BofA's Albright on VNAV Funds
Dale Albright, head of money market portfolio management at BofA Global Capital Management, recently co-authored a white paper called, "Variable NAV Prime Money Market Funds: Risks and Rewards." Albright and co-author Jeremy Harman, Senior Institutional Sales Representative at BofA, write, "Prime money market funds have been used for decades because they have offered the potential for attractive yields, daily liquidity, diversification and principal stability. The evolving interest rate environment and sweeping regulatory reforms represent changes whose impact investors should understand as they use VNAV money market funds. The sponsors of institutional prime money market funds have time to implement the VNAV reform, and investors have time to consider the impact of the change in the context of their risk tolerance, return objectives and liquidity requirements. While some investors may not have the appetite for even a few basis points of NAV deviation, others might view such NAV movement as they would transaction fees on bank, sweep or custody accounts -- a cost of doing business justified by the risk/return profile and overall benefits of the investment. Investors' make this trade-off today. Most investment policies state that preservation of principal is the primary objective, yet most short-duration investors do not limit themselves to U.S. Treasuries. They use institutional prime money market funds knowing there is no guarantee that the funds' NAVs will remain stable at $1.00 because they believe the additional yield potential institutional prime money market funds have offered adequately compensates them for the additional risk. So, while principal preservation is, and should be, liquidity investors' primary objective, yield and return are considerations today and will be in the future. Absent large and unpredictable dislocations in the short-term debt markets, the advent of a floating NAV for institutional prime money market funds is unlikely, in our view, to negate the benefits offered by this category of funds. Under normal circumstances, the potential impacts of a shift to a floating NAV are likely to be small, and they are, in many ways, quantifiable (and thus manageable). Moreover, investors understand that market dislocations, such as the global financial crisis, threaten principal preservation whether a fund's NAV is pegged at $1.00 or floats. We believe that in a normal operating environment, a VNAV structure would not, by itself, undermine principal stability. Investors might choose to use VNAV prime money market funds differently in the future (using them for reserve cash instead of operating cash, for example), but we believe institutional prime funds will remain a valuable component of a diversified liquidity-management program even after these funds adopt the variable NAV in October 2016."
