Fitch Ratings released a statement entitled, "Reform, Policy Hurting Small US MMF Managers," which says, "Recent money fund reforms and monetary policy implementation are placing smaller money fund managers at a competitive disadvantage relative to their larger rivals." Also, Wells Fargo Funds published a white paper called, "Prime money market fund NAV volatility will likely remain low," which spells out why investors shouldn't give up on Prime Inst funds. Finally, BlackRock sent a letter to clients with an update on the BofA funds merger, and BofA submitted several Form N-CR filings for its pending Muni fund liquidations. We review all of these below.
The Fitch report begins, "Following years of fee waivers and forgone revenue driven by low interest rates, the costs arising from money fund reform implementation are proving too onerous for many small fund managers. This has led to acquisitions of smaller funds by larger rivals, liquidations of small funds and conversions from prime to government funds, which Fitch expects to accelerate as reform deadlines loom in 2016. Recent acquisitions of mostly smaller money funds by BlackRock, Federated and Dreyfus, three of the largest US money fund managers, demonstrate the relationship between scale and efficiency in the money fund space."
It continues, "For example, Federated (ranked the fourth-largest US money fund manager by Crane with $211 billion AUM) over the past year took over management responsibility for approximately $4 billion of money fund assets previously managed by Reich & Tang, acquired $930 million of money funds previously managed by Huntington Asset Advisors and $100 million of money funds previously managed by Touchstone. In addition, Dreyfus (ranked the eighth-largest US money fund manager by Crane with $163 billion AUM) acquired $1 billion of money funds previously managed by Touchstone. After the Federated and Dreyfus transactions, Reich & Tang, Huntington and Touchstone were no longer active players in the money fund industry."
Fitch continues, "Fitch believes the high incremental operating expenses associated with complying with money market reforms introduced in 2014 will be a more significant burden for smaller fund managers than for their larger peers. These reforms are being phased in through October 2016. Based on discussions with industry participants, Fitch estimates incremental reform-related costs, such as infrastructure upgrades, legal fees, product development and client outreach could range from single-digit to tens of millions of dollars. This is particularly true for institutional prime funds, which will require more changes than government funds.... This means they will incur higher costs as a percentage of assets, reducing their competitiveness and/or profitability."
They add, "Smaller funds also have limited or no access to the Fed's reverse repo program (RRP) given the Fed's asset size prerequisites to participation. The RRP is an important source of supply of government securities in a market where the supply of government paper is low relative to demand. Nineteen of the 20 largest money fund families (as tracked by Crane data) have at least one RRP-eligible fund compared with only five of the next 20 largest fund families having access.... The RRP has become a cornerstone of the investment strategy of many of the funds that are eligible counterparties for the Fed."
In other news, Wells Fargo's new paper on "NAV volatility"," explains, "Institutional prime money market funds will be required to transact at market-based, or floating, net asset values (NAVs) as of October 14, 2016.... To help clients gauge the practical implications of this change, below we share observations about how our prime funds have performed. The price fluctuations of our prime funds have been minimal; Scenario analysis suggests that income earned should remain the largest component of a fund's return; and Prime money market fund market-based NAVs have been steady because they have invested in short-term, high-quality assets."
They say under, "Reasons to continue to count on prime money market funds," "While past performance is not a guarantee of future results, we have always sought to provide our shareholders with both stability of principal and a high degree of liquidity, and we have done this by prudently managing our prime money market funds. In addition, the SEC requires money market funds to meet certain maturity, credit quality, and diversification limits to reduce risk and bolster liquidity. For example, a money market fund generally may not acquire any security with a remaining maturity greater than 397 days, the dollar-weighted average maturity of the securities owned by the fund may not exceed 60 days, and the fund's dollar-weighted average life to maturity may not exceed 120 days. These limits serve to curtail interest-rate risk. Similarly, liquidity and diversification requirements also help reduce risk."
It continues, "The price fluctuation of our flagship prime money market fund, the Wells Fargo Heritage Money Market Fund, has been minimal based on the four-digit market-based NAV that we have published since 2011. [F]rom the beginning of 2011 to the most recent data point, the difference between the highest market-based NAV and the lowest market-based NAV was 2 basis points. Assuming a $100 million investment and that the fund had been operating with a floating NAV rather than a stable $1.00 NAV, the largest price change in any one year (a 2-bp price change in 2011) would have resulted in a $20,000 loss.... [I]ncome payments would outweigh the effect of an NAV loss, resulting in a positive total return."
Wells adds, "The price fluctuation of the Wells Fargo Cash Investment Money Market Fund, a prime money market fund, also has been minimal based on its four-digit market-based NAV. [F]rom the beginning of 2011 to the most recent data point, the difference between the highest market-based NAV and the lowest market-based NAV was 3 bps. Looking at this in dollar terms, assuming a $100 million investment and that the fund had been operating with a floating NAV rather than a stable $1.00 NAV, the largest price change in any one year was 2 bps or $20,000."
The piece concludes, "In the future, institutional investors in prime money market funds will see a number of changes from the new SEC rules, especially those that take effect in October 2016. To help investors make confident choices, we suggest that they watch the fund data posted on fund websites, including market-based NAVs, weekly liquidity percentages, and yields. Many funds already report this information, and all will be required to do so beginning in April 2016.... While the stable NAV of a government money market fund may be best for some institutional investors, we believe that higher yields may be an important consideration for others. In fact, we expect we may begin to see a larger difference between prime money market fund yields and government money market fund yields, given the strong demand for government securities from a number of different investor types amid limited supply."
On Friday, BlackRock sent a letter to clients from Tom Callahan, Head of Cash Management, saying, "In November, we shared the exciting news that we had entered into an agreement with Bank of America's asset management business, BofA Global Capital Management, to transfer investment management responsibilities for approximately $94 billion of assets under management currently managed by BofA Global Capital Management to BlackRock." (See our `Feb. 12 News, "BofA Details Fund Mergers Into BlackRock MMFs.")
They tell us, "Since that announcement, we have made several important decisions, not least of which are the proposed reorganizations of certain BofA Global Capital Management money market funds into BlackRock money market funds. Below are the proposed reorganizations which have been approved by the BofA Funds' board of trustees and the BlackRock Funds' board of trustees." It explains that BofA Cash Reserves and BofA Money Market Reserves will be merged into BlackRock TempFund. (This will bring TempFund's assets to around $91.6 billion, making it one of the largest MMFs.) Also, BofA Govt Plus Reserves will be merged into BlackRock FedFund, BofA Government Reserves will be merged into the Federal Trust, and Treasury Reserves will merge into BlackRock T-Fund.
Callahan concludes, "If these reorganizations are completed, we believe the additional scale resulting from the combination of the assets of these funds will benefit our clients through even greater liquidity and diversity. The BofA Funds reorganizations are expected to be completed on or about April 15, 2016, subject to certain closing conditions, including shareholder approval."
Finally, note that BofA also recently filed a Form N-CR for each of its liquidating Municipal MMFs -- BofA CA Tax-Exempt Reserves, BofA CT Muni Reserves, BofA MA Muni Reserves, BofA Municipal Reserves, BofA NY Tax-Exempt Reserves, and BofA T-E Reserves. (See our Feb. 24 News, "Clean Sweep: Tax Free MMFs Liquidating En Masse; BofA, RBC, Deutsche.") The Form N-CRs say, "On February 22, 2016, the Board of Trustees of the Fund adopted a plan of liquidation and termination. Capital contributions would be provided to the extent necessary so that no shareholder of the Fund will receive less than $1.00 per share in connection with the liquidation of the Fund." The amount of support remains "To be determined."
