We also asked, "What about challenges running the portfolio, low yields and lack of spreads? Benevento said, "Definitely, it is a big challenge. You haven't even quite reached the expansion cycle, and we're at credit spreads that are pretty tight, pushing us back years.... I think overall anytime you get a change in regulatory recommendations or any kind of market change, issuers adapt and buyers adapt.... I say tightness of supply is probably something we're going to be dealing with for a while, whether it'll be just market supply or possible recommended change to 2a-7. Diversification is probably the next biggest challenge."
Regarding the market "beyond 2a-7", Sarbinowski told MFI, "We call ourselves Liquidity Management, so we've got essentially a few different products to satisfy the market. Certainly the tried-and-true and the one that we're best known for is the money market fund. We also have a separate account business, as well as our FDIC Insured Deposit. So there are products to meet different client needs. We have clients that may invest both in our money funds and also in our separate accounts for different types of cash, working capital vs. 'core'."
Finally, we asked, "Which of the SEC proposals would be the most onerous from a portfolio management perspective? Benevento responded, "The liquidity buckets are going to be difficult. I think it is going to be a challenge to diversify in that sector, and it will be a challenge to find the supply -- issuers willing to issue that short as the market heals. For us, that is what we see as the most difficult part." On the proposal banning illiquid securities, he says it's not really a concern. "I don't see that as being a major problem for us. But I think the liquidity buckets, and having the market all adjust to the liquidity buckets, is what we're concerned about."
On Friday, Crane Data published the August issue of its flagship Money Fund Intelligence newsletter. The latest edition features the articles: "MFI Subs See Low Rates as Biggest Challenge," which reveals a survey of readers' opinions on the SEC's Money Market Fund Reform Proposals; "DB Advisors Meets Thirst for Liquidity, Knowledge," which interviews Deutsche's Joe Benevento and Joe Sarbinowski; and "Online Portal Share Inches Up, Growth Stalls," which discusses recent statistics on money market fund trading "portals."
Every issue of Money Fund Intelligence also features news, indexes, and performance information on over 1,300 money market mutual funds. Statistics include: assets, average maturity, expense ratio, 7-day yield, 30-day yield, 1-month return, 3-mo, YTD, 1-year, 3-yr, 5-yr, 10-yr, and since inception returns. MFI also contains tables of the top-yielding and largest money funds, top-yielding bank deposits, brokerage sweep rates, and our benchmark Crane Money Fund Indexes.
Our latest monthly statistics show the Crane Money Fund Average, our broadest measure of taxable money funds, declining to a record low 0.09% (7-day simple annualized yield) as of July 31, 2009. The Crane 100 Money Fund Index, an average of the largest money funds, saw its 7-day yield decline to 0.16% at month-end, down from 2.24% a year ago and 5.00% two years ago. The Crane Institutional MF Index ended the month with a yield (7-day) of 0.14% while the Crane Retail MF Index fell to 0.04%. The Crane Tax-Exempt MF Index ended the month yielding 0.14%.
The Crane 100 MF Index had a 30-day yield (annualized) of 0.18% as of July 31, 2009. This average's 1-month return (unannualized) was 0.02%; its 3-month return was 0.07%; and its year-to-date return was 0.27%. Over the past year, the Crane 100 returned, on average, 1.08%, over 3 years its annualized return was 3.28%, over 5 years 3.21%, and over 10 years it was 3.11%. The Gross 7-Day Yield, which estimates the average yields before expenses are deducted, of the Crane 100 was 0.51% at the latest month-end.
The lead article in the August MFI says, "Crane Data recently surveyed MFI subscribers and readers of our website at www.cranedata.com about the SEC's recent Money Market Fund Reform Proposals and issues facing money funds. The responses indicate that ultra-low interest rates have surpassed regulatory changes as the most important issue facing money funds, and that the proposals overall are rated relatively favorably." Look for more excerpts from MFI in coming days, or e-mail Pete to request the latest issue.
Note that the August issue of Money Fund Intelligence and July 31 performance data was published Friday morning.
Moody's Investors Service recently published a report entitled "Are Insurers and Investment Managers on the Road to Recovery? The Special Comment from Moody's Insurance contains a section on "Managed Investments: Money Market Funds", which discusses the recovery and outlook for the money fund sector.
Moody's writes, "The credit picture for Constant Net Asset Value money funds (or 'CNAV money funds') has stabilized considerably from the dark days of September 2008 after the Reserve Primary Fund failure. We currently view the stability in CNAV money market-fund credit quality to be well-grounded. However, recent improvements in the CNAV fund credit picture could be reversed by further deterioration in the credit ratings of large U.S. and European banks and/or a significant increase in net investor outflows."
They continue, "We see very few near-term signs in the market that could trigger a fall-back to September 2008 lows. However, for improvements in the liquidity and credit picture of CNAV money market funds to become well-established, CNAV funds will have to show that they can operate smoothly in a world without governmental liquidity and insurance programs. Given this, we believe CNAV funds will slowly be weaned off government programs to effect a very smooth transition."
But the comment adds, "In a low-interest-rate environment, however, some managers are extending the weighted average maturity of their portfolios to generate yields in excess of their management fees. This tactic exposes their funds to heightened liquidity and market risk, but it should not affect their overall credit risk substantially. These managers have typically handled such a situation by investing in longer-dated time deposits issued by systemically important banks or government securities."
"The decline in usage of the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF) and the Commercial Paper Funding Facility (CPFF), which are two of the main U.S. governmental liquidity programs, is a positive sign of some improvement in money market conditions. However, the Federal Reserve's decision to extend these programs through February 1, 2010 signals that conditions remained stressed."
Finally, Moody's says, "We do not envision that AUM run-off would be of a magnitude that would jeopardize recent improvements in CNAV money-fund credit quality. This view is based on our belief that CNAV funds have positioned their portfolios well over the past six months for elevated redemption scenarios.... Additionally, in the U.S., we also do not expect that the expiration of the U.S. Treasury's Temporary Guarantee Program for Money Market Mutual Funds (it is likely to expire on September 19th) will trigger a rush of redemptions in U.S. CNAV money funds."
There have been a number of new filings for money market mutual fund share classes over the past month and a half, many of them institutional, according to searches performed by Crane Data utilizing Strategic Insight's Fund Filing product, a front-end to the SEC's EDGAR mutual fund filing database. Among these are new classes of funds from Allegiant Funds, JPMorgan Funds, TDAM, and TIAA-CREF.
Allegiant, formerly National City's asset management unit but now owned by PNC Financial Services, has filed for additional classes on six of its funds. Allegiant Advantage Instl Government MM and Allegiant Advantage Instl Treasury MM have filed for Institutional, Advisor and Service share classes; Allegiant Advantage Instl MM has filed for a Service class; and Allegiant OH Muni MM, Allegiant PA TxEx MM, and Allegiant TxEx MM have filed for new "Class T shares.
Expenses appear to be at 0.10% and 0.25% for two of the new institutional classes, with a minimum investment of $5 million. The "T" classes will have a minimum initial investment of $1,000. Allegiant is the 35th largest manager of money funds with $7.4 billion in assets, according to Money Fund Intelligence XLS.
TD Asset Management, which is owned by Canada's TD Bank Financial Group, filed to launch TDAM Institutional Money Market Commercial class, with a $10 million minimum and 60 basis point exepense ratio, and TDAM Institutional Muni Money Market, which will have Institutional, Institutioanl Service, and Commercial classes.
TIAA has also filed for TIAA-CREF Money Market - Premier, a $5 million minimum share class charging 0.29% in expenses and managed by Michael Ferraro. TIAA-CREF ranks 61st out of 86 money fund managers with $1.3 billion in assets. JPMorgan Prime MM, JPMorgan US Govt MM, JPMorgan US Treas Plus MM, and JPMorgan TxFr MM have all filed for new "Direct" share classes back in late May.
Once again, we learned about a new SEC "no-action" letter impacting money market funds from Stradley Ronon Stevens & Young LLP Counsel Joan Ohlbaum Swirsky. The letter, entitled, "Acquisition of Auction Preferred Stock; Issuance of Liquidity Protected Floater Securities," "describes an approach developed by UBS to provide liquidity for auction rate preferred shares (ARPS) held by its clients," says Swirsky.
She tells Crane Data, "The approach involves creating trusts to purchase the ARPS, where the trust will thereafter issue securities to money market funds and others. The securities are called 'Floaters,' and they resemble in many respects the more traditional 'floaters' that money market funds purchase in the form of tender option bonds backed by municipal securities (rather than being backed by ARPS)."
Swirsky explains, "Auctions of ARPS have been failing since February 2008, and UBS AG and its affiliates have designed the new type of security (the Floaters) to promote the resumption of successful auctions. The Floaters would be interests in newly-created trusts that acquire ARPS and make payment to holders of the Floaters, based on payments received from the underlying ARPS. UBS envisions that the Floaters will be eligible for purchase by money market funds. Accordingly, by purchasing ARPS and selling Floaters to money market funds (and possibly others), the trusts may create a market for ARPS that will revive liquidity in the auction process."
She continues, "The Floaters will have a type of guarantee known as an unconditional demand feature ('UCDF'), and the UCDF could be provided by an affiliate of UBS. Under prior no-action letters, a guarantee on preferred shares was required to be from a non-affiliate of the issuer to permit a money market fund to rely on the credit quality of the guarantee to satisfy Rule 2a-7. The UBS no-action letter states that money market funds may rely exclusively on the credit quality of a guarantor in determining whether preferred shares subject to the guarantee meet Rule 2a-7's credit quality conditions, regardless of whether the guarantor is affiliated with or controlled by the issuer."
Finally, Swirsky adds, "The letter is third in a series that has been issued over the past few years that bear on restructuring ARPS. In 2002, the SEC staff issued a no-action letter to Merrill Lynch that opened the way for money market funds to purchase certain types of preferred shares, which normally would not satisfy the technical requirements of Rule 2a-7. The SEC staff imposed a number of conditions, a major one being that the preferred shares must be supported by an UCDF from a party unaffiliated with the issuer of the underlying preferred shares.... In 2008, Eaton Vance obtained no-action relief that ... broadened the description of a UCDF that could render preferred shares eligible for purchase by money market funds." (See our Crane Data News 6/16/08 "SEC Gives Eaton Vance No-Action Letter to Issue LPP to MMFs for ARPS".)
"Money fund assets declined by over $215 billion, or 6.0%, during the second quarter of 2009, so the market share winners recently have been fund complexes showing any increases," says the latest issue of Money Fund Intelligence Distribution Survey, Crane Data's quarterly publication that tracks market share and sales trends. MFIDS continues, "Among the largest money fund managers, these included Fidelity (up $6.3B, or 1.3%), Dreyfus (up $2.7B, 1.2%), and JPMorgan (up $2.3B, or 0.6%)."
The quarterly says, "Among fund complexes ranked 11 through 20, SSgA (up $6.0B, or 13.0%), RBC (up $1.2B, or 3.3%), DWS (up $440M, or 0.6%) and AIM (up $374M, or 0.5%) showed rare positive (though modest) growth in Q2, while Oppenheimer ($1.1B, or 11.0%), HSBC (up $2.2B, or 7.2%) and Fifth Third ($496M, or 5.2%) showed gains among those ranked 21-35." (See the full MFI Distribution Survey or our monthly Money Fund Intelligence XLS for the full market share tables.)
The Distribution Survey adds, "Over the past 12 months, the big winners in dollar terms were JPMorgan (up $133.6B, or 53.5%) and Fidelity (up $109.3B, or 27.3%), followed by Federated (up $69.5B, or 30.2%), Dreyfus (up $57.7B, or 31.6%), Goldman Sachs (up $43.7B, or 25.3%), and Wells Fargo (up $22.4B, or 22.0%). The largest percentage increases were shown by RBC (114.2%), JPMorgan (53.5%), American Funds (53.4%), Fifth Third (32.1%), and Dreyfus (31.6%)."
"Overall money fund assets, as measured by our Money Fund Intelligence XLS, grew by $268.4 billion, or 8.3%, in the 12 months through June 30, 2009. Note that these totals only include domestic U.S. money funds tracked by Crane Data.... Among the biggest dollar losers in Q2'09 were Schwab (down $19.4B, or 9.2%), Columbia (down $19.0B, or 13.0%), Federated (down $15.5B, or 4.9%), and Vanguard (down $11.3B, or 5.5%). Some of these names no doubt indicate that retail and brokerage customers led the way in redemptions during the quarter," says MFIDS.
Finally, the publication says, "Concentration of assets has occurred -- the largest 25 complexes account for 94.3% of all money fund assets vs. 91.2% a year ago. But the majority of this can be attributed to the movements of cash from four complexes over the past year -- Neuberger Berman, Janus, Putnam and American Beacon. These fund groups lost $17.9B (75.2%), $12.8B (87.5%), $12.7B (82.1%), and $9.4B (88.4%), respectively, totaling almost $53 billion." Of course, the redistribution of Reserve's assets also contributed.
The Fortis and Aston/Fortis Money Market Funds, formerly known as the ABN Amro Money Funds, liquidated at the end of July, becoming the latest casualty of fund consolidation. An SEC filing said, "Effective June 22, 2009, the Aston/Fortis Money Market Fund, Fortis Government Money Market Fund, Fortis Tax-Exempt Money Market Fund and Fortis Treasury Money Market Fund are no longer available as an exchange option. The Board of Trustees of Aston Funds approved a plan to liquidate and terminate each Money Market Fund on or about July 30, 2009."
Aston/Fortis, which last month had shrunk to a mere $179 million in assets, ranked #83 out of 85 money fund complexes tracked by Crane Data's Money Fund Intelligence XLS as of June 30. These funds had held over $2 billion in assets at the start of 2008, and the funds had been paying zero yields and running AMs, or WAMS (weighted average maturities), of just 1 day for a number of months (often a sign of a pending liquidation). Note also that Fortis, which is owned by BNP Paribas, continues to run money market funds outside the U.S..
The Aston fund's filing continues, "The last date to place orders to exchange shares of each Money Market Fund for shares of other Aston Funds is July 28, 2009. Effective July 15, 2009, the Aston Money Market Fund -- Bedford Shares of the Money Market Portfolio of The RBB Fund, Inc. offered in connection with the Aston Funds will be available as an exchange option for shareholders of the Aston Funds. Existing shareholders of the Money Market Funds or the intermediaries through which shares are held must take affirmative action to exchange their shares from the Money Market Funds into the Aston Money Market Fund."
Aston/Fortis represents the fifth complex to exit or announce an exit from the money fund management space in the past two years. The others are: Calamos, Credit Suisse, Monarch, Munder, and UCM, or Utendahl. There also, of course, is Reserve Funds' likely exit. (Janus and Putnam are sometimes mentioned too, but they only exited the institutional side of the business.) In addition, there have been at least 4 "outsourcing" deals -- Capital One (moved assets into Fidelity), Fifth Third (moved muni assets into Federated), Nationwide (Federated), and most recently, Neuberger Berman (the former Lehman is moving taxable assets to SSgA).
Crane Data discuss more consolidation, and why we think the trend is overrated, in our most recent quarterly Money Fund Intelligence Distribution Survey. As we said in MFIDS, "Almost all of these moves have been made by marginal players. While there undoubtedly will be more deals, the status quo remains a force to be reckoned with."