Late last week, Crane Data hosted its second online event, "Crane's Money Fund Webinar: Portfolio Holdings Update," which featured Peter Crane and J.P. Morgan Securities' Teresa Ho. The pair gave an update on the latest trends in the money fund space with a focus on the latest Money Fund Portfolio Holdings data. We excerpt highlights from the first half of the webinar below, but readers may also access the video recording and materials via our Webinar page here. (Mark your calendars and register for our next event, "Crane's Money Fund Webinar: Portfolio Manager Perspectives," which is scheduled for Wednesday, July 22 at 1:00pm (EDT). It will feature our Peter Crane hosting a panel of PMs, including Federated Hermes' Sue Hill, Northern Trust Asset Management's Peter Yi and UBS Asset Management's David Walczak.)
Crane comments, "What I found interesting on the flows is, March was a monster month, you had hundreds and hundreds of billions moving in, but April was almost as big. You had $1.1-$1.2 trillion come into money funds in March and April. May was basically flat and now it looks like June is down $60 to $100 billion, depending on which point you pick. When ICI comes out with their numbers [last Thursday], they should be flat to slightly up.... April 15th was moved to July, so you're going to have a little weakness. But then [Teresa] wrote recently, in the second half you get this natural seasonal inflow."
Ho responds, "What we saw in March, April and May was a combination of a variety of things.... We saw the most growth ... in institutional money funds, and not much on the retail side. I think there were a couple of factors that were driving that -- I think one was certainly the corporates wanting an additional buffer on their corporate balance sheets because of the pandemic. They were just uncertain as to what the future was going to hold. So, what did they do to kind of shore up that liquidity? They drew down on credit facilities at the bank. In total, by our estimate, close to $350 billion of credit facilities were drawn down. They also raised cash in the commercial paper market in the days and weeks before kind of everything came crashing down. Then, also just any revenue that they had and any investment that they had, they were basically selling their Treasuries in exchange for cash, knowing that they just want to have that extra little cash on their balance sheet."
She continues, "I think it was driven by a lot of corporations feeling very risk averse at that time, and the whole flight to quality that prompted that surge of inflows into 'govie' funds. As we headed into kind of the later part of April and May, we saw some of that stimulus money come up in the CARE package, that was another factor that went into the jump in govie money fund balances. For a lot of these guys that got stimulus payments, they didn't want to use that just immediately. They wanted to pocket it someplace safe and have it available for later."
Regarding, "Our outlook for the second half of this year," Ho tells us, "Historically, we typically see corporations kind of trail down on their money fund balances to pay for these quarterly tax payments, and we see no reason why this time will be any different. So that will be something that will be driving it down. But beyond that, when we think about money that's in the system, currently there's about $1.6 trillion of money that's sitting in Treasury's general account. That money was raised in the Treasury market to be deployed into the economy, to finalize these stimulus payments. [This] hasn't been paid out yet, but the expectation is that they will be paid out over the next couple of months. So, when that happens, I would suspect another jump in govie fund balances."
She adds, "Then also, from a seasonal perspective, we do typically see in the second half of the year corporations holding onto more cash than they would otherwise. So usually we would see inflows in the second half. I think all these factors point to a slight dip over the next couple months. But between what the Fed is doing and what Treasury is doing, once we pass the July and August dates we should see flows kind of moving back into govie funds in the later part of this year."
Crane also says, "When rates last went to zero back in 2008-9, you had this initial spike up [in assets] as institutional investors tried to 'ride the lag' a little bit. Then in 2009 and 2010, money funds lost about 15 percent in a year. So, you did have an erosion. You know, we expect to lose a lot of the trillion that came in. But how much and how fast? You just don't know how long those balances are going to hang around."
He explains, "A couple more points before we get into the holdings. I want to touch on negative yields and the 'soft' closings.... But if you look at the numbers recently, Prime keeps growing. The June numbers, when they come out, are going to show prime with a big increase and government with a big decrease. So, it's sort of odd timing, but you are seeing that shift from government to prime as the yields are hitting zero."
Crane tells the webinar, "I'm being asked a ton about fee waivers [which] you should label 'partial fee waivers.' You're seeing almost half of all money fund share classes hitting that 0.01% floor and presumably, those are the funds that are waiving fees day by day to stay positive. The big institutional funds still have a little bit of yield, but they’re being compressed down.... We do expect funds to waive what they need to, to maintain a zero or positive yield like they did from 2009 through 2015. If we get into a negative rate ... you may see the reverse distribution mechanism or various things come into play."
Ho comments, "The view from J.P. Morgan is ... we really don't see the Fed going negative anytime soon. And I think this view has been echoed across various Fed officials.... The money fund industry in the US is just much bigger, and for all that to move into negative territory will be somewhat challenging, I think, for this entire sector. It would be challenging for the banks, too, because if the money funds weren't there as a cash alternative, presumably that money will move into banks. Banks have already received a ton of deposits and the likelihood and the feasibility of them holding an additional $4 trillion of deposits would also pose a very big challenge."
She continues, "With that being said ... even if we don't go negative, the current low interest rate environment is still not an ideal situation for the money funds, and we're kind of going back into waiving fees again and soft closing funds. In the case of Fidelity and Northern Trust, where they've decided to [liquidate] some of their prime institutional funds, I think that's really telling as to the value of these funds declining over time, especially in the current interest rate environment and especially given the prospect of potentially more money market fund reform down the road."
Ho states, "I think it just brings into question just the value that some of these funds provide in the context of the big, broader money fund industry. So, some things to be keeping an eye on. I think our view is that we would expect more consolidation either internally or externally across fund families, particularly for the smaller money funds that have to deal with all of this but don't necessarily have the resources.... That's kind of what we'll be looking for as we go forward in time."
Finally, Crane responds, "Last time the consolidation was grudging, it was slow. I don't expect a wholesale flight from the Prime space.... I've started speculating on Fidelity's move.... FSOC and the financial regulators [may target them since] they're bigger and have a higher profile than others. They were the first to move in 2015, even 2014, ahead of the 2016 changes; they converted Cash Reserves to a government fund. So that was sort of instructive. That also took some courage from others to stick it out and they moved as well. But it also could be an estate planning issue, too.... Ned Johnson at FMR may be [letting go]. The heirs may not want to risk their billions and their lawyers are telling him to protect that for some reason."
