Wells Fargo Money Market Funds' latest Portfolio Manager Commentary discusses the "orderly nature" of the transition to money fund reforms. It explains, "When something as transformative as money market reform occurs, one naturally expects something will mark -- or mar, depending on your outlook -- the occasion. After all, this reform effort has affected virtually every aspect of the short term investment markets. The U.S. Securities and Exchange Commission (SEC) required all institutional prime and municipal money market funds to begin transacting with shareholders at a floating net asset value (FNAV) by the fund opening on Friday, October 14. But when the opening bell figuratively rang, nothing happened. It was a day like any other day, with portfolio managers trading and shareholders purchasing and redeeming. It was ... ordinary." We review this, as well as recent updates from Fitch Ratings and Capital Advisors, below.
Wells Fargo Asset Management's piece continues, "The orderly nature of the conversion was the culmination of two years of planning and implementation, in which changes -- and yes they were big -- happened not suddenly, but incrementally and, for the most part, with a great deal of foresight. The headline change of note is, of course, the rotation of investors out of prime and municipal funds and into government funds. Between October 2015 and close of business October 13, 2016, overall money market fund assets declined by only 2%. But ... over $1.1 trillion left prime and muni funds, and virtually the same amount flowed into government funds."
It explains, "The hardest-hit sector was prime institutional funds, which declined by almost 83%; in comparison, municipal funds saw their assets cut virtually in half. As mentioned in our August commentary, cash flows out of prime funds occurred throughout the year, with the majority of planned changes happening by the end of June. At that point, just over three months away from the implementation deadline, $491 [b]illion had moved out of prime and municipal funds. Client-driven cash flows were still the big unknown, in regards to both amount and timing. As expected, those redemptions accelerated in the last two weeks before funds began their implementation."
Wells also commented, "Another thing creeping onto radar screens is the possibility of another debt ceiling showdown in Washington as early as March of next year. It is certainly not worth speculating yet what that showdown might entail, but it is important to note that past debt-ceiling discussion periods have usually been preempted by noticeable declines in Treasury bill issuance. Considering the importance of the increase in outstanding T-bills in helping government funds during this period of asset growth, it should come as no surprise that the potential for a similar decline in the near future is something market participants should certainly add to their watch list, if it is not there already."
Fitch Ratings also released yet another update, saying, "While the mass exodus from prime institutional money market funds slowed in the weeks following the Oct. 14 reform implementation date, asset outflows continue, with prime institutional assets under management declining $12 billion between Oct. 14 and Nov. 7. Government institutional funds' assets increased by $46 billion in the same period, reaching a total of approximately $1.6 trillion. Since Oct. 27, 2015, prime institutional money funds have lost approximately $870 billion in assets, and all prime money funds have lost $1.1 trillion (due to a combination of fund conversions and investor outflows)."
They state, "Of 30 prime institutional funds reviewed as of Nov. 7, one fund reported a shadow net asset value (NAV) below $1.00, consistent with one fund as of Oct. 24. Some of the cash that left may return to prime funds, but this will be a function of the relative yield differential between prime and government funds as well as investors adapting to the new features of prime funds. Alternative liquidity products are also expected to garner inflows."
Fitch adds, "As of Nov. 7, prime institutional funds' weekly liquidity averaged 71%, up from 54% on June 30. However, as asset flows have stabilized, fund managers are beginning to revert to more normal portfolio management by extending maturities. This has caused prime institutional funds' average weekly liquidity to fall 16% from a peak of 87% on Oct. 7, a week ahead of reform.... [T]he spread between institutional prime and government funds increased to 0.21% as of Nov. 7."
In other news, Capital Advisors Group writes in a new blog post, "AFP Conference Attendees Rethink Cash Management Strategies In Wake of Money Market Fund Reforms." CEO Ben Campbell, tells us, "Our panel session at this year's AFP Conference on "Managing Liquidity in a Post-Reform World" came at an opportune time -- just after new SEC regulations on institutional prime money market funds went into affect that have already started to dramatically transform the cash management landscape. So it was no surprise when much of the formal discussion at the conference (not to mention plenty of informal cocktail party talk as well) focused on one simple question: "Now what?" (See also, Capital Advisors' new white paper, "Six Advantages of Separately Managed Accounts Over Ultra-short Bond Funds," which we cover briefly in our November Bond Fund Intelligence.)
Capital Advisors writes, "A standing-room-only crowd of more than 250 conference attendees heard our three panelists -- Kim Kelley-Lippert, CTP, Manager of Treasury Operations at American Honda Motor Co., Inc.; Klas Holmlund, CFA, Assistant Treasurer at Vertex Pharmaceuticals; and David Miller, Treasurer and Senior Vice President at Hunt Companies -- share their insights and experiences positioning their organizations for the new era. The session provided an overview of the macro changes in cash management markets. `Even before the institutional prime funds on October 14 imposed SEC-mandated floating net asset values, optional redemption fees and possible liquidity gates, asset managers had made major moves into alternative cash investments."
They continue, "But with yields stuck at historically low rates as all that cash chased a limited supply of government debt, many investors said they were also considering other scenarios that might offer slightly higher returns along with an acceptable balance of liquidity and safety of principal. Some said they planned to trade off a bit of liquidity by allocating a portion of their portfolios to investments with longer maturity dates and slightly higher returns. Others said they would change their investment policies to accommodate a broader range of investments, including separately managed accounts and/or direct purchases of commercial paper and other alternatives."
Campbell says, "In fact, in the annual AFP Liquidity Survey fielded last summer, 44% of respondents said they were considering separately managed accounts, the most-preferred investment alternative that organizations would consider in response to the money market fund reforms.... We got similar results from an electronic poll of the attendees at our conference session. When asked to choose one of six options, 29.9% of the respondents to our instant poll said they were considering separately managed accounts, followed by FDIC-insured deposit solutions (20.1%), floating-NAV prime funds (14.2%), direct ownership of securities (12.7%), short-term/ultra-short bond funds (12.7%) and private money market funds (10.7%)."
Finally, he adds, "Don't be surprised if we see a lot more movement of cash into alternatives once the dust starts to settle from the impact of the money market fund reforms -- especially if and when the Fed decides to raise interest rates again by the end of this year or early in 2017. During our panel session and through several days of conversations at the AFP Conference with corporate cash managers wrestling with the fallout from the reforms, one thing became clear to me. We're only at the starting line of a long-term process of reallocating cash investments in response to this once-in-a-generation disruption of the cash management landscape."
