The Wells Fargo Advantage Funds Money Market Funds team did such a spot-on recap of the 6th Annual Crane Money Fund Symposium in its June 30 "Portfolio Manager Commentary" that we thought we'd share it with you. "Last month we attended the Money Fund Symposium sponsored by Crane Data. With nearly 500 attendees, this is the largest conference aimed at money market fund portfolio managers, credit analysts, investors, servicers, issuers of money market securities, and others involved in the money market fund industry. There were a number of good panels and many enlightening side conversations, but those of us here who attended had a common takeaway: an underlying current of frustration," writes the team, led by Dave Sylvester, head of money funds at Wells Fargo. (Sylvester moderated a dealer panel that talked about supply -- see our previous story here. Another member of the team, Mike Bird, senior fund manager, taxable money funds, spoke at a session called "Government Money Fund Issues & Repo Update." Note: To subscribe to Wells' free monthly Money Fund "Portfolio Manager" Commentary, click here.)
The Wells commentary continues: "Many participants expressed frustration with the glacial pace of so-called money market fund reform measures. After having the floating net asset value (NAV) of Damocles hanging over their heads for more than a year now, we understand the desire of some to move on. But we'll not join one participant who voiced the view that it almost doesn't matter what the Securities and Exchange Commission does, so long as we get something soon! While we don't generally comment in this forum on the proposed amendments to Rule 2a-7, we would counsel patience and are thankful that the regulators are taking a measured and thoughtful approach to what might prove to be deeply significant and long-lasting changes."
It says, "There was also a general undertone of frustration with how long we have had to endure the Federal Reserve's (Fed's) zero-interest-rate policy. It is staggering to think that the federal funds target rate has been set between 0 and 25 basis points (bps; 100 bps equals 1.00%) for five and a half years now! Conference participants shared an almost universal belief that short-term rates will rise in 2015, prompted most certainly by the Fed's own forecasts, colloquially known as the dots. What surprised us somewhat was that everyone seemed to accept that any rise in rates would be clearly signaled well in advance in clear and universally understood terms and that the Fed would hike rates in a slow and deliberate manner. The Fed's own forecasts, along with speeches by some of the Federal Open Market Committee (FOMC) members, reflect considerably more diversity of opinion than we encountered at the conference. What's more, if conference participants are heeding the FOMC's warnings that changes in current interest rate policy are dependent on the strength of the economy, they must share a universally rosy view of those prospects."
Wells continues, "There also seemed to be an almost unquestioning faith in the Fed's ability to manage the next phase of monetary policy through the dual mechanisms of interest on excess reserves (IOER) and its reverse repurchase agreement (RRP) program despite the fact that both are brand new tools that have never been used to manage monetary policy, let alone in an environment where the Fed has a $4 trillion balance sheet. While RRP seems to be successful so far in its role as the new rate floor, few people seemed to recall that IOER, which now acts as a ceiling on money market rates, was actually designed to put a floor under them and now has to be supplemented by the RRP. Even without this misstep, the complexity of the markets alone makes us think that somehow, some way, things will not go as smoothly as our colleagues seem to expect."
Wells Fargo also summarized a session on supply, "Conference attendees also expressed frustration with the continued lack of supply of eligible money market investments, especially in the shorter maturities. One particularly engaging presenter noted that the total money market supply is down almost $2.5 trillion since its peak in 2008, whereas money market fund assets have fallen only about $435 billion during the same period. This has created a real shortage of investable assets and is one factor enabling money market yields to regularly trade below IOER. We noted that banks are curtailing their issuance of shorter maturities as they move into compliance with the Basel liquidity coverage ratio, while others are trimming the size of their repurchase agreement (repo) books to fit the requirements of the supplementary leverage ratio. Cocktail party talk sometimes seemed like a competition between the different banks to see which had the longest minimum maturity it would write or which had cut the size of its repo book the most. There were, however, a couple of faint rays of hope on the supply front as some of the dealer panelists looked for a modest increase in the amount of asset-backed commercial paper outstanding, while others thought that nonfinancial commercial paper would continue to grow. Both of these are relatively small segments of the market, though, and any increase there will not make up for cutbacks in the certificate of deposits, Treasury, and repo markets."
"Generally it was felt that once the Fed's RRP program started up in earnest, money market funds could use it to fill their daily and weekly liquid-asset buckets. But several participants expressed a reluctance to completely embrace the Fed's program. Some expressed a reluctance to tie their portfolios to an investment with an administered rate and preferred the market-based rates in the repo and time deposit markets, while others questioned whether RRP could really be counted on as a permanent feature of the market. Still others questioned whether a portfolio that only had one repo counterparty was consistent with the concept of diversification."
It concludes: "Overall, the conference had an optimistic tone with respect to the outlook for money market fund assets. Many panelists and participants expressed the view that should assets eventually leave prime funds because of a floating NAV, most of that money would end up in government money market funds. One panelist expressed the view that the increased cost of wholesale deposits would cause banks to turn away institutional depositors who would then turn to government money market funds. While it is hard for us to envision banks actually turning away creditworthy institutional depositors, we did talk to one hedge fund representative who was doing due diligence on money market funds specifically because the banks they work with had capped the amount of deposits they would take. Whether or not this becomes a theme remains to be seen. Overall, it was once again an excellent conference and one that we would recommend to anyone interested in an in-depth look at the world of money market funds. Despite the frustrations expressed by the participants, the overall mood remained upbeat, and the industry seemed well positioned to meet the challenges of the future."
For more coverage of the conference, check out the following links: Fidelity's Nancy Prior Gives Symposium Keynote: Black Clouds Parting; State of the MF Industry: Nowhere to Go But Up; Feeling Good in Boston; Senior PMs Talk Ratings, Regulations, Trends at Money Fund Symposium; More Money Fund Symposium Highlights: Major Money Fund Issues 2014; and Yet More MF Symposium: Dealer Panel on Supply Outlook, New Products. Attendees and subscribers can also hear the recordings and see the final Powerpoints and binder in our "Money Fund Symposium 2014 Download Center" here.
