Federated Investors posted a series of informational videos on YouTube discussing Money Market Reform and featuring Deborah Cunningham and Bud Person. The videos are entitled: "Will Prime and Municipal funds still be compelling if they are subject to fees and gates?" "What is the current state of Federated's government money market complex and its capacity for growth?" "How much will institutional FNAV funds fluctuate?" and "What prime and municipal products will Federated offer for institutional accounts?" We excerpt from these below.
In the first video, "Will Prime and Municipal funds still be compelling?" Cunningham answers, "Absolutely! Currently about half the money market fund industry is comprised of prime and municipal money market funds. From Federated's standpoint, we manage about $105 billion in prime portfolios and about $16 billion in municipal money market fund assets including both national and 13 state specific products. The advantage of both the prime and municipal money market fund products versus their government counterparts has always been yield spread for minimal additional risks."
She continues, "That yield spread is actually growing today and we expect it to continue to get larger as we approach the October 14th date. Recent yield spreads between a triple rated prime money market fund and a government money market fund is about 22 basis points, that's about 8 to 10 basis points wider than historical norms. The tax advantaged yield spread for a municipal money market fund over a government money market fund is currently about 20-50 basis points, depending on if the client is retail or institutional and their tax bracket. The spread is compelling and will likely continue to widen."
Cunningham adds, "Gates at least are not a new concept for money market funds. The 2010 amendments require money market funds to be able to put up a gate as part of those rule changes to enhance the long term resiliency of the product. The further refinement of gates and the introduction of fee language occurred with the 2014 rule amendments."
She continues, "In several ways the 2014 rules improve on the 2010 rules. First, the 2014 amendments define the circumstances around which the imposition of a gate or a fee could be considered. The circumstances were specified as only when the weekly liquid assets of the fund drop below certain levels. With the additional disclosure now required for MMFs, this weekly liquid assets number is very easy to monitor. The 2014 amendments cap the number of business days a firm could remain gated at 10. [This is] clearly better than having no maximum. Third, the SEC intended for gates and fees to be used together. If a problem occurred, it would likely be that a gate would be put up when the problem was assessed. Once the problem was identified and assessed the gate would be lifted and replaced with a fee to restore the liquidity of the product. The circumstances around this action will almost certainly be the same, both pre and post rule making changes -- that being the occurrence of a credit event in a portfolio."
In the second video on "Federated's government money markets," Cunningham explains, "Federated's government money market funds are open and available for new business. [Our] money market fund assets are more than half government money market products at this point ... right around $130 billion. Federated did not have to convert any of its prime money market funds to government money market funds in order to achieve proper scale. We have been in the government market fund business since its beginnings, way back when in the mid 1970's. Our funds are large, they're diverse, and they have long historical performance records."
She continues, "There are four main segments of the government money market funds sector: Treasury non-repo, Treasury with repo, Government agency non-repo, and Government agency with repo. We currently have about $17 billion in the treasury non-repo sector, about $28 billion in the treasury with repo sector, approximately $6 billion in the agency non-repo space, and finally about $60 billion in our largest government money market sector, which is the agency with repo space."
Cunningham adds, "Industry wide government money market funds recently surpassed prime money market funds in terms of assets with about $1.4 trillion. I'm often asked about the supply of eligible securities in that government money market fund sector, given the expectation of continued growth. It's a very simple answer to that question -- It is not an issue with adequate supply. Including the New York Fed’s reverse repo facility there is over $8 trillion in 2a-7 eligible government money market supply -- both direct treasuries and agencies, as well indirect supply through the repo market. The question remains, however, as to the price and the yield of that supply. As with any situation where you have increase in demand with the same amount of supply, the yield on this supply is likely going to drop. That's why the Fed's December 2015 rate lift off is even more important going forward. With the reverse repo facility as their main monetary tool, the current rate floor of 25 basis points has been established."
In the third video on "FNAV fluctuations," Cunningham states, "The likelihood of an institutional FNAV money market fund fluctuating at anything other than the fourth digit, which would represent the hundredth of a penny or basis points, is remote, unless that fund is experiencing a negative credit event. Theoretically an institutional FNAV money market fund that was positioned at its worst configuration at the time of a rate hike would be most at risk. That most aggressive configuration would consist of having a 60-day weighted average maturity, owning the maximum in individual securities out to 397 days final maturity, and having the least amount allowed in daily and weekly liquid assets, that being 10% and 30% respectively."
She adds, "In that worst configuration, the FNAV fund would move, all things being equal, about 4 basis points with an instantaneous shift of 25 basis points in the yield curve with all other considerations such as fund size, being held constant. In actuality, when fund managers begin to anticipate a Fed move, they reposition their portfolio to be shorter and have greater liquidity. The market also generally prices in a Fed move over a 3-4 month window as opposed to instantaneously. This is exactly what happened in the December 2015 move. During that move the shadow NAV's of funds moved 0-2 basis points rather than the theoretical 4 basis points, so 1 in 4 zeros either stayed there or went to four 9s or went to “9998. This was great to see this play out as such especially when the transactional price over this time period was still at one dollar."
Cunningham continues, "As far as evaluation comparisons go, total return calculations must now be used rather than just straight yield comparisons. The total return calculation in the December rate hike scenario resulted in shadow NAV declines of about 0-2 basis points. For those funds that theoretically lost 2 basis points in price, was the yield spread over those funds whose NAV remain stable enough to compensate for those lost basis points in price? This depends on how large the spread was being earned. Generally speaking, the larger then spread and longer the holding period, the more favorable the outcome toward the FNAV institutional money market fund product ."
Finally, Federated's Bud Person discusses, "Prime and municipal products" in the fourth video. He says, "Let`s touch on what new options will be available. First, we will be offering two types of floating NAV prime funds. With respect to NAV calculation frequency, the so called strike times, the first type will have three daily NAV calculations, or strike times, at 8 am, noon, and 3 pm eastern time, with subsequent standard redemption order processing after each. The other fund type will have just a single NAV calculation, or single strike time, at 3 pm. Remember with all floating NAV funds, the mark to market NAV must first be calculated to confirm the price of a transaction order and this takes time. So when it comes to redemptions think of a three times daily multi-strike fund as an intraday liquidity vehicle, whereas a single strike fund is simply a once a day liquidity vehicle."
Person continues, "In addition we will be offering a floating NAV multi-strike fund with a slightly different portfolio management approach that we’re calling a prime 60 day max fund. It will only invest in securities with maturities of 60 days or less and we’ll use amortize cost to value individual portfolio securities when permitted to do so. The fund will typically maintain a weighted average maturity of 40 days or less, which is shorter than the 55 days or less range of our traditional prime funds. We believe this strategy will minimize the volatility of its NAV. With respect to a floating NAV municipal fund, we will offer a fund that is limited to securities with a maximum maturity of 7 days. This 7-day constraint is consistent with weekly variable rate demand notes, which as you know typically represent a large portion of most tax exempt funds today. The strategy also seeks to minimize the volatility of the NAV."
He concludes, "Lastly I would like to add that we're planning on offering a prime private liquidity fund for accredited and qualified purchasers, which is expected to use amortized cost to seek a stable $1 NAV and not be subject to liquidity threshold fees and gates. We are also planning on offering a prime collective investment fund for ERISA only accounts that is also expected to use amortized cost to seek a stable NAV and will not be subject to fees and gates either. Neither of these products will be registered under the Investment Company act of 1940. In closing, we`re very excited about these offerings and for more information please contact your federated representative."
