The Wall Street Journal writes "SEC: More Changes for Money-Market Funds". It says, "Money-market funds could be forced to pay out less interest under new federal rules designed to make them sturdier. With memories still raw from the 2008 meltdown of Reserve Primary Fund, the Securities and Exchange Commission released rules on Wednesday that require funds to hold more liquid and higher-quality assets and disclose the value of their assets per share more frequently. The trade-off: These safeguards also will put pressure on yields that are already near zero. The changes likely will reduce yields by about 0.10 percentage point, said Pete Crane, president of research firm Crane Data LLC. This isn't good news for money-fund sponsors already suffering from redemptions because of their low rates. Investors pulled about $540 billion out of money-market mutual funds last year, bringing assets to $3.3 trillion, according to Crane." The Journal adds, "For the most part, the rules resemble many of the SEC's original proposals last year. Notably, they didn't include a controversial idea that the agency proposed be considered -- scrapping the $1-per-share standard for money funds in favor of a floating standard -- which is an idea that was strongly opposed by the industry. Instead, the rules will require a fund to disclose its actual 'mark-to-market' net asset value, known as 'shadow NAV,' on a 60-day lag." Also, Investment News' writes "Money funds forced to disclose floating net asset values". It says, "Money market funds will have to disclose on a delayed basis their fluctuating 'shadow' net asset values rather than their $1-per-share value, thanks to new rules adopted today by the Securities and Exchange Commission.... But Peter Crane, president of Crane Data LLC, which tracks money market fund performance, says that requiring money market funds to disclose a shadow net asset value on a delayed basis is 'a baby step towards more transparency in the actual NAV.' The concern is either a floating rate or a shadow price would be interpreted the wrong way by investors, Mr. Crane said." Investment News quotes Crane, "If [investors] see $0.999 [per share] they're going to say, 'Oh my God, my fund broke the buck,' when these are just normal fluctuations that happen all the time."
The Securities & Exchange Commission will discuss and likely adopt its final Money Market Fund Reform proposals Wednesday morning starting at 10:00 a.m. (To view the live webcast, click here.) The Open Meeting Agenda including "Money Market Fund Reform" features Division of Investment Management staff Robert E. Plaze, C. Hunter Jones, Penelope Saltzman, Sarah ten Siethoff, Thu B. Ta, Adam Glazer, and Daniele Marchesani.
The agenda says, "The Commission will consider a recommendation to adopt new rules, rule amendments, and a new form under the Investment Company Act of 1940 governing money market funds, to increase the protection of investors, improve fund operations, and enhance fund disclosures. Look for details from a press release and summary around 9:30 a.m. Wednesday, and watch for the full Final Money Market Fund Reform amendments to be posted over the next couple of days. (Check here to see where the final rules should appear around Friday.)
Some of the final rules appear to have leaked already with some stories appearing Tuesday night. The Wall Street Journal says in "SEC To Vote Wed On Rules For Money-Market Funds", "The U.S. Securities and Exchange Commission on Wednesday will vote on rules requiring money-market mutual funds to disclose slight fluctuations around their $1-a-share price, but regulators will leave in place the current $1 standard, according to people familiar with the rule's content. The SEC is scheduled to vote on final rules designed to reduce the risk and volatility of money-market mutual funds. The rule, which is still being finalized, will require funds to disclose fluctuations around $1, called a 'shadow price,' on a monthly basis with a 60-day lag, these people said.... The final rule won't make any changes to the current net asset value framework. But regulators are likely to state that future rules could include a floating standard."
The Journal article continues, "The rule also will include uniform mandatory liquidity requirements for money-market funds at an institutional-investor level, requiring a minimum of 10% of assets to be in liquid securities on a daily basis and 30% on a weekly basis. The SEC had proposed a lower standard for retail investors, but regulators decided after receiving public comment that dual-liquidity standards were too complex to implement and monitor.... In a change to the proposed rule, the SEC decided that it wouldn't ban outright investments in so-called second-tier securities, or those that don't have the highest rating. Instead, the final rule will include limits on money-market funds' use of second-tier securities, limiting their exposure to 3% overall and 0.5%% of any individual second-tier security. The maturity window for second-tier securities also will be reduced from 397 days to 45 days."
Reuters says in "US SEC mull tough rules for money market funds", "The agency is considering requiring money market funds to hold a minimum of 10 percent of their assets in liquid securities and may shorten the average maturity of debt the funds can hold to 60 days from 90 days, the sources said. At a meeting Wednesday, the SEC will also consider requiring funds to publicly disclose the net asset value, or value of each share of a money fund, on a 60-day lag basis.... The agency may consider at a later date other changes that could include a fluctuating net asset value."
Finally, Bloomberg quotes Peter Crane in its "SEC Said to Drop Plan to Bar Money Funds From Lower-Rated Debt," "They are really fighting and clawing over inches.... The vast majority of the changes that the SEC proposed and likely will adopt, most of the industry has been adhering to already." Crane adds, "The SEC rules 'are seen as a necessary evil because you have to do something'.... People are more concerned about the President's Working Group and the re-emergence of Paul Volcker. There's still a slim chance of radical change."
Over the weekend, several articles warned of the dangers of following the herd into bond funds. The most prominent was Sunday's New York Times, which wrote "For 'Safe' Investors, This May Be a Challenging Year. It said, "Money market funds are paying investors next to nothing. More precisely, the 100 biggest funds are now paying 0.05 percent annually, on average, a yield as low as it has ever been, according to Peter G. Crane, the president of Crane Data of Westborough, Mass."
The Times quoted Crane, "It's so low it's a joke. At that yield, it would take more than 1,000 years to double your money." The article continued, "This microscopic rate of return is part of the continuing fallout of the financial crisis -- a consequence of the very loose monetary policy of the Federal Reserve and other central banks."
The NYT piece wrote, "There are many indications that this herculean intervention has been working. In the bond market, though short-term interest rates are still hovering near zero, longer-term rates have been on an upward trajectory since late November. In part, this may be a healthy sign, suggesting that the economy is recovering. But it has also created a very unusual situation for financial markets, and it poses some tricky problems for savers, investors and home buyers."
The article continued, "William H. Gross, the co-chief investment officer of the Pacific Investment Management Company, or Pimco, the world's biggest bond manager, says the gap between short- and long-term rates has rarely been greater. Translated into the parlance of the bond market, the 'yield curve' has seldom been steeper."
But it said, "For investors, this can create some hard-to-resist temptations. People who have been holding cash in money market funds or in bank certificates of deposit, for example, may be yearning to buy longer-term bonds instead. Watch out, though. Liquidating investments that pay almost nothing in order to shift to long-term bonds that pay substantially more may not make sense right now, said Robert F. Auwaerter, the head of fixed-income investing at the Vanguard Group."
Finally, the Times wrote, "Still, many analysts project that the Fed will raise its benchmark Fed funds rate, bringing it to perhaps 1 percent by year-end.... For individuals focused on keeping their investments very safe, it's likely to be a challenging year." The piece quotes Crane, "Basically, savers are going to have to suck it up. Yields are so low that they're getting almost nothing in return, but this is not a time to play offense. Remember, if you're holding a money market fund or a C.D., you're there because you don't want to lose money. This is not the time to take a lot of risks."
In addition to its normal 1-year return and 7-day yield performance ranking tables, the January issue of our monthly newsletter recognizes some of the top-performing money funds of 2009 and of the past decade with the newly created Money Fund Intelligence Awards. The winners include the No. 1-ranked money market funds based on 1-year, 5-year and 10-year returns, through Dec. 31, 2009, in a number of categories.
The top-performing fund overall (again) in 2009 and among Prime Institutional funds was Touchstone Institutional Money Market Fund (TINXX) with a return of 1.07%. Among Prime Retail funds, USAA Money Market Fund (USAXX) had the best return in 2009 (0.84%). RBC US Govt MMF Inst 1 (TUGXX) was the top Government Institutional fund over 1-year with a return of 0.51%, while Vanguard Federal MMF (VMFXX) won the MFI Award for Government Retail Money Funds over 1-year. Vanguard's Admiral Treasury MM (VUSXX) ranked No. 1 in the Treasury Institutional class while Goldman Sachs FS Treasury Oblig Select (GSOXX) ranked first among Treasury Retail funds.
For the 5-year period through December 2009, Touchstone Inst MMF again took top honors for the best-performing money fund over the past 5 years with a return of 3.53%. Fidelity Select MM Portfolio ranks No. 1 among Prime Retail funds with an annualized return of 3.30%. Goldman's FGTXX and GSOXX ranked No. 1 among Govt Inst and Treasury Retail funds, and Vanguard Federal again ranked No. 1 among Govt Retail funds. BlackRock Cash Treasury MMF Inst (the former Barclays fund) ranked No. 1 over 5-years among Treasury Inst money funds.
The highest-performers of the past decade include: DWS Daily Assets Fund Inst (DAFXX), which returned 3.24% (No. 1 overall and first among Prime Inst); TIAA CREF MM Fund Retail (TIRXX), which returned 3.09% (the highest among Prime Retail); and, AIM STIT Govt & Agency Inst (AIM04), American Beacon US Govt Select (AAOXX), and JPMorgan US Govt Capital (OGVXX) all returned 3.03%, (so tied for No. 1 among Govt Inst funds). AIM STIT Treasury Inst (AIM03) returned the most among Treasury Institutional funds over the past 10 years; and, Wells Fargo Advantage Treasury Plus Admin (WTPXX) ranked No. 1 among Treasury Retail funds.
For the period ended Dec. 31, 2009, our Crane 100 Money Fund Index returned 0.31% over 1-year, 2.57% 3.08% over 5 years and 2.90% over 10 years. See our latest Money Fund Intelligence XLS for more detailed listings, percentiles, and rankings, and look for more Money Fund Intelligence Awards in coming days.
The Sunday LA Times writes "Look, Ma, nearly no yield", which is subtitled, "Assets pour out of money market funds, Vanguard comes out ahead and other highlights of 2009." The Tom Petruno article says, "The plug got pulled on money market mutual funds in 2009. Total assets of money funds plummeted by nearly $500 billion, to about $3.26 trillion at the end of the year, a drop of 13% from the end of 2008, according to IMoneyNet Inc. The cash poured out because the Federal Reserve's policy of near-zero short-term interest rates also reduced money fund payouts to nearly zero.... What's more, investors know that money fund yields have little chance of moving higher until the Fed begins to lift its benchmark interest rate -- an event unlikely to happen until the second half of the year.... But the surprise may be how much cash has stayed in money funds. About 70% of money fund assets belong to institutional investors, and for many of them there may be no decent alternative to the immediate liquidity that money funds provide, even if interest earnings are zilch, said Pete Crane, head of money fund research firm Crane Data. Many risk-averse small investors, too, may be opting to wait out the rate drought in the funds, Crane figures, given paltry yields on other short-term accounts." Crane says, "My general rule is, if you're not going to make $100 more [in interest] by switching, don't bother." See also, The Boston Herald's Chuck Jaffe Q&A, "Money fund yields so low that banks are better idea".
The Preliminary Agenda has been posted for Crane's Money Fund Symposium, a conference for money fund and money market professionals and investors. MFS2010 will be held July 26-28, 2010, at The InterContinental Boston. A sample of this year's agenda includes the sessions: Washington & The New Regulatory Regime with ICI's Paul Schott Stevens, "The New Normal in the Money Markets" with Federated's Debbie Cunningham and "Industry Mergers, Consolidation & Outlook with S&P's Peter Rizzo and Wells Fargo's Dave Sylvester. Other sessions include: "Discussing Parental Backing & Bailouts and "Government Support Review: AMLF, CPFF, TMMFG." (See the Agenda here or e-mail Pete for the PDF.) Registration (which is now live) for Crane's Money Fund Symposium 2010 will be $750. Exhibit space is $3,000; and sponsorship opportunities are $4.5K, $6K, $7.55K, and $10K. (Contact Crane for more info.) Our mission is (again) to deliver a better and less expensive conference alternative to money market fund professionals and investors.