BlackRock's "Cash Academy" learning center features a new "Focus on Government Money Funds" section including a video from Portfolio Manager Joseph Markowski and a paper entitled, "Differentiating in a Commoditized Market." Markowski explains, "Given the current market dynamics and shifting regulatory framework facing cash investors, we expect government money market funds to become increasingly attractive. Regulatory change is a key driver, due to the ability of government money market funds to retain constant net asset value pricing, with optional adoption of the liquidity fee and redemption gate provisions under Rule 2a-7 of the Investment Company Act of 1940. As cash investors confront a possible re-allocation between prime and government money market funds, we feel it is important to carefully evaluate providers as well as the construction of these products, even government money market funds. Here's why."
He continues, "Liquidity assumptions are, in our opinion, a significant feature of government money market funds, as investors have historically turned to these solutions for their lower risk, and for the liquidity resulting from holding high quality government securities. Shifting secondary market demand for government and Treasury securities has led some managers to be even more meticulous about how they construct government money market funds with liquidity at the forefront of their consideration. For example, U.S. Treasury Bill and agency discount note sectors have historically demonstrated higher liquidity in the secondary market when compared to U.S. Treasury Notes."
The video tells us, "Relative value is another important factor to consider when comparing government money market funds. It is not so much an issue of credit risk as it is liquidity risk, which can be monitored through careful evaluation of market technicals, such as bid-ask spreads and market price movements. BlackRock continually seeks to understand and adapt to market technicals to avoid pockets of poor execution or illiquidity, and to take advantage of market dislocations.... BlackRock carefully considers whether the potentially higher yields offered by a Treasury FRN warrants the extension of WAL. Seeking out relative value and risk/reward tradeoffs within a dynamic market structure is something we feel sets us apart in the government space, however, executing on this knowledge would not be possible without a platform of scale."
It adds, "We believe scale and access to the market are key to providing a government money market fund platform with the breadth and depth that investors are seeking. The ability for a fund manager to accept and efficiently manage flows is critical to delivering scale and meeting clients' liquidity needs. BlackRock offers a variety of government money market fund strategies, totaling over $140 billion as of June 30, 2016 including Treasury-only, Treasury and repurchase agreements, or repo, government-only, government and repo, and Treasury and repo with the Federal Reserve Bank of New York.... We believe liquidity, relative value, and scale should drive investment decisions for all money market funds, especially government strategies."
BlackRock's paper says, "As the October 2016 compliance date for certain money market funds (MMFs) to adopt a floating net asset value per share (FNAV) and liquidity fee and redemption gate provisions approaches, we anticipate that many investors will shift their MMF investments into U.S. government and Treasury strategies. Between June 2015 and June 2016, the assets invested in government MMFs has grown by more than $500 billion (source: Crane Data) indicating, in our view, a seismic shift between MMF Categories is underway. At BlackRock, we have sought to position our government MMF complex to accommodate potentially high levels of inflows, and still continue to provide our clients a cash investment solution that preserves capital, is liquid and delivers competitive yield."
It also comments, "We are at the early stages of a potentially historic shift of assets into government MMFs. As cash investors carefully consider their investment policies and determine what strategies best fit their needs and risk tolerances in light of current market dynamics and the shifting regulatory framework, we recommend a careful evaluation of MMF providers and their processes in constructing money market portfolios and managing risk. We believe BlackRock's U.S. government and Treasury money market strategies set themselves apart from others because of our focus on liquidity and relative value, and our access to scale."
In other news, a release entitled, "Fitch: Money Fund Reliant US Corporates Eye Liquidity Challenges," says, "Corporations that heavily rely on money funds for cash management may need to enhance disclosures and risk management in light of upcoming money fund reform, according to Fitch Ratings. We believe the reform is creating a new paradigm for corporations' cash management, which will require a more sophisticated approach to managing liquidity."
It explains, "Regulatory changes to money funds coming into effect in October are expected to cause some US corporates to re-examine their comfort level with prime money funds. Under the new reforms, institutional prime money funds that are used by corporates may restrict investor liquidity during a time of stress. The funds' boards of directors can impose liquidity fees on shareholders looking to redeem cash, or gate the fund altogether, if the fund's liquidity level falls below the required regulatory threshold. Government money funds are not subject to these provisions, and many corporate treasurers plan to move cash from prime to government funds to avoid this risk."
Fitch writes, "Non-financial corporates historically have been big investors in money funds in absolute terms, holding $573 billion in money fund investments as of 1Q2016, according to Federal Reserve data. Fitch's analysis of the non-financial firms in the Fortune 100 showed that 33 noted investments in money funds and 22 disclosed the amount invested in money funds. For the 22 firms that disclosed investments, money funds accounted for 26% of their cash and cash equivalents on average."
They continue, "Some corporates use money funds sparingly or not at all, while others utilize money funds extensively for daily cash flow management and strategic cash buffers. For example, Walgreens held $2.4 billion in money funds, which accounted for as much as 72% of its cash and cash equivalents.... Cisco was the largest money fund investor in the sample, with holdings of $7.2 billion, accounting for 81% of its cash and cash equivalents. Conversely, Apple invested $3.3 billion in money funds, representing a modest 18% of its cash and cash equivalents. These firms often had additional short-term financial assets, such as US Treasuries and commercial paper, which could be used for liquidity but were not classified as cash and cash equivalents."
The brief adds, "From our review of these firms' financial disclosures, it is unclear whether they invest in prime funds, government funds, or both. For corporations that continue to rely on money funds, enhanced disclosures and risk management will be important to appropriately monitor key weekly liquidity measures in prime funds."
Finally, it says, "While Fitch's rating criteria for prime money funds have always focused on the funds' liquidity, the new rules introduce a higher standard in the form of a regulatory "tripwire." In light of this new risk, Fitch updated its money fund criteria in December 2015 to clarify our analysis of funds' intrinsic liquidity levels compared to the volatility of flows driven by the funds' investor profiles."
