J.P. Morgan Asset Management published a series of briefs urging investors to reconsider Prime money market funds. The lead piece, entitled, "Capitalizing on the prime opportunity," and subtitled, "A fresh look at the case for prime money market funds (MMFs)," explains, "SEC amendments to Rule 2a-7 have spurred growing demand for government MMFs, resulting in a move away from prime MMFs. However, growing confidence in the operational stability of prime funds -- along with increasingly attractive spreads -- is gearing up to entice investors back again." We review the three JPMAM papers below, and also quote from a new BlackRock brief entitled, "Time for Prime." (Note: Thanks again to attendees, speakers and sponsors of our first Bond Fund Symposium, which took place last week in Boston. The binder, Powerpoints and recordings are now available to attendees and Crane Data subscribers at the bottom of our "Content" center here.)
JPMAM's lead explains, "For institutional clients, the existence of fees and gates theoretically jeopardizes their ability to access their cash at all times -- reducing the attraction, for some, of investing in prime MMFs. Meanwhile, for retail investors, fees and gates appear to have raised substantial barriers to access."
They tell us, "Broker dealers and pension plan sponsors have been unwilling to build the infrastructure that is now needed to allow retail clients to invest in prime MMFs, forcing these intermediaries to move their clients to government MMFs, which carry no requirement to adopt gate and fee provisions, nor transact at FNAV. As a result, the prime MMF market is now significantly smaller than its government counterpart, which was boosted by substantial inflows in the second half of 2016."
The piece asks, "So why revisit Prime right now?" It answers, "Robust demand for government MMFs is forcing yields lower, while reduced demand for prime MMFs is pushing yields higher, creating historically attractive relative spreads. At the same time, institutional investors are becoming increasingly comfortable with the operational stability of prime MMFs. As a result, we anticipate that the investment tide will turn, with assets being drawn back into prime."
They show a chart with a yield spread of 44 basis points between JPMorgan Prime MMF/Capital class and JPMorgan US Govt MMF/Capital, and they show asset growth of 25% in JPM Prime MMF since Oct. 14, 2016. (Crane Data shows Prime Inst MMFs yielding 0.69% on average, with a number of funds now yielding over 1.00%, vs. average yields of 0.41% for Treasury Inst MMFs and 0.43% for Govt Inst MMFs. Thus spreads overall are 28 or 26 basis points, and they're even higher on the pure "Inst" share classes of most funds.)
JPMAM's second paper, entitled, "Floating NAV (FNAV) prime funds: still a compelling option for liquidity investors," discusses, "Replicating the operational benefits of stable NAV prime funds." It says, "On October 14, 2016, the two most significant reforms introduced by the Securities and Exchange Commission (SEC) for institutional prime money market funds (MMFs) came into effect: the option to introduce gates and fees, and the obligation to transact at FNAV."
On "What Has Changed," J.P. Morgan Asset Management comments, "Prime MMF boards can now opt to impose liquidity fees and redemption gates, but only if they believe it is in the best interests of their funds -- and only if weekly liquid assets (WLA) fall below 30%. Additionally, institutional prime and municipal MMFs must transact at FNAV. For liquidity investors -- and retail clients, in particular -- these new requirements have acted as a barrier to investment, driving assets out of prime and into government funds."
But they explain, "Very little has actually changed. From an operational point of view, prime MMFs remain as easy to use as their government counterparts: they still offer the same easy access, flexible trading and multiple T+0 settlements per day. Crucially, NAV volatility remains reassuringly benign in the wake of the move to FNAV. It's also worth remembering that neither the boards of prime nor government MMFs are under any obligation to impose fees and gates on their funds." They show the "Multiple NAV Strikes and Settlement Cycles per Day" in a graphic, explaining that JPMorgan Prime has an 8am, noon, and 3pm NAV, so a trade placed at 9am would transact at noon, and if a redemption would "typically receive cash prior to 2pm".
The third new update, "Fees and gates: a decision - not an obligation," states, "Under the new Securities and Exchange Commission (SEC) rules, effective on October 14, 2016, money market fund (MMF) boards can contemplate whether to implement a liquidity fee or redemption gate in certain circumstances.... Boards have two key powers under the new rules. If a fund's weekly liquid assets (WLA) drop below 30%, a board has the option to impose a liquidity fee of up to 2% on redemptions until WLA rise above 30%. It can also set a gate on redemptions for any 10 days out of a 90-day period. If a fund's WLA drop below 10%, a 1% fee is required to be imposed, unless the Board determines that it's not in the best interest of the fund to do so."
They clarify, "It's important to remember, however, that a breach of the 30% threshold doesn't automatically lead to a fee or gate -- these are only employed if the board believes them to be in the best interests of the fund and its investors. In the event that WLA drop below 10%, however, the board must assess the liquidity profile of the fund, but can still choose not to take action, if in the best interests of the fund and its investors."
Finally, the piece also says, "Portfolio managers do everything within their power to actively manage weekly liquidity well above the 30% threshold. This is first achieved by carrying a robust liquidity buffer above the required threshold. If a fund approaches a liquidity threshold, a number of tools can be utilized to increase its liquidity buffer, including limiting term purchases and/or selling portfolio securities. Additionally, we employ a rigorous governance framework to manage client concentration risk. And lastly, our dedicated distribution model fortifies the client relationship, supporting an active dialogue and significantly curtailing unknown cash flow activity."
BlackRock's "Time for Prime?" update asks, "The paradigm has shifted. Are prime money market funds right for you? <b:>`_. It explains, "There is no longer a one-size-fits-all solution in the money market space. In the new world of cash investing, should prime money market funds (MMFs) have a place in your strategy? In addition to the transparency information available elsewhere on this site, the information below may help you better understand how an allocation to prime MMFs could be additive to your portfolio. We are here to help. Contact us to discuss your needs."
They write, "Assets are steadily returning to the category. TempFund continues to gather assets. Since October 11, 2016 - the implementation date of the floating net asset value (FNAV) per share - portfolio assets have increased 38%, have been in net-positive territory (compared to October 11th assets) every day of 2017, and are up 54% year-to-date." (The piece shows a chart of TempFund assets, as well as spreads going back to 10/16 and daily income on a theoretical $100 million investment.)
BlackRock also says, "Prime MMF spreads are compelling. Since the implementation of the FNAV, TempFund (Institutional share class) has yielded 0.34% more than FedFund (Institutional share class) on average. With a current yield of 0.90%, the current spread is 0.38%. Scale is important. Only four institutional prime MMFs have assets approaching or above $10 billion. This threshold is important for investors concerned with concentration. A large and diversified fund can offer a myriad of potential benefits from risk management to yield enhancement. We believe BlackRock's $403.6 billion cash management platform can help clients efficiently manage their liquidity needs."
