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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."
The October issue of our flagship Money Fund Intelligence newsletter, which was sent to subscribers Friday morning, features the articles: "MMFs Give Up Prime Ghost; $1.1 Trillion Now 'Gone Govie'," which reviews the massive shift away from Prime and into Govt MMFs; "Federated Reveals Prime Private Liquidity Fund," which profiles Bud Person on Federated's new "3c-7" fund; and "Regulations, Brexit Focus of European MF Symposium," which excerpts highlights from our recent European Money Fund Symposium. We have updated our Money Fund Wisdom database query system with Sept. 30, 2016, performance statistics, and we also sent out our MFI XLS spreadsheet Friday a.m. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our October Money Fund Portfolio Holdings are scheduled to ship Wednesday, Oct. 12, and our Oct. Bond Fund Intelligence is scheduled to go out Monday, Oct. 17.
MFI's lead "MMFs Give Up Prime Ghost" article says, "The total amount that's moved out of Prime and Tax Exempt money funds combined reached $1.1 trillion this week, as the "Big Shift" of assets into Government money funds approached a crescendo ahead of the October 14 money fund reform deadline."
It adds, "ICI's latest weekly "Money Market Fund Assets" report shows that Prime funds fell by over $110 billion in the past week, again the largest drop of the year, and Crane Data's MFI XLS shows Prime totals falling by a shocking $295 billion, or 37%, in September alone. Since Oct. 29, 2015, Prime assets have fallen by a massive $985 billion, or 68%, and Tax Exempt funds have declined by another $116 billion, or 47% (according to ICI's broader weekly series). Combined these two non-Government sectors (which will be subject to emergency gates and fees come October 14) have fallen by $1.101 trillion (down 65%) since this giant migration started."
Our latest fund interview reads, "Federated Investors recently launched a "private" money market fund, Federated Prime Private Liquidity Fund, a "3c-7" fund which intends to maintain a $1.00 NAV and adhere to money funds' liquidity, quality, maturity, diversity, and disclosure guidelines. The fund went live on Sept. 22 and has attracted approximately $220 million in assets to date. We review the launch with Federated's Bud Person and excerpt from Fitch and S&P's ratings statements on the new fund."
The article says, "Federated plans to offer share classes charging 10 bps and 15 bps with $25 and $5 million minimums, but the lower priced "Founders" shares will only accept new accounts until January 2017 or the fund reaches $5 billion in assets, whichever comes first. In a FAQ, Federated says it is disclosing yield, liquidity, shadow NAV and other information on its website. The Private Placement Memorandum is only available upon request. (Crane Data plans on tracking this and other private funds to the extent possible. See our Sept. 26 News.)"
The "European MF Symposium" article explains, "Last month, Crane Data hosted its 4th European Money Fund Symposium, which brought together about 120 money fund and money market professionals in London. We briefly review some of the highlights of the discussions and sessions below. The keynote, entitled, "IMMFA Update: The State of MMFs in Europe," was presented by Reyer Kooy, Chairman of IMMFA. He commented, "With the combination of Brexit, ultra-low Sterling rates and money market fund reforms, we're keeping ourselves pretty busy at the moment.... It's exciting times for everyone in the money fund industry."
In a sidebar, we discuss, "Fed Z1: Household MMFs Fall," saying, "The Federal Reserve released its latest quarterly "Z.1 Financial Accounts of the United States" statistical survey (formerly the "Flow of Funds"). Among the 4 tables it includes on money market mutual funds, the Second Quarter, 2016 edition shows that the Household Sector remains the largest investor segment, though assets here declined again and fell back below the $1.0 trillion level. Funding Corporations, Nonfinancial Corporate Businesses and Private Pension Funds showed gains in the latest quarter, while Funding Corporations, Nonfinancial Corporate Businesses, State & Local Governments, and Private Pension Funds showed increases over the past 12 months."
We also do a sidebar on "Worldwide MF Assets Q2," which comments, "The Investment Company Institute released its latest "Worldwide Mutual Fund Assets and Flows" data collection late last month. The latest report shows that total global money fund assets declined by $67.1 billion, or 1.3%, to $4.996 trillion in Q2 2016. The U.S., China and Luxembourg suffered the biggest declines, while France, Korea and Brazil saw gains. Worldwide MMF assets have increased by $136.0 billion, or 2.8%, over the previous 12 months through 6/30/16."
Our October MFI XLS, with Sept. 30, 2016, data, shows total assets decreased $48.5 billion in September to $2.595 trillion after increasing $19.3 billion in August, $11.6 billion in July, and decreasing $13.8 billion in June. Our broad Crane Money Fund Average 7-Day Yield was up 2 bps to 0.14% for the month, while our Crane 100 Money Fund Index (the 100 largest taxable funds) also rose 2 bps to 0.24% (7-day).
On a Gross Yield Basis (before expenses were taken out), the Crane MFA inched up to 0.46% and the Crane 100 rose one bps to 0.49%. 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 31 days (up 1 day from last month) and for the Crane 100 was 30 days (up 1 day). (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
Below, we reprint our latest BFI profile, "Diversity Key at Dimensional: Discussion w/Dave Plecha".... This month, Bond Fund Intelligence interviews Dave Plecha, Global Head of Fixed Income at Dimensional Fund Advisors and manager of the DFA One-Year Fixed Income Portfolio. We ask Dave about Dimensional's history, strategies and presence in the ultra-short, and overall, bond market. We also discussed Dimensional's views about timing the market, ultra-short funds benefiting from money fund reforms and more. Our Q&A follows.(Contact us if you'd like to see the latest Bond Fund Intelligence.)
BFI: Give us a little bit of your history. Plecha: Dimensional was founded in 1981. We launched our first fixed income strategy in 1983 -- an ultra-short bond fund with a maximum average maturity of one year. So we've had 33 years of experience investing in short term fixed income. I joined the firm in 1989 and was involved in the One-Year Fixed Income Portfolio from my start, so it has been 27 years for me.
We have a large, experienced team of portfolio managers and traders. Our fixed income teams are in Santa Monica, Austin, and Charlotte in the US, as well as in London, Sydney, and Tokyo. The One-Year Fixed Income Portfolio team is based in the US. We employ a team-based approach, which we like because it helps establish clear responsibility and multiple levels of accountability without too much reliance on any one person. This helps ensure continuity for our investment process.
BFI: Is One-Year Fixed Income Portfolio Dimensional's biggest bond fund? Plecha: The fund was the largest for a number of years, and today it is still one of our biggest fixed income funds and is used widely by our clients. But we manage a lot of fixed income, almost $90 billion across strategies with different maturity and credit quality constraints, including European based UCITS and Australian based trusts for investors in those regions. What was appealing to our investors in 1983 is still appealing to investors today.
BFI: Talk about that fund's position relative to the other funds in the lineup. Plecha: In the US we have two funds that I would categorize as ultra-short bond funds. The One-Year is focused on U.S. dollar-denominated, short term and high quality bonds, and the average maturity is no more than one year. The fund can buy individual bonds with up to two years maturity, which has basically been the structure of the portfolio since inception. In 1996, we launched a global version, which is fully currency hedged and invests in high quality global bonds, as well as bonds with up to two years maturity. Dimensional has other U.S. and global taxable and non-taxable portfolios that seek higher expected returns while investing in a broader set of credit qualities and maturities.
BFI: What was the original impetus? Plecha: The strategy was designed to offer investors a premium over cash, while maintaining capital preservation. If you care about capital preservation then you probably want to focus on short duration, high quality issues, and you want to be diversified -- that lines up with how we position the portfolio. But within that universe, we can still pursue higher expected returns. So for investors who might otherwise still be in cash, the strategy offered them the ability to have a portfolio that extended duration and the premium that comes with taking that approach.
BFI: What are your biggest challenges? Plecha: We have no challenge finding the securities we want to execute our strategy. Today, we are in a low yield environment and some investors are tempted to reach for yield and extend duration in an attempt to get a bit more yield. But yield is not the only component of expected returns. Our approach of finding portions of the yield curve with higher expected capital appreciation, and our willingness to roll bonds instead of holding to maturity, adds an expected capital appreciation component of returns to the yield. As with any strategy, we believe it is critical to set the proper expectations with our clients -- in a low rate environment and otherwise -- to help them understand there are no free lunches and the importance of remaining disciplined.
BFI: What can and can't you do in the fund? Plecha: At Dimensional, we believe you can't time the market -- that markets are very difficult to outguess consistently. We believe in market prices and that new information is quickly reflected in prices. We believe we provide value to our investors by having a deep understanding of the relationship between the current term structure, the current yield curve, and expected return premiums. This is where we focus.
BFI: Do you adhere to pretty tight maturity guidelines? Plecha: We have a one-year maximum (for our average security). Our maturity guidelines are essentially a function of the shape of the yield curve and the term structure. When yield curves are upwardly sloped, on average we expect larger premiums for moving out towards the one-year limit. When yield curves are flat or inverted, we don't expect the same premium. The Fama research shows that there is a positive relationship between forward rates and term premiums. When yield curves are upwardly sloped, expected premiums are positive. So while our average maturity will vary between zero and one year, it will be near the upward limit in upwardly sloped curves and near the lower limit in flat or inverted curves.
BFI: What about quality guidelines? Plecha: In our opinion, one of the most important attributes of an ultra-short strategy with an objective of capital preservation is liquidity, and we take that very seriously. We stay broadly diversified on the very high end of the credit spectrum, investing primarily in double- and triple-A government and corporate securities.
BFI: What about diversification limits? Plecha: We put a lot of emphasis on diversification, not only to reduce volatility or minimize the risk of losses but also to enhance liquidity. We have tighter maximum allocation limits per issuer than what is allowed for credit issuers in money market regulations. So within a portfolio of very high quality issuers, triple-A and double-A issuers, we are highly diversified. We fix limits by issuer, by guarantor and by industry. Even though we are investing in U.S. dollar-denominated bonds, there are issuers from all over the world that come into the U.S. corporate bond market to issue debt. So we look at the country of issuer and put limits on that. We believe that diversification is important in all of the portfolios we manage -- fixed income and equity.
BFI: How about sectors in general? Plecha: We buy commercial paper which is a big market with new issues every single day. We also have floating rate notes in the portfolio which we often buy on new issue, as two-year issues of FRNs are not uncommon. We do not invest in mortgage-backed securities in the portfolio.
BFI: Do you have relatively stable cash flows? Plecha: Our client base is made up of institutional investors and financial advisors. We've been fortunate to see pretty steady inflows across our fixed income offering as more clients recognize the benefits of our approach. That being said, for the One-Year Fixed Income Portfolio we are talking about a highly liquid strategy -- stable cash flows are not a requirement for the strategy to be successful.
BFI: How about expenses? Plecha: There are a couple of aspects to think about when thinking about costs. Obviously the expense ratio of the strategy is important, but also important are the costs of executing the strategy, which some people forget about. The expense ratio for this portfolio is 17 basis points. We care a lot about the costs of executing the strategy, as anything we can do to reduce them can be passed along as higher returns for clients.
BFI: What about the regulatory environment? Plecha: As you know, the recent focus has been on money market fund reform. Money market funds have an opportunity cost due to the regulatory constraints in the way they need to be managed. Historically, they were able to provide stable NAVs as a benefit to investors. The reform in October and the switch to floating NAVs for prime money market funds take away that "main attraction" if you will. Without this benefit, I would expect that many investors who were or are in 2a-7 funds may be considering ultra-short portfolios.
BFI: Do you have an outlook on the Fed? Plecha: The whole market has an outlook on the Fed, and that outlook, together with all other information, is embedded in the term structure of interest rates. Rather than forecasting in the traditional sense, we use the broader information provided by the yield curve to assess difference in expected returns among different maturities when implementing our strategy, and we do this every day.
BFI: Any thoughts on the future? Plecha: We have 33 years of live history, and I think the One-Year Fixed Income Portfolio and its successful track record is a great example of our investment process at work. At all points during the last 33 years there have been investors who have found a favorable tradeoff to take some extra duration out of cash. And there's nothing that indicates that over the next 33 years, or the 33 years after, will be any different.