BNY Mellon CIS posted the second entry its new "Dreyfus Podcast Series" this week. The latest "Invested in cash" interview, entitled, "Money Market Trends Post Reform," features our very own Peter Crane. The session's description says, "Peter Crane talks about trends his firm is noticing with cash managers so far this year, the level of NAV volatility on FNAV funds, fee or gate potentials, alternatives to money funds and the implications the political landscape has on money market funds." We review Dreyfus' latest Q&A below
The podcast says, "Welcome to our second Dreyfus Podcast: Invested in Cash. Today we're talking about money market trends post reform in 2016. My name is Sue Anne Cormack. As director of sales at Dreyfus, I'm really grateful to be joined today by Pete Crane, Founder, President & CEO of Crane Data, which is money market and mutual fund information firm."
Cormack continues, "Peter is recognized as an incredible industry expert in the institutional money market fund space, and has more than 23 years of experience. Pete, thank you so much for joining us today. As you know we're fielding more and more questions about prime funds and flows and people getting in the ready position. Can you please share your observations with us about how prime funds have behaved post-reform. In other words, how might investors might think about the use of Prime funds in their investment plan?"
Crane answers, "Sure, thanks so much for having me today, Sue Ann. I think the important thing about looking at Prime funds currently is that they have begun recovering since the October 2016 reforms went in to effect. People are arguing over how much they've risen since then; it's $20, $30 billion, about 5 or 6%. The important thing is that assets have been clawing their way higher. They’ve been recovering, and you've barely seen any down weeks or months during that time. So money is slowly but surely moving back to Prime. Whether you as an investor want to join that slow trend is a decision you have to look at, but the spreads are growing, prime is slowly recovering, and going forward we do expect prime assets to continue this recovery."
When asked, "Will assets in prime funds ever equal what they once were before reform?" Crane responds, "That would be a bold prediction and a contrarian prediction. It will be a long time.... I think eventually assets may rival the trillion and a half that they were. But at this pace it would take decades. And it all depends on spreads, it all depends on if investors get comfortable with the new emergency gates and fees, which I think we'll talk about at the moment here. So prime is recovering. It's about to break back over $400 billion, it had dipped to the lowest [n years] which is $375 billion. Whether we ever reach a trillion and a half? It will be a very long time <b:>`_."
Cormack also asks, "Have you seen much movement in the NAVs within the floating NAV funds? Have any funds that you're watching been close to triggering a fee or a gate? Crane tells her, "No is the short answer. That's an equally important thing to note: in addition to the slow asset recovery, the NAV's have been stable. The average NAV for prime and institutional funds is over 1.0000, its 1.0003. So there's a little bit of leeway there. The daily liquid assets are 30%, the weekly liquid assets are about 50%, well above that 30% weekly threshold that they would first have to trigger to even consider a gate and fee. So it's clear that funds are running more conservative, they're running with more liquidity, they're trying to inch out and get a little investment yield here. But I think investors have been watching and are growing more comfortable with the concept that the floating NAV money fund will float very little."
Next, Cormack asks Crane, "We also noticed that some investors are looking at alternatives to money market funds.... What are some of your observations? Do you see investors doing anything different with the concept of segmenting their cash or operating cash in various buckets?" He explains, "Yeah, I mean there's a lot of smoke, and a little fire. But there is growing [interest]. There are a number of experiments going on in the ultra-, ultra-short bond segment [and] with private funds, [and interest with] separately managed accounts. Money is moving into those alternate sectors, but at a slow pace. They're gradually building the volume that they would need to take larger batches of assets."
Crane continues, "Investors are looking at segmenting and starting to look at running transactions through government money funds to allocate a little bit to prime, a little bit more to yield. In the past, you got your safety liquidity and yield all in one place. In the future, you're going to have to get your safety and liquidity in one place and your yield someplace else.... I think that prime money funds are still the best alternative for these secondary cash segmentation slices that are going on out there. But a lot of people are looking at ultra-shorts and looking at other options and whether they succeed or hit or not remains to be seen."
Dreyfus also asks, "What about the political landscape or other regulatory [developments] like Basel III?" Crane comments, "Some of the money fund managers out there have been just thrilled that the regulations for money funds are passed [over with] now. There's an outside chance that you could have the SEC or Congress or someone come in and tweak that again. But that's a long-shot. In general [with] the banking regulations, a lot of people expect bank assets to be pressured back into money market funds. We're not seeing that to a large degree yet. But I think yield's going to be the dominant force there. As money fund yields continue pushing towards 1.0%, as the Fed keeps hiking rates here as we go through the year, the yield attraction of money funds should begin to bring some of those banking assets in."
Cormack adds, "That's really consistent with what we're hearing as well. So with all of this in mind are there other high-level observations that you would like to share?" Finally, Crane comments, "I think my advice and comments are always the same. You really want to stay diversified. You want to keep your options open. Back during the massive shift to Government, shutting down your prime fund or banning different investments just doesn't make sense with the landscape that we are in. You can see these [potential] big shifts, where if the debt ceiling all of a sudden becomes an issue ... you may have to shift assets from a Government fund. So keeping your options open and of course watching the market develop here as it recovers from reforms is your best bet going forward."
