Goldman Sachs Asset Management recently posted two "Liquidity Solutions Viewpoints" video updates on their website. The first features Global Head of Short Duration Strategies John Olivo and is entitled, "Repatriation Brings Cash Home: Corporations Looking for Flexibility," while the second features Head of Liquidity Solutions Dave Fishman and is called, "European Money Market Funds Take a New Path: Reforms Differ from US, More Complex." We quote from both below, and we also review the latest fund manager disclosures on plans for European MMF Reforms. (Note: We'd again like to remind readers of our upcoming European Money Fund Symposium, which is Sept. 20-21 at the London Tower Bridge Hilton.)
On repatriation, Olivo explains, "So repatriation has been a meaningful event in front-end, high-quality, fixed income assets. For many years corporations have been incentivized to hold cash offshore, and since they didn't need liquidity on that cash, they've invested in short duration assets. That all changed starting in December of this past year where tax reforms, and specifically repatriation was enacted. As a result, `we’ve seen corporations start to transfer cash offshore to onshore."
He continues, "We haven't seen meaningful liquidation of assets, but the transfer has occurred. As a result, corporations are starting to rethink how they think about managing their cash on a go forward basis. I would say the net result is that we've seen duration start to shorten, either actively, via selling of bonds, although we haven't seen a tremendous amount of that, or passively where portfolios are starting to age and become shorter in overall duration."
Olivo concludes, "Corporations are looking for greater flexibility in terms of their cash on a go forward basis, since it's no longer trapped offshore. We've seen an impact on markets. Credit spreads have widened, albeit off of very tight levels, despite the fact that corporate fundamentals remain quite strong. U.S. corporations had served as a huge source of demand for front end credit assets. That demand has diminished and as a result you've seen spreads widen. Going forward, we do expect there to be again, shorter overall durations resulting in greater flexibility in the use of cash."
Goldman's Fishman tells us, "Ten years post financial crisis, European Regulators have finally finished new rules governing European money market funds. Unfortunately, the rules are different than the rules that govern U.S. money market funds and are likely to create confusion among customers. [It's] unclear what the utility decline will be for these customers. But what we now have is three different types of money market funds in Europe: a government money market fund, a variable NAV money market fund, and a limited volatility money market fund. This simple product that people use for liquidity is now being made more complex."
In related news, a press release entitled, "Federated Investors Announces Post-reform Structures of European Money Market Funds," tells us, "Federated Investors, one of the largest investment managers in the United States -- and its subsidiaries in London, Frankfurt and Dublin -- ... announced the proposed changes to its European money market mutual funds in preparation for the 21 January 2019 compliance requirement of new regulations. These changes will affect the structure, composition, valuation, liquidity requirement and information reporting of money market funds domiciled, managed or marketed in the European Union."
Federated says, "Based on discussions with clients and an examination of the effects of restructuring, Federated determined the implementation date of the changes should closely coincide with the compliance requirement date to allow clients time to prepare their systems. The company announced 11 January 2019 as the implementation date."
The release explains, "Federated intends to implement the following structure for its mutual funds:" Federated Short-Term Sterling Prime Fund will convert from a Short Term CNAV fund to a Low Volatility MMF (LVNAV) fund; Federated Sterling Cash Plus Fund will continue to be a Standard VNAV fund; Federated Short-Term U.S. Prime Fund will convert to a Short Term CNAV to a Low Volatility MMF (LVNAV) fund; Federated Short-Term U.S. Government Securities Fund and Federated Short-Term U.S. Treasury Securities Fund will remain Public Debt CNAV funds.
For more on fund managers' European Money Market Fund Reform plans, see our August 17 News, "BlackRock Details European Money Fund Reform Plans; Love the LVNAV," our August 14 News, "SEC Shows Private Liquidity Funds Up in Q4; HSBC's European MF Plans," our July 17 News, "Morgan Stanley European MMF Reform Plans; Offshore Port Composition," our March 16 News, "JPMAM European MMFs Plan for Nov 2018 Conversion; MF Assets Plunge, and our Nov. 16, 2017 News, "JP Morgan To Offer All European Fund Options; ICI MMF Holdings Update."
Finally, in other news, the Investment Company Institute's latest weekly "Money Market Fund Assets" report shows money fund assets inched up to reach their highest levels since 2010 after dipping last week. Prime assets continued to rise. Money fund assets are entering one of the strongest seasonal periods of the year, so we expect flows to continue higher in coming weeks. They're now up $26 billion, or 0.9%, YTD, and they've increased by $129 billion, or 4.7%, over 52 weeks.
ICI writes, "Total money market fund assets increased by $3.74 billion to $2.86 trillion for the week ended Wednesday, August 22, the Investment Company Institute reported today. Among taxable money market funds, government funds decreased by $3.97 billion and prime funds increased by $7.49 billion. Tax-exempt money market funds increased by $225 million." Total Government MMF assets, which include Treasury funds too, stand at $2.213 trillion (77.3% of all money funds), while Total Prime MMFs stand at $521.3 billion (18.2%). Tax Exempt MMFs total $129.8 billion, or 4.5%.
They explain, "Assets of retail money market funds increased by $6.35 billion to $1.05 trillion. Among retail funds, government money market fund assets increased by $3.01 billion to $630.94 billion, prime money market fund assets increased by $2.73 billion to $297.99 billion, and tax-exempt fund assets increased by $607 million to $122.20 billion." Retail assets account for over a third of total assets, or 36.7%, and Government Retail assets make up 60.0% of all Retail MMFs.
ICI's release adds, "Assets of institutional money market funds decreased by $2.61 billion to $1.81 trillion. Among institutional funds, government money market fund assets decreased by $6.98 billion to $1.58 trillion, prime money market fund assets increased by $4.75 billion to $223.33 billion, and tax-exempt fund assets decreased by $382 million to $7.63 billion." Institutional assets account for 63.3% of all MMF assets, with Government Inst assets making up 87.3% of all Institutional MMFs.
