Last Thursday, Clearwater Analytics hosted a Webinar on "Money Market Fund Reform (see replay and slides here)." While much of the panel featured now familiar recaps of the recent SEC Money Market Fund Reforms, ICI Senior Economist Sean Collins revealed a number of fresh statistics on money funds (expected to appear in May in the next edition of the ICI's Mutual Fund Fact Book).
Collins says to the Webinar audience, "[I]n 2007 and 2008, we had record inflows, in excess of $600 billion in each of those years. Then 2009, [we saw] some significant reversal, split about evenly between retails and institutional funds.... If you look at our weekly data, you'll see that we've continued to see fairly substantially outflows in recent weeks. For example, in the last three weeks or so, we've seen about $100 billion in outflows.... At the moment on a weekly basis, we are probably down to about $3 trillion mark."
He continues, "The next slide gives you some indication of what the importance of money market funds is in helping businesses manage their short term assets.... You can see in 2008, about 35% of businesses' short-term assets were held in money market funds. This is things like direct holdings of commercial paper, repurchase agreements, Treasury securites, cash at banks, money market funds, and other similar instruments. With the outflows in 2009, we are down to about 30%. But [this is] still above any record level except for 2008."
Collins explains, "The reason for the outflows, certainly on the retail side, not surprisingly, is just a no small measure due to what's been happening to short-term interest rates. This [next slide] shows you the flows to taxable retail money market funds ... relative to ... the spread between the yield on money market funds and money market deposit accounts at banks. You can see that in 2009 and early 2010, given the very low level of interest rates ... we've been having significant outflows."
He adds, "I think to some extent that carries over to what's going on the institutional sector as well. When you are getting roughly zero on a short-term instrument, you may be willing to go out the curve a bit to try and get a little bit of yield, or if you can get a little bit more in some kind of a bank instrument you may go there. So I think that what's been happening recently, if there is any doubt, is probably not so much related to any confidence in the money fund product, but probably just primarily where we are at in the interest rate cycle at the moment."
Collins also says, "One effect has been that we are beginning to see some compression in the industry.... [T]he percent of assets held by the top five complexes has crept up from 39% in 2006 to 47% in 2010.... That probably reflects a number of factors: one is simply outflows over the past year, regulatory pressures which are adding to cost, and the low interest rate environment especially for funds that have had to offer waivers.... But I think that the interest rate environment here is probably what is driving the outflows." He adds, "The number of funds has been declining for about 10 years now, from 1,045 in 1999 to about 704 as of January 2010. I think that's just evidence of some of the market pressures that we're seeing, probably also evidence of rationalization of the market for the product itself."
On the future, he says, "We still have the President's Working Group report to come out, and we're not sure what we'll see in that.... Bob Plaze at the SEC has said [in Phoenix recently] that some of what's in it might give [ICI President] Paul Stevens some heartburn. But we really don't know what's in there, so we're just playing 'wait-and-see' at the moment. Another big question is monetary policy. We all know that short term rates are going to go up at some point. It's more a matter of how quickly and when. I think we heard today from Chairman Bernanke that it's probably later rather than sooner.... When the Federal Reserve does begin to raise rates, they're going to do it slowly."
Finally, Collins responds to a question on outflows and regulations, "I think some of it's going out the curve. Some of it's probably gone back into bank products. Some of it may be going offshore. But again, I'm not convinced that what we have been seeing recently is any indication that people are worried about the product per se. It's more a matter of just what the interest rate cycle looks like at the moment. Down the road, as money funds begin to pick up yield, we'll probably see that chain of events reverse, I would think.... We had an awful a lot of money flow in to money funds in the aftermath of September 2008. I think it would have been unreasonable to expect all of that to stick.... I just don't think that at this point we can say that the new regulations have been completely behind of what is going on [with any outflows]. Certainly, it's going to have an effect. But it's too early to say that we have lost a trillion dollars because of new regulations. I think other factors are probably quite important."
