Mutual fund publication Ignites hosted a webinar on Tuesday called, "Counting Down to Money Fund Reform," featuring Crane Data's Peter Crane and Federated Investors' Bud Person, and Moderated by Ignites' Beagan Wilcox Volz. In the 45 minute webinar, the panelists discussed asset flows, yield spreads, money fund managers readiness for reforms, strike times, lineup changes, and new products. In particular, Person talked about new funds that Federated has in the pipeline to launch prior to the October 14 implementation date.
When asked about the readiness of money fund managers for the upcoming money market reforms, Person said, "At Federated we are ready and able to move forward as we've substantially completed the required reform work." He said Federated has been working on it since July 2014 when the reforms were first announced and the firm expects to have testing completed by August, well in advance of final implementation deadline. "As far as the industry as a whole, my general sense is that yes, the leading money fund companies have been diligently working on this for the last the last 22 months since the rule came out."
Crane added, "The major changes are well underway. We're two thirds of the way through, but there's still an awful lot of dotting the I's and crossing the T's -- things like strike times. Most of the major product announcements and plans are in the midst of being made but there's still a lot to do."
Among the hot topics in the industry right now are asset flows, yields and spreads, lineup changes, disclosures, and alternatives, like ultra-short bond funds, said Crane. "One thing to keep in mind is that money market assets overall have been remarkably stable. Over the past five years, they've been flat to up slightly. Bank savings during this period have been skyrocketing, so there's a lot of extra cash out there a lot of cash that may push these levels higher. But of course as we've seen since November, an awful lot of changes have been occurring under the surface."
He continued, "We've seen about $300 billion shift from Prime to Government funds, of which, over $200 billion has already moved into Government as we approach October. You may see hundreds of billions more in institutional asset shift over but that's all guesswork and a lot depends on how comfortable investors are with some of the new features -- the floating NAV, the gates and fees, and how yield spreads look at the time."
Crane added, "The changes have been absolutely relentless. Other than the Prime to Government shifts, you've seen consolidation on a scale that we haven't seen in decades where small managers are either getting out of the business or going government. Particularly among tax exempt funds, you've seen a major exodus. While most of the major lineup announcements have been made, the smaller players continue to announce changes, and going forward we'll see more."
He said there's also been a shift from Prime to Ultra-Short Bond Funds as well as new product launches, such as Private funds. "Fund companies are in effect throwing spaghetti against the wall trying to get products that investors may move to if they do abandon Prime Institutional funds. But I think it's still a big if." To date, investors have not moved assets yet, Crane said, but that could be coming in Q3.
On the changes at Federated, Person explained, "Here at Federated, approximately 400 colleagues have been involved in money market reform. It's just been a monumental task and true collaboration between investment management, sales, product management, marketing, client services, IT, fund treasury, legal, and compliance. It's also given us an opportunity to rationalize and consolidate our funds. We've done 10 fund mergers resulting in 26 new share classes, and we've designated all our Prime and Municipal funds as either Retail or Institutional."
He added, "The new website disclosure rules went into effect April 14th, not coincidentally a full six months before the October implementation of the fees and gates rule. This is just great new transparency for money fund investors.... It's on our website, and all the fund websites you'll see daily and weekly portfolio liquidity, daily net flows, shadow NAVs, and a rolling six month history for each. We think these disclosures are crucial to getting clients comfortable with the reforms. Once they understand the changes and see these disclosures, they'll be less concerned. We want investors to see that floating NAVs are relatively steady in this kind of a rate environment and that our funds will have well above 30% in weekly liquidity." This transparency and broader understanding of the portfolio could result in more investors staying in Prime and Muni funds, he added.
Person continued, "The transitioning of fund assets is very important to coordinate in advance with your fund manager. We do expect flows to move from Prime and muni into government. Maybe not as much as everyone thinks, but advance notice is always a good idea.... We can help you determine which accounts are retail or institutional, if you have questions we have a website dedicated to money market reform; it's called "`Money Market Reform Resource Center." And we have mapping guides to help transition accounts from one fund to another."
Person elaborated on Federated's lineup changes. "We've reduced the number of funds -- we're down to 30. We've been streamlining, basically with the goal of having fewer but larger funds, and I think we've accomplished that. We have 6 Government funds, 5 Institutional floating NAV funds, and 19 Retail funds. We slightly changed the names of our 5 Institutional funds, inserting the word "Institutional" into the formal names of those funds to make it clear that those are institutional funds subject to a floating NAV."
He also commented on new funds in the pipeline. "We're looking at two kind of new concepts that we're really excited about in the floating NAV arena. One, on the taxable Prime side, is being referred to as a "60-day max fund." This is a floating NAV fund that will not buy any securities with the remaining maturity of greater than 60 days. As a result, its weighted average maturity will be under 40 days, which will be shorter than how we run the majority of our prime funds. By running shorter it will seek to minimize the volatility of the NAV."
Person explained, "On the Muni side we're going to run a 7-day max floating NAV muni fund -- both of these products are being geared towards institutional investors. How did we come up with seven days? Look at the variable rate demand note market -- most of those notes are seven day maturities and historically, the majority of muni money funds hold a majority position in seven day variable rate demand notes.... Again, we're doing this to minimize the NAV fluctuation."
Furthermore, Person commented, "In the non-registered world, we are offering a Private Liquidity Fund. This fund will be able to accept non-natural person investors meaning, institutional investors. We'll run this fund with traditional portfolio amortized cost meaning, dollar in and dollar out.... Also because it's not registered and subject to 2a-7 rule changes, it will not be subject to liquidity fees and gates. What we're trying to do here is replicate, in a non-registered form, a prime liquidity experience that many of our institutional clients have historically experienced with our traditional registered money funds."
He added, "An additional non-registered product will be a Prime Collective investment fund, which will be limited to ERISA accounts only. It will also use amortized cost and seek to maintain a one dollar N.A.V. It will also not be subject to fees and gates. We're really pretty excited about all four of these."
On spreads between Prime and Government funds, Crane stated, "Currently there is a little bit of spread for prime money funds. That first Fed hike in December was a godsend. If we get another one, you're going to see spreads go up. Historically, Prime funds yield 10 to 20 basis points over Government and Treasury funds. Now you're seeing a 20 to 25 point spread. Most believe that a 40 or 50 basis point spread, which is double the historical average, is enough to stop or slow the outflows. But clearly we're going to need another Fed hike, maybe even another two Fed hikes, to move rates up to the level where the fee waivers are unwound and that natural spread sort of finds a level."
When asked if there should be an industry standard for strike times, Person commented, "I think the standard is that all the leading fund companies will be offering both. `We will be offering multi-strike time funds along with single strike funds. This is all new ground." For some funds, Federated will do NAV calculations three times a day -- 8 am, 12 noon, and 3pm. On others it will be once a day, 3pm.
Finally, the panelists were asked if they thought the reforms will have a benefit to the industry. Said Crane, "With reform, you're going to pay more for safety. Investors will get lower yields, and they'll get more safety.... Overall, I think it is a workable reform. So, yeah, it's a pain because there's a cost in both the yield and in time and effort for this additional safety, but I think these are changes people can live with."
Person concluded, "After many years of a super low rate environment, there's still $2.7 trillion in money market mutual funds. I confidently believe we'll still have $2.7 trillion in money market mutual funds post October. The vehicle just works too well. It will be a little different now in some cases, but I think with time everyone will get used to it and the products will still play an important role with cash management."
