Vanguard Group, the second largest manager of money market mutual funds with $482.3 billion, announced that it is converting its $125.3 billion Vanguard Prime Money Market Fund into a Government MMF, the third major exit from the Prime space since the coronavirus shutdown froze the commercial paper market in March and the first Prime Retail fund to convert since Money Market Fund Reforms went into effect in 2016. Their release, "Vanguard Announces Changes to Money Market Fund Lineup," tells us, "Vanguard today announced the following changes to its taxable money market fund lineup: Vanguard Prime Money Market Fund will be reorganized into a government money market fund and renamed Vanguard Cash Reserves Federal Money Market Fund.... Vanguard Treasury Money Market Fund has reopened to new investors." (Note: Thanks to those who attended our recent "Money Fund Webinar: Mini Fund Symposium" and to our excellent speakers and generous sponsors! The recording is available here and materials are available (to Crane subscribers) on our "Webinar Download Center." To register for our next event, "Crane's Bond Fund Webinar: Ultra-Shorts & Alt-Cash," which is Sept. 24 at 1pmET, click here.)

The release explains, "Having observed and navigated two market crises in the past 12 years, Vanguard believes it's better to seek to provide clients with a higher yield through lower expenses on a secure government portfolio than incurring risk in the prime market. The fund will enhance its credit quality and liquidity levels by investing almost exclusively in U.S. government securities, cash, and repurchase agreements that are collateralized solely by U.S. government securities or cash. Given the current low-interest rate market environment and tight credit spreads, Vanguard has already increased the fund's exposure to government securities, while commensurately decreasing credit risk by letting non-government holdings, such as commercial paper, mature."

CIO Greg Davis comments, "Vanguard investors prioritize capital preservation for their money market investments, and we believe that the rewards of even the most conservatively managed prime funds are no longer worth the risk. We are committed to structuring and managing our money market funds prudently while preserving their safety and liquidity, and are confident these changes will best position the fund to continue to meet the expectations of our clients, while still providing a competitive yield over the long term."

The release adds, "Vanguard also announced the reopening of its $38.9 billion Treasury Money Market Fund. Vanguard closed the fund in April 2020 to protect existing shareholders following a spike in demand for government money market funds during the first-quarter. Vanguard sought to preserve the fund's yield by preventing excessive purchases of low-yielding government securities over a short time period. Vanguard expects that new cash flow will no longer have the same dilutive effect and has reopened the fund to new investors. There will be no changes to the $196.4 billion Federal Money Market Fund, which will continue to operate as a government money market fund that meets the needs of a broad range of investors, while continuing to serve as a sweep vehicle for retail brokerage clients."

The Prospectus Supplement for Vanguard Prime Money Market Fund explains, "The board of trustees of Vanguard Prime Money Market Fund has approved changes to the Fund's investment strategy and name, and a change in the Fund's designation to a 'government' money market fund. These changes will be effective on or about September 29, 2020. The Fund is currently designated as a 'retail' money market fund. The Fund invests primarily in high-quality, short-term money market instruments, including certificates of deposit, banker's acceptances, commercial paper, Eurodollar and Yankee obligations, and other money market securities, including securities issued by the U.S. government or its agencies and instrumentalities. The Fund invests more than 25% of its assets in the financial services industry."

It continues, "The Board has determined that it is in the best interests of the Fund and its shareholders to change the Fund's designation to a 'government' money market fund. Pursuant to Rule 2a-7 under the Investment Company Act of 1940, a government money market fund is required to invest at least 99.5% of its total assets in cash, U.S. government securities, and/or repurchase agreements that are collateralized solely by U.S. government securities and/or cash.... Accordingly, effective on or about September 29, 2020, the Fund will invest at least 99.5% of its total assets in government securities and the Fund's name will change to Vanguard Cash Reserves Federal Money Market Fund."

See also our June 22 News, "Fidelity to Liquidate Prime Instit Money Funds; Cites Investor Behavior;" our May 20, 2020 News, "Northern Liquidating Prime Obligs; NY Fed on PDCF; Weekly Port Holds;" and, our Feb. 2, 2015 News, "Fidelity Announces Major Changes to MMFs; Staying Stable, Going Govt." (For more coverage, see: CNBC's "Vanguard shifting prime money market fund to safer U.S.-backed investments".)

In other news, the Investment Company Institute released its monthly "Trends in Mutual Fund Investing" and its "Month-End Portfolio Holdings of Taxable Money Funds" for July 2020 late yesterday. The former report shows that money fund assets decreased by $55.4 billion to $4.579 trillion in July, after decreasing $133.5 billion in June and increasing $31.8 billion in May and $399.4 billion in April. For the 12 months through July 31, 2020, money fund assets have increased by a breathtaking $1.230 trillion, or 39.6%.

ICI's monthly "Trends" release states, "The combined assets of the nation's mutual funds increased by $635.73 billion, or 3.0 percent, to $22.05 trillion in July, according to the Investment Company Institute's official survey of the mutual fund industry. In the survey, mutual fund companies report actual assets, sales, and redemptions to ICI. Bond funds had an inflow of $69.28 billion in July, compared with an inflow of $66.88 billion in June.... Money market funds had an outflow of $55.36 billion in July, compared with an inflow of $133.78 billion in June. In July funds offered primarily to institutions had an outflow of $35.74 billion and funds offered primarily to individuals had an outflow of $19.62 billion."

ICI's latest statistics show that both Taxable MMFs and Tax Exempt MMFs lost assets last month. Taxable MMFs decreased by $47.3 billion in July to $4.458 trillion. Tax-Exempt MMFs decreased $7.9 billion to $121.8 billion. Taxable MMF assets increased year-over-year by $1.314 trillion (41.8%), while Tax-Exempt funds fell by $14.0 billion over the past year (-10.3%). Bond fund assets increased by $152.4 billion in July (3.2%) to $4.870 trillion; they've risen by $374.7 billion (8.3%) over the past year.

Money funds represent 20.8% of all mutual fund assets (down 0.8% from the previous month), while bond funds account for 22.1%, according to ICI. The total number of money market funds was 357, down one from the month prior and down from 368 a year ago. Taxable money funds numbered 277 funds, and tax-exempt money funds numbered 80 funds.

ICI's "Month-End Portfolio Holdings" confirms a jump in Repo and a drop in Treasuries and Agencies last month. Treasury holdings in Taxable money funds remain in first place among composition segments since surpassing Repo in April. Treasury holdings decreased by $70.3 billion, or -3.0%, to $2.278 trillion, or 51.1% of holdings. Treasury securities have increased by $1.528 trillion, or 203.4%, over the past 12 months. (See our August 12 News, "August MF Portfolio Holdings: Treasury Bender Ends; Repo, TDs Jump.")

Repurchase Agreements were in second place among composition segments; they increased by $46.0 billion, or 5.1%, to $954.7 billion, or 21.4% of holdings. Repo holdings have dropped $252.4 billion, or -20.9%, over the past year. U.S. Government Agency securities were the third largest segment; they decreased $39.6 billion, or -4.8%, to $786.4 trillion, or 17.6% of holdings. Agency holdings have risen by $106.7 billion, or 15.7%, over the past 12 months.

Certificates of Deposit (CDs) stood in fourth place; they increased by $347 million, or 0.2%, to $218.0 billion (4.9% of assets). CDs held by money funds shrunk by $41.5 billion, or -16.0%, over 12 months. Commercial Paper remained in fifth place, down $13.9 million, or -6.5%, to $199.1 billion (4.5% of assets). CP has decreased by $33.0 billion, or -14.2%, over one year. Other holdings increased to $36.4 billion (0.8% of assets), while Notes (including Corporate and Bank) were down to $6.6 billion (0.1% of assets).

The Number of Accounts Outstanding in ICI's series for taxable money funds decreased by 43.2 million to 39.314 million, while the Number of Funds was down one at 277. Over the past 12 months, the number of accounts rose by 3.637 million and the number of funds decreased by 10. The Average Maturity of Portfolios was 43 days, unchanged from June. Over the past 12 months, WAMs of Taxable money have increased by 13.

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