Post-reforms, the money market fund industry will certainly look different than it does now. In a recent webinar called "Investment Policy Decisions and Amendments, Post Money Fund Reform," a panel of experts discussed what some of those changes might look like. The webinar was hosted by StoneCastle Cash Management with support from Fitch Ratings, PIMCO, and iTreasurer. It was moderated by Ted Howard, managing editor, iTreasurer, and featured presentations by Roger Merritt, Managing Director, and Greg Fayvilevich, Director, Fitch Ratings; Brandon Semilof, Managing Director, StoneCastle; and Brian Leach, Product Manager, PIMCO. We review the webinar below, and we also mention some recent merger and consolidation news. (Note: Monday, Oct. 27 is also the deadline for comments on the Treasury and IRS's Proposed Rule, "Money Market Funds: Method of Accounting for Gains and Losses on Shares and Broker Returns with Respect to Sales of Shares," which accompanied the SEC's recent Money Fund Reforms. See our July 30 News, "Reform Floating NAV Accounting Issues Addressed by Treasury Proposal". No comments have been posted to date, but we will review these if and when they are released.)
PIMCO's Leach talked about managing cash amidst reforms and a rate environment he called, the "new neutral". "Like everyone else, we know that the Fed is going to eventually hike rates; the market expects this to happen mid- or late next year. That is only part of the story. The other part of it is where we think, long-term, interest rates are headed and that's where our concept of the 'new neutral' comes in. In short, the new neutral reflects our view that central bank policy rates will be lower than their historical average -- somewhere in the range of 2% from the Fed in the US. If we assume a 2% inflation rate, this really means a 0% real yield," said Leach.
How will this impact cash management? While yields will increase, they don't think they will reach historical norms. "Historically, for many investors, strategies like these were a one-stop shop for cash management -- they got a nice yield and they had a fixed NAV. Will this be the case going forward? Definitely not, so that leads us to thinking about an evolved cash management framework that we call cash tiering."
Leach talked about a 3-tiered system for cash management framework based on their expectations for rates and the increase in options available to investors. Tier 1 includes traditional stable NAV money market funds and bank deposits with the sole focus on principal preservation and liquidity. Tier 2 is reserved for short duration products that offer enhanced returns to cash liquidity, perhaps enhanced cash funds or the like. The 3rd tier might consist of products with a longer duration where the idea is to grow the balance as opposed to simply protecting on the downside, said Leach. This might include ultra short bond funds.
Fitch's Fayvilevich talked about how MMF reforms may impact the industry. "The baseline expectation in the industry is that some money will flow out of institutional prime," he said. Based on surveys of money fund investors and corporate treasurers, there's an expectation that some will stop using or reduce their usage of prime institutional money funds. Estimates of the outflows vary quite widely, anywhere from 10% to more than 50%, he said. "It's not clear how much money will leave prime institutional funds; we will probably get a little more clarity as we get closer to 2016. So far, we haven't seen any movement in cash, in fact, since the SEC released the rules, institutional prime funds have gained a little bit of assets."
Where will the money flow? "The answer is not that simple because many of the liquidity products that could serve as alternatives to prime funds are also in a bit of flux because of regulatory changes and market forces. Perhaps the most natural alternative to prime (institutional) money funds is government money funds, which are going to maintain their stable NAV and are exempt from fees and gates." However, there is an issue of the amount of inflows these funds can handle before becoming a more difficult to manage, he added.
In recent months, he has seen a few managers launch ultra short term bond funds. A couple of managers are also looking at private MMFs, he added, but nothing has really gained a lot of traction yet. Other products that could gain traction, added Merritt, are FDIC-insured structured deposits and money funds that operate with a WAM of 60 days or less, although the latter would not make sense in this current low-yield environment, but might make more sense as yields increase.
Merritt concluded, "Corporate treasures and cash managers are facing a dramatically shifting landscape so we think, with that concept in mind, it's now more than ever important that you take a very proactive, strategic examination of your investment guidelines.... and make sure they are appropriately updated [to reflect changes in the regulatory environment]. Stale policies lead to missed opportunities."
In other news, effective October 22, investment management of all ("offshore" or European-based) Ignis Liquidity Funds transferred to Standard Life Investments, with full migration to the Standard Life Investments platform expected by the end of 2014. There will be no change to the management style (or name) of the Ignis Liquidity Funds, company officials told us. Standard Life Investments completed its acquisition of Ignis Asset Management on July 1. The acquisition increases total cash managed within Standard Life Investments to L36.2 billion. Gordon Lowson, Head of Money Market and Foreign Exchange at Standard Life Investments, will assume responsibility for the Ignis Liquidity Funds.
Finally, a release entitled, "Fitch Withdraws Virtus Insight Money Market Fund's 'AAAmmf' Rating" says the firm withdrew its 'AAAmmf' rating on prime money market fund Virtus Insight Money Market Fund due to the fund's planned liquidation. Virtus Insight Money Market Fund was managed by BMO Asset Management. "The fund redeemed all of its shareholders' assets at a net asset value per share of $1.00 on Oct. 20, 2014." For more on the Virtus liquidation and recent mergers and acquisitions in the money market space, see our article "Rates, Reforms Driving Money Fund Consolidation, Changes" in the October issue of Money Fund Intelligence.
