We've gotten used to outrageous statements on money market funds from the Financial Times over the past several years, but the latest one takes the cake. Their article from late last week, "Money funds at risk of big drop in assets," reaches new heights of ridiculousness with the claim that money funds could lose one-third of their assets in the next year. The FT, which sources a Moody's report that groups U.S. money funds in with the totally different "European" variety, writes, "Global money market funds are projected to lose around a third of their assets under management next year as the combined forces of record low interest rates and new regulations batter the multi-trillion dollar industry. Incoming rules from regulators in the US and Europe could trigger outflows of at least 30 per cent, according to Moody's, the credit rating agency, with medium and small funds hit worst as spooked investors pull their money."
The article explains, "Under US and European regulators' proposals money market funds are set to change their approach to pricing, potentially moving from a stable $1 or E1 net asset value to one that will fluctuate according to the market value of the underlying investments.... EU authorities have also proposed that money market funds should hold capital buffers equal to 3 per cent of their investments." (The European Union regulatory proposal gives the option of a buffer for stable NAV funds or a floating NAV, but it isn't expected to become law for well over a year.)
The FT adds, "In the US, the Securities and Exchange Commission has also proposed limiting investors' ability to withdraw their cash from money market funds during times of market stress, and is currently weighing whether this idea is better than a floating NAV, or whether it can combine the two. The changes would only affect part of the industry. The SEC plans to exempt funds that invest only in super-safe government securities, and those targeted at retail investors, who are seen as less likely to start a run on a fund. The gloomy Moody's prognosis comes as low interest rates, which squeeze funds' already wafer-thin margins, has led to declines in assets under management for many funds."
The quote Moody's Yaron Ernst, "If the regulation comes in as proposed we expect a 30 per cent or higher decline of AUM because of the likely switch to 'variable net asset values' by most managers. The AUM decline will especially affect small and medium-sized fund complexes that will be taking the hardest hit."
Crane Data believes Moody's and the FT's estimates to be ridiculous. There are currently approximately $4.5 trillion in global money fund assets (according to ICI); they have decreased by a mere $89 billion, or 1.9% over the past year (already well into the zero rate and potential radical regulatory overhaul environment). A 30% decline would mean a drop of $1.35 trillion in the coming year and would be a rate of decline never seen in money funds' 40-year history. U.S. money funds, which have been effectively flat for 3 years straight, account for almost 58 percent of the worldwide total ($2.6 trillion); they would need to decline by over $775 billion for a drop of this magnitude. Thus, we think these bearish predictions have no chance of being right. We think even a drop of half of this magnitude is very unlikely even given drastic regulatory change (and we don't think the more radical changes will become reality).
In other news, Joan Ohlbaum Swirsky of Stradley Ronon wrote recently about "U.S. Debt Ceiling – Lessons Learned for Money Market Funds. She says, "A unique event may display issues in a new light. The U.S. debt ceiling uncertainty during October 2013 illustrates that effect. Congress delayed increasing the cap on the amount the U.S. government is permitted to borrow to meet its existing obligations. The resulting events – such as the decline in value of certain short-dated Treasury bills and the increased redemptions in some money market funds – provided a new prism through which to view disclosure and other issues for money market funds. Below are a few of the issues that took on a changed complexion for some money market funds as the debt ceiling deadline approached. Money market fund professionals now have the luxury to consider these points, free of a looming deadline to avoid a U.S. Treasury credit default."
Swirsky continues, "Consider disclosing ability to delay payment of redemption proceeds. During the October debt ceiling debate, some money market funds may have contemplated using the flexibility that the Investment Company Act provides regarding payment of redemption proceeds: A fund may postpone the right of payment upon redemption for up to seven days. However, some money market funds do not include prospectus disclosure that reflects the permitted flexibility.... Consider disclosure of cash investments. Some money market funds may have held more cash than usual during October in order to ensure sufficient liquidity in the event redemptions accelerated. If so, prospectus disclosure that permits a temporary defensive strategy would be appropriate.... Review requirements to dispose of securities – rule, procedures and disclosure.... [and] Consider ability to convene the board"
Finally, she adds, "These are a few of the host of issues that may arise for money market funds during challenging markets. To address some of the issues, funds or advisers may consider having in place escalation procedures or negative event protocols. By considering these issues during tranquil circumstances, funds may help themselves weather the more turbulent circumstances that are sure to arise from time to time."
