As we wrote last Thursday in "Crane Reviews State of Money Funds, Regulations and Outlook," Crane Data LLC President Peter Crane has given several talks on the state of money funds recently. We excerpt from one of them, Crane's recent AFP Webinar, "Money Market Mutual Funds: Reviewing the New Regulations & Discussing the Outlook for Future Changes", below. Here Crane discusses portfolio holdings and the pending shadow NAV disclosure requirement in more detail.
Crane says about examining money fund portfolios, "Money fund holdings are like subatomic particles -- by the time you look at them they are gone. I also say, 'Looking at a money fund portfolio is like looking at the control panel of a 747.' It is not going to make you feel any better, and the pilot is going to say, 'Get the heck out of the cockpit.'"
He also discussed the "shadow NAV", saying, "Money funds have always produced a shadow NAV.... With a 60 day lag [disclosure], by the time you see a shadow NAV the vast majority of the securities that have made up that shadow NAV will be gone." Crane explained that any deviation between mark-to-market and amortized cost accounting would have already disappeared during this period. "It would already have paid off ... unless [something] defaulted and didn't pay off, in which case you wouldn't have to look at the shadow NAV [to know something was wrong].... You'd hear a giant sucking sound."
Crane continues, "The shadow NAV, I don't believe it's going to be a real big issue. It may be a pain in the butt for a fund company, servicers and representatives who may have to explain to investors why 0.9999 equals a $1.00. Why, I'm not sure, but we chose to use two decimals in this world and to round to dollars.... I don't think this is going to be a real big deal ... once you start seeing the numbers. With the shadow NAV in general, you are going to see almost all 9's. It's going to be 0.999 and then another number. A 0.998, which may trigger somebody to say, 'There is something different' -- that level of depreciation in the underlying prices of securities normally would be caused for action anyhow."
He says, "A lot of people are under the misconception that money market funds, during the SIV crises, broke the buck and then put were back together.... The board and directors of a money market fund would be on high alert, red alert, when a fund was half way to breaking the buck. At a money market fund shadow NAV or underlying NAV of 0.9975, you already at the point of no return, where you either take action to push the NAV up or the investor's 'spider senses' are tingling and they are already beginning to pull assets and make that discrepancy larger."
Finally, Crane adds, "Anyone with a 0.998, or whatever the market decides is a dangerous level, you would expect 60 days after the fact that the company would already taken action to push that back, to support it or to do something. Once you reach that half way towards breaking the buck that is usually the point of no return.... Anyone that does show significant deviation is going to have their response ready."
