Northern Trust Asset Management posted a video entitled, "Cash is Back" featuring Director of Short Duration Fixed Income Peter Yi. He explains, "Over the last 10 years, investors have become conditioned to believe cash investments such as money market funds were simply a return of principal rather than a return on principal. Quite simply, they viewed cash as a very expensive insurance policy for principal safety and daily liquidity. But times are changing." We review Yi's video, as well as an update from Capital Advisors Group and our latest Weekly Money Fund Portfolio Holdings below.
Yi says, "In the last two and a half years, the Federal Reserve has slowly increased short-term interest rates seven times, bringing the federal funds target range to 1.75% to 2.00. As we move further away from an extraordinary monetary policy era defined by near zero short-term interest rates, new considerations are emerging as the yields on money market instruments increase. Interestingly, the yields on three-month Treasury bills are now greater than our forecast for a 2.0% dividend yield of the S&P 500."
He continues, "With the U.S. government expected to maintain an elevated supply of Treasury bill issuance, money market rates are well supported at these higher rates. And with inflation continuing at only a modest pace, returns on money market funds are now better positioned to preserve purchasing power in a more meaningful way. In fact, the $2.9 trillion money market industry increased assets in 2017 to a level not seen in 7 years."
Yi also tells us, "We think risk assets will continue to perform well in the near term, which makes the trade-off for higher cash allocations less favorable. However, cash investments such as `money market funds play a critical role in an overall asset allocation and now provide a much higher level of income potential. Cash allocations can vary from investor to investor depending on factors such as risk profile, but having some level of cash can allow investors to be opportunistic in the marketplace. Not only are the liquidity benefits of money market funds valued in every market cycle, but it also adds stability during periods of market volatility. So after years of earning near zero yields on your cash allocations, investors are once again starting to view cash as a real income-producing asset class."
In other news, Capital Advisors also recently published a paper entitled, "Comprehensive Cash Investment Strategies: Comparing Three Major Types of Investment Vehicles." Author Lance Pan tells us, "We are closing in on the 10th anniversary of the peak of the global financial crisis marked by the Lehman Brothers bankruptcy and runs on money market funds. Old-timers still remember the exotic species which invaded the previously tranquil meadows of the world of cash such as auction rate securities, extendable asset-backed commercial paper, structured investment vehicles, and collateralized debt obligations, to name just a few. To say that a lot has changed in the corporate cash world is a great understatement."
He explains, "Our current environment appears much healthier, but it is not without new challenges. We endured an extraordinarily long period of low interest rates that just ended in 2015. The Eurozone debt crisis that sowed the seeds of EU skepticism faded largely into the background, although complications from Brexit remain challenging. The conversion of prime institutional funds to a market-based net asset value (NAV) regime saw the orderly transition of institutional assets to government funds, while similar changes on the European front are just starting. Tougher capital and liquidity requirements and bank resolution reforms in major developed markets made banks more resilient to systemic shocks, although recent regulatory relaxation in the US has slowed this momentum."
Pan also says, "Adding to these external factors is the need to find a transitional and/or permanent home for cash infusion from repatriated offshore profits, windfalls from corporate tax relief, and bank deposits that pay stubbornly low interest. With relatively benign market conditions and baseline short-term interest rates hovering around 2%, return on investments is again a notable goal for many organizations in addition to return of investments and liquidity mandates.... With the reset button pressed on so many cash management vehicles and strategies, this is an appropriate time to reintroduce our readers to the comprehensive approach we discussed a few years ago. We discuss these common cash vehicles in a general fashion to allow investors to make their own decisions based on their unique needs and circumstances."
He writes, "In our opinion, the types of instruments suitable for corporate cash management invariably fall into three categories: deposits, asset pools and direct purchases.... Deposits may include insured and uninsured bank balances. They can be transactional (demand deposit) accounts or time and savings accounts that are issued by U.S. banks, foreign banks, U.S. branches of foreign banks (Yankee deposits) or foreign branches of U.S. banks (offshore deposits)."
Pan continues, "Asset Pools refer to commingled investments where investors have prorated ownership in professionally managed cash-like instruments. Money market funds are a subset of mutual funds which have a goal of achieving a stable net asset value and providing daily liquidity (which is more challenging for institutional prime funds post reform). Other short-duration asset pools may include ultra-short-term bond mutual funds, local government investment pools, lightly regulated private investment pools (3c-7 funds) and exchange-traded funds."
The paper concludes, "The evolving landscape of treasury cash investments may cause anxiety among practitioners looking for ways to house their liquidity portfolios and earn competitive returns, especially when faced with seemingly dwindled selections and influx of cash. We hope our framework of these three types of cash vehicles will facilitate further dialogue internally and with investment managers on the feasibility of each option."
Finally, Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics and summary Tuesday. Our weekly holdings track a shifting subset of our monthly Portfolio Holdings collection, and the latest cut (with data as of August 17) includes Holdings information from 60 money funds (down 3 from August 17), representing $1.037 trillion (down from $1.137 billion on August 17) of the $2.990 (34.7%) in total money fund assets tracked by Crane Data. (For our latest monthly Money Fund Portfolio Holdings numbers, see our August 10 News, "August Money Fund Portfolio Holdings: Treasuries, CP, CD Show Jumps.")
Our latest Weekly MFPH Composition summary shows Government assets dominating the holdings list with Repurchase Agreements (Repo) totaling $358.6 billion (down from $401.9 billion on August 17), or 34.6%, Treasury debt totaling $290.4 billion (down from $340.0 billion) or 28.0%, and Government Agency securities totaling $242.9 billion (down from $248.2 billion), or 23.4%. Certificates of Deposit (CDs) totaled $46.9 billion (up from $42.4 billion), or 4.5%, and Commercial Paper (CP) totaled $45.0 billion (down from $45.5 billion), or 4.3%. A total of $26.8 billion or 2.6%, was listed in VRDNs and the Other category (primarily Time Deposits), accounted for $26.4 billion, or 2.5%.
The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $290.4 billion (28.0% of total holdings), Federal Home Loan Bank with $179.9B (17.4%), BNP Paribas with $51.4 billion (5.0%), RBC with $36.7B (3.5%), Federal Farm Credit Bank with $34.5B (3.3%), Credit Agricole with $24.2B (2.3%), Wells Fargo with $21.6B (2.1%), Natixis with $20.2B (1.9%), Nomura with $19.7B (1.9%), and Mitsubishi UFJ Financial Group Inc with $19.1B (1.8%).
The Ten Largest Funds tracked in our latest Weekly Holdings update include: JP Morgan US Govt ($141.7B), Fidelity Inv MM: Govt Port ($110.3B), Wells Fargo Govt MMkt ($72.9B), Dreyfus Govt Cash Mgmt ($68.2B), Morgan Stanley Inst Liq Govt ($53.6B), State Street Inst US Govt ($44.3B), JP Morgan Prime MM ($42.9B), JP Morgan 100% US Trs MMkt ($39.5B), Fidelity Inv MM: MMkt Port ($37.9B), and First American Govt Oblg ($36.6B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary.)
