Is the liquidation of Reich & Tang's money market funds, and possible rollover to Federated, a sign of things to come? In a recent article called, "There's No Profit For You -- or Fund Companies -- in Money Funds," Marketwatch's Chuck Jaffe suspects the current money fund landscape will lead to further consolidation. He writes, "[W]hen Reich & Tang Asset Management announced last week that it's liquidating its money-market funds, it should have fired alarm bells with investors who use money funds as a safe haven for cash. While Reich & Tang is not a household name, it did have nearly $10 billion in money-fund assets, enough to rank as the 25th largest company in the money-fund game, according to Crane Data." (See our March 17 News, "Federated In Talks with Reich & Tang Over MMF Assets," and our March 13 "Link of the Day", "Reich & Tang Announces Liquidation of Money Market Mutual Funds."
Jaffe's piece continues, "And in exiting the business, Michael Lydon, Reich & Tang's president and chief executive officer, sounded a warning for the industry. "Given the ongoing regulatory changes that are being added to the already challenging landscape for money funds," he said, "the ability for mid-tier money-fund sponsor firms to thrive has become significantly diminished." Fund companies are waiving expenses mostly to make sure the funds don't break the buck, and regulatory changes hurt them by slightly hiking expenses -- since most people and firms will gravitate toward insured [sic]/Treasury funds which tend to be slightly higher in cost -- which means it will take even more time before running a money fund again becomes profitable. In short, there's no money to be made in money-market funds, except for the biggest of sponsors."
He adds, "The [Reich & Tang] news really highlights how long and painful the money market business has been for the fund industry," said Russel Kinnel, director of fund research at Morningstar Inc. "The giants have the scale and cost structures to minimize the pain, but it's hard for smaller companies to manage and they have steadily been leaving money markets for a few years now." Investors haven't left quite so fast; there's $2.7 trillion stashed in money funds."
Finally, Jaffe quotes Peter Crane of Crane Data, "Investors became desensitized to yield, they just stuck their heads in the sand and said 'Forget it' when rates went below one percent. There's a real question of when investors will become re-sensitized; they haven't seen anything good for so long, you have to wonder if they will jump at the first round numbers they see. Money funds used to be about convenience and yield, but without the yield advantage, the only reason to use them is if it's convenient." Crane added. "They'll be worth discussing more if and when they get their yield advantage back; we'll just have to see which companies are still in the business when that finally happens."
In other news, the Investment Company Institute released its latest "Money Market Fund Holdings" report, which tracks the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds (as of Feb. 28, 2015). ICI's "Prime and Government Money Market Funds' Daily and Weekly Liquid Assets" table shows Prime Money Market Funds' Daily liquid assets at 25.6% as of February 28, 2015, up from 25.4% on Jan. 31. Daily liquid assets were made up of: "All securities maturing within 1 day," which totaled 21.1% (vs. 20.8% last month) and "Other treasury securities," which added 4.5% (down from 4.6% last month). Prime funds' Weekly liquid assets totaled 37.9% (vs. 38.7% last month), which was made up of "All securities maturing within 5 days" (32.3% vs. 32.2% in January), Other treasury securities (4.9% vs. 4.4% in January), and Other agency securities (1.1% vs. 2.1% a month ago). (See also our previous Money Fund Portfolio Holdings story, Crane Data's March 11 News, "March Portfolio Holdings Show Drop in Agencies, TDs; Repo, CP Up.")
Government Money Market Funds' Daily liquid assets totaled 56.4% as of Feb. 28 vs. 58.1% in January. All securities maturing within 1 day totaled 24.6% vs. 26.3% last month. Other treasury securities added 31.8% (vs. 31.8% in January). Weekly liquid assets totaled 80.9% (vs. 78.7%), which was comprised of All securities maturing within 5 days (40.3% vs. 37.8%), Other treasury securities (29.3% vs. 29.9%), and Other agency securities (11.2% vs. 11.0%).
ICI's "Prime and Government Money Market Funds' Holdings, by Region of Issuer" table shows Prime Money Market Funds with 40.5% in the Americas (vs. 41.2% last month), 20.2% in Asia Pacific (vs. 19.5%), 39.0% in Europe (vs. 38.9%), and 0.3% in Other and Supranational (same as last month). Government Money Market Funds held 85.7% in the Americas (vs. 86.5% last month), 0.4% in Asia Pacific (vs. 0.3%), 13.9% in Europe (vs. 13.1%), and 0.1% in Supranational (vs. 0.1%).
The table, "Prime and Government Money Market Funds' WAMs and WALs" shows Prime MMFs WAMs at 44 days as of Feb. 28, same as last month. WALs were at 79 days, same as last month. Government MMFs' WAMs was at 42 days, down from 43 days last month, while WALs was at 80 days, up from 79 days. ICI's release explains, "Each month, ICI reports numbers based on the Securities and Exchange Commission's Form N-MFP data, which many fund sponsors provide directly to the Institute. ICI's data report for February covers funds holding 94 percent of taxable money market fund assets." Note: ICI publishes aggregates but doesn't publish individual fund holdings.
In their latest "Prime Money Market Fund Holdings Update," JP Morgan Securities', Alex Roever, Teresa Ho, and John Iborg comment, "During February, prime funds increased their exposures to banks by $14bn. This modest gain was driven primarily by a $15bn increase in time deposit holdings across several European banks, and a $12bn increase in CD holdings of Japanese banks. Conversely, holdings of ABCP declined by $5bn month-over-month, while repo allocations decreased by $8bn. At $136bn, money fund holdings of repo (ex RRP) are at their lowest levels since we began collecting this data."
They continue, "Our data shows that the top 25 bank issuers in the US money market are beginning to issue more in shorter maturity buckets. Year-over-year, outstandings of the top 25 bank issuers held by prime MMFs have increased by $65bn, the majority of which has been allocated in the 0-7 day maturity bucket. We suspect that concentration of issuance into the 0-7 day space may be the beginning of a broader trend in the months to come. As investors begin to migrate out of prime funds, and large fund families alter the structure of their complexes, portfolio managers are likely to focus more on ensuring ample liquidity and demand shorter maturity paper."
Finally, JPM Securities writes, "Money market funds took down $169bn or 82% of total RRP at the end of February. Prime funds took down $10bn of term RRP and $48bn of overnight RRP. Government funds took down $39bn of term RRP and $72bn of overnight RRP. Looking forward, we expect RRP usage to surge at the end of March as banks temporarily pull back on short-term funding for quarter-end. As banks engage in regulatory induced balance-sheet management, the RRP will serve as a viable source of backstop supply for money funds. This time around, $500bn in Fed RRP will be available at the end of the month ($200bn in term RRP + $300bn in overnight RRP). With the newly added counterparties and $500bn aggregate cap on the facility, using historical usage data we estimate that demand from money funds for RRP could now register around $370bn at the end of the month."
