A press release entitled, "Morgan Stanley Investment Management Launches New Ultra-Short Income Fund" explains, "Morgan Stanley Investment Management today announced the launch of its new Morgan Stanley Institutional Fund Trust (MSIFT) Ultra-Short Income Portfolio, a conservatively managed fund that may be appropriate for cash investors." The fund, managed by Jonas Kolk and Michael Cha, launched on April 29, according to the fund's website. The release says the fund "provides a compelling alternative for cash investors." We excerpt from the release below, and we also review a report from Fitch Ratings, "Foreign Banks Lose Money Fund Financing as Reform Looms." (Note: We initially reported on the MS filing in our October 2015 Bond Fund Intelligence, and watch for more coverage in our May BFI, which ships Friday.)
Morgan Stanley's press release says, "The reforms to SEC Rule 2a-7 which govern money market funds and are effective this October will require institutional Prime money market funds to operate with a floating net asset value (NAV) and face the possible imposition of liquidity fees and/or redemption gates. As a result of these reforms, investors in prime money market funds who are concerned about the potential imposition of liquidity fees and gates will be forced to re-evaluate their current cash investment strategies. Conservatively managed ultra-short funds are being considered by many cash investors as a potentially intriguing vehicle for cash investments."
Kolk, Managing Director and Chief Investment Officer for Global Liquidity, comments, "This is a member of a new category of funds, Conservative Ultra-Short. Because the 'ultrashort' category lacks specificity -- with some funds managed very conservatively and others aggressively, with durations close to a year and credit quality that dips into the high yield space -- it is critical for investors to look under the hood of ultra-short funds to see how their investment engines run. Not all ultra-short funds are created equal."
The release continues, "The MSIFT Ultra-Short Income Portfolio provides a compelling alternative for cash investors. It focuses on capital preservation and liquidity, has an initial NAV of $10.00 that may float, a maximum weighted average maturity of 90 days, a conservative investment approach, daily liquidity, a diversified portfolio, AAA/V1 rating and the same experienced and specialized team that manages the Morgan Stanley Institutional Liquidity Funds."
Fred McMullen, Managing Director and Head of Client Engagement for Global Liquidity, tells us, "In many ways, a very conservatively managed ultra-short income fund can provide great utility to a cash investor. We're advising clients to expedite their analysis and expedite their decision-making timeframe, because a lot is going to change between now and October."
The release adds, "The MSIFT Ultra Short Income Portfolio is not a money market fund and does not seek to maintain a stable net asset value. Morgan Stanley Investment Management's Global Liquidity Solutions business offers a unique value proposition to its clients to navigate the evolving cash investment landscape -- direct and easy access to a combination of expertise, resources and investment solutions, including money market, ultra-short and short duration products."
On the Ultra-Short Income Portfolio's webpage, MSIM explains the investment process. They say, "The management team follows a multi-pronged investment process with respect to credit risk, interest rate risk and liquidity. Securities are reviewed on an ongoing basis on their ability to maintain or improve creditworthiness taking into consideration factors such as cash flow, asset quality, debt service coverage ratios and economic developments. Additionally, exposure to guarantors and liquidity providers is monitored separately as are the various diversification requirements. The team manages the Portfolio's assets in an attempt to reduce credit or interest rate risks." (See our March 17 News, "Morgan Stanley Declares Inst Funds in Filing; BlackRock Fed RRP Fund," for more on MS's money fund plans.)
In other news, Fitch's report on Foreign Banks says, "Foreign banks are losing a source of dollar funding as U.S. prime money funds convert to government funds, according to a new report from Fitch Ratings. U.S. money fund managers are revamping their product line-ups in response to reforms enacted by the SEC in 2014 and many prime money funds are converting to government funds. As funds convert, they invest in government securities instead of corporate and bank short-term debt, reducing available funding for banks."
Senior Director Greg Fayvilevich comments, "Foreign banks that rely most on U.S. prime money funds to support their clients' U.S.-dollar-based activities will be most affected by prime to government fund conversions, and may incur higher costs to replace relatively cheap dollar funding from U.S. prime money funds." Fitch says, "Many foreign banks use money fund financing only opportunistically, and have access to other sources of dollar funding, such as central bank swap facilities."
The report continues, "U.S. prime money funds provide funding to foreign banks that do not have a natural retail deposit base in U.S. dollars. As the funds convert to government funds, some banks have lost a significant portion of their total funding from U.S. money funds. Thirteen foreign banks lost more than $4 billion each in funding from the converting money funds between May 2015 and March 2016, in portfolios of 34 converting funds tracked by Crane Data LLC, with $259 billion in total assets. For example, Sumitomo Mitsui Trust Bank lost $6.2 billion in financing from converting prime money funds since May 2015, accounting for 31% of its total financing from all money funds."
Finally, Fitch adds, "Some foreign banks are adjusting their funding profile to rely more on secured government funding. While Bank of Tokyo-Mitsubishi UFJ lost $7.6 billion in prime-type financing from the converting prime funds, it increased its government repo borrowing by $1.9 billion from the same funds, reducing the net impact of reform-related asset shifts. Fitch expects that additional foreign banks will follow a similar strategy."
