The May issue of Crane Data's Bond Fund Intelligence was sent out to subscribers on Friday. Our latest edition features the stories, "ICI Fact Book Shows Outflows for Bond Funds in 2015; Stats," which looks at year-end 2015 trends in bond funds, and a profile of Charles Melchreit, co-Portfolio Manager of the $2.7 billion Pioneer Multi-Asset Ultrashort Income Fund. Also, we recap the latest Bond Fund News, including flows for March and April, and the launch of several new Ultra-Short funds, including one by Morgan Stanley. (See our May 11 News and today's "Link of the Day.") BFI also includes our Crane BFI Indexes, which showed gains in April. In other news, Stradley Ronon's new "Tax Insights" features recent IRS notices involving money market funds. (See our May 9 LOTD, "IRS Gives Guidance on Diversification in Govt VA MMFs, Advisor Contributions," and see our July 30, 2014 News, "Reform Floating NAV Accounting Issues Addressed by Treasury Proposal.")
Our lead Bond Fund Intelligence story says, "The ICI's recently released its "2016 Investment Company Fact Book," an annual statistical compilation that shows that bond funds suffered outflows in 2015 for the first time since 2008. However, flows and performance have returned in 2016.... Of the $15.7 trillion in US mutual fund assets, 22% were in bond funds at year-end 2015."
In a sidebar "Big Spring for Bond Flows," we explain, "Bond funds posted four straight weeks of inflows in April, according to ICI's "Estimated Long-Term Mutual Fund Flows" report. From April 6 through April 27, bond funds showed $25.2 billion in inflows. ICI's monthly "Trends in Mutual Fund Investing, March 2016 shows that bond fund assets were up $71.3 billion in March to $3.501 trillion -- the first time they have topped $3.5 trillion since August of 2015. It was the largest monthly gain since June of 2012, according to ICI data.... Year-to-date, bond fund assets are up about $89 billion."
Our Profile on Pioneer's Charles Melchreit says, "This month, Bond Fund Intelligence interviews Charles Melchreit, Senior Vice President and Portfolio Manager at Pioneer Investments. He manages several funds, including the $2.7 billion Pioneer Multi-Asset Ultrashort Income Fund -- one of the largest and oldest ultra-short funds on the market. He discusses how the fund "threads the needle" between short-duration products on the market using a layered investment strategy." We also report on returns, writing, "Returns moved higher in April across our Crane BFI Indexes. Our BFI Total Index averaged a one month return of 1.05% and is up 2.49% year to date. (`Contact us if you'd like to see a copy of our latest Bond Fund Intelligence.)
Stradley Ronon's "Tax Insights" publication, features a piece on, "IRS Issues Guidance to Government Funds for Section 817(h) Diversification Requirements." It says, "The IRS has issued Notice 2016-32, which provides guidance to taxpayers regarding the diversification requirements under Section 817(h) for a segregated asset account that invests in an MMF that is a government MMF.... The notice explains that under current practice, only a limited number of United States agencies or instrumentalities issue securities that Rule 2a-7 allows MMFs to hold. Also, in coordination with the MMF Reform Rules described above, some MMFs are expected to convert to government MMFs, resulting in increased demand for government securities. This increased demand, the IRS notes, may exacerbate MMFs' difficulty in acquiring the assets necessary both to qualify as a government MMF and to satisfy the diversification requirements under Section 817(h) and Treasury Regulations Section 1.817-5."
Stradley continues, "The Treasury Department and the IRS have determined that variable contracts should be able to offer government MMFs as an investment option. Therefore, the notice states, the Treasury Department and the IRS intend to amend Treasury Regulations Section 1.817-5. Pending the promulgation and effective date of future administrative or regulatory guidance, taxpayers may rely on the following alternative diversification requirement under Treasury Regulations Section 1.817-5 for a segregated asset account that invests in a government MMF: A segregated asset account, within the meaning of Treasury Regulations Section 1.817-5(e), is adequately diversified for purposes of Section 817(h) if: (1) No policyholder has investor control; and (2) Either: (a) The account itself is a government MMF under Rule 2a-7(a)(14); or (b) The account invests all of its assets in an "investment company, partnership, or trust," as defined in Treasury Regulations Section 1.817-5(f)(1), that satisfies the criteria of Treasury Regulations Section 1.817-5(f)(2) and qualifies as a government MMF under Rule 2a-7(a)(14)."
The law firm also wrote a segment entitled, "IRS Provides Relief for Certain Money Market Funds That Receive 'Top Up' Contribution." It says, "The IRS released Revenue Procedure 2016-31 to provide guidance to money market funds that receive contributions from their advisers as the MMFs transition to comply with Securities and Exchange Commission rules that change how MMF shares are priced. Revenue Procedure 2016-31 advises that if an MMF receives a contribution as part of a transition to implement the floating NAV reform before Oct. 14, the IRS will not challenge the MMF's treatment of the contribution as an amount that is included in investment company taxable income (ICTI) for purposes of Section 852(b)(2) (section references are to the Internal Revenue Code of 1986, as amended), but it is excluded from ICTI for purposes of Section 852(a)(1)."
Stradley's piece continues, "The revenue procedure provides an example that includes a contribution from the adviser of an MMF that increases the MMF's NAV to $1.0000. In the example, the adviser "grosses up" the contribution to the MMF so that the contribution is sufficient to cover the federal income tax that will be owed by the MMF. The net amount of the adviser's contribution remaining after the payment of federal income tax by the MMF is sufficient to restore the MMF's NAV to $1.0000.... Revenue Procedure 2016-31 does not address the ability of the adviser to deduct its contribution to an MMF and does not address the state and local tax consequences, if any, of an adviser contribution to an MMF."
It adds, "An MMF converting to a floating NAV may receive a contribution so that when the MMF transitions to a floating NAV, all shareholders receive the same value per share at the time of the transition (a "top up" contribution), e.g., a contribution from the adviser to the fund. RICs are required to meet certain income distribution requirements under Sections 852 and 4982. As the IRS highlights in the revenue procedure, if the distribution requirements apply to an adviser contribution, it may be impossible or impractical for the advisers of some MMFs to make contributions that raise the MMF's NAVs to $1.0000, so that shareholders will receive the same value per share both before and after the transition to a floating NAV."
Finally, Stradley Ronon writes, "The Treasury Department and the IRS believe that it is in the interest of sound tax administration to apply Section 852 in a manner that will support the efforts of the staff of the SEC Division of Investment Management to facilitate a smooth transition to compliance with the SEC MMF Reform Rules. The Treasury Department and the IRS believe that excluding certain adviser contributions from ICTI for purposes of the distribution requirements in Section 852(a) is important to facilitate those contributions, but they do not believe the contributions should be excluded from the RIC's income for other federal tax purposes." Note, the guidance doesn't finalize the proposed "wash sale" and simplification of gains for floating NAV funds -- that's expected to come out late this summer.
