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The December issue of our flagship Money Fund Intelligence newsletter, which was sent to subscribers Wednesday morning, features the articles: "Prime, Tax-Ex Assets Bottom; Rising Rates Returning Cash?" which reviews the latest yields, flow data and fund changes; "SSGA's Butler & McCusker on Cash Investing Post Reform," which profiles Yeng Felipe Butler and Pia McCusker on State Street's latest thinking; and "European Money Fund Regs Passed, But Details Murky," which looks at the EU's new money fund reforms. We have updated our Money Fund Wisdom database query system with Nov. 30, 2016, performance statistics, and also sent out our MFI XLS spreadsheet Wednesday a.m. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our December Money Fund Portfolio Holdings are scheduled to ship Friday, Dec. 9, and our Dec. Bond Fund Intelligence is scheduled to go out Wednesday, Dec. 14.
MFI's lead "Prime, T-E MMFs Stabilize" article says, "Prime money market fund assets, which slid $1.1 trillion, or 75% in the 52 weeks through the end of October, have been flat at around $375 billion for 5 weeks straight. Tax-exempt MMF assets too have seen outflows subside, as both savaged segments of the money fund world catch a breather and await a likely Fed hike next week. The return of Prime and the development of alternatives like conservative ultra-short bond funds depends heavily on growing spreads between these and Government products."
It adds, "While it's been a very rough year for Prime, the New Year looks a lot brighter. Yields have already risen slightly in recent weeks. Our Crane 100 Money Fund Index, the average yield of the 100 largest taxable MMFs, is up 2 basis points in November (to 0.30%) and another one in December month-to-date. If, as expected, the Fed moves its target funds rate to a range of 0.5-075% next week, money fund rates will quickly follow."
Our latest fund "profile" interview reads, "This month, Money Fund Intelligence interviews State Street Global Advisors' Senior Managing Directors and Global Heads of Cash Management Yeng Felipe Butler and Pia McCusker. We discuss a number of topics, including finding the right mix of liquidity and return for clients in the new post-reform money fund environment."
The article asks, "How long has State Street Global Advisors been involved in running cash and money market funds?" Butler tells us, "State Street Global Advisors has been managing client cash for nearly four decades. We launched our first prime money market fund in 1988 and have continued to bring new cash solutions to our clients over the years. Today, we provide commingled and tailored solutions to institutional clients around the world through our money market funds, separately managed accounts, cash ETFs, and ultra-short term bond funds."
Our "European Money Fund Regs" article explains, "The European Union agreed to a new set of money market fund regulations recently, which will introduce a hybrid of stable and variable NAV money funds in Europe. The European Parliament's release entitled, "Money Market Funds: breakthrough agreement between MEPs and Slovak Presidency," says, "An agreement on the EU money market funds regulation has been struck by the European Parliament, Council and Commission, after lengthy negotiations, more than three years after the Commission published the original proposal."
It adds, "U.K. Rapporteur Neena Gill comments, "This is one of the most contentious and complex pieces of legislation that has been held up for more than three years. I am delighted we have an overall agreement between Parliament and the Council. I believe this is a win-win deal for both major European MMF sectors, variable and constant net asset value MMFs (VNAVs and CNAVs) respectively."
In a sidebar, we discuss, "Wells and RBC on SIFMA," saying, "Wells Fargo Securities' Garret Sloan writes, "After taking a wild ride over the past few months, the SIFMA 7-day index appears to be finding an equilibrium level in the mid-50s. In December, the index remained relatively uncorrelated with the movement of the Fed funds rate, remaining pinned at 1 basis point for another three months before moving in response to tax-related outflows in March. Previous rate cycles have seen SIFMA move more quickly, though not in a 1-for-1 relationship."
We also do a sidebar, entitled, "JPM: 2017 Outlook Uncertain," which comments, "J.P. Morgan Securities' writes in a new "Short-Term Fixed Income 2017 Outlook" about life after Prime. They tell us, "Normally, these year-ahead outlooks are focused on the future.... Yet as we write this in November 2016, our forecasts are clouded with a level of uncertainty, not only because of the outcome of the US elections but also because there's been a significant transformation in the money markets this past year, leaving many to wonder just how liquidity investors and issuers will behave in the new world absent the large presence of prime MMFs."
Our December MFI XLS, with Nov. 30, 2016, data, shows total assets increased $32.1 billion in November to $2.646 trillion after decreasing $3.1 billion in October and $48.5 billion in September, and increasing $19.3 billion in August and $11.6 billion in July. Our broad Crane Money Fund Average 7-Day Yield was up 1 bps to 0.16% for the month, while our Crane 100 Money Fund Index (the 100 largest taxable funds) rose 2 bps to 0.30% (7-day).
On a Gross Yield Basis (before expenses were taken out), the Crane MFA inched up to 0.50% and the Crane 100 rose 3 bps to 0.55%. Charged Expenses averaged 0.33% and 0.25% for the Crane MFA and Crane 100, respectively (unchanged). The average WAM (weighted average maturity) for the Crane MFA was 35 days (up 1 day from last month) and for the Crane 100 was 36 days (up 1 day). (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
This month, our flagship newsletter Money Fund Intelligence interviews Deutsche Asset Management Managing Director Joe Sarbinowski and Director & PM Geoff Gibbs. We discuss the recent big shift from Prime MMFs into Government funds, and the new frontier of money fund alternatives, including ultra-short bond funds, separate accounts and FDIC insured products. Our discussion follows. (The interview below is reprinted from our November Money Fund Intelligence.)
MFI: How have you been involved in the cash business? Sarbinowski: Our roots hail back to a couple of different firms including the Scudder Kemper, Alex Brown and the Bankers' Trust franchises. There are some legacy funds from those organizations that have made it all the way to today.... I got involved in the business in 2000, so [I've been here] about 16 years now. Gibbs: I started back in ‘96 with the Scudder, Stevens & Clark business, and then we went through the few mergers where I ended up here in New York with Deutsche.
MFI: What is your biggest priority? Sarbinowski: We're pleased to have gotten past October 14 and to have successfully implemented our plan for reform. Really our priority right now is getting out in front of our clients and ... helping them assess the new environment and where to go. I know you're fully aware that $1 trillion has left the prime space for government, which probably exceeded most people's expectations. We believe that some of our clients will be looking for another home at some point, so now we're helping them understand how our platform has changed and how their decisions can affect the type of risk and return they are willing to take going into future.
MFI: What other offerings do you have? Sarbinowski: We have a full range of choices for mutual fund investors and beyond, quite frankly. We've got prime retail, we've got prime institutional -- our VNAV and Daily Assets funds.... We've got government and treasury only, we have retail tax-exempt -- the stable NAV version -- and then a year ago we launched ultra-short funds in our Limited Maturity Quality Income fund and our Ultra-Short Fixed Income fund.... We have our FDIC sweep product, and we're big in separate accounts. That's our complete lineup, offering clients a real wealth of choice.
Gibbs: If you remember last year at this time, projections for how much money would transition were, at the high end of the range, $600 billion. Ultimately, seeing north of $1 trillion dollars move, I think is a testament to the industry how smoothly that transition was and how well prepared all of us were for reform here. It really goes to show all the work that was done behind the scenes, and we all handled it well.
MFI: What's your biggest challenge? Gibbs: I think to the extent that the Fed Repo facility is available and has been a great back-stop of supply ... that's been helpful. I think the bigger challenge really is managing the prime funds in this new environment. Most of the funds are much smaller than they were in the past. So it becomes trying to balance that liquidity versus stability of NAV, while at the same time providing a sufficient amount of yield to really maintain the confidence of our clients and assuage their fears about some of the [reform-related] changes.
Sarbinowski: We're in a unique situation where our VNAV has operated as a T-0, 2a-7 fund for five years. We've been through the Euro crises, the U.S. debt downgrade, and the budget ceiling crises, geopolitical risks and even a Fed hike. So we're fortunate to have good history to share with clients. But now everyone gets to see how these floating funds operate. The challenge is certainly with so much money sitting in government MMFs, working to create that differentiating factor to have clients to do business with us. So we're not just supplying them with a nice-performing government fund, but also bringing value in the consultative process of where to begin, where to take the risks, what sort of wrappers are appropriate for the right type of cash bucketing they're doing. So that's really the challenge now -- to find some new ways to add value.
MFI: What are you buying now? Gibbs: I think when you're looking at the Primes, it really becomes focusing on short maturities and floating rate product. We're looking to demonstrate the stability of the NAV while providing robust liquidity buckets. In terms of what we're not buying, we're cautious on spread risk [and] use of illiquid products in those portfolios. When we're looking at the government funds, we're making use of floaters. There is a lot less product availability there ... you're really talking about agencies and repo, so it does become difficult to differentiate yourself. Some of the challenges there are really managing around late day liquidity, especially giving the new rules around repo reform.... It really just becomes providing liquidity for your clients, providing service, and having good communications with them.
MFI: What about customer concerns? Sarbinowski: They're taking a breather after moving their money into government funds. But there are some that are now saying, 'Let's talk about [options].' We're first seeing it first in the form of separate accounts. The largest cash investors have done separate accounts for many years in a low rate environment to get some extra yield. Now some additional firms are getting a little sharper about their bucketing and what can they term out.... Obviously, Basel III continues to impact them on the banking front. So they turn to us on the asset management side to see what solutions we have.... So regulatory challenges are on their mind, low yields are on their mind.... It's a more complicated story about how to deploy your cash in this new environment.
MFI: Are you seeing fee waiver relief? Sarbinowski: Certainly, last December's Fed hike gave the whole industry some relief, as well as differentiation between the performance and credit versus noncredit. So, a second hike, potentially this December, would be welcome. It will further sharpen that delineation, and any [remaining] waivers ... will be probably be absorbed with that hike.
MFI: What about MMF alternatives? Sarbinowski: We don't see that there's one silver bullet. The old prime funds were wonderful, and they served a lot of needs at once.... On our platform, we do have an ultra-short offering ... our Limited Maturity fund, which is very similar to [the] 2a-7 of old. Then you've got Ultra-Short, which is more akin to what we see bigger clients buying in the form of separate accounts.
Separate accounts are an animal [where] you have to work with investor guidelines.... The big folks have been doing this for a while.... But other investors who may have in the past only done money funds and deposits, they may have to change their investment policies. There definitely are some hurdles in terms of education.... We think the market will eventually come back in a bigger way to credit, taking advantage of some of the spread differentials. It's just a question of what sort of format that will take. We think ultimately it will be a combination of 'all of the above.'
MFI: Tell us about the "offshore" or European business. Sarbinowski: The offshore business continues to be a growth business for us. We manage stable NAV in dollar, euro and sterling.... We continue to be optimistic about the overall offshore universe in money fund land. Asia-Pac and LatAm are two areas that continue to be growth areas for us. We continue to add clients, and that all feeds into our Irish and Luxembourg platforms. Clearly the elephant in the room is pervasive negative rates, which continue to exist in Europe. There [in Europe] it's just a function of where can clients go to have their money with T-0 liquidity that's well diversified with high quality credits? And really the answer to that is money funds. So we've seen an uptick in flows since rates have gone negative in our euro money market fund.
European money fund reform is quite complex. The regulators have come to some sort of agreement on the shape that it will take, but they still have to iron out the details. With an event like Brexit, there are a few greater distractions going on slowing from moving forward. We really don't see, assuming the same sort of implementation time frame we had here in the U.S., any sort of reform striking until either late 2018 or early 2019, at the earliest. So it's business as usual in a fairly good environment for investors with cash offshore.
MFI: What about brokerage sweeps? Sarbinowski: We've seen a shift into government [MMFs] ... but also FDIC [sweep] continues to grow for us at a nice double digit growth rate. I think that's a function of the flexibility that it affords. It allows a little bit more customization by the clearing firm to treat their clients ... while also having the pass through insurance of FDIC. So money has been moving there for our [Insured Deposit Program, or IDP] product for quite some time. We've been operating a multi-bank program for over 10 years and it continues to be a growth area for us.
MFI: What is your outlook? Sarbinowski: We're thankful that clients still continue to recognize the value of the 'homogenization' of 2a-7. It's a standard, it's well-known, [it has] T-0 liquidity, diversity ... it's a very convenient tool that delivers a very decent return for them. So we're pleased all this money remains there. Looking forward, we think that versus when we were in the zero rate environment, we think that this is a very exciting time to be in this business. There's just so much to talk to with clients about and assist them. You can really be quite valuable and deepen the relationship through this consultative process, having them speak with folks like Geoff and his team and helping them understand where to go with their money. This is a big difference from when we were just in the doldrums of waiting for final money fund reform rules.
The November issue of our flagship Money Fund Intelligence newsletter, which was sent to subscribers Monday morning, features the articles: "Post-Reform MMF Era Begins; Prime Outflows Stabilize," which reviews the Oct. 14 transition and latest flow data; "Deutsche's Sarbinowski & Gibbs Thankful for Change," which profiles Joe Sarbinowski and Geoff Gibbs on Deutsche Asset Management's latest fund lineup; and "Focus Turns to Government Money Funds; A Comparison," which looks at the new largest money fund sector. We have updated our Money Fund Wisdom database query system with Oct. 31, 2016, performance statistics, and we also sent out our MFI XLS spreadsheet Monday a.m. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our November Money Fund Portfolio Holdings are scheduled to ship Wednesday, Nov. 9, and our Nov. Bond Fund Intelligence is scheduled to go out Monday, Nov. 14.
MFI's lead "Post-Reform MMF Era" article says, "Money market mutual funds took a bit of a breather following the October 14 implementation of the final round of reforms. The gigantic shift of assets from Prime and Tax Exempt money funds into Government money funds was finalized in the first half of October, though some money continues to trickle out. The focus now is shifting to whether cash will return to Prime or populate a host of alternatives, and how another hike in rates by the Fed in December will impact MMFs."
It adds, "Apart from the giant shift of assets, the transition to adapt to the SEC's 2014 Money Fund Reforms, with their floating (4-digit) NAV for Prime Institutional funds and emergency gates and fees provisions for all Prime and Municipal money market funds, went surprisingly smooth. Prime outflows have slowed to a trickle, and we've even seen several days, including Thursday, with inflows. Also, spreads between Prime and Govt MMFs have widened slightly, and WAMs, particularly for Prime Retail funds, have lengthened."
Our latest fund interview reads, "This month, Money Fund Intelligence interviews Deutsche Asset Management Managing Director Joe Sarbinowski and Director & PM Geoff Gibbs. We discuss the recent big shift from Prime MMFs into Government funds, and the new frontier of money fund alternatives, including ultra-short bond funds, separate accounts and FDIC insured products. Our discussion follows."
The article asks, "How have you been involved in the cash business?" Sarbinowski says, "Our roots hail back to a couple of different firms including the Scudder Kemper, Alex Brown and the Bankers' Trust franchises. There are some legacy funds from those organizations that have made it all the way to today.... I got involved in the business in 2000, so [I've been here] about 16 years now. Gibbs: I started back in '96 with the Scudder, Stevens & Clark business, and then we went through the few mergers where I ended up here in New York with Deutsche."
The "Government MMF" article explains, "Given the massive growth in the Govt money fund space, we thought we'd examine some of the largest funds and issues here. Total Government fund assets -- which include Crane Data's Treasury Retail, Treasury Inst, Govt Retail and Govt Inst categories -- have more than doubled from $1.0 trillion to $2.1 trillion over the past year. Nine out of 10 of the largest portfolios are now Govt funds, versus 3 out of 10 a year ago."
In a sidebar, we discuss, "AFP Crowd Split on Alts," saying, "This year's Association for Financial Professionals' Annual Conference, which took place 2 weeks ago in Orlando, was surprisingly short on money market fund content this year with just two sessions involving cash investing. The first, "Managing Liquidity in a Post-Reform World," was moderated by Benjamin Campbell of Capital Advisors Group, and included Klas Holmlund of Vertex Pharmaceuticals, Kimberly Kelly-Lippert of American Honda Motor Company, and David Miller of Hunt Companies."
We also do a sidebar on "Federated Earnings," which comments, "Federated Investors, the 4th largest manager of money funds, reported its earnings late last month. Their release, "Federated Investors, Inc. Reports Third Quarter 2016 Earnings," shows that lower fee waivers continue to be a bright spot in the otherwise cloudy and rapidly-changing money fund sector."
Our November MFI XLS, with Oct. 31, 2016, data, shows total assets decreased $10.0 billion in September to $2.592 trillion after decreasing $48.5 billion in September, increasing $19.3 billion in August and $11.6 billion in July, and decreasing $13.8 billion in June. Our broad Crane Money Fund Average 7-Day Yield was up 1 bps to 0.15% for the month, while our Crane 100 Money Fund Index (the 100 largest taxable funds) rose 4 bps to 0.28% (7-day).
On a Gross Yield Basis (before expenses were taken out), the Crane MFA inched up to 0.47% and the Crane 100 rose 3 bps to 0.52%. Charged Expenses averaged 0.32% and 0.25% for the Crane MFA and Crane 100, respectively (unchanged). The average WAM (weighted average maturity) for the Crane MFA was 34 days (up 3 days from last month) and for the Crane 100 was 35 days (up 5 days). (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
Following on the heels of our European Money Fund Symposium last month in London (and our Money Fund Symposium this past summer in Philadelphia), Crane Data is now preparing for its next event, our "basic training" Money Fund University. Our seventh annual MFU will be held at the Westin Jersey City Newport, Jersey City, NJ, January 19-20, 2017. Crane's Money Fund University is designed for those new to the money market fund industry or those in need of a concentrated refresher on the basics. The event also focuses on hot topics like money market regulations, money fund alternatives, offshore markets, and other recent industry trends. The affordable ($500) educational conference (see the preliminary agenda here or e-mail us to request our brochure) features a faculty of the money fund industry's top lawyers, strategists, and portfolio managers. (Note: Crane Data would like invite those attending next week's Association for Financial Professionals annual conference in Orlando to stop by Booth #208 to say "Hello.")
Money Fund University offers attendees a 2-day course on money market mutual funds, educating attendees on the history of money funds, the Fed, interest rates, ratings, rankings, money market instruments such as commercial paper, CDs and repo, plus portfolio construction and credit analysis. At our Jersey City event, we will also take a look at some remaining issues involving regulations, and we'll have a mini "Bond Fund University" double segment on ultra-short bond funds.
The morning of Day One of the 2016 MFU agenda includes: History & Current State of Money Market Mutual Funds with Peter Crane, President & Publisher, Crane Data; The Federal Reserve & Money Markets with Joseph Abate, Director, Fixed Income Strategy, Barclays and Mark Cabana, MD, Bank of America Merrill Lynch; Interest Rate Basics & Money Fund Math with Cabana and Phil Giles, Adjunct Professor at Columbia University and, Ratings, Monitoring & Performance with Greg Fayvilevich, Director, Fitch Ratings, Michael Masih, Associate Director, Standard & Poor's Global Ratings Services, and Rochelle Genetti, Managing Director, First American Funds.
Day One's afternoon agenda includes: Instruments of the Money Markets Intro with Teresa Ho, Vice President, J.P. Morgan Securities; Repurchase Agreements with Teresa Ho and Tyler Williams, Associate, J.P. Morgan Securities; Treasuries & Govt Agencies with Sue Hill, Senior Portfolio Manager; Federated Investors and, and Mike Watt, Senior MD, INTL FCStone Partners; Tax-Exempt Securities & VRDNs with Shaloo Savla, Research Analyst, Fidelity Investments; Commercial Paper & ABCP with Rob Crowe, Director, Citi Global Markets, Director, Money Markets, Citi Global Markets; CDs, TDs & Bank Debt with Vanessa Hubbard, Vice President, Wells Fargo Securities and Marian Trano, Senior Vice President and Treasurer, Bank Hapoalim; and, Credit Analysis & Portfolio Management with Adam Ackermann, VP and Portfolio Manager, J.P. Morgan A.M..
Day Two's agenda includes: Money Fund Regulations: 2a-7 Basics & History with Joan Swirsky, Of Counsel, Stradley Ronon, Jack Murphy, Partner, Dechert LLP and Stephen King, Senior Counsel, Perkins Coie LLP; Outstanding Issues with MMF Reforms with Stephen Keen, Senior Counsel, Perkins Coie, Jack Murphy, Partner, Dechert LLP and John Hunt, Partner, Sullivan & Worcester LLP; and, Bond Fund University: Ultra-Shorts with Peter Crane (and a speaker TBD). The conference ends with its annual MFU "Graduation" ceremony (where diplomas are given to attendees).
New portfolio managers, analysts, investors, issuers, service providers, and anyone interested in expanding their knowledge of "cash" investing should benefit from our comprehensive program. Even experienced professionals may enjoy a refresher course and the opportunity to interact with peers in an informal setting. Attendee registration for Crane's Money Fund University is just $500, exhibit space is $2,000, and sponsorship opportunities are $3K, $4K, and $5K. A block of rooms has been reserved at the Westin Jersey City.
We'd like to thank our past and pending MFU sponsors –- BlackRock, Fitch Ratings, Dreyfus/BNY Mellon CIS, Federated, J.P. Morgan Asset Management, Invesco, S&P Global Ratings, Dechert LLP, Fidelity, Morgan Stanley, SSGA, First American Funds/US Bank, INTL FCStone, and Wells Fargo Funds -- for their support, and we look forward to seeing you in Jersey City in January. E-mail Pete Crane (email@example.com) for the latest brochure or visit www.moneyfunduniversity.com to register or for more details. Crane Data is also preparing the preliminary agendas for its new Bond Fund Symposium (March 23-24, 2017, at the Boston Hyatt Regency), and our "big show," Money Fund Symposium, which will be held June 21-23, 2017, at the Atlanta Hyatt Regency.
In other news, Bloomberg writes on the "Conservative Ultra-Short Bond Fund" sector in the article, "Specter of New Threat Emerges in $1 Trillion Money-Fund Exit." Author Liz McCormick writes, "Regulations designed to safeguard the $2.7 trillion U.S. money-market industry threaten to steer cash toward higher-risk alternatives. Investors may respond to the market overhaul that took effect last week by seeking the higher yields of short-term bond funds, say Crane Data LLC, Fitch Ratings and Goldman Sachs Asset Management. In a sign of the segment's appeal, a category that Crane dubs conservative ultra-short bond funds, with a maturity mostly less than one year, has swelled to a 19-month high of almost $31 billion." (See also our latest Bond Fund Intelligence and our Oct. 17 News, "Sept. Bond Fund Intelligence Features Fitch, Fidelity's Doug McGinley.")
The Bloomberg piece continues, "But these funds aren't subject to the same standardization as their money-market counterparts, raising the prospect that investors will be surprised by the degree of potential losses and even run for the exits if values slide. That may undermine some of the benefits from the money-fund revamp, which most firms agree has gone a long way to reducing systemic risks in an industry that helped fuel the financial crisis."
It tells us, "Yet the uninspiring returns on government-only funds may lead investors to seek another destination. The 30-day yield for those offerings, an annualized measure of the period's earnings, was about 0.17 percent as of Oct. 17, compared with a yield of 0.81 percent for Crane's conservative ultra-short bond-fund index. Prime institutional funds yield 0.29 percent on average."
Finally, Bloomberg adds, "For Peter Crane, president of Westborough, Massachusetts-based Crane Data, the risk is that investors lured to short-term bond funds for their relatively higher yield may flee if they see share values slump, as holders of prime funds did in 2008, spurring a broader market disruption. "Investors still haven't been taught the lesson that higher yield or higher return means higher risk," he said. "We've seen this movie before, and every other time in history it ended badly."