Note: Crane Data has released its January 2012 Money Fund Portfolio Holdings dataset with data as of December 31, 2011. Money Fund Wisdom subscibers should have already received the XLS files via e-mail, and users may also download them via our Content Center web page........... Fitch Ratings distributed a press release entitled, "U.S. Prime Money Market Funds Continue Flight to Quality and Liquidity with Asset Allocations," which summarized the ratings agency's latest "U.S. Money Market Funds Sector Update." The release states, "U.S. prime money market funds (MMFs) continued their flight to quality and liquidity during the fourth quarter of 2011 (4Q'11), further reducing exposure to European financial institutions and increasing holdings of U.S. government securities, according to Fitch Ratings. As of November 2011, Fitch-rated prime MMFs invested 9.8% of their total assets in U.S. government securities, a significant increase from 5.4% allocation to this asset type in May 2011. The long-term decline of asset-backed commercial paper (ABCP) investments also continued, with overall ABCP outstandings declining by $52.4 billion, or 14% during the same period."

Fitch continues, "During 4Q'11, Fitch-rated prime MMFs remained conservatively positioned with respect to credit, interest rate, and liquidity risk as evidenced by a reduction in credit exposures, a high level of available liquidity, and low weighted average maturity to reset dates (WAMr). These MMFs reduced their average WAMr to 38 days at the end of November 2011, from 46 days at the end of May 2011."

They add, "Fitch notes that ongoing banking system deleveraging has affected the supply of MMF-eligible securities, with the decrease in ABCP outstanding as one example of this trend. U.S. prime MMFs have reacted by increasing allocations to municipal securities and utilizing new instruments such as collateralized commercial paper and variable-rate demand preferred stock issued by closed-end funds. MMFs are also making greater use of nongovernment repos backed by corporate bonds and equity securities, among other types of collateral."

The full report tells us, "The prolonged short-term interest rate environment continues to exert pressure on many fund operators in the form of fee waivers necessary to maintain positive yields for investors. Evidence of this pressure has come in the form of increasing industry consolidation and/or outright fund liquidations. According to CraneData, the number of U.S. money market funds decreased by 14 funds in the fourth quarter of 2011, to 1,235 funds from 1,249 funds, as a result of various liquidations and mergers. The Federal Reserve's Dec. 13, 2011 announcement of its intention to keep interest rates low for the time being is likely to influence additional consolidation and liquidation activity."

It adds, "Fees and expenses of prime institutional MMFs averaged 21 bps at the end of December 2011, representing an average increase of 1 bp since Sept. 30, 2011, when the average expense ratio stood at 20 bps. The average fund expense ratio with respect to government institutional MMFs as of the same date was 8 bps, remaining unchanged from the prior period. Fees that MMFs are able to charge in this low rate interest environment are still depressed relative to the precrisis level."

Finally, the Sector Update says, "Potential U.S. MMF regulatory developments remain actively debated by industry stakeholders. Changes aimed to improve MMF resilience are likely to be a net positive from a ratings perspective, but should be weighted against any additional conflicts and costs.... Fitch would have to consider the overall implications of any changes such as capital buffers, floating-rate net asset value (NAV), or liquidity charges/gates relative to its ratings criteria and investor expectations. Furthermore, Fitch would have to factor into its ratings any conflicts of interest that may arise due to different classes of shareholders, unintentional incentives to reach for yield, or changes in how Fitch views the sponsors' implicit or explicit commitment to the fund."

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