"Money fund firms withdrawing from Treasury program" writes Investment News. The article says, "Signaling greater stability in the credit markets, most of the major fund complexes offering Treasury money market funds have discontinued their participation in the federal guarantee program on those funds. According to Peter Crane, president of Crane Data LLC, a Westborough, Mass., research firm that focuses on the money market industry, the large fund firms dropping guarantees on Treasury money market funds are keeping the insurance on prime money market funds and money market funds that invest in non-government debt." IN continues, "Some observers expect the Treasury Department's guarantee program to end in September. The program was launched last September after a fund managed by The Reserve Management Co. Inc. of New York lost value and 'broke the buck,' causing panic in the money markets. Other observers, however, say it's too early to predict whether the program will be discontinued." It quotes Cary Carbonaro, president of Family Financial Research, "My clients are out of panic mode. It feels like some of the fear is gone. I don't see the insurance as having a huge value. In addition, the clients will be paying for it with a lower yield."
Last Thursday in Washington, the Investment Company Institute held a meeting of its Institutional Money Market Funds Advisory Committee, which was formed two years ago to discuss industry issues involving money market funds. The latest gathering included Crane Data's Peter G. Crane presenting on "The State of the Money Market Mutual Fund Marketplace," as well as non-public discussions on the "Report of the Money Market Working Group and Rule 2a-7 Reform," Government Programs, and Credit Rating Agencies Reform."
Crane gave an overview of the current state of money funds, examining asset flows, support events, and a slew of money fund statistics. He told the audience of about 50 money fund industry heavyweights that he guessed that even in the "greatest disaster in the history of the money fund business", Reserve Primary Fund's "breaking the buck," this fund would even eventually show a positive return in 2008. He also disagreed with the common wisdom that investors and institutions are holding record levels of cash, citing recent ICI stock fund liquid asset levels as actually being near record lows.
On the current state of money funds, Crane told attendees that despite the unprecedented turmoil in the space, money fund assets remain just a little over $100 billion below their record level of $3.9 trillion (set on Jan. 14, 2009). He noted that money funds have almost 40 million shareholders, representing one of the most powerful political demographics in the country -- "people with money" -- that money funds bring in more revenue than Hollywood at the box office, in the range of $13 trillion a year, and that money funds have paid investors over $1 trillion in their 40-year history. He added that, according to press reports on campaign filings, President Obama was a money fund shareholder, holding almost one-half a million in a Northern Institutional Municipal money fund.
Crane's slides showed the shift away from Treasury funds and into Government and Prime funds since December, and noted that overall assets remain over $300 billion higher than they were in the weeks following Reserve. He told the ICI group that the historical relationship of money funds to Fed funds has changed; money fund yields have been running about 1/4 percent over the Fed funds target vs. 1/4 percent under in the past. Crane also detailed the Subprime Liquidity Crisis timeline, and reviewed the series of support action taken by almost 1/3 of all money fund advisors. He urged members to expand their educational and communication efforts to prevent investors' "bosses' bosses" from saying "Sell everything" in the future.
Finally, Crane speculated on what he thought the SEC's pending recommended changes to Rule 2a-7 would look like, mentioning the spread WAM and concentration disclosures as areas of interest. He also said that 75% of money fund assets are currently covered by the Treasury's Guarantee Program and that he didn't think Treasury could afford to have any fund "break the buck". He also noted that there was an outside chance of the program continuing. While money funds have had their problems, he noted that their competition has been "decimated". "In the land of the blind, the one-eyed man is king," quoted Crane.
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Today's Wall Street Jounal writes "Money Funds Begin to Cut U.S. Backing", saying, "The Treasury Department's guarantee program for money-market funds was welcomed as panic gripped the industry, but some fund firms now appear to be preparing to wean investors from the program. The guarantee program was instituted in September after Reserve Primary Fund's net asset value dropped to 97 cents a share, and investors began pulling money from prime money-market funds.... Since then, the program, which essentially ensures funds against 'breaking the buck' as the Primary Fund did, has been extended twice. It is set to run through Sept. 18. But fund companies aren't embracing it as they once did." It says, "Peter Crane, president and chief executive of Crane Data, says coverage from the program has, in effect, gone to about 75% from about 95% as funds don't renew for Treasury and some of their government money-market funds." Crane says, "But with prime money-market funds, that still make up the largest segment, participation remains virtually unanimous." In other news, see Standard & Poor's Peter Rizzo on Fox Business News. (Look for "Trends in Money Market Funds".)
Kiplinger's asks "Are Money Funds Safe Now?" The piece says, "[M]oney funds are headed for a more comprehensive makeover. You can expect heightened regulation that would, among other things, limit portfolio risk, ensure minimum levels of cash to meet withdrawals, disclose more details about investments, and ensure that, in the event of a run, the first shareholders out the door won't be cutting their losses at the expense of those who remain. Most funds already comply with most of the suggestions on the table." The magazine quotes Peter Crane, "The market has ruthlessly addressed the risk in money funds -- they've gone conservative." "New regulations won't reduce yields any more than they've already been clipped by investing more conservatively, says Crane. What you're less likely to see: funds with floating net asset values, or $10-a-share NAVs." In other news, The Boston Globe writes "Columbia's tangled web", which says, "It comes as no shock that struggling Bank of America Corp. would be interested in unloading its money management arm headquartered in Boston. Here's the puzzler: Why would someone want to buy Columbia Management Group, or at least purchase it at a price that would be considered attractive to the capital-challenged Bank of America?" The Globe continues, "Columbia's $340 billion of assets includes about $142 billion of money market funds, according to Peter Crane of Crane Data LLC, a money fund research firm in Westborough. It quotes Crane, "Both Columbia and Legg Mason are seen as being the hardest hit with the SIV issue. They weren't nearly the worst cases, but they were the biggest, so the numbers are just gigantic."
Pensions & Investments features "Inside the panic at Reserve Fund", which describes the hours before The Reserve Primary Fund "broke the buck" and the recent SEC charges filed against the company. P&I says, "The Securities and Exchange Commission last week charged the Bents and Reserve with fraud, alleging that they failed to provide key information to customers, board members and credit-rating agencies after Lehman collapsed. Reserve and the Bents said they would support the $1-per-share asset value of their fund when in fact there was no such intention, the SEC contends. The agency also charges that Reserve misled directors and credit raters by significantly understating how many investors were yanking money after the Lehman bankruptcy hit." In other news, see Investment News' "Money market mutual funds hit record low in April", which says, "The average yield for money market mutual funds hit a record low in April, according to Crane Data LLC. The Crane 100 Money Fund Index, which is an average of the 100 largest taxable money funds' latest seven-day yields, found that the average yield fell to 0.38% in April, net of fees, from 0.43% the previous month." It quotes Pete Crane, "Yields cannot get much lower."
Hear Pete Crane on The Wall Street Journal's Podcast which accompanied yesterday's article, "When Safe Places No Longer Feel So Safe". Crane tells the WSJ, "There are really a few things you can do [to make sure your money fund is safe]. The most important thing is to know where the Fed is, to know where the Federal funds target rate is. It's currently zero to 0.25%. Make sure that your yield that you're getting on the money fund is not too far removed. In normal conditions, a one percent range around the Federal funds target ... would be appropriate. Currently, you go up to perhaps as much as 2%, but anything over 2% in the current environment is too good to be true. The other thing you can do is go with the name and the brand.... Even though money market funds can 'break the buck' as we learned so painfully, it's more likely that you'll get reparations or be made whole if you go with a large, reputable firm.... It's not always the case, but investors should assume that return equals risk, that there's no free lunches."
Today's Wall Steet Journal writes "When Safe Places No Longer Feel So Safe", which asks, "Is anything safe??" The article says, "Just a year or so ago, it wasn't hard to spot the safest options on a typical retirement-plan investment menu. There were money-market funds, which typically aim to maintain a steady $1-a-share net asset value. There were stable-value funds, which also are designed to preserve capital and deliver smooth, steady returns. And there were short-term bond funds, which many investors saw as only slightly riskier than cash. But all of these supposedly stodgy investments have come under serious strain in the financial crisis. In September, a money-market fund that held Lehman Brothers debt fell below the sacrosanct $1 level, sparking massive withdrawals from certain money funds. In recent months, at least two stable-value funds have dished up losses to retirement-plan investors. And a number of short-term bond funds posted large declines last year as mortgage-related holdings hit the skids." On money funds, it adds, "Investors should pay attention to a money-market fund's yield. A higher yield often means higher risk. In this low-rate environment, a yield much above 1% could be a red flag, says Peter Crane, president of Crane Data LLC of Westboro, Mass., which tracks the money markets." "If you've made the decision to be in safe investments in the first place, you don't want to blow it by reaching for a little extra yield," WSJ quotes Crane.