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Thank you to all who attended and supported Crane's Money Fund Symposium last week in Minneapolis! (We had a record 502 attendees.) The conference binder, recordings and Powerpoints are now available to attendees and to Crane Data Subscribers at the bottom of our "Content" page. Watch for excerpts and coverage of the sessions in coming days on www.cranedata.com and in the July issue of our Money Fund Intelligence newsletter. Our next event is European Money Fund Symposium, Sept 17-18 in Dublin, our next "basic training" Money Fund University is Jan. 19-20 in Boston. Next year's Money Fund Symposium will be in Philadelphia, June 22-24, 2016. Also, in today's "News," we excerpt from our latest Bond Fund Intelligence, Crane Data's new publication focusing on the bond fund and conservative ultra-short bond fund marketplace. (Contact us to see the latest issue and our BFI XLS "complement" or to subscribe. BFI is $500 a year, or $1K including BFI XLS.)
The June issue of our new Bond Fund Intelligence newsletter features a profile of Gregory Nassour, Senior Portfolio Manager at Vanguard Investments. Nassour manages the new Vanguard Ultra Short Term Bond Fund, which launched earlier this year. Nassour tells us about the important gap that this new fund fills in the Vanguard lineup and why the space between money market funds and short term bond funds is so critical for investors in this market. As Nassour says, it's all about giving investors choices. Below, we reprint our latest BFI interview.
BFI: How long have you managed funds? Nassour: I've been with Vanguard since 1992 and I've been within the fixed income group since 1994. I'm principal and senior portfolio manager within the group. I co-head all of our actively managed investment grade corporate bond portfolios. I'm portfolio manager on the Ultra Short Term Bond Fund (along with David Van Ommeren), the Short Term Investment Grade Portfolio, the Intermediate Term Investment Grade Portfolio, and the Long Term Investment Grade Portfolio.
BFI: How have Vanguard's short term products evolved? Nassour: The oldest one we have is our Short Term Tax Exempt Portfolio which started back in 1977. On the taxable side, the Short Term Investment Grade portfolio started in October of 1982. When you look at the whole gamut, Vanguard runs a lot of short term bond portfolios. We have a Short Treasury, a Short TIPs, a Short Term Federal Portfolio, Short Term Investment Grade, a Short Term Government Bond Index Fund, a Short Index Fund, a Short Corporate Index Portfolio, and a Limited Tax Exempt Fund.
BFI: So the new Ultra Short Term Bond Fund fills a gap in the lineup? Nassour: Exactly. We have an equivalent short term tax exempt portfolio, but we did not have one on the taxable side. So this is basically to fill out our fund lineup. Our Short Term Investment Grade portfolio is right around two and a half years duration. If investors wanted to go shorter, they had to go to our money market portfolios, so we wanted to fill that gap. The Ultra Short Term Bond Fund has a one year duration and that's going to be its home. The biggest challenge right now in this space is yield; hopefully this will be short lived. It's important to point out that it's not a money fund. It has a variable rate NAV, so if rates go up, prices will go down on this particular bond fund. We've made it very clear, not only on all of the PR that we did, but to all of our clients who are considering the product that this is an extension of our bond fund lineup.
BFI: How has the fund been received? Nassour: One of the neat things about this portfolio launch has been its consistency. This fund is just under $230 million in assets right now and the cash flow has been very consistent. Overall, Vanguard is great at keeping hot money out of the portfolios. We have policies in place to make sure that doesn't happen so that we can protect the current fund holders. That's a true benefit of the portfolios here; money tends to be sticky. That's great from the shareholder standpoint and it helps us manage the portfolio much better.
BFI: What is the investment strategy? Nassour: About 25% of the portfolio will look similar to the securities we would hold in a money fund. The rest of the portfolio has around 25% in corporate bonds, 25% to 30% in asset backed securities -- mostly high quality AAA auto loans and credit cards. There will be a small amount of CMBS, mostly the triple-A enhanced tranches. So the portfolio is very conservative. It has 10% Agency bullets and about 10% Treasuries. Yes, it has some money market securities in it, but I look at it as more closely related to the Short Term Investment Grade Portfolio -- just a little bit more conservative. We know that investors want a little more yield than money market funds because money market funds are not yielding anything. At the same time they're not in a longer duration portfolio where they're worried about a rate rise.
BFI: Are there concentration limits or diversification requirements? Nassour: We are going to keep this portfolio right around the one year duration. One of the hallmarks of Vanguard is, we give you exactly what the fund says it is going to be. For example, a long term investment grade fund is never going to become an intermediate fund because rates are going to rise, the inter-mediate funds are not going to shorten up to where it becomes a short term fund, and on down the line. This fund is going to be right around one year duration. It will give shareholders some decent current income. Right now the SEC 30-day yield is 65 basis points yield to maturity. The duration is not going to fluctuate too much up or down from that one year.
We offer enough funds that we give the investors the ability to choose what they want. If you want a Treasury fund, we have short, intermediate, and long Treasury funds. If you want an investment grade fund we have short, intermediate, and long investment grade funds. We give investors choices and we stay exactly within what the portfolio says it's going to be. In terms of concentration limits, all of our investment portfolios are highly diversified. If it is a lower quality security like a triple-B, we wouldn't own more than 25 basis points exposure in the portfolio. If it's single-A, we might hold up to 50 basis points in the security, and at AAA obviously we can hold more.
BFI: Can you invest in any junk or any below investment grade? Nassour: All of our investment grade portfolios have the ability to go up to 5% in high yield securities -- this way, in case securities get downgraded by the rating agencies we're not forced sellers and we can sell when the time is right. But we do not plan on investing in the high yield sector as a strategy in [this fund] at this time. Even in our Short Term Investment Grade Portfolio we're only around 1.25% of high yield exposure. But in this fund it is currently zero.
BFI: What types of investors are using it? Nassour: We've been looking at the behavior of our investors, and we have found a lot of investors moved out of money market funds and into this particular fund. I think that's just a yield play. Yields are so low in the money market space that they wanted to get a little bit more out of their money so they moved into this fund. And that's what we thought would happen. Certainly some investors moved down from short term investment grade into this fund just to get a little bit shorter duration in case rate rises. From a shareholder perspective, if they have a long term investment plan and they're dollar cost averaging into the funds, then yes, when interest rates go up, bond fund prices will go down. But as you continue to buy, you'll be buying at yields that will be higher and higher in the portfolio and you'll be buying the fund at a slightly lower price.
BFI: What is your outlook for rates? Nassour: We believe the Fed is going to move, probably in 2015, in a more gradual pace, so we don't think it's going to be a real shock to the portfolio. We don't think it's going to be a straight line -- they'll probably pause along the way to take a look at how the economy is performing. I think this fund will actually fare pretty well in that sort of environment. As rates slowly begin to rise, we'll be able to invest in product that will have a slightly higher yield and because it will be slow, it'll be able to absorb the rate hike. What investors need right now is yield. They're not making anything on money funds, short term yields are still not exceptional, and everyone can do with a little bit more income.
BFI: Are there any lessons to be learned from past rate hike cycles, like 1994? Nassour: I think the Fed learned a lot during that period. If you get behind the curve, then you wind up with a 1994 scenario where you're just jumping too quickly, in fifty basis point increments. They don't want to do that, but they also don't want to go too slow either. We're in an economy now where inflation is not rearing its ugly head. We're not getting macro-economic data that is fantastic; we're just muddling through. The Fed is very aware of that environment, so I do believe they're keeping that front and center in terms of how they're going to proceed with the rate rise. It will be painful on the way up, but when rates normalize, it's definitely a longer term positive for investors. Investors are really feeling the pain of low yields, especially those who are either nearing retirement or in retirement. From that standpoint, a higher rate environment will certainly be better.
BFI: What is the future of ultra short bond funds in general? Nassour: One of the lessons that a lot of investors learned, especially during the crisis, is the importance of having a balanced portfolio -- money funds, bond funds, equities. So bond funds are going to be very important. In terms of the future of ultra short term bond funds, they're going to have a place because investors have different needs for their allocations.
The June issue of Crane Data's Money Fund Intelligence was sent out to subscribers Friday. The latest edition of our flagship monthly newsletter features the articles: "More Change: Federated, FAF, Wells; Private Fund Options," which looks at recent MMF lineup changes from 3 major fund managers and examines "Private" funds; "Northern Trust's Peter Yi on Reforms; More Than MMFs," a profile of Northern's Peter Yi, who talks about responding to reforms and other topics; and "JPM Cuts Back on Triple, 'AAA' Ratings; Rated Funds," which reports on JP Morgan's decision to streamline its AAA rated money market funds. We also updated our Money Fund Wisdom database query system with May 31, 2015, performance statistics, and sent out our MFI XLS spreadsheet late last week. (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 tomorrow afternoon, June 9, and our May Bond Fund Intelligence is scheduled to ship Friday, June 12.
The lead article on "More Change" says, "Since our last edition of MFI, we've had several more money fund managers announce changes to their lineups, including Federated, Wells Fargo, and U.S. Bank's First American Funds. Fund companies continue to keep their options open by offering all types of funds, they continue to slowly declare funds as retail or institutional, and they also continue to explore alternatives like short maturity funds, private funds, and separate accounts. We briefly review the latest strategies below. Federated's most recent set of fund changes, announced yesterday, categorize a number of funds as "retail" funds and streamline its product line by merging 7 funds. Once these mergers are completed, Federated will offer 6 Prime Retail and National Municipal funds." (See Friday's News, "Federated Announces Retail Money Fund Plan, Streamlines MF Lineup".")
MFI continues, "The 10th largest MMF manager, Wells Fargo, also outlined which funds will be classified as Retail recently. Wells Fargo Advantage MMF ($2.7 billion) will be Prime Retail, and Wells Fargo Advantage California Municipal ($1.0B), Advantage Muni ($1.5 billion), and Advantage National Tax-Free ($2.6 billion) will be classified as Muni Retail funds. It also will designate Wells Fargo Advantage Cash Investment ($11.1B) and Heritage ($41.0B) as Prime Institutional, while Municipal Cash Management ($1.2 billion) will float as a Municipal Institutional fund.... First American Funds also said last month that it won't impose gates or fees on its Government MMFs once SEC reforms go into effect. In an update, Lou Martine, Senior Managing Director, Head of Distribution at US Bancorp Asset Management, (which manages the First American Funds) elaborated further on the firm's post-reform plans, including the possibility of Private and 60-day max maturity funds."
In our middle column, we profile Peter Yi, Head of Short Duration Fixed Income at Northern Trust <b:>`_ who discussed how his firm is responding to money market reforms and the growing interest in ultrashort bond funds. It reads, "MFI: How long have you managed cash? Yi: We've been managing money market funds since the 1970s, when we created our first cash sweep vehicle in our trust department. We've been doing this for a long time and have demonstrated a commitment to the money market business. We view cash management to be a flagship capability and a product that caters incredibly well to our institutional asset servicing business and our wealth management franchise. Right now we're managing about $235 billion in assets across various money market funds and short duration products and strategies. Of that $235 billion, about $85 billion is in money market funds. The remainder is in STIFs, "sec lending" reinvestment vehicles, ultra short fixed income strategies and separately managed accounts. What resonates most with investors across all these strategies is our conservative investment philosophy that emphasizes credit research and risk management."
It continues, "MFI: What is your top priority right now? Yi: Both internally and externally, I'm spending an enormous amount of time focusing on money market reform. Without a doubt, our number one priority is to focus on our investors and find the right solutions for them as the reforms take effect. We have the benefit of a reasonably long compliance period for the new structural changes for certain types of money market funds. Our message to investors is that we believe that this is enough time for everyone to thoughtfully assess their options and not react in a disruptive, knee-jerk manner. It's very valuable to engage with our money market investors, observe reactions to these changes, and think about what we can do to address their liquidity needs in this changing industry. It's also especially important to ensure that our investors have a voice in our product evolution. Aside from the regulatory debates, I'm spending a lot of strategic focus on our ultrashort fixed income product offerings."
The third MFI article says, "JP Morgan Asset Management is streamlining the number of 'AAA' ratings on its money market mutual funds, removing ratings on a number of funds that previously had multiple triple-A's. The ratings removals include funds rated 'AAAm' by S&P and 'Aaamf' by Moody's and involve U.S. money funds, as well as "offshore" Luxembourg-domiciled money funds. (It also recently added a new ultra-short "offshore" money fund and got this triple-A rated.) On the changes, JP Morgan Asset Management's John Donohue, CEO of Investment Management Americas says, "The three major NRSRO's views of credit and risk management have diverged significantly over the past few years and have imposed differing investment requirements on rated money market funds. Our request to remove these ratings follows an ongoing global strategic review of all of our ratings across the J.P. Morgan range of money market funds." (See our May 20 News, "JP Morgan Streamlines AAA Ratings on Money Funds; Lux Current Yield" for more.)
Crane Data's June MFI XLS, with May 31, 2015, data, shows total assets gaining in May by $26.8 billion to $2.514 trillion, the first positive month of 2015. The first four months of the year, assets were down -- by $89.3 billion in April, $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 both 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, unchanged) and 0.19% (Crane 100, unchanged) on an annualized basis for both the 7-day and 30-day yield averages. (This is up 2 bps from gross yields of 0.13% and 0.17%, respectively, at the start of the year.) Charged Expenses averaged 0.14% (up from 0.13%) and 0.15% (unchanged) for the two main taxable averages. The average WAMs for the Crane MFA and the Crane 100 were 38 and 40 days, respectively, both down 1 day from last month (and down from 40 and 43 days, respectively, at the start of 2015). (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
The May issue of our new Bond Fund Intelligence publication features Goldman Sachs Asset Management's John Olivo, head of GSAM's short duration strategies within the firm's Global Liquidity Management group. A GSAM veteran of nearly 20 years, John is responsible for overseeing the management of approximately $45 billion in short duration strategies. Our discussion covers the challenges of a low-yield environment, the opportunities for short duration strategies going forward, product development and more. Below, we rerun the first half of the Q&A that first appeared in the latest BFI.
BFI: How long have you been running short term bond funds? Olivo: It's been almost 25 years since we launched our first short duration mutual fund, the Short Duration Government Fund. Today, we offer a range of innovative strategies and support our clients with deep insight, robust risk management and an extensive liquidity management platform. As one of our flagship products, we believe the Short Duration Government Fund offers a very clear illustration of all these features and of the strength of our platform overall. In addition to our funds, GSAM has been running separately managed accounts (SMAs) in the short duration space for more than two decades.
BFI: Are you looking at launching new products? Olivo: GSAM continually reviews its short duration product suite. Over the years, we have adapted our offerings according to investor demand. We've also sought out product gaps which we think we can fill. In both cases, GSAM's goal has been to provide the right solutions for clients, and to strive to meet investor needs in every type of environment. For example, GSAM recently launched an ultra-short duration mutual fund in preparation for money market fund regulatory reform. That was a case where both investor demand and changes in the marketplace convinced us to act.
We also run short duration strategies which derive their primary sources of alpha in innovative ways -- for instance, from a variety of sectors, specifically corporate or securitized products, and in multiple currencies. That was a case of meeting client needs. Another example is the High Quality Floating Rate Fund. This is one of the few floating rate funds that does not take any credit risk, focusing primarily on floating rate securitized products. GSAM believes this approach will resonate with investors in a rising rate environment.
BFI: Any plans for ETFs? Olivo: ETFs have seen explosive growth, and we think they are one of the more innovative product types to come onto the scene the last couple of years. We are always watching the short duration and money market space across product types. At this point, however, we have yet to launch anything.
BFI: What is the biggest challenge for short duration funds today? Olivo: Achieving yield continues to be the major challenge. As you know, today's low interest rate environment is a persistent, pervasive feature of the market. Short duration mutual funds do offer some flexibility as they can invest in longer dated securities and hedge away the unwanted duration risk, but our strategies are subject to the same interest-rate constraints which face every investor. What's more, the funds invest primarily in high quality, short duration assets, which aren't known for their high yields. As a result, offering an attractive yield has been the biggest issue for the entire short duration universe.
BFI: How do short duration investment strategies differ from money funds? Olivo: Generally, there's enough differentiation between short duration funds and money market funds. The duration on some of the short duration strategies are shorter than a year, but you're buying more traditional fixed income securities. For example, in the High Quality Floating Rate fund, we are purchasing longer duration floating rate products in both the agency mortgage and asset backed securities area. In the Enhanced Income fund, we are purchasing high quality corporates -- with a final maturity no greater than 5 years. That is the primary source of excess return in that strategy. Therefore, there is enough differentiation that you are not crossing over into the 2a-7 world very often. (Watch for the second half of our interview tomorrow, or contact us for the latest issue of our Bond Fund Intelligence.)
Crane Data's latest Money Fund Intelligence Family & Global Rankings, which rank the asset totals (and break out by type of fund) and market share of managers of money market mutual funds in the U.S. and globally, were sent out to subscribers late last week. The May edition, with data as of April 30, 2015, shows asset decreases for almost all of money fund complexes in the latest month. The vast majority of managers also show losses over the past three months. Assets declined by $89.0 billion overall, or 3.6%, in April; over the last 3 months, assets are down $112.5 billion, or 4.3%. But for the past 12 months through March 31, total assets are flat -- down just $1.3 billion, or 0.1%. Below, we review the latest market share changes and figures. (Our domestic U.S. "Family" rankings are available in our MFI XLS product, our global rankings are available in our MFI International product, and the combined "Family & Global Rankings" are available to our Money Fund Wisdom subscribers.)
The only gainers in April were First American and Oppenheimer, rising by just $261 million and $713 million, respectively. American Funds was flat, and everyone else was down. Morgan Stanley, Franklin, Vanguard, Oppenheimer, and Northern had the only increases over the 3 months through April 30, 2015, rising by $5.9B, $6.1B, $262M, $214M,and $58M, respectively.
Our latest domestic U.S. money fund Family Rankings show that Fidelity Investments remained the largest money fund manager with $394.7 billion, or 15.9% of all assets (down $8.7 billion in April, down $10.2 billion over 3 mos., and down $13.9B over 12 months), followed by JPMorgan's $240.5 billion, or 9.7% (down $7.4B, down $15.5B, and up $156M for the past 1-month, 3-months and 12-months, respectively). BlackRock remained in third with $199.3 billion, or 8.0% of assets (down $16.3B, down $17.2B, and up $7.3B). Federated Investors was fourth with $196.1 billion, or 7.9% of assets (down $9.6B, down $14.5B, and down $14.5B), and Vanguard ranked fifth with $172.3 billion, or 6.9% (down $1.4B, up $262M, and up $191M).
The sixth through tenth largest U.S. managers include: Dreyfus ($165.3B, or 6.6%), Schwab ($153.7B, 6.2%), Goldman Sachs ($140.2B, or 5.6%), Morgan Stanley ($115.3B, or 4.6%), and Wells Fargo ($105.5B, or 4.2%). The eleventh through twentieth largest U.S. money fund managers (in order) include: Northern ($82.6B, or 3.3%), SSgA ($78.0B, or 3.1%), Invesco ($53.7B, or 2.2%), BofA ($46.2B, or 1.9%), Western Asset ($43.3B, or 1.7%), First American ($41.3B, or 1.7%), UBS ($35.3B, or 1.4%), Deutsche ($29.0B, or 1.2%), Franklin ($24.8B, or 1.0%), and RBC ($15.4B, or 0.6%).
Crane Data currently tracks 71 managers, down one from last month. Alpine Funds, with $106 million in assets, liquidated its lone money fund, Alpine Municipal Money Market Fund. See our April 14 "News", "Fidelity Operational Update Details More Changes; Alpine Liquidates."
Over the past year through April 30, 2015, Morgan Stanley showed the largest asset increase (up $16.4B, or 16.6%), followed by Goldman Sachs (up $11.9B, or 9.2%), Dreyfus (up $7.4B, or 4.7%), BlackRock (up $7.3B, or 3.8%), Northern Trust (up $7.2B, or 9.5%), and Franklin (up $6.3B, or 33.7%). Other asset gainers for the year include: First American (up $3.4B, or 9.0%), Western (up $2.3B, or 5.5%), BofA (up $2.2B, or 5.1%), HSBC (up $1.9B, 17.4%), and SEI (up $746M, or 6.3%). The biggest decliners over 12 months include: Federated (down $14.5B, or -6.9%), Fidelity (down $13.9B, or -3.4%), Invesco (down $7.4B, or -12.2%), Schwab (down $6.9B, or -4.3%), Deutsche (down $5.4B, or -15.8%, UBS (down $3.8B, or -9.8%), RBC (down $3.8B, or -19.6%), SSgA (down $2.1B, or -2.7%), and T. Rowe Price (down $1.5B, or -9.1%). (Note that money fund assets are very volatile month to month.)
When European and "offshore" money fund assets -- those domiciled in places like Dublin, Luxembourg, and the Cayman Islands -- are included, the top 10 managers match the U.S. list, except for Goldman moving up to No. 4, and Western Asset appearing on the list at No. 10 (displacing Wells Fargo from the Top 10). Looking at the largest Global Money Fund Manager Rankings, the combined market share assets of our MFI XLS (domestic U.S.) and our MFI International ("offshore"), the largest money market fund families are: Fidelity ($401.2 billion), JPMorgan ($368.5 billion), BlackRock ($308.3 billion), Goldman Sachs ($217.2 billion), and Federated ($203.8 billion). Dreyfus/BNY Mellon ($189.4B), Vanguard ($172.3B), Schwab ($153.7B), Morgan Stanley ($133.5B), and Western ($122.1B) round out the top 10. These totals include offshore US Dollar funds, as well as Euro and Pound Sterling (GBP) funds converted into US dollar totals. (Note that big moves in the dollar have recently caused volatility in Euro and Sterling balances, which are converted back into USD.)
Finally, our May 2015 Money Fund Intelligence and MFI XLS show that yields remained largely unchanged in April. Our Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 858), remained at 0.02% for both the 7-Day Yield and the 30-Day Yield (annualized, net) Average. The Gross 7-Day Yield went up to 0.15% from 0.14%. Our Crane 100 Money Fund Index shows an average 7-Day Yield and 30-Day Yield of 0.03%, the same as last month. Also, our Crane 100 shows a Gross 7-Day Yield of 0.18% (unchanged) and a Gross 30-Day Yield of 0.18% (up from 0.17%). For the 12 month return through 4/30/15, our Crane MF Average returned 0.01% (down from 0.02%) and our Crane 100 returned 0.02% (unchanged).
Our Prime Institutional MF Index (7-day) yielded 0.04% (unchanged), while the Crane Govt Inst Index was at 0.02% (unchanged). The Crane Treasury Inst, Treasury Retail, Govt Retail and Prime Retail Indexes all yielded 0.01%. The Crane Tax Exempt MF Index also yielded 0.01%. The Gross 7-Day Yields for these indexes were: Prime Inst 0.22% (up from 0.21%), Govt Inst 0.12% (unchanged), Treasury 0.07%, and Tax Exempt 0.12% (up from 0.09%) in April. The Crane 100 MF Index returned on average 0.00% for 1-month, 0.01% for 3-month, 0.01% for YTD, 0.02% for 1-year, 0.03% for 3-years (annualized), 0.05% for 5-year, and 1.48% for 10-years. (Contact us if you'd like to see our latest MFI XLS or Crane Indexes file.)