State Street Global Advisors published a new paper entitled, "Critical IPS Changes for the New Cash World," which reviews Investment Policies and recent money market changes and options. It says, "Cash investing has undergone major changes over the past several years. The new SEC rules with a phase-in deadline of October 14, 2016 have dramatically altered how money market funds (MMFs) operate, seeking to make them safer in aggregate but introducing new measures that can impact access and net asset value (NAV). Other market developments -- including a shortage of appropriate securities and widespread ratings downgrades on MMF counterparties -- have also reshaped cash investing."
The paper tells us, "The result: cash has been transformed from a straight-forward, seemingly risk-free asset class to one requiring more flexibility and closer attention to risk-return tradeoffs. In the new cash world, investors are being called upon to apportion their cash among funds that tilt subtly among the attributes that they have long taken for granted: capital preservation, liquidity, convenience and return. To adapt, many investors are finding that their existing cash policies need to be revisited or even overhauled."
It explains, "An expanded universe of cash investment options are now available, tailored to the unique requirements of three cash segment types: (1) operational, (2) core and (3) strategic cash. State Street Global Advisors (SSGA) believes that investing a portion of a company's cash portfolio in higher yielding vehicles -- such as prime funds or ultra-conservative bond funds -- could result in improved performance, within an acceptable risk profile."
SSGA continues, "As the new cash world becomes a durable reality, a company may find that its legacy Investment Policy Statement (IPS) either lacks the flexibility needed in the new cash landscape, or is obsolete, posing potential operational or compliance risks. SSGA is urging clients to review their cash management practices, to ensure both that their IPS is appropriate for current market and regulatory realities, and that risk and liquidity goals are effectively being managed in accordance with the changes. SSGA sees the potential for excess return for investors willing to evolve their portfolios to capitalize on new opportunities. This paper is intended to facilitate an IPS review."
They comment, "The cash IPS is a "living document" carefully conceived and reviewed to govern a company's cash investment profile. It is a key component of risk management, through which executive management delineates the goals and constraints for managing one of the most vital assets of a company: its liquidity. In the new cash world, the IPS must be detailed enough to guide the various individuals and firms involved in managing the cash portfolio, yet it must also be dynamic and flexible enough to let corporate staff anticipate market conditions. It is critical that the IPS is developed in accordance to the company's specific goals, constraints and market environment."
Under a section entitled, "Rethinking Principal Preservation," the piece says, "Revisions to SEC rule 2a-7 stipulate that after October 14, 2016, only U.S. Treasury, U.S. government-sponsored entity (GSE) and retail prime MMFs will continue to price their shares at a constant net asset value. All institutional prime MMFs will operate with a floating NAV, calculated to four decimal places.... For investors sensitive to balance fluctuations, the emergence of floating-NAV MMFs post-October 2016 compounds the importance of ensuring that the IPS directs corporate staff to segment cash and invest according to a tiered risk tolerance criteria. Investors wary of the new rules governing prime funds have shifted balances to government funds. Yet for investors willing to adapt to the new rules and opt to remain invested in prime funds the yield could be significantly more than a government fund."
SSGA writes, "To account for the emergence of floating NAV MMFs, we believe that companies should consider updating their IPSs to use total return (rather than yield) as a performance criteria. The total return metric -- which accounts for yield, price fluctuations and capital gains and losses -- more accurately enables comparison among MMF options that offer a constant versus a fixed NAV. As Figure 2 demonstrates, the excess interest earned on a prime fund has the potential to offset a price decline."
Under "Accounting and Tax Relief," the piece explains, "When the reforms were first proposed, investors raised questions over record-keeping hurdles. In particular, there were concerns that constant buying and selling of a floating NAV MMF would demand complex accounting and tax reporting for capital gains on the underlying MMF securities. Investors also posed questions over the applicability of the IRS "wash sales rule" on the sale and repurchase of assets in fewer than 30 days. These concerns have been mitigated, however, by the Treasury Department which recently published final Regulations and Revenue Procedures allowing for a simplified floating NAV accounting method and eliminating the "wash sales rule" complexity. Under the simplified NAV accounting method, MMF investments can be taxed based on the net fiscal-year (or other period chosen) gain or loss, with adjustments; a figure that should be available on reports prepared by the fund administrator."
Finally, it concludes, "Vast changes are influencing how a company manages cash. These include SEC reforms impacting MMF liquidity and principal preservation; credit rating revisions; and a reduction in the supply of short-dated securities. The reforms appear poised to make cash investing safer and more transparent, but investors need to adapt to the changes in order to achieve liquidity and performance goals. In contrast to pre-crisis cash management, investors have more options for how to balance liquidity, capital preservation and return. Of course, more options mean more review and more decisions; but continuing to operate according to the old rules is no longer possible. State Street Global Advisors is urging clients to review their cash strategies and IPSs to ensure they support your organization's goals. We are available to help assess your needs, revise your IPS and prepare for management and board approvals."
In other news, we're still catching up with the flurry of fund changes surrounding the October 14 Money Fund Reform deadline. One of the "Prime-to-Government" conversions we hadn't caught beforehand was TIAA-CREF Money Market Fund, which filed on its "Conversion to government money market fund" previously. A Prospectus Supplement explains, "As a result of amendments to Rule 2a-7 under the Investment Company Act of 1940, as amended, the Board of Trustees (the "Board") of the TIAA-CREF Funds has approved a proposal for the TIAA-CREF Money Market Fund (the "Fund") to convert to a "government money market fund," as defined in the amendments, on or before October 14, 2016."
It explains, "As a government money market fund, the Fund will be required to invest at least 99.5% of its total assets in cash, government securities and/or repurchase agreements that are collateralized fully by cash or government securities. The Fund's portfolio securities will continue to be valued at their amortized cost and the Fund will continue to seek to maintain a share value of $1.00 per share. A government money market fund is not required to impose liquidity fees or redemption gates, and the Fund does not currently intend to impose such fees and/or gates."
