As we mentioned in our August 13 News, "DWS Converts Variable NAV to DWS ESG Money Fund, First ESG Offering," the manager formerly known as Deutsche just converted an existing fund into an "ESG" money market fund. A press release put out yesterday, entitled, "DWS launches first ESG money market fund in the U.S.," tells us "DWS Group today announced the launch of DWS ESG Liquidity Fund (ESGXX), the first money market fund available in the U.S. to apply ESG (Environmental, Social and Governance) criteria. The fund will invest in high-quality, short-term, U.S. dollar-denominated money market instruments paying a fixed, variable or floating interest rate while also filtering for various ESG factors using DWS's proprietary software -- the ESG Engine."
Sonelius Kendrick-Smith, Head of Liquidity Solutions, Americas, comments, "As a global asset manager, it is crucial for DWS to enable our clients to invest in a sustainable future by incorporating ESG factors into their global investment process across asset classes. Through the DWS ESG Liquidity Fund, investors will now be able to take advantage of our proprietary ESG Engine software while effectively managing their liquidity."
Fiona Bassett, Global Co-Head of Products, tells us, "DWS has more than 20 years of experience as a leader and innovator in the field of sustainable, responsible and impact investing. The launch of the DWS ESG Liquidity Fund, the first ESG money market fund available for investors in the U.S., offers investors the opportunity to gain best-in-class ESG exposure for their liquidity needs and help invest in a sustainable future."
The press release adds, "The DWS ESG Liquidity Fund buys U.S. government debt obligations, money market instruments and other debt obligations that present minimal credit risks. In addition to considering financial information, the security selection process also evaluates a company based on ESG criteria which considers multiple factors, including: Level of involvement in controversial sectors and weapons; Adherence to corporate governance principles; ESG performance relative to a peer group of companies; and Efforts to meet the United Nations' Sustainable Development Goals." (See also our May 24 News, "Deutsche Funds Changing Back to DWS; Fed Minutes Hint at Rate Tweaks.")
In other news, Federated Investors hosted a webinar on Wednesday that focused on the manager's Prime Private Liquidity Fund. Federated Senior VP & National Sales Manager Brian Ronayne explains, "This product is designed to offer investors a higher net yield than a Treasury or Government money market fund, yet uniquely positioned to still maintain a $1.00 constant NAV with liquidity until 5:00pm Eastern every single day. It does so by investing in a portfolio of high quality, dollar-denominated securities issued by banks, corporations, and the U.S. government that all mature in 397 days or less. In fact, the private fund only invests in eligible money market instruments."
He continues, "This fund maintains the same 10% daily liquid and 30% weekly liquid buckets and the same maximum weighted average maturity of 60 days or less as a traditional 2a-7 money fund. And, yes, Federated's Private Prime Liquidity Fund is AAA-rated both by S&P and Fitch. The yield today on the private fund is 2.10%, which certainly compares favorably to institutional government funds and candidly many institutional bank deposit products, which are trading closer to the 1.85 to 1.90% [level]. It's noteworthy that the spread of the private fund has consistently been 20 to 25 bps over government funds throughout 2018."
Ronayne tells us, "What we have found is that our clients have segmented their cash into three categories: deposits, funds, and direct purchases. [T]his second category, funds, is where we are referring to professionally managed asset pools such as money market funds, private funds, short duration bond funds, and ETFs. Following the implementation of the 2016 Money Market Fund Reform rules, only a small subset of these funds are able to maintain a $1 constant NAV. Namely, various types of government money market funds.... As a result, we've found most, if not all, of the transactional dollars of our institutional accounts migrated to government funds."
He comments, "However, with prime funds now yielding above 2.0%, and a consistent ... spread of 20 to 25 bps over government funds and in some cases over institutional bank deposits, we are seeing money move back into prime funds. We think that makes sense. Yet with that said, we've also found there are pools of money resulting from securitizations, escrows, the repatriation of offshore profits, or from corporate tax relief that is ... being relegated into government funds or lower yielding bank deposits. The plain truth is, many government fund investors have selected that product solely for the $1 NAV and the "no fees and gates" provisions. `Yet those same investors are now realizing that there are alternatives like Federated's Private Prime Liquidity Fund that offer those same exact features, i.e., a $1.00 NAV, no fees and gates, daily liquidity until 5 o'clock, [and] a cash and cash equivalents status."
Federated Money Market CIO Deborah Cunningham states, "Simply put ... the Private Prime Liquidity Fund is just like our Prime Obligations Fund, but without the fluctuating net asset value, without the gates and fees, and therefore without the 2a-7 designation packaging difference. From a composition standpoint, it's currently about 46% in CP, 16% in CDs, and ... about 38% in overnight securities.... We find a huge amount of value currently in the asset-backed commercial paper sector. We have an allocation that's substantial to that. We also like variable rate instruments and non-traditional repo.... The portfolio has about 25% of its composition in variable rate instruments."
Cunningham says, "That is [managing lumpy flows] something that we've learned how to do quite successfully over the course of many decades of managing this type of cash in what has typically been our 2a-7 products. We're just extending that same sort of knowledge into this 3c-7 product and it's working in exactly the same way. We get a lot of information ahead of time from clients upon setup, and we know when this type of cyclicality or monthly cycle is happening, and we are absolutely equipped from a portfolio management team and investments perspective with meeting the needs of this type of client."
Finally, she adds on transparency and disclosure, "It is a different website, so we wanted to make sure that the SEC did not have any problems with us providing the same transparency, but [we're] also trying not to confuse investors by putting it on the same website as our money fund.... You'll find portfolio composition on a bi-monthly basis, you'll find the daily shadow NAV, you'll find daily purchases and redemptions, you will find the daily WAM and WAL calculations, you will find the daily information on daily liquid assets and weekly liquid assets.... In addition, we also provide an update for clients on the underlying shareholders.... So transparency is all that money market funds [do] plus a little bit more."
For more on "private" funds, see Federated's Prime Private Liquidity Fund page (for qualified investors), and see these Crane Data News stories: SEC Shows Private Liquidity Funds Up in Q4; HSBC's European MF Plans (08/14/18) and Federated Says Private, Prime, Ultrashort Still Growing on Q1 Call (04/30/18).
