Federated Investors' CEO Chris Donahue commented on the 3rd largest money fund manager's most recent earnings call Friday, "Average money market fund assets were up over $5 billion in the fourth quarter, while the quarter end totals increased by nearly $11 billion to $256 billion. Our market share for money market funds increased slightly [in Q4].... For separate account money market assets, the $4 billion of growth in period end assets was due to expected seasonality. The year-end expiration of the government's unlimited insurance on non-interest-bearing bank, accounts called TAG program, likely accounted for some part of the money market fund asset growth for us and for the industry. However, it is not unusual for us to see money market inflows during the fourth quarter. The impact of yield related waivers decreased in Q4, but we expect it to increase in Q1."
He continued, "On the regulatory front, I'll start out by noting that with the industry up $90 billion in money market assets in the fourth quarter, it's obvious that money market investors have remained confident about the product as it's presently constructed -- dollar in, dollar out; uninsured; transparent; invested in a diversified portfolio of high-quality securities; and supported by proper accounting and market valuations. Still the regulators continue on their mission to reform money funds in ways that, as presented by FSOC in their letter to the SEC in November, will raise debt costs for municipal issuers, corporations and others. [This could cause] investors to move cash to investments that are far less regulated, have far less transparency and which, in the case of the still too-big-to-fail banks, present far more systemic risks to the financial system."
Donahue told analysts, "With the comment period extended until mid-February on FSOC's Section 120 SEC letter, we continue to be active in informing our customers and the marketplace about the dangers of the measures outlined by the FSOC, and to offer our help to the regulators to arrive at constructive changes. Our position is straightforward. We will continue to champion those things that enhance the resiliency of money market funds, while retaining the core features of a sound product with an unparalleled long record of safety and success, namely daily liquidity at par to the market rate of interest."
CFO Tom Donahue told callers, "Taking a look first at money fund fee waivers, the impact to pretax income in Q4 was $15.5 million, down from $16.3 million in the prior quarter. The improvement was due mainly to higher rates for treasuries and mortgages, and mortgage-related securities, offset partially by lower yields for prime and muni securities and by higher assets. Early in Q1, we have seen rates decrease in all money market categories compared to Q4. Some of this is cyclical, as Chris noted earlier, we tend to see cash assets including money market fund buildup at year end and carryover into the first part of the next year. As those assets compete for short-term instruments, rates tend to tighten. [T]he end of Operation Twist, QE3.5 and the end of the TAG program are factors as well. Combined with higher asset levels, the impact of these minimum yield waivers is likely to be higher in Q1."
He added, "Based on the current assets and expected yield levels, impact of minimum yield waivers to pretax income in Q1 could be approximately $21 million or $5.5 million more than in Q4. Looking out over the rest of the year, we think rates will rise as the economy improves and some of the seasonal pressures ease. Looking forward and holding all other variables constant, we estimate that gaining 10 basis points in gross yields would likely reduce the impact of minimum yield waivers by about 40%, and the 25 basis point increase would reduce the impact by about 70%. It's important to note that the variables impacting waivers can and do change frequently."
One analyst asked about daily market NAVs and floating NAVs. Donahue answered, "No, we're not transitioning to variable NAVs. And any suggestion that A is related to B is, is just not appropriate especially in our case.... Once a bunch of our competitors decided to do it, then the customers look at it and say, 'Hey, if A and B are doing it, why isn't C doing it?' And that's why we're doing it. In the whole history of our money market fund area, I'm not aware of anyone who ever asked for the current shadow NAVs on our funds. On some due diligence trips, we've had people who've asked for the historic daily valuations, and so we've responded to that. So it was definitely not client demand." (See also, Federated's recent explantory piece, "Taking the Shadow Out of Shadow Pricing".)
Donahue continued, "And as regards to clients, so far what we can detect is, publishing is a lot like lifting your hand out of a bucket of water and then seeing what impact you had. But on the other hand, I think that, I would say, that if having been done means that this is an area where the industry, for whatever reasons and however it happened, has taken the single most transparent financial product in the history of man and made it more transparent. And that, those who think that there are problems in the funds with disclosure, ought to hit pause mode on doing things to destroy this industry because now you can look at these factors, they're all published, and see if there are things going on that you don't like. It certainly, seems to me, should undercut some of the arguments in favor of doing some of the more drastic things you mentioned like changing the NAV."
He told analysts, "Well, assuming the dread [scenario] occurs ... any of the new products that have ... a higher yield and a little bit of a change in NAV are not going to be favored by the customers. So the answer is not going to be [a] creative variable [net] asset value product. The creativity is going to be coming up with products that are as close to $1 as you can get them. And whether that is re-going over the enhanced cash products, whether it's looking at collective funds, common funds, whether it's looking at offshore funds, whether it's looking at private accounts, separate accounts, whether it's looking expanding the province of estate pools, you do all of those kinds of things. Because your goal at that point, which I don't think we'll get to because I think good policy will win out, your goal is still the dollar-in, dollar-out type net asset value as best as you can do it."
MM CIO Debbie Cunningham added, "I think, to some degree, this will help mitigate some of the perhaps sensationalization of NAV mark-to-market or shadow pricing versus the amortized cost, or 'fictional pricing' as [some] refer to it as. The fact that, for the most part, what you'll see is movement in the fourth decimal point.... [I]t makes it very boring and makes it very apparent, I think, that what has been mentioned as incorrect or a fictional pricing from an amortized cost basis was shown to be exactly wrong. And that in fact, when you look at the shadow pricing, you compare it to the trading NAV as conducted by the amortized cost pricing is identical."
Donahue commented, "On the timeline, I think, [the next step is] mid-February, [where] the FSOC extended the deadline. And so comments come in, comments have to be evaluated, however long that takes (FSOC hasn't told us). Then, FSOC has the ability to either come up with a proposal to the SEC or to not come up with a proposal to the SEC. And if the SEC receives that proposal, they then have to put it into a rule form. Then they have to publish the rule and give a 60- or 90-day comment period, then receive the comments back, and then construct the rule. So it's very hard under that sequence to get any of that completed before even Labor Day."
He said, "Another sequence that is possible at any time is the usual SEC process, which I just added on to the end of the FSOC process. So if the SEC decides to come up with a rule proposal, they have to internally come up with a term sheet, gives the commissioners 30 days to look at it and say this, that, be in favor or not, then vote on it or not. Then, if they vote on it, then they publish it, then they have 60 or 90 days and sometimes even longer comment period, then accept comments, and then decide to come up with a rule, and then have whatever implementation time they deem appropriate in the rule. So that's kind of the timeline.
Donahue answered, "Now for the second part of the question, making book on know this comes up. Having been at this business for 40 years and dealing with the regulators, at various times, the SEC, the Fed and others, now FSOC, it's very, very hard to make book on how these things will come up. My belief is that good regulation and good regulatory policy will win out. And that there has been no evidence put out that shows sins committed by money funds or a need to be draconian about the industry. And therefore, I don't think those kinds of things will happen. But I'm not in charge of it, and it's really hard to exactly predict it. But I would say that if any of those things ... come to fruition, I am certain that the regulators understand what they're dealing with, and there will be long [timelines for] the implementation because of how important and how sensitive these issues are."
