The ICI released its "2014 Investment Company Fact Book" in PDF form yesterday afternoon, ahead of the Institute's General Membership Meeting (GMM) next week in Washington. As usual, the "Fact Book" is loaded with useful statistics and analysis of mutual funds, and of money market mutual funds. Under the section, "Demand for Money Market Funds (on page 45)," the Fact Book says, "In 2013, money market funds received a modest $15 billion -- the first annual inflow since 2008. Demand for money market funds was not uniform throughout 2013, however. Various factors, including tax events, rising long term interest rates, and a U.S. debt ceiling standoff, influenced money market fund flows during 2013."

It explains, "Outflows from money market funds were concentrated in the first four months of 2013, during which investors redeemed $125 billion, on net (Figure 2.16). Tax payments by corporations in mid-March and individuals in mid-April were likely key drivers behind these redemptions. In addition, in early 2013, investors appeared to have unwound money market fund investments made near year-end 2012 as a result of uncertainties surrounding the fiscal cliff. In the last two months of 2012, money market funds received $145 billion in new cash as some investors sold equity mutual funds to lock in capital gains tax liabilities in anticipation that capital gains tax rates would increase in 2013. Also, in advance of increases in tax rates at the end of 2012, some corporations paid out hefty special dividends to stockholders and part of this cash was funneled to money market funds."

ICI comments, "After these tax-related influences waned in early 2013, outflows abated and money market funds received inflows of $129 billion over the second half of the year (Figure 2.16). Rising long-term interest rates over this period likely caused investors to divert some cash to money market funds to avoid capital losses in long-term bond funds by shifting toward shorter-horizon investments."

The Fact Book also says, "Net inflow into money market funds during the second half of 2013 was briefly interrupted in October by a prolonged U.S. government shutdown and a congressional stalemate over whether to raise the U.S. borrowing limit. Concern regarding the implications of a temporary suspension of debt payments on maturing short-dated Treasury securities by the U.S. government prompted investors to redeem $57 billion from government money market funds, which invest almost exclusively in U.S. Treasury and agency securities, in the first 16 days of October."

On "Retail Money Market Funds," ICI comments, "Because of Federal Reserve monetary policy, short-term interest rates continued to remain near zero in 2013. Yields on money market funds, which track short-term open market instruments such as Treasury bills, also hovered near zero and remained below yields on money market deposit accounts offered by banks (Figure 2.17). Individual investors tend to withdraw cash from money market funds when the difference between yields on money market funds and interest rates on bank deposits narrows or becomes negative. Retail money market funds, which principally are sold to individual investors, saw an outflow of a little more than $12 billion in 2013, following an outflow of $1 billion in 2012 (Figure 2.18)."

They write about "Institutional Money Market Funds," "Institutional money market funds -- used by businesses, pension funds, state and local governments, and other large-account investors -- had a net inflow of $27 billion in 2013, following an inflow of $1 billion in 2012 (Figure 2.18). Some of the cash generated by rising corporate profits in 2013 was likely held in money market funds as well as in bank deposits. U.S. nonfinancial businesses are important users of institutional money market funds. In 2013, U.S. nonfinancial businesses' portion of cash balances held in money market funds was 20 percent (Figure 2.19) [a record low]. This portion reached a peak of 37 percent in 2008 and has declined since then."

Finally, ICI adds in "Recent Reforms to Money Market Funds," "In 2010, the U.S. Securities and Exchange Commission (SEC) significantly reformed Rule 2a-7, a regulation governing money market funds. Among other things, the reforms required money market funds to hold a certain amount of liquidity and imposed stricter maturity limits. One outcome of these provisions is that prime funds have become more like government money market funds. To a significant degree, prime funds adjusted to the SEC's 2010 amendments to Rule 2a-7 by adding to their holdings of Treasury and agency securities. They also boosted their assets in repurchase agreements (repos). A repo can be thought of as a short-term collateralized loan, such as to a bank or other financial intermediary. Repos are collateralized -- typically by Treasury and agency securities -- to ensure that the loan is repaid. Prime funds' holdings of Treasury and agency securities and repos have risen substantially as a share of the funds' portfolios, from 12 percent in May 2007 to a peak of 36 percent in November 2012. In December 2013, this share was 28 percent of prime fund assets, still more than double the value prior to the financial crisis and subsequent reforms (Figure 2.20). For more complete data on money market funds, see section 4 in the data tables on pages 196–203."

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