Mutual fund news website ignites.com wrote yesterday, "Ultra-Shorts Attract Assets, SEC Scrutiny Post–Money Fund Reform." The article says, "Ultra-short bond funds have become a prime beneficiary of the SEC's money market fund reforms, reporting substantial growth in assets during 2017 — the first full year the rules were in effect. But as the number of products and their assets under management have swelled, the SEC has been looking more closely at new product registrations. The agency wants to ensure that the funds are sufficiently liquid. How shops disclose strategy and risk is another major staff concern, says one '40 Act lawyer." We review the ignites piece below, and we take another look back at the Subprime Liquidity Crisis 10 years ago.
The ignites piece quotes Stephen Cohen, partner at Dechert, "There's always this fine line of how you market these funds. If you market them as a cash alternative, it has to be very clear that the fund can lose money." They tell us, "The SEC wants to make sure that shops aren't billing short-term bond funds as akin to money market funds when they are not, because money funds must operate under the constraints of the new regulations, Cohen adds." (See also Crane Data's Jan. 23 News, "Jan. BFI Profiles Dechert's Cohen on Regulations Impacting Bond Funds.")
The article explains, "Investors poured about $40 billion into ultra-short bond funds last year, pushing assets in the category up by 37%, from $111 billion at the end of 2016 to $152.7 billion as of Dec. 31, according to data from Morningstar Direct. This surge in assets made ultra-short bond funds the third-fastest-growing category among taxable bond products last year, according to Morningstar.... Last year's growth helped ultra-shorts hopscotch past bank loan funds and inflation-protected bond funds in total assets."
It tells us, "The number of ultra-short funds on the market has climbed from 53 as of the end of 2014 to 83 as of Dec. 31, according to Crane Data, which began tracking the funds three years ago. A dozen ultra-short funds launched in 2017. In part, ultra-short funds have the SEC to thank for their growth."
They quote our Peter Crane, "It's a combination of the money fund reforms and the ultra-low yields.... It's tough to separate the two.... Ultra-shorts have attracted investors who want higher yields than those of money funds.... Investors are still yield-starved.... The Federal Reserve's string of interest rate increases has pushed net yields on numerous money funds above 1%, but net yields on ultra-shorts are nearing 2%, he adds."
Ignites comments, "Crane Data tracks a subset of ultra-short bond funds that it deems to be more conservative than others in the category. The funds' holdings have durations of less than six months and maturities of less than a year. They do not invest in junk bonds. The assets of this subset have grown even more quickly than the broader category, rising by 41% from $34.2 billion at the end of 2016 to $48.5 billion as of Dec. 31, according to the money fund and bond fund tracker."
They add, "The fastest-growing conservative ultra-short fund in the past year was Morgan Stanley's Ultra Short Income fund, which launched in April 2016. That fund more than quadrupled its assets during the year ended Dec. 31, 2017, growing from $1.3 billion to $6.4 billion, according to Crane Data. Sales into the ultra-short category have come mostly via financial advisors and high-net-worth individuals, even though firms have been heavily courting institutional and corporate clients, says Crane."
Finally, the piece says, "In line with the SEC's additional scrutiny, Crane warns that ultra-short bond funds don't have the homogeneity of money funds, and that investors should carefully review each fund's holdings.... [T]his space has gotten the crap kicked out of it more times than you can count,' Crane says."
In other news, we continue looking back at the 10-year anniversary of the seeds of the "Great Recession," or as we refer to it, the Subprime Liquidity Crisis. It began in August 2007, but February 2008 was one of the roughest months for money markets. (See our February 2008 News Archives.) Ten years ago today (2/13/08), Crane Data wrote the brief, "`"Break The Buck" Rumors False, No Money Mkt Funds Trading Below $1 <i:https://cranedata.com/archives/all-articles/1384/>`_." We explained, "Rumors circulated this morning that a money market mutual fund had broken the buck, or dropped below its $1.00 share price. These rumors are false. No money fund has declined in value, to our knowledge, and none are expected to. The dangers from SIV-related debt have been diluted by time and asset inflows, and the handful of defaults and downgrades have been met by bailouts or cash infusions by investment managers."
Our piece continued, "This time rumors, allegedly based on comments by Miller Tabak and spread by HSBC Securities, among others, had centered around Citi, failed auctions and SIV support actions.... Again, rumors of a money fund breaking the buck are incorrect and were based on false information, likely circulated with malicious intent. Money funds experienced a number of similar false rumors during the ABCP Crisis of 2007. At least six separate incidents of losses or redemption freezes at enhanced cash private placement "3c-7" funds, boutique investment advisors, and local government pools all were erroneously called money market or cash funds over the past six months by reporters and market participants."
Our Feb. 14, 2008, article, "`SEC Chairman Cox Says Money Market Funds $1 NAV Not Threatened," discusses the same topic. It said, "Securities & Exchange Commission Chairman Christopher Cox, in testimony before today's Senate Banking Committee hearing hearing, said, "[T]he Commission staff has been active in working with the managers of money market funds as they cope with the downgrading of ratings and the declines in value of securities in which their funds have invested. Commission rules limit money market funds to investing in high-quality, short-term investments in an effort to ensure that these bedrocks of the financial system are reliable in all market conditions. Losses by a money market fund would be reflected by the fund re-pricing its securities below $1.00 (known as "breaking the buck"). Only one fund, and that of very modest size, has ever broken the buck [Community Bankers U.S. Govt MMF] since the development of money market funds in the 1970s. The Commission is closely monitoring the fund industry and while we have seen some instances of funds requiring infusions of capital from the corporate parents of fund advisers, we are not aware of any money market fund that is threatened with having to reprice below $1.00."
See also our Feb. 12, 2008 News, "Credit Suisse Takes $702 Million 4th Qtr Charge for Money Fund Damage." It explains, "In what is by far the worst damage to a money market fund advisor from the liquidity crisis of 2007, Credit Suisse took a $702 million charge in its latest quarter over valuation losses in its "money market fund repositioning".... Credit Suisse purchased $8.43 billion of SIVs and ABS from its Credit Suisse Prime Inst MMF and "offshore" money funds and took paper losses of $835 million in total in 2007."
Finally, see our Feb. 21, 2008 News, "Whistlejacket Could Add to Fund Advisor Support Tab; Dresdner Backs K2," discusses another major event in February 2008. We wrote then, "First the bad news. Yesterday, reports hit that the $7 billion Whistlejacket SIV had been forced into receivership and possibly default. This raises the possibility that more advisors could be forced to purchase or protect the SIVs troubled securities from any money funds still holding this debt. Crane Data counts at least six advisors that hold this name in their most recent filings, but only one shows a maturity date lasting into 2008. Standard & Poor's listed Whistlejacket as the 7th largest SIV held by rated money market funds with $1.95 billion in exposure in a November 2007 research piece (the number almost certainly has declined since). (See also Treasury Strategies' recent postings on LinkedIn on the crisis.)
