We learned from mutual fund news publisher ignites that Charles Schwab Investment Management has filed to liquidate the $8 billion Schwab Money Market Fund, a move that likely indicates an acceleration in Charles Schwab & Co.'s shift of brokerage "sweep" assets from money market funds into FDIC-insured bank accounts. The Prospectus Supplement says, "At a meeting held on December 12, 2017, the Board of Trustees of The Charles Schwab Family of Funds approved the liquidation of, and the related Plan of Liquidation for, Schwab Money Market Fund (the Fund)." We review this latest liquidation filing, as well as recent rate increases on brokerage sweep accounts, below. (See our Oct. 23, 2017 "Link of the Day," "Schwab Earnings Talk MMFs.")
The Schwab Money Market Fund filing explains, "In accordance with the Plan of Liquidation, the Fund will redeem all of its outstanding shares on or about May 25, 2018 (the Liquidation Date), and distribute the proceeds to the Fund's shareholders in an amount equal to the shareholder's proportionate interest in the net assets of the Fund after the Fund has paid or provided for all of its charges, taxes, expenses and liabilities. Additionally, the Fund anticipates making a distribution of any taxable dividends and capital gains of the Fund prior to or on the Liquidation Date."
It continues, "As the Fund approaches the Liquidation Date, the Fund will wind up its business and affairs, and will cease investing its assets in accordance with its stated investment policies. On or before the Liquidation Date, all portfolio holdings of the Fund will be converted to cash, cash equivalents or other liquid assets. As a result, the Fund will not be able to achieve its investment objective and will deviate from its investment policies during the period as it approaches the Liquidation Date."
Schwab tells us, "The Fund's investment adviser will bear all expenses associated with the liquidation other than transaction costs associated with winding down the Fund's portfolio and effective April 2, 2018 through the Liquidation Date, the Fund's investment adviser will waive the Fund's management fees. The liquidation is not expected to be a taxable event for the Fund."
They add, "Once the Fund has been liquidated, all references to the Fund will be deleted from the Prospectus and Statement of Additional Information. A copy of the Fund's Prospectus and this supplement is available on the Fund's website www.schwabfunds.com/schwabfunds_prospectus, and the Fund will provide additional information, should it become available, on its website."
The filing also comments on Schwab Government Money Fund, saying, "The third paragraph in the section entitled, "Buying/Selling Shares" on Page 25 of the Prospectus is deleted and replaced in its entirety with the following: When you designate one of these funds as the sweep fund on your Schwab account, your uninvested cash balances will be invested in the fund according to the terms and conditions of your account agreement.... If you do not designate one of these funds as the sweep fund on your Schwab account, your uninvested cash balances may be automatically deposited in an interest-bearing deposit account at Charles Schwab Bank ("Bank Sweep Program"). All accounts participating in the Bank Sweep Program may be subject to a maximum deposit amount limit, which will apply to the amount that can be swept into bank deposit accounts under the Bank Sweep Program. Available balances in excess of the maximum deposit amount limit will be automatically invested in a secondary sweep option, which may be Schwab Government Money Fund."
In our October Link, we wrote, "The Charles Schwab Corporation's latest quarterly earnings release mentions money market funds and cash in a couple of places. CEO Walt Bettinger says, "Most recently, we enhanced our money fund offerings by lowering expenses, reducing and standardizing investment minimums, and streamlining share classes across our entire lineup. These changes are part of our work to ensure clients continue to have access to a range of cash solutions offering attractive yields and smart features."
It added, "CFO Peter Crawford comments, "During the third quarter, we transferred $1.7 billion in sweep balances to Schwab Bank – $1.4 billion from Schwab One and approximately $300 million from sweep money market funds. In addition, we used $5 billion in Federal Home Loan Bank advances to provide temporary funding for additional investments ahead of future bulk transfer activity. The FHLB advances, the third quarter money fund transfers, and higher client cash levels all helped our consolidated balance sheet reach $230.7 billion as of September 30th; our preliminary Tier 1 Leverage Ratio at quarter-end was 7.7%." (See Schwab's release "Announcing Lower Minimums and Expenses for Schwab Money Funds.")
Schwab is currently the 8th largest manager of money market mutual funds with $161.4 billion in assets. The firm will continue to offer Prime MMFs, including the $35.9 billion Schwab Cash Reserves, the $14.1 billion Schwab Advisor Cash Reserves, and the $27.4 billion Schwab Value Advantage Money Fund.
Though Schwab hasn't commented further on their latest moves, there has been plenty of movement in brokerage sweep rates, following years of rock-bottom 0.01% yields. Crane Data's Brokerage Sweep Intelligence product shows that rates among the $1 trillion in FDIC-insured cash held at brokerages moved higher in the latest week, rising to 0.11% (for accounts of $100K-$249K) from 0.07% the week prior and from 0.04% a year ago.
Several brokerages, including Ameriprise, Raymond James, Schwab and TD Ameritrade, increased rates on selected sweep tiers in the last week of 2017. (Schwab bumped up rates to 0.12% for all tiers on its Bank Sweep.) We expect these rates to continue inching higher in coming weeks as higher-yielding money funds begin to draw cash back out of bank products. (Let us know if you'd like to see a copy of our most recent Brokerage Sweep Intelligence report.)
For more news on brokerage sweeps, see our Oct. 12, 2017 News, "Wells Bumps Up Brokerage Sweep Rates, Raises FDIC Insurance Coverage," our May 9, 2017 News, "Signs of Life in FDIC Brokerage Sweeps; StoneCastle on Sweep Platforms," our Aug. 15, 2016 News, "Morgan Stanley Pulls Plug on Prime, Muni Sweeps; ignites on Strikes," and our June 29, 2016 News, "UBS Liquidates Sweeps, Goes Govt; Vanguard Floats Internal Money Fund."
