The Association for Financial Professionals released its "2016 Liquidity Survey" yesterday. The new report shows a tiny decrease in bank deposits and increase in money fund holdings, but it also shows that a majority of respondents will make changes to how they invest in Prime money market funds. Specifically, it says 62% plan to make changes in how they invest in prime funds and that 37% of that number will move to Govt funds or Bank products. However, AFP takes the under on how much it expects will move out of Prime Inst -- just $40 billion. Also, "Safety of principal" remains the top priority among investment objectives, increasing to 68% in 2016 from 65% last year. (Note: The full survey is only available to AFP members. See our July 13 Link of the Day, "2016 AFP Liquidity Survey," for coverage of the press release.)
The introduction of the 33-page report explains, "The survey generated 787 respondents from corporate practitioners from organizations of varying sizes and representing numerous industries." The survey was once again underwritten by State Street Global Advisors. In the opening remarks, SSGA's Yeng Felipe Butler says, "Although money market reform is bearing down on us with a mid-October implementation deadline, many treasurers are taking a "wait and see" approach, keeping an eye on interest rates and evaluating options on a real-time basis. It remains unclear what level of assets will move between different types of cash investments, but many viable options exist across the short term spectrum to meet your investment objectives."
Under the section, "Holdings of Cash and Short-Term Investments/Securities," it says, "Almost one-third (32%) of practitioners reports that their organizations' cash holdings within the U.S. increased from May 2015 to May 2016." Further, 47% indicate no significant change and 21% reported a decrease. Outside the US, 27% increased their cash balances, 58% said no changes, and 15% decreased. Looking ahead, one quarter expect to increase cash balances in the next year, 55% anticipate no changes, and 20% expect cash balances to decrease."
Under "Investment Policies," AFP states, "Seventy-three percent of organizations have a written investment policy that dictates their short-term investment strategy. This is three percentage points higher than the figure reported in the 2015 survey and three percentage points lower than the 76 percent share reported in 2014. Safety continues to be the most valued short-term investment objective for 68 percent of organizations.... Thirty percent of survey respondents indicate that their organizations' most important cash investment objective is liquidity.... [Y]ield continues to be a distant third.... [O]nly two percent of survey respondents consider yield to be the most important investment objective for their organizations."
They add, "79 percent of finance professionals report that their organizations' investment policies require money funds to be rated ... 32 percent of respondents indicate that their organizations' policies require at least one agency assign an AAA rating and 28 percent report that their policies mandate money funds earn AAA ratings from at least two agencies."
Under "Current Allocations," the study comments, "Organizations are maintaining over half their short-term investments in bank deposits (55 percent). This is just one percentage point lower than last year's record-breaking 56 percent.... Companies continue to keep their short-term investment holdings in a relatively small number of investment vehicles. Organizations invest in an average of 2.4 vehicles for their cash and short-term investment balances, a decrease from the 3.2 investment vehicles reported in 2015 and slightly less than the 2.7 reported in both 2014 and 2013."
It goes on, "Over three-fourths (77 percent) of organizations continue to allocate most of their short-term investment balances in three safe and liquid investment vehicles: bank deposits, money market funds (MMFs) and Treasury securities. This year, MMFs account for 17 percent of organizations' short-term investment portfolios, up two percentage points from the 15 percent reported last year.... Larger organizations with annual revenue of at least $1 billion, those that are net investors and those that are publicly owned are more likely to allocate their short-term investments in MMFs than are other organizations."
Taking a closer look at the allocation to MMFs, 9% had allocations to Prime/Diversified MMFs (same as last year), 7% to Government/Treasury MMFs (up 1 from last year), and 1% to Muni/Tax-Exempt MMFs (same as last year). Furthermore, just 1% (same as last year) had an allocation to `Enhanced Cash/Conservative Income/ Ultra-Short Bond Funds. Outside the US, 10% of non-U.S. cash holdings are held in MMFs while 71% is in bank deposits.
On selecting MMFs, AFP explains, "There are a variety of factors finance professionals consider when selecting a MMF in which their organizations should invest. Nearly half (48 percent) of survey respondents indicate that a fund's rating was the most important determinant when selecting a fund. Forty percent of finance professionals rank counterparty risk of underlying investments as the primary deciding factor. Yield, the fund sponsor taking a role in the bank relationship mix, and support were each ranked number one by 34 percent of survey respondents. The second most important factor in selecting a MMF is diversification of underlying investments (cited by 42 percent of respondents) closely followed by fund ratings (39 percent). A majority (59 percent) of finance professionals cites ease of transacting with the fund and accounting treatment as the third most important criterion when selecting a fund."
On "SEC Ruling Money Market Reform," it states, "The majority of finance professionals (62 percent) anticipate that their organizations will make significant changes in their approach to investing in prime money market funds as a result of the new SEC rules. Nearly half (47 percent) anticipate their companies will either discontinue investing in prime funds altogether or move some or all their holdings out of those funds. Thirty-seven percent plan to move their money into government MMFs or into bank products to maintain stability -- a 17 percentage-point increase from last year. Fifteen percent of respondents report that their organizations will alter their investment policy to accommodate only stable NAV options and another 15 percent will alter their investment policy to accommodate floating NAV products (up from 8%)."
The Liquidity Survey adds, "As the end point (i.e., when the rule goes into effect) becomes more certain, the default selection seems to be to move from prime into government funds. The U.S. Treasury, through the use of the Reverse Repo Program, plans to support the anticipated movements to provide liquidity in the marketplace. It is also the perception of many asset managers that organizations will move from prime to government funds, but the real question is one of timing -- prior to October 15, or the first week, first day, or first month when the changes come into play. The decision about where to invest may ultimately be made when the informed options present themselves."
It continues, "Finance professionals anticipate other changes in their organizations' investment policies as their companies plan for the changes resulting from SEC money market fund reform. Twenty-four percent of survey respondents indicate they will implement changes in fund concentration risk if they have invested in prime funds and another 24 percent report they will likely add floating NAV options to their investment policy.... Since the new MMF rules have not yet taken effect, many organizations are currently taking a "wait and see" approach. Most organizations with which AFP has spoken anticipate they will at least review their investment policies and, as the survey results show, some do anticipate making changes if the money fund reforms impact them."
The AFP adds, "Based on money market fund data from the Investment Company Institute, as of the end of May 2016 there was approximately $765.85 billion in prime institutional money market funds and $948.64 billion in institutional government money market funds. Based on the current allocation ... a nine percent allocation to prime funds would equate to approximately $68 billion for survey respondents. Likewise, the current allocation of seven percent in government institutional funds would be approximately $66 billion for the same group."
They continue, "There are many industry reports speculating how much money will move from prime to government funds. Amounts have ranged between $200 and $800 billion on average. Our estimate is that it would be much less -- approximately 60 percent of survey respondents indicate they would move funds in some fashion (move out of prime or move into government funds). This equates to approximately $40 billion, considerably less than other estimates. This conservative estimate also assumes that the majority of survey responses are classified as institutional vs. retail at the time of this writing."
Furthermore, the study says, "How much money will finally be shifted between types of MMFs is still undetermined, but the large portion of money in prime funds has already been moved -- and indeed, has yet to come back since the financial crisis. The allocation is about half of what it was in 2008. Fund companies are still in the process of making fund changes, announcing NAV strike times and settling their funds lineup. More clarity around this issue will be solidified closer to October."
It adds, "AFP asked survey participants what spread between government funds and prime funds would be necessary for their organizations to stay invested in or return to investing in prime funds. Thirty percent of finance professionals indicate that regardless of the spread, their organizations would not invest in prime funds. This is 20 percentage points less than those who held this view last year and suggests that organizations are becoming more comfortable with floating NAV products. Some complications still exist: identifying and explaining investment policy changes, accounting treatment and internal buy-in remain for some companies that plan to adopt floating NAV options. Over the past three years, AFP has seen a warming trend towards floating NAV products. One-fourth of finance professionals reports that their companies would invest in prime funds if the spread were at least 50 (basis points) bps; an additional 25 percent would invest in those funds if the spread were at least 25 bps."
The AFP survey says, "For organizations that do not plan on investing in prime funds at all, there are other factors at play. For some, the floating NAV violates at least two tenets of short-term investing: safety and liquidity. Despite the funds having a very short duration and maturity structure, the risk of having a floating NAV is too great for some. The risk of having gates and fees is also a concern for many companies and violates the liquidity principal: having funds available when needed." Finally, under "Alternative Investment Options" organizations are considering, SMAs (44%) were the most preferred, followed by 2a7-like funds with stable NAV (21%), extending maturities (18%), Direct Repo (13%), and Ultra-Short bond funds (13%).
