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Crane Data, publisher of Money Fund Intelligence, celebrates its 9th birthday this month. As we wrote in our most recent issue of MFI, we'd like to take a moment to review our progress and update you on our efforts, which include growing our conference business and extending our coverage beyond money market funds. Crane Data was launched in May 2006 by money fund expert Peter Crane and technology guru Shaun Cutts to bring faster, cheaper and cleaner information to the money fund space. We began with our MFI newsletter and have grown to offer a full range of daily and monthly spreadsheets, news, database query systems and reports on U.S. and "offshore" money funds and other cash investments. (Note: We also wanted to remind you to make hotel reservations -- we expect the hotel to be sold out soon -- and to register for our upcoming Money Fund Symposium, June 24-26 in Minneapolis, and to start making plans for our European Money Fund Symposium, Sept. 17-18 in Dublin.)
As we first mentioned in our May MFI, our big new product addition over the past year is Bond Fund Intelligence, a monthly newsletter that tracks the bond fund universe, with a focus on the ultra-short and short-term bond fund sector. BFI includes news, features, and performance data on over 300 (and growing) of the largest bond funds and ETFs. We also publish a fund "profile" interview each month with a bond fund portfolio manager. As with MFI, Crane Data offers an Excel "complement" with even more performance, data and rankings, Bond Fund Intelligence XLS. BFI includes our new Crane Bond Fund Intelligence Indexes, which now provide benchmarks for various bond market segments, including a new Conservative Ultra-Short BFI Index, a more focused benchmark for the more conservative funds in the space just beyond money market funds.
The BFI newsletter was launched due to the changing nature of the money fund and cash space. With the SEC's money fund reforms making some aspects of the cash marketplace more restrictive, we saw an opportunity to cover the growing space just beyond money funds, the ultra short and short-term bond fund segment. We listened to feedback from clients and money managers who say that area will be more attractive in an era of money fund reforms and rising interest rates. (Watch for our May issue of BFI later this week, and let us know if you'd like to see the latest edition of BFI and BFI XLS.)
Crane Data President & Publisher Peter Crane comments, "While our first love and loyalty is of course to the money fund segment, our clients -- which now include several hundred asset managers, issuers, dealers, servicers, regulators and investors -- wanted to hedge their bets too and to gather more intelligence on this growing market segment. We look forward to working with readers, bond fund providers and others in building out this new product line. We plan to eventually track Bond Fund Portfolio Holdings and launch a Bond Fund Symposium conference in this sector, though these both will take time."
Crane Data has also continued to see great success in the money fund conference business. Our 7th Annual Money Fund Symposium will take place in Minneapolis, June 24-26, and we again expect to host the largest gathering of cash investors in the world. We're also preparing for our 3rd annual European Money Fund Symposium, which be in Dublin Sept. 17-18, 2015 (the preliminary agenda is now available and registrations are now being taken for this event), and our next Money Fund University, which will be Jan. 21-22, 2016, in Boston.
The past 9 years have brought dramatic change to the money fund industry and no doubt more is yet to come. But money funds continue to hold fast, and we think higher rates will soon bring higher assets. In our MFI update, we show the annual asset totals of money funds against our flagship Crane 100 Money Fund Index (the average of the 100 largest taxable funds). During our first two years, we saw assets increase by over $1.5 trillion and yields drop from almost 5% to under 1%. During the next three years, money fund assets declined by over $1.0 trillion, while yields settled just above zero. The past 4+ years, we've seen both assets and yields virtually flat, stuck around $2.6 trillion and 0.03%, respectively.
As for Crane Data, we continue to grow. We now have 14 employees and topped $1.1 million in annual revenue in 2014. We added a new Editor, Dave Kovaleski, who is now writing much of the commentary, and we continue to rely on our core of veteran employees -- Kaio Barbosa, who oversees our Money Fund Portfolio Holdings collection, and Statistics Editors Diana Bucaro, Natalia Mendonca, and Thereza Alves. We hope to continue to deliver good information at reasonable prices, and we thank you for your continued support! Please let us know if you have any feedback or requests. We're always happy to discuss. Sincerely, Pete Crane
The May issue of Crane Data's Money Fund Intelligence was sent out to subscribers Thursday morning. The latest edition of our flagship monthly newsletter features the articles: "Crane Data Celebrates 9 Yrs., Enters Bond Fund Info Market," which marks our 9th anniversary with a look back at the past year, including the launch of our new endeavor, Bond Fund Intelligence; "Schwab & Latest Fund Co. Changes; SEC Answers FAQs," which examines Schwab's recent update on their money market funds, recaps all of the fund company announcements since the beginning of the year, and looks at the SEC's response to reform FAQs; and "ICI Fact Book Shows Flat Is New Up for Money Funds," which reports on the fund flows and other trends from the ICI's 2015 Investment Company Fact Book. We have also updated our Money Fund Wisdom database query system with April 30, 2015, performance statistics, and sent out our MFI XLS spreadsheet earlier this a.m. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our May Money Fund Portfolio Holdings are scheduled to go out on Monday, May 11, and our May Bond Fund Intelligence is scheduled to ship Thursday, May 14. Also, we mention the news of IMMFA's new Chair below.
The lead article in MFI on Crane Data's 9th anniversary says, "Crane Data, publisher of Money Fund Intelligence, celebrates its 9th birthday this month. As we've done in past May issues, we'd like to take a moment to review our progress and update you on our efforts, which include extending our coverage beyond money market funds. Crane Data was launched in May 2006 by money fund expert Peter Crane and technology guru Shaun Cutts to bring faster, cheaper and cleaner information to the money fund space. We began with our MFI newsletter and have grown to offer a full range of daily and monthly spreadsheets, news, database query systems and reports on U.S. and "offshore" money funds and other cash investments."
It continues, "Our big new addition over the past year is Bond Fund Intelligence, a monthly newsletter that tracks the bond fund universe, with a focus on the ultra-short and short-term bond fund sector. BFI includes news, features, and performance data on over 300 (and growing) of the largest bond funds and ETFs. We also publish a fund "profile" interview each month with a bond fund portfolio manager. As with MFI, Crane Data also offers an Excel complement with even more performance, data and rankings, Bond Fund Intelligence XLS. BFI includes our new Crane Bond Fund Intelligence Indexes, which now provide benchmarks for various bond market segments, including a new Conservative Ultra-Short BFI Index, a more focused benchmark for the more conservative funds in the space just beyond money market funds."
In our middle column, we look at how Schwab and others are adapting to SEC reforms, as well as the SEC's FAQs. It reads, "Charles Schwab Investment Management became the latest money market fund complex to issue an update on how it plans to adapt to the SEC reforms. Since the beginning of the year, 10 of the 20 largest money market fund managers have announced changes or updates to their MMF lineups. In this article, we not only review Schwab's plans, but we also recap the changes that have happened so far in 2015. Also, the SEC came out with answers to Frequently Asked Questions about MF Reforms, though these mainly dealt with very technical and minor issues. We also briefly review these."
It explains, "We have reported on all of the announcements that have come to our attention over the past several months. Of the 20 largest money fund complexes, half have issued updates, including the four largest -- Fidelity, JP Morgan, BlackRock, and Federated. Here is a look at the changes (and dates) announced so far." (We also list the 15 largest managers with their assets by type in the article.)
The third article says, "ICI's new "2015 Investment Company Fact Book" revealed some interesting trend data on money market fund flows in 2014. For instance, despite landmark SEC reforms, money funds saw overall inflows in 2014. What's more, institutional MMFs, which were hit hardest by reforms, saw significant inflows, while retail funds saw outflows. In addition, corporate investment in money fund assets was stable last year."
Crane Data's May MFI XLS, with April 30, 2015, data shows total assets plunging in April, the fourth monthly drop in a row, down $89.3 billion to $2.487 trillion, after falling $20.9 billion in March, $1.6 billion in February, and $44.6 billion in January. Our broad Crane Money Fund Average 7-Day Yield and 30-Day Yield remained at 0.02%, while our Crane 100 Money Fund Index (the 100 largest taxable funds) stayed at 0.03% (7-day and 30-day). On a Gross Yield Basis (before expenses were taken out), funds averaged 0.15% (Crane MFA, up from 0.14 last month) and 0.18% (Crane 100, same as last month) on an annualized basis for both the 7-day and 30-day yield averages. Charged Expenses averaged 0.13% (unchanged) and 0.15% (unchanged) for the two main taxable averages. The average WAMs for the Crane MFA and the Crane 100 were 39 and 41 days, respectively, both down 2 days from last month. (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
In other news, the U.K.-based Institutional Money Market Fund Association confirmed Reyer Kooy as the new Chair of IMMFA. The statement reads, "Reyer is head of Institutional Liquidity Management, EMEA and Asia business, for Deutsche Asset & Wealth Management (DeAWM) and has been with Deutsche for nearly 5 years. Prior to joining DeAWM, Reyer was head of EMEA for a similar business at Credit Suisse, and also worked at JP Morgan for 12 years. Reyer has represented DeAWM on the Board of IMMFA since June of 2012 and also acted as its Treasurer.
Outgoing Chair Jonathan Curry of HSBC Global Asset Management was thanked for his 3 years' service as Chair of IMMFA, which followed an earlier 3 year spell as Chair of IMMFA's Investment Committee. Curry comments, "The past 3 years have been challenging for money market funds. I believe IMMFA has been instrumental in ensuring that the views of the investors and industry have been heard. There is still work to do, but we look forward to continuing the Association's work in this key area, supporting our Members."
Today, we excerpt from the April issue of Crane Data's newest publication, Bond Fund Intelligence, which tracks the bond fund marketplace with a focus on the ultra-short and most conservative segments. The article says: Our April Bond Fund Intelligence "profile" interviews `Putnam Investment's Portfolio Managers Joanne Driscoll and Michael Salm, who is also Co-Head of Fixed Income at the firm. Driscoll and Salm run the $2.2 billion Putnam Short Duration Income Fund, one of the largest funds in our Conservative Ultra Short Bond Fund universe. They talk about the importance of differentiating between various types of Ultra Short Bond Funds and why this niche is poised for growth in an environment of rising rates and more regulations.
BFI: How long have you been involved in this space? Driscoll: I have been at Putnam for almost 20 years and currently oversee the short-term liquid markets team where I'm responsible for all of our front-end strategies. Putnam launched Short Duration Income Fund in October 2011 -- with Mike and I serving as the lead managers. In 2009, we looked at the changing regulatory environment for money funds, driven by the pending amendment to SEC Rule 2a-7. While money funds were forced to shorten their investments, issuers were being told by regulators that they needed to become less reliant on the front end and extend the duration of their debt. So, our goal in launching this fund was to leverage the changes in money funds and the opportunities that were created in the market by this change. We felt this would create a demand for a fund just outside of 2a-7, but something more conservative than a short term bond fund.
Salm: During my 18 years at Putnam, I have focused quite a bit on structured products, mortgages in particular. Over time, I have worked a lot on liquid markets in general, focusing on interest rates and volatility, as well as our views about the Fed. In thinking about this strategy, there was a lot of overlap in using our expertise on the front end of the curve and in using our expertise just beyond the traditional 2a-7 venue. We wanted to leverage this very interesting combination of investment processes that you don't necessarily see blended together in normal fund structures.
BFI: How has the Short Duration Income Fund been received? Driscoll: The fund has grown to about $2.2 billion in assets under management. The objectives of our fund are capital preservation and income maximization. Our process is primarily built around the best ideas of our credit team, which focuses on alpha generation within a host of areas. We believe that prudent short term investing requires relentless focus on credit quality and risk management. Due to the nature of the fund, we focus on credit fundamentals and the risk-return trade off. Something that really differentiates Putnam in this space is the way our fixed income team works: We can leverage the entire research team; our analysts cover the sectors across all asset types -- high yield, high grade, money markets, and munis in some cases. With our broader coverage, we can put an intense focus on credit analysis.
We have found that the fallout from the financial crisis has made the ratings agencies reactionary and that impacts many issuers. While our analysts view some of these companies to be either equal to or stronger than prior to the downgrade, due to the ratings requirements of 2a-7, they cannot be purchased by money funds, even though internally we feel that they would be appropriate. These institutions are attractive purchases for Putnam Short Duration Income Fund and add some good yield to the portfolio.
There's a big difference between our fund and our peer group. Putnam Short Duration Income Fund is generally higher quality than many of its peers. We don't buy below investment grade, so we don't have high yield or floating rate bank loans like you see in some competitors. We limit our investments in the low triple-B category because we're trying to minimize the volatility in this fund as much as possible. The reception to the fund has been very positive. We find a lot of investors are challenged by the low level of interest rates and the new 2a-7 amendments. We see more and more interest in the fund because they are looking for products that can add incremental yield over a money fund with low NAV volatility.
BFI: What are the challenges for this fund? Driscoll: For us, it's making sure that financial advisors understand that this is not a money fund or a cash alternative. Prior to the crisis, many firms sold cash alternatives that behaved and looked more like a short term bond fund, and those outcomes, as we know, weren't always good. We spend a significant amount of time educating our financial advisors on the strategy and the risk-return tradeoff, so there are few, if any, surprises. We've seen a large amount of variability in this peer group, so we want to make sure the advisors understand what this fund is.
Salm: In fact, we're very sensitive about distinguishing ourselves so that people know that this category itself can be very heterogeneous. Don't mistake us in any way, shape, or form as a money market fund. We think there's a really good space between the ultra-short bond fund and money market fund categories, which is where the Short Duration Income Fund resides. The fund has been able to meet its objective in the last three years, delivering a high degree of capital preservation and a consistent return.
Watch for more of our latest BFI profile in coming days, or contact us to see the latest issue of our Bond Fund Intelligence. (BFI is $500 a year, or $1,000 including our BFI XLS spreadsheet.)
The latest issue of our flagship Money Fund Intelligence newsletter features the article, "Wells Fargo's Weaver Says Clients Still Want Yield Too," which profiles Wells Capital Management's new head of money market funds, Jeff Weaver. We reprint our Q&A below... When Dave Sylvester, the long-time head of money market funds at Wells Fargo, announced his retirement at the end of 2014, the reins were handed over to Jeff Weaver, who now wears two hats. Weaver, the head of Wells Capital Management's short-duration team, also become head of the money market fund team effective January 1, 2015. We sat down with him to get his thoughts on not just money funds, but on separate accounts and the short‐duration bond fund space. He also discussed how Wells is evaluating its money fund lineup to prepare for the upcoming rule changes.
MFI: How long have you been involved in the money fund space? Weaver: Wells Fargo has been offering money market funds for 30 years. The oldest fund is the Wells Fargo Advantage Treasury Plus Money Market Fund, which has an inception date of Oct. 1, 1985. Our funds and our talent are really the result of various mergers and acquisitions. Currently, we're the 9th largest money fund provider with more than $112 billion. As for me, I joined the firm in 1994. I started my career at Bankers Trust in 1991. For the majority of my career I have been involved in the short duration and money market space. Since 2002, I've overseen the short-duration fixed-income team at Wells Capital Management. My team specializes in managing separate accounts for corporations, municipalities, and other institutional accounts. Our clients typically have large exposures to money market funds and deposits, but they also look to separate accounts and short‐term bond funds to add diversification, customization, and yield.
There's a lot of cooperation and coordination that goes on between the short duration fixed-income team and the money market team. Matt Grimes and his group of analysts are the primary taxable credit research resource for both of these teams. In the past when Dave [Sylvester] headed up money funds, our teams were very much aligned, much like they are today. Over the years, he's been a great advisor and mentor. Today, I'm working very closely with a tremendous core of senior fund managers that includes Laurie White, Mike Bird, Jim Randazzo, Vlad Stavitskiy, and our head of short‐duration municipal credit research, Ken Anderson.
MFI: What is your biggest priority now? Weaver: Our biggest priority is -- and has always been -- our clients. We want to ensure that we are providing them with the best solutions for their liquidity management needs. We aim to offer liquidity and preservation of capital while maintaining a stable NAV. But certainly, we do all of this against the backdrop of money market reform, as the new rules are officially coming into place in October 2016. Here at Wells Fargo, we have a large team dedicated to complying with these new rules with members from operations, fund administration, IT, portfolio management, legal, compliance, and sales. From the operation side, these new rules will take a tremendous effort to implement. When looking at money fund reform through a portfolio management lens, however, the news rules won't prompt a dramatic change from what we've done before. For example, consider our government funds -- we've always complied with them being at least 99.5% invested in government securities.
MFI: Can you tell us about supply? Weaver: We are seeing a consistent lack of supply. Money fund reform is practically at odds with the increased bank regulations we have seen put into effect since the financial crisis in 2008. Money funds rely on extremely short-term funding. Yet, banks are being pressed to move away from short-term debt and to issue longer-term funding. This lack of supply is consistent when you look across each type of money fund (prime, municipal, government). For example, much of the issuance that is available to prime funds is bank originated, creating an endless supply and demand struggle. [We see this], too, in government funds. Bank funding via repurchase agreements comprises a major asset class in government money funds. Also impacting supply is the increase in demand of bills. Banks now are required to hold more high quality liquid assets (HQLA) so bank demand for bills is increasing. This all adds up to a big challenge when managing money funds today.
MFI: Will you make any lineup changes? Weaver: We remain committed to offering retail and institutional prime, government, and municipal funds -- particularly if that's what our clients want -- and we believe they do. Many of our clients are in a wait-and-see mode until that October 2016 deadline approaches. Right now, we're evaluating our product lineup. We're speaking with clients with the goal of developing product solutions that best meet their needs. Our client base is largely institutional -- 90% institutional versus 10% retail -- so that is always front of mind as we're making these changes. Once we finalize a plan of action, we will present it to our Funds' board. We will not make any announcements until the board has seen and approved those changes.
MFI: What concerns are you hearing? Weaver: When the rule changes were first announced, clients initially were quite concerned about the floating NAV. There's still some concern about how that's going to work for same day settlement and sweep type mechanisms, but not as much as before. Clients remain concerned about the capital preservation portion of a variable NAV, although we believe that they will find the NAV changes to be negligible. Lastly, our clients are now having more of a concern around fees and gates. We continue to keep them apprised of our portfolios and regulatory matters through our monthly commentary and education primers.
MFI: How have you handled fee waivers? Weaver: Fee waivers are definitely impacting us, our competitors as well, in this low interest rate environment. We've been waiving fees now for some time, yet we remain convinced that money market funds are an important investment option for our clients. We believe fee waivers to be a temporary factor which will be best solved by an increase in interest rates. Generally speaking, institutional fund yields will react more quickly to increased rates because there are a lot less waivers involved.
MFI: Are you seeing interest in "enhanced cash"? Weaver: We always advise our client to tier their liquidity management strategy. Many of our clients in the money fund space are already customers of our enhanced cash and short-term bond offerings. It certainly is a compelling time to consider other options other than money funds, and that's one of the reasons we have aligned our money market fund and short duration capabilities. In short duration fixed-income funds and separate accounts we have over $60B in assets -- about $40B of that is in separate accounts while the remainder is in ultrashort and short‐term bond funds.
In the ultra‐short space, we have four differentiated offerings -- the Adjustable Rate Government Fund, the Ultra Short-Term Income Fund, the Ultra Short-Term Municipal Income Fund, and the one we get really excited about is our Conservative Income Fund. We feel like it is a natural extension for money fund customers. We launched the Conservative Income Fund in 2013, and utilized the separate account team's track record. The fund has a one-year maximum average duration, and a limit of 3 1/2 years' duration for any one security. Securities purchased are limited to an A-rating or better and are diversified between money market securities, governments, corporate bonds, and asset-backed securities. The fund was designed to look a lot like the institutional investment policies that we've become quite accustomed to seeing over the past three decades. We think that the Conservative Income Fund is a low volatility NAV option, and an extension beyond the money market fund universe that allows clients to pick up additional yield. It can perhaps be a solution for the next step beyond money market funds.
MFI: Tell us about separate accounts. Weaver: The benefits of using separate accounts are that you can get beyond the money market universe and pick up additional yield, but also you have the ability to customize to your preferences and cash flows. We can customize a separate account to reflect each customer's unique return objectives, risk tolerance, biases, and cash flow needs. We manage separate accounts that range from money market fund-like accounts out to benchmarks that are in the one-to-five-year range ... to pick up the additional yield.
We refer to separate accounts just beyond money market funds as "enhanced cash." They tend to have portfolio durations less than one year and keep their maturities at three years or less. They tend to be invested in single-A or better credits although increasingly we've seen clients willing to go lower in credit quality. That's why we created the Conservative Income Fund; it's representative of those enhanced cash separate accounts. We also offer products in the limited duration space. These tend to have durations right around the two‐year mark. We have many variations of these in the separate account side, in addition to our short‐term fund offerings, the Short‐Duration Government Bond, Short‐Term Bond, and Short‐Term Municipal Bond funds.
MFI: Are you launching any new products? Weaver: We're certainly aware of the 60‐day [maximum maturity] money fund option. We have not ruled out anything. We'll certainly consider it. If we feel like that is what is going to help our clients the most, then we will look to pursue it. However, we do get concerned about supply, and wonder if the 60-day fund is going to offer the yield that clients want given the supply/demand dynamics we just discussed. In the end, clients want liquidity, they want capital preservation, but they want yield as well. That's why you haven't seen a shift away from prime funds yet, because for the time being they can continue to earn the additional yield in institutional prime funds.
MFI: What is your outlook for rates? Weaver: We expect the Fed to raise rates this year albeit at a slower pace than we've been accustomed to seeing in previous tightening cycles. The March FOMC meeting, despite the removal of "patient," had a very dovish tone to the comments and perhaps that pushes off the first increase to later in the year. Now, the increased demand for government securities -- not only from a shift from prime to government, but also from banks with their increased HQLA holdings -- could cause the spread between prime and government to increase. Where we are today with government vs. prime, it's only a modest pickup in yield. But it's quite possible that in the future we could see spreads of 25, 40, or even 50 basis points. All of a sudden, it becomes a much different decision for our clients and, at that point, prime funds could be quite attractive.