This past year saw a continuation and acceleration of the money fund yield and asset recovery that began following the end of the zero rate era and regulatory reforms of 2016. Money fund managers benefited from higher yields driven by a series of Fed rate hikes, the gradual recovery of Prime fund assets and negative returns in bonds and stocks for the first time in a decade. It was the fourth straight year that rates moved higher, and the first in over 8 years that yields moved over the 2.0 percent level. We've selected the most important news stories of the year 2018 below, and some that represent some of the major trends over the past year.
Crane Data's Top 10 Stories of 2018 include (in chronological order): "More Opposition to and Coverage of Stable NAV Bill; Bank Group Balks" (1/18/18); "Schwab Money Market Fund Liquidates, Shift to Bank Deposits Continues" (5/29/18); "JPM Securities' Outlook on Bills, Repatriation, Deposits, MMF Inflows" (6/26/18); "JPMorgan on European MMF Reforms; Aviva First to Convert to LVNAV" (9/5/18); "Sept. BFI Profile: Fidelity Conservative Income Bond Fund Breaks $10 Bil" (9/25/18); "Wells Fargo MMFs Look Back at Global Financial Crisis, Changes Since" (10/12/18); "Invesco Buying OppenheimerFunds; DWS ESG, Northern's RAVI Advertise" (10/22/18); "Crane 100 Money Fund Index Hits 2.0 Percent; ICI's Trends for Sept." (10/31/18); "WSJ Says Cash Is a Star in Rocky Year; Weekly Holdings; ICI Annual" (12/6/18); and, finally, "Fed Hikes Ninth Time to Range of 2.25-2.5 Percent; MMF Yields Moving" (12/20/18).
While regulatory changes in the U.S. didn't play a big role in 2018, there was movement in Congress to overturn some of the 2016 regulatory changes. Our Jan. 18 story, "More Opposition to and Coverage of Stable NAV Bill; Bank Group Balks (1/18/18)," explained, "Since our Jan. 12 News update, "Stable NAV MMF Bill Stalls," we've seen two more mentions of H.R. 2319, the bill to bring back the $1.00 NAV for Prime Institutional money funds. In the first, Politico Pro writes "Investment Companies Fight Effort to Undo Fund Rules." They comment, "ICI is lobbying to preserve money market fund regulations enacted in 2014, as the House Financial Services Committee prepares to vote on bipartisan legislation that would roll back the regulations. ICI told senior lawmakers in a letter Friday that it opposes the House bill, citing "substantial and costly operational changes" that had been undertaken and its view that markets had adjusted to the regulatory overhaul." (The bill remains stalled and is not expected to pass, though there remains a slim chance of passage.)
Another big issue in 2018 was brokerages shifting money fund assets to bank deposits. Our May 29 piece, "Schwab Money Market Fund Liquidates, Shift to Bank Deposits Continues (5/29/18)," comments, "Charles Schwab liquidated its Schwab Money Market Fund late last week as the brokerage continues to shift large amounts of money market fund "sweep" assets into bank deposits. Schwab MMF (SWMXX) saw its assets decline to zero on Friday, from $15.4 billion two years ago and $7.3 billion on April 30, 2018. Schwab is the 8th largest manager of money market mutual funds with $138.8 billion in assets as of April 30, 2018. The brokerages' money fund assets declined by $4.1 billion in April, by $16.9 billion over 3 months, and by $17.5 billion, or 11.2%, over the past 12 months. Year-to-date, Schwab has shifted at least $32 billion in money fund sweep assets into bank deposits." (See also our Feb. 16 News, "Schwab Changes Brokerage Cash Sweep, Adds Bank, Cuts Money Funds," and also our Jan. 4 News, "Schwab Liquidating MMF, Shifting to FDIC; Brokerage Sweep Rates Jump.")
A late June story, "JPM Securities' Outlook on Bills, Repatriation, Deposits, MMF Inflows (6/26/18)," hit on several of the major themes of 2018 -- growing Treasury bill supply and the potential for bank deposit cash to move back into money market funds. We wrote, "J.P. Morgan Securities writes in a recent "Short-Term Fixed Income: Mid-Year Outlook," "Though 3m Libor-OIS has retraced to more normalized levels since hitting a high in early April, pressures remain that will likely continue to favor elevated Libor-OIS levels in the near term. First, seasonal funding needs on the part of Treasury will likely prompt net bill issuance to increase again later this year. Currently, our Treasury strategists estimate net bill outstandings will grow by [about] $290bn in 2H18."
The passage of European Money Fund Reforms was another big theme of '18. Our piece, "JPMorgan on European MMF Reforms; Aviva First to Convert to LVNAV (9/5/18)," explains, "JP Morgan Securities published a paper entitled, "European Money Market Reform: CNAV, LVNAV and VNAV," that "summarise[s] the main elements of the pending European Money Market Reform which will mostly impact short term European money market funds." It says, "The European Money Market reform (Regulation (EU) 2017/1131) is a set of regulations for Money Market Funds (MMFs) established, managed or marketed in the European Union. The reform applies to collective investment undertakings that 1) require or are authorised as UCITS or AIF, 2) invest in short term assets 3) preserve the value of the investment or offer returns in line with money market rates. It has become effective for new funds on 21st July 2018 and will apply to existing funds on 21st January 2019." We excerpt from this update below, and we also quote the first European money fund manager to be fully compliant with the new reforms, Aviva Investors."
For more on European Money Market Fund Reforms, see these recent Crane Data News stories: SSGA Podcast on European Money Fund Reforms Discusses PM Strategies (8/29), Goldman on Repatriation, European Reforms; Federated Plans; Assets (8/24), BlackRock Details European Money Fund Reform Plans; Love the LVNAV (8/17), SEC Shows Private Liquidity Funds Up in Q4; HSBC's European MF Plans (8/14), Morgan Stanley European MMF Reform Plans; Offshore Port Composition (7/17), JPMAM European MMFs Plan for Nov 2018 Conversion; MF Assets Plunge (3/16), and JP Morgan To Offer All European Fund Options; ICI MMF Holdings Update (11/16/17).
Another important trend in 2018 was the continued growth and popularity of ultra-short and "conservative" ultra-short bond funds. We wrote in our, "Sept. BFI Profile: Fidelity Conservative Income Bond Fund Breaks $10 Bil (9/25/18)," "This month, Bond Fund Intelligence interviews Fidelity Investments Portfolio Manager Julian Potenza, who along with Rob Galusza, runs Fidelity Conservative Income Bond Fund. Fidelity "CIB" as it's referred to, is one of the pioneers in the "Conservative" Ultra-Short Bond Fund space, and recently passed the $10 billion milestone. We discuss the fund's strategies, its success, and a number of issues in the shortest segment of the ultra-short term bond fund market. (Note: This profile is reprinted from the Sept. issue of our Bond Fund Intelligence publication. Contact us if you'd like to see the full issue, or if you'd like to see our BFI XLS performance spreadsheet, our BFI Indexes and averages, or our most recent Bond Fund Portfolio Holdings data set.)"
Though it's been 10 years since the depths of the 2007-2008 Subprime Liquidity Crisis or "Great Recession," we continue to feel the effects. In October, we featured the News, "Wells Fargo MMFs Look Back at Global Financial Crisis, Changes Since (10/12/18)." It said, "Wells Fargo Money Market Funds' latest "Portfolio Manager Commentary" looks back at the financial crisis and what has changed in the decade since. Jeff Weaver, et. al., write "'Surveying [what's left of] the landscape,' That's how we titled the overview section of our September monthly commentary published 10 years ago. September 2008 was a seminal moment in the money markets. Following months of stresses in various sectors of the financial markets, the crisis hit home with a vengeance when Lehman Brothers declared bankruptcy on Monday, September 15, 2008. In its wake, a run began on money market funds, culminating with the Reserve Primary Fund, the nation's first and oldest money market fund, breaking its one-dollar net asset value (NAV), becoming only the second to do so since the Community Bankers money market fund in 1994. What began as a credit crisis quickly transformed into a crisis of liquidity and confidence, with markets seizing up and issuers unable to roll their maturities."
On Oct. 22, we wrote, "Invesco Buying OppenheimerFunds; DWS ESG, Northern's RAVI Advertise (10/22/18)," which discussed the phenomenon of consolidation (or lack thereof) and the first ESG money fund. We wrote, "A press release entitled, "Invesco announces Combination with OppenheimerFunds," tells us, "Invesco Ltd. (IVZ) ... announced a combination with OppenheimerFunds, a strategic partnership with Massachusetts Mutual Life Insurance Company (MassMutual) and a $1.2 billion common stock buyback program." Invesco is the 13th largest manager of money funds with $57.8 billion, while Oppenheimer is the 29th largest manager with $8.0 billion. A combined Invesco/OppenheimerFunds would still rank 13th (below SSGA) with $65.8 billion. We review this deal, as well as a couple of recent advertisements from money funds and ultra-short bond funds, below.
In our piece, "Crane 100 Money Fund Index Hits 2.0 Percent; ICI's Trends for Sept. (10/31/18)," we explained, "Money fund yields moved higher in October following the Fed's 8th quarter-point rate hike at the end of September, bringing our Crane 100 Money Fund Index up to the 2.0% level for the first time in 10 years. (Our Crane 100 MF Index measures the average yield of the 100 largest taxable money market funds.) Yields have moved up from 1.88% at the start of October and up from 1.12% at the start of 2018 and 0.43% at the start of 2017. We briefly discuss recent yields, and we also review the ICI's latest Trends and Portfolio Composition releases. Our broad Crane Money Fund Average, a simple average of 692 taxable money market mutual funds, currently yields 1.82%, up from 1.69% on 9/30/18, and up from 0.92% on Dec. 31, 2017 and 0.26% on Dec. 31, 2016."
Then, towards the end of 2018, we penned, "WSJ Says Cash Is a Star in Rocky Year; Weekly Holdings; ICI Annual (12/6/18)." Our www.cranedata.com News said, "The Wall Street Journal writes "Cash Is a Star in Rocky Year for Global Markets," which says, "In a year of anemic returns and wild gyrations across most markets, cash is a star. U.S. cash and cash equivalents are on track to be some of the best-performing assets in 2018, enticing money managers struggling with a rare synchronized downturn in stocks, commodities and bond markets. Rising returns on cash make it more appealing for investors to move out of other investments, risking a turning point for markets as the global economy shows signs of slowing and the Federal Reserve slowly normalizes interest rates."
Finally, we again wrote about rising rates in, "Fed Hikes Ninth Time to Range of 2.25-2.5 Percent; MMF Yields Moving (12/20/18)." It said, "The Federal Reserve raised short-term interest rates from a range of 2.00-2.25% to a range of 2.25-2.50% yesterday, their 9th 1/4-point hike since December 2015 and 4th hike of 2018. Money market fund yields, which have inched higher in recent days, should again move upwards over the next several weeks. Our Crane 100 Money Fund Index is now at 2.10%, up 4 basis points from 11/30/18 and up 23 bps since 9/30/18. This average of the largest money fund yields (net, annualized) is up from 1.12% at the start of 2018, 0.43% at the start of 2017, and 0.06% at the start of 2016. Brokerage sweep rates and bank deposit rates should also continue to inch higher in coming days and weeks. The Crane 100 should move above 2.25% by mid-January, and the highest-yielding money funds should break well over 2.50% and approach 2.75% by next month."
For more 2018 (and soon 2019) News (and prior years going back to 2006), see Crane Data's News Archives. We'll continue to provide daily updates on the money fund marketplace in the coming year, so keep reading our News and Link of the Day commentaries in 2019. (Watch for our Bond Fund Intelligence News website to launch at some point in the coming months too.) Thanks to our readers, subscribers and supporters; we wish you all the best in the coming year. Happy New Year!
