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PIMCO Portfolio Manager Jerome Schneider posted commentary recently called "The B Side of Capital Preservation." He writes, "Vinyl single records have two sides: The A-side is always the well-known hit song by the musician, and the other, called the "B-side," is often a lesser known (or unknown) work. When it comes to cash management, the hit song on the A-side -- "Capital Preservation Is King" -- has been played over and over since the financial crisis. Amid episodes of stress and illiquidity, continuing central bank action and changing regulatory frameworks, investors sought refuge through three traditional avenues to capital preservation: investing cash with depository banks, buying U.S. Treasury bills directly and buying shares in regulated 2a-7 money market funds. Until now, these strategies mostly succeeded in preserving capital. However, regulatory and market forces are changing the landscape, and these traditional schemes have become less appealing or simply less available. In addition, many have failed to preserve purchasing power: Their near-zero returns have trailed even recent modest levels of inflation. As monetary stimulus in the U.S. winds down, global investors need to consider turning the record over to the B-side and listening to the new tune for cash management: "Purchasing Power Preservation." Of the three traditional strategies, regulated money market funds have been the vehicle of choice for investors looking to manage liquidity while preserving capital. Over the past few years, investors have even forgone attractive returns, with money funds yielding a mere 0.01% at the end of June, according to Crane's Money Fund Index. With bond yields low overall and inflation expectations benign, the opportunity cost of this strategy has been small over the past five years. But things are changing." Schneider concludes, "We suggest investors begin to listen closely to capital preservation's "B-side." We are on the brink of a New Normal for liquidity management and conscientious capital preservation. In our view, all investors -- retail and institutional -- can benefit from an active approach that not only takes into account changes to portfolio and market liquidity but also aims to offer enough capital return to protect purchasing power.... Ahead of the Fed's rate actions and the implementation of the Securities and Exchange Commission money market fund reform in 2016, we believe now is the time for investors to consider active approaches for capital preservation and look beyond money market funds."

We wanted to remind those attending (or considering) our upcoming European Money Fund Symposium in Dublin, Sept. 17-18 to make hotel reservations asap if you haven't yet. Our block of rooms at the Conrad Dublin is almost sold out (and the hotel expects to sell out), and attendees only have a couple more days to get our discounted rate. Visit to see more Hotel details, to register or for more information. Crane's European Money Fund Symposium is the largest annual gathering of money fund professionals outside the U.S., and features two days of sessions and discussions on European and global money fund issues. (Note: Mark your calendars too for next year's U.S. Money Fund Symposium, the largest money fund conference in the world, which will take place June 22-24, 2016, in Philadelphia. Our next "basic training" event, Crane's Money Fund University, will take place Jan. 21-22, 2016 at the Hyatt Regency Boston, and we're also preparing to launch a new Bond Fund Symposium, though likely not until March 2017.) In other news, the Financial Times wrote late Friday, "Investors Head for Cash and Gold in Volatile Week. The piece says, "Stock market volatility ... drove investors out of equity funds this week and into gold and money market funds. Outflows of $29.5 billion from equity funds ... were the highest on record in nominal terms, according to an analysis of data from EPFR by Bank of America Merrill Lynch. Meanwhile, more than $22 billion flowed into money market funds, a cash proxy.... "The Chinese situation has some investors taking stock, and there certainly has been an increase in US money market fund assets," says Dennis Gepp, a managing director who runs the European money market funds for US-based Federated Investors." (Note: Crane Data's Money Fund Intelligence Daily shows money fund assets increasing by just $10.7 billion through Thursday (8/27), hinting that flows subsided late last week. Money fund assets inflows have been strong all summer though, even long before the recent market correction.)

Stephen Keen, Senior Counsel at Perkins Coie, posted two pieces on the SEC's updated FAQs. The first is entitled, "Good News for Retail Funds," while the other is, "Why Gating Would be an Emergency." In the first, Keen writes, "In Question 16 (formerly 15) of the FAQs, the staff clarified that it would look to the definition of "beneficial owner" in Rule 13d-3 when interpreting the definition of a "retail money market fund." Keen explains, "Rule 13d-3 uses voting, as well as investment, power to determine beneficial ownership. Voting power has nothing to do with the ability "to redeem quickly in times of market stress." Accordingly, the revised answer to Question 16 states that: "in the staff's view and notwithstanding Rule 13d-3, policies and procedures would be deemed 'reasonably designed to limit all beneficial owners of the fund to natural persons' even if they do not use voting power as a basis for identifying beneficial owners of the fund." He tells us, "Putting Question 16 together with Rule 13d-3, it appears that a retail fund's policies and procedures should be reasonably designed to confirm, for each shareholder’s account, that at least one natural person has investment power (as defined in Rule 13d-3) to redeem the shares held in the account." In his blog post on "Gating," Keen explains, "Section 22(e) of the Investment Company Act of 1940 prohibits mutual funds from suspending the right of redemption except in specified circumstances. These circumstances include: any period during which an emergency exists as a result of which (A) disposal by the company of securities owned by it is not reasonably practicable or (B) it is not reasonably practicable for such company fairly to determine the value of its net assets." Keen concludes, "It is important to note that the "extraordinary circumstances" include the board's determination that suspension of redemptions is in the best interests of the fund. So weekly liquidity assets falling below 30% of total assets should not always be considered, by itself, to constitute an emergency. The SEC does not have authority over the interpretation of fund organizational documents, which are governed by state laws. However, insofar as provisions of organizational documents permitting suspensions of redemptions are designed to conform to section 22(e), it makes sense to interpret "emergency” consistently in both contexts. Thus, the staff's response to new Question 31 should provide persuasive authority for directors and trustees to conclude that they have authority to gate a money market fund under its current organizational documents."

We noticed yesterday that several money funds were having trouble reporting their latest daily assets or nightly rate files. But we weren't sure what was happening until we say the WSJ story, "A New Computer Glitch is Rocking the Mutual Fund Industry. It says, "A computer glitch is preventing hundreds of mutual and exchange-traded funds from providing investors with the values of their holdings, complicating trading in some of the most widely held investments. The problem, stemming from a breakdown early this week at Bank of New York Mellon Corp., the largest fund custodian in the world by assets, prompted emergency meetings Wednesday across the industry, people familiar with the situation said. Directors and executives at some fund sponsors scrambled to manually sort out pricing data and address any legal ramifications of material mispricings, those in which stated asset values differed from the actual figures by 1% or more." It adds, "A swath of big money managers and funds was affected, ranging from U.S. money-market mutual funds run by Goldman Sachs Group Inc., exchange-traded funds offered by Guggenheim Partners LLC and mutual funds sold by Federated Investors. (Note: Federated money funds weren't involved though.) Fund-research firm Morningstar Inc. said 796 funds were missing their net asset values on Wednesday." In other news, the stock market slide has thrown into even more doubt the liftoff for interest rates. Reuters, reported "An interest rate hike next month seems less appropriate given the threat posed to the U.S. economy by recent global market turmoil, an influential Federal Reserve official said on Wednesday. In the clearest indication yet that fears of a Chinese economic slowdown could influence U.S. monetary policy, New York Fed President William Dudley said the prospect of a September rate hike "seems less compelling" than it was only weeks ago. Dudley, a dovish policymaker and close ally of Fed Chair Janet Yellen, however left the door open to raising rates for the first time in nearly a decade when the U.S. central bank holds a policy meeting Sept. 16-17.... [A]n initial rate hike "could become more compelling by the time of the meeting as we get additional information on how the U.S. economy is performing and (on) international financial market developments, all of which are important to shaping the U.S. economic outlook," he said." The Wall Street Journal writes, "Atlanta Fed's Lockhart Says Fed Is Still on Track to Raise Rates This Year." It says, "Federal Reserve Bank of Atlanta President Dennis Lockhart stuck to his guns Monday, saying he still expects the U.S. central bank to raise short-term interest rates in the next few months, even as he acknowledged stresses facing the U.S. economy and financial markets were making the outlook less certain. "I expect the normalization of monetary policy -- that is, interest rates -- to begin sometime this year," Mr. Lockhart said. "I expect normalization to proceed gradually, the implication being an environment of rather low rates for quite some time," he said."

Reuters writes "U.S. money-market funds raise fees after years of cutting them. The article says, "U.S. money-market funds, which have lost billions of dollars in revenue since the height of the financial crisis, are raising fees after years of cutting them, according to industry executives and analysts. The $2.7 trillion industry has lost some $30 billion in revenue since 2009, according to the Investment Company Institute. Money funds reduced fees to ensure that investors did not actually lose money in an era of rock-bottom interest rates. But in recent months, top money-market fund sponsors including No. 1 Fidelity Investments, Federated Investors Inc and Charles Schwab Corp, have been charging higher fees as they recognize slightly better yields on the securities they buy for their funds." Reuters quotes our Peter Crane, president of money fund research firm Crane Data LLC, "Fund companies see the light at the end of the tunnel." The piece adds, "With expectations that the U.S. Federal Reserve will raise interest rates, yields on the securities that money-market funds purchase, such as short-term corporate debt and bank certificates of deposit, have risen slightly. To be sure, no major money-fund repricing is expected until the Fed actually makes a move.... That uptick in charged expenses continued into August, according to senior executives at two large money-fund sponsors. They declined to be named because they were not authorized to speak about fee trends. Analysts at Jefferies recently raised their outlook for Federated Investors, the No. 4 money-fund sponsor with $206 billion in assets, because of an expected reduction in waived expenses. In recent weeks, executives at Northern Trust Corp, T. Rowe Price Group Inc and Charles Schwab also have discussed rising fee trends during conference calls with analysts and investors. Meanwhile, a number of smaller money-market sponsors have been consolidated or they have liquidated fund assets amid low fees and more regulation. Profit margins have been crushed, according to Crane."

The Wall Street Journal published commentary by Gerald O'Driscoll, senior fellow at the Cato Institute and former vice president at the Federal Reserve Bank of Dallas, called "The Fed Flirts With the Right Move at the Wrong Time." He writes, "Financial markets and Federal Reserve watchers are focused on when the Federal Open Market Committee will vote to raise short-term interest rates, likely by 25 basis points. Investors and pundits would do better to ask why the Fed would raise rates now, when the arguments against a hike are so strong. The shudder felt through the global financial markets over the past few weeks, culminating on Friday with the Dow plunging more than 500 points, should give anyone pause about a Fed course change in the coming weeks or months. Let me be clear: I belong to the camp that has long argued for the Fed to raise short-term interest rates. The more the Fed held rates down, the more economic distortions its policy created.... Artificially low rates cause investors to chase yields and take on more risk. That was a goal of the Fed's extraordinary monetary policy (though it was stated more euphemistically). And near-zero rates harm savers and those living on retirement income, so the policy is inherently and perversely redistributional.... The question is why now, after seven years? It can't be for any of the standard criteria traditionally employed by the FOMC in its decision-making." It continues, "Low interest rates were thought to be stimulative. But we have learned that financial intermediaries struggle with spreads in a low-interest-rate environment. Hardest hit must surely be the money-market mutual-fund industry. Absent a dangerous lunge for risky returns, how much longer can that industry cope with the current interest-rate policy? One suspects that some combination of these motivations, reflecting a concern for financial stability, is behind the call for higher interest rates. To one degree or another, the concern is appropriate -- but that has been the case for many years. Now it appears that the FOMC is at last poised to do the right thing, but with bad timing." In other news, Bloomberg wrote Friday, "Treasuries Aren't So Special in Repo Market as Fed Bets Deferred." It says, "The $1.6 trillion market where dealers go to borrow U.S. government debt is adding to signs that Treasury bears are in retreat less than a month before a potential Federal Reserve interest-rate increase. Typically, when there is heightened interest in shorting Treasuries -- meaning bet they'll decline -- the securities are in demand in the repurchase agreement market as traders try to obtain the debt to sell. In the argot of repo traders, that's known as being "on special." Yet that phenomenon is barely in evidence, signaling traders aren't gearing up for bond losses with the Fed's Sept. 17 decision looming."

Reuters featured an article entitled, "Goldman braces for big demand for U.S. government money market funds" on Friday, which says, "Goldman Sachs Group Inc. fund managers believe investors could pour $450 billion into money market funds that invest in U.S. government debt in response to new rules for the short-term funds, an executive told Reuters. Goldman Sachs joins other asset management firms in preparing for the rules, which are designed to protect investors from extreme market stress. The Securities and Exchange Commission approved the rules in July 2014, and they take effect in October 2016." The article explains, "Under the new rules, money market funds will impose fees to deter investors from pulling out all their money if too many want their cash at the same time. The rules will also require funds with institutional investors to record the value of their assets at market value daily, meaning the value of clients' holdings will fluctuate as the market rises and falls. These changes could be alarming to investors who view money market funds as places to park cash they might want on short notice. The funds now hold about $2.7 trillion, a figure that is rising as the U.S. stock market sells off. Government and U.S. Treasury money market funds are exempt from the new rules." It adds, "Jim McCarthy, Goldman Sachs' co-head of the global liquidity management business, said investors could end up pulling out about half of the $900 billion now in prime funds for institutional clients and shifting that money into government and U.S. Treasury funds. McCarthy said he had not yet seen this shift among Goldman Sachs clients, but it could happen in the future." The Reuters piece continues, "Not everyone expects a mass exodus from prime money market funds. Peter Crane, whose Crane Data LLC is a leading money fund research firm, said that if the Federal Reserve raises rates in coming months as expected, yields on prime money market funds might rise much faster than those on government funds. Those relatively higher yields may convince some institutional investors to stay in prime funds, he added." Finally, it says, "For Goldman's part, it said in July it would introduce a new government money market fund and convert another prime fund to a government fund to meet expected demand. Fund managers including BlackRock Inc have taken similar steps."

Money funds are continuing their summer asset tear in August. ICI's latest "Money Market Mutual Fund Assets" report shows assets up for the third straight week. It says, "Total money market fund assets increased by $11.01 billion to $2.69 trillion for the week ended Wednesday, August 19, the Investment Company Institute reported today. Among taxable money market funds, Treasury funds (including agency and repo) increased by $7.01 billion and prime funds increased by $3.01 billion. Tax-exempt money market funds increased by $980 million. Assets of retail money market funds increased by $4.59 billion to $881.06 billion. Among retail funds, Treasury money market fund assets increased by $1.11 billion to $199.13 billion, prime money market fund assets increased by $2.57 billion to $501.34 billion, and tax-exempt fund assets increased by $910 million to $180.59 billion. Assets of institutional money market funds increased by $6.41 billion to $1.80 trillion. Among institutional funds, Treasury money market fund assets increased by $5.90 billion to $811.05 billion, prime money market fund assets increased by $440 million to $925.53 billion, and tax-exempt fund assets increased by $70 million to $68.05 billion." Year-to-date, money fund assets are now down just $47 billion, or about 2%. Assets have been up 7 of the last 9 weeks and the past 4 months in a row. In other news, The Wall Street Journal writes, "Fed Preps September Term Reverse Repos as Extra Rate-Rise Tool." It says, "The Federal Reserve Bank of New York said it would again offer a "supplementary tool" called term reverse repos in September as a way of supporting its main levers for raising rates when the time comes. The New York Fed said in a statement Wednesday it had been instructed by the Federal Open Market Committee, a special rate-setting panel, to examine how the term reverse repos could support its key monetary policy tools when it moves to raise rates for the first time in nearly a decade.... In March, the FOMC authorized the New York Fed markets desk to conduct term repos over the end of each quarter, through Jan. 29, 2016." It continues, "The New York Fed's markets desk said it had been "working internally and with market participants" on how the reverse repo program would work in practice to control the federal-funds rate when it is taken out of test mode, where it has been for almost two years.... For the end of September this year, the desk said it plans to offer $200 billion in term reverse repos in addition to the overnight reverse repos it plans to use at liftoff. Currently, the overnight repos are capped at $300 billion."

The Federal Reserve released the Minutes from its July 28-29 FOMC meeting yesterday. The minutes say, "The staff next summarized some of the recent steps the System had taken to prepare further for the process of normalization of monetary policy. The staff also proposed that future changes in the FOMC's target federal funds rate range as well as associated changes in related administered interest rates -- including the interest rates on excess and required reserves, the ON RRP rate, and the primary credit rate -- all be effective on the day after the Committee's policy decision. Making all such rate changes effective on the same day would enhance the clarity of Federal Reserve communications. It would also help promote federal funds trading within the new target range, partly by enabling the Desk to conduct ON RRP operations at the new rate specified by the Committee on the same day that the new target range becomes effective. Participants supported the staff proposal.... During their discussion of economic conditions and monetary policy, participants mentioned a number of considerations associated with the timing and pace of policy normalization. Most judged that the conditions for policy firming had not yet been achieved, but they noted that conditions were approaching that point. Participants observed that the labor market had improved notably since early this year, but many saw scope for some further improvement. Many participants indicated that their outlook for sustained economic growth and further improvement in labor markets was key in supporting their expectation that inflation would move up to the Committee's 2 percent objective, and that they would be looking for evidence that the economic outlook was evolving as they anticipated. However, some participants expressed the view that the incoming information had not yet provided grounds for reasonable confidence that inflation would move back to 2 percent over the medium term and that the inflation outlook thus might not soon meet one of the conditions established by the Committee for initiating a firming of policy." In other news, Barclays' strategist Joseph Abate said in his last "US Weekly Money Market Update," "Earlier this week, the effective fed funds rate moved to 15bp -- its highest sustained level since April 2013. This back-up has widened the spread between the effective fed funds rate and the Fed's overnight RRP to 10bp and has raised questions about where the effective rate will settle at lift-off.... Indeed, it is probably not coincidental that the jump the fed funds rate has occurred at the same time that Treasury GCF repo rates have also cheapened. So far this month, the Treasury GCF repo rate has averaged 26bp (compared with 18bp and 19bp in June and July, respectively, and excluding month-ends). We think there are two potential explanations for the increase in repo rates: the G-SIB capital surcharge and the absence of a significant short-base in the Treasury market."

First American Funds released its quarterly money market funds "Portfolio Manager Commentary." Portfolio Managers Jim Palmer, Jeffrey Plotnik, and Mike Welle write, "During the second quarter, the U.S. short-term markets continued to speculate on the timing of the first Fed rate hike since 2006. Investors were generally in agreement with regard to the pace of any target range increases, with the expectation the Fed will opt for a modest and gradual approach.... The objectives of the First American money market funds in this environment were to maintain strong credit quality and incorporate future Fed rate expectations into portfolio investment selections to take advantage of a steepening yield curve. The Fed's Reverse Repo Program (RRP) continued to be a market stabilizing force by setting a floor on overnight inter-dealer repo rates in the five- to eight-bps range. Market consensus is the Fed's repo facility going forward will be instrumental in executing monetary policy, controlling short-term interest rates and providing access to quarter-end liquidity. While the final disposition of the RRP is still to be determined, we anticipate the Fed will continue to test various scenarios regarding the rate, size, auction timing and structure of the program. Ultimately we believe the Fed will expand the program enough to absorb investor demand for short-term instruments." They continue, "As the First American Prime and Tax-Free Obligations Funds prepare for reform implementation, they will be structured to implement strategies that coincide with the timing and expected market impact of reform." First American adds, "In the coming quarters, we anticipate the overall investment environment will be more volatile as the market interprets economic data and speculates on the timing of a Fed rate hike. We expect to see yields trend higher leading up to money fund reform and a Fed rate hike. As global demand for low-risk assets is expected to remain strong, we foresee any upward movement in yields impacting prime funds more significantly than government and Treasury funds. With our view the Fed will keep the current target range of 0.00 to 0.25% until at least September, we will continue seeking to capitalize and extend where opportunities arise from market volatility based on Fed expectations and impacts of money market fund reform." In other news, Fidelity's Head of Fixed Income Nancy Prior answered questions on MMF reform in a Q&A posted on Fidelity's web site earlier this summer. She discusses, among other things, Fidelity's conversion of the $112 billion Fidelity Cash Reserves from Prime to Government, saying, "We clearly heard that many customers want continued access to a money market fund that offers a stable $1 NAV and is not subject to liquidity fees that could be placed on redemptions in certain circumstances, or to gates, which prohibit redemptions in specific situations."

Plan Sponsor magazine writes, "Regulatory Change Brewing Beyond Fiduciary Rule." It says, "Beyond its own focus on fiduciary advice issues, the Securities and Exchange Commission (SEC) is in the process of implementing major money market fund reform provided for under rulemaking adopted in July 2014. The SEC is concerned the money market fund reforms could catch some plan sponsors and advisers unawares, so they are more aggressively warning about the changes qualified retirement plans will have to make to accommodate the reforms. Chances are a given plan sponsor will be impacted by the money market reforms, with the PLANSPONSOR Defined Contribution Survey showing upwards of two-thirds of plans currently offer money market funds. While the SEC has said its rules will allow most plans to remain in retail money market funds, some are concerned the reforms could make this untenable from a fiduciary perspective, given the emergence of liquidity gates and fees." It continues, "The widespread use of money market funds among retirement plans and other institutional investors means industry providers should be paying attention, and should be gearing up to help guide plan sponsors and their own sales representatives through the 2016 implementation. Two business leaders at Voya Financial tell PLANADVISER their firm is proactively preparing for the money market changes. According to Susan Viston, client portfolio manager, and Paula Smith, senior vice president for investment products-only business, Voya is actively talking with plan sponsors about what the reforms mean. "Probably half of them are still trying to decide what their next move is going to be, based on the money market reforms," the pair explains. "We foresee some people just staying put, but others are eyeing stable value more closely. Especially in the mid- to large-plan space, we're seeing more interest in stable value again. It's something service providers are paying increasing attention to." Months ago, the concerned industry groups warned that, despite a relatively long window provided for the reforms to take effect, as we near the fall of 2016, huge numbers of plan sponsors will all at once turn to reexamining their money market options in light of their fiduciary duty to plans and participants. The industry groups say they worry plan sponsors will feel compelled to replace their retail money market funds with government money market funds, which will not have liquidity fees or redemption gates. Again, the SEC has highlighted carve-outs in its rulemaking to prevent this outcome, but providers and fiduciary sponsors are being cautious."

Ignites published, "Northern Trust Plunks Down $45M to Top Up Funds." (See our July 27 News.) They write, "Northern Trust took a $45.8 million pre-tax charge in the second quarter to prop up the net asset values of two money market funds and two non-registered funds for institutional investors, according to the firm's second-quarter earnings report and a statement from the firm. The firm cited "legacy losses realized by the funds during the financial crisis" as the reason for the capital infusion, according to a Seeking Alpha transcript of the earnings call with analysts. The money funds are the $8.1 billion Northern Money Market Fund and the $4.4 billion Northern Institutional Liquid Assets Portfolio, Northern Trust said in the statement." It continues, "Fitch reviewed information from Crane Data and found that the shadow NAV of the firm's Money Market Fund increased from $0.9989 on July 9 to $1.00 the next day. If the bump-up in shadow NAV was the result of a capital injection, "it would have cost approximately $8 million," according to Fitch's recent report. Because it targets retail investors, the fund does not have to move to a floating net NAV, as required of institutional products under reform passed by the SEC last year, Fitch notes. Still, Northern Trust will have to post the fund's shadow NAV on its website, the research and rating agency notes, "which may have been one of the reasons for the top up."" In a statement, Northern commented, "As announced on July 22, 2015, Northern Trust recorded a pre-tax charge of $45.8 million in the second quarter of 2015 related to voluntary cash contributions to certain constant dollar net-asset-value (NAV) funds. These funds include the `Northern Money Market Fund, the Northern Institutional Liquid Assets Portfolio and two non-registered funds for institutional investors. These voluntary cash contributions offset legacy net losses in certain securities realized by these funds during the financial crisis. Prior to the contributions, all of these funds were trading well above the $0.9950 per share required by the U.S. Securities and Exchange Commission for constant NAV funds to transact at $1.00 per share. Northern Trust took this voluntary action to demonstrate its commitment to the constant dollar funds and their investors."

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