Will BlackRock be the next mega money manager to realign its money market fund lineup in response to the Securities and Exchange Commission's money market reforms? An article in Wednesday's Wall Street Journal says that indeed may be the case. The Journal piece, "Advisers Prepare for Changes to Money-Market Funds (finally) recaps the news that we've covered for a couple of weeks now, that Fidelity is converting three of its Prime Retail funds, including the $112 billion Fidelity Cash Reserves Fund, to a government fund due to investor demand. (See our Feb. 2 News, "Fidelity Announces Major Changes to MMFs; Staying Stable, Going Govt.") But it also examines what others have been wondering for the last two weeks: Will other managers do something similar? Federated has stated for months, before the Fidelity news came out, that it is considering money market fund changes in response to the SEC reforms. However, the Journal also reports that BlackRock, also a top 5 money manager in terms of assets, might be shaking things up, too.
The Journal writes, "Fidelity Investments' plans to revamp some of its money-market funds could be a sign of things to come as asset managers prepare for new regulations that are likely to transform the $2.7 trillion industry. The Boston money manager will convert three of its prime funds--which now invest in corporate debt--to government funds that invest in cash, government securities or repurchase agreements collateralized by government securities. Those changes may result in lower yields for investors now in the prime funds, and other money managers will likely follow suit.... Retail and government money-market funds may maintain their stable $1 share price under the regulations. But under the new rules, the boards of non-government money-market funds are permitted [required] to impose liquidity fees on shareholders for withdrawing assets and to suspend redemptions temporarily to thwart a run on a fund."
The story continues, "Those new conditions, however, are not popular with many investors. "Many investors have told us that they want access to money-market mutual funds with a stable net asset value that will not be subject to liquidity fees or redemption gates, which would restrict their use of the funds," Fidelity said. Matthew Tuttle, chief executive at Tuttle Tactical Management, is among those who doesn't want clients' access restricted. He makes extensive use of Fidelity's prime money-market funds, and says, "I'd rather have a government money-market fund than something that floats.""
The Journal writes, "Roger Merritt, managing director at Fitch Ratings, says any shift from a prime fund to a government fund will typically result in reduced yield for investors.... Exclude the crisis period from June 2007 to June 2008, and the average spread differential falls to six basis points in favor of prime funds, says Nancy Prior, president of fixed income at Fidelity. In essence, investors now have to make a choice on what's more important to them--a fund with a stable net asset value without the possibility of gates and fees or that "very small yield differential," Ms. Prior says."
The WSJ article continues, "Fidelity's plans, some of which require shareholder approval, are a wake-up call to money-market fund participants who had entered a period of calm given that almost no changes had been made by managers or investors since the new regulations were approved, says Vikram Rai, fixed-income strategist at Citigroup Inc. Other large players in the money-fund industry are already mulling changes."
It says, "BlackRock Inc. will likely convert its retail prime funds later this year, says Thomas Callahan, co-head of the firm's cash-management group. It has no plans currently to convert its institutional funds. And Federated Investors Inc. continues to work on product modifications and additions related to the new regulations, a spokesman says. To meet money-fund needs, its products will likely include prime and muni money-market funds modified to meet the new requirements, among other options, he says. The Vanguard Group is evaluating the reforms and the effect on its shareholders, a spokesman says. The vast majority of the asset-manager's money-fund investors are retail, he says, adding that the firm doesn't have any plans to convert its prime money-market funds into government money-market funds."
The article quotes Crane Data President Peter Crane as saying, "Explaining and preparing for the emergency gates and fees is scaring off boards of directors and sweep-fund directors [investors]," he says. "They don't want that small chance that their cash might be frozen at some point." Mr. Rai of Citigroup says the industry "will undergo a slightly unsettled phase as key players tweak their models." He anticipates some near-term outflows from institutional prime funds overall, but doesn't anticipate that the changes will open the floodgates for large outflows from institutional prime funds."
In other news, Fidelity Investments wrote surprisingly little on money market funds in its 2014 Shareholder Update. They say, "Money market funds continue to operate in a near-zero interest rate environment, and we saw $13 billion in managed money market fund outflows [in 2014]. Money market funds remain very important to our customers, and will continue to be an integral part of our business. Thanks to the hard work of associates across Fidelity, we are well prepared to make changes to our product offering and fund operations to comply with the SEC's new rules." In terms of performance, Fidelity's money market funds beat 69%, 72%, and 73% of peers for the trailing one-, three-, and five-year periods ended December 31, 2014, respectively, according to the annual report.
