Schwab Money Fund Commentary
Schwab Money Funds recently published an "October 2020 Commentary," which tells us, "During the 3rd quarter on an industry wide basis, government, prime, and municipal money market funds experienced outflows, as money market fund yields declined, even while underlying market technical factors continued to improve. Actions taken by the Fed in the first-half of the year have been effective in providing ample liquidity and maintaining credit spreads at more normalized levels. Additionally, the reduction in the Fed Funds Rate earlier in the year continued to drive money market fund yields to historical lows. Despite the drop in yields, investors did not lose sight of money fund's appeal as a vehicle for capital preservation and daily liquidity. Due to the low yield environment, the lingering uncertainty of the pandemic and the upcoming election cycle, money fund providers, including Schwab, remain defensively positioned." Schwab's Linda Klingman and Rick Holland write, "Prime yields remained stable throughout the third quarter, but near historic lows. Spreads between prime and government securities are unusually tight across the curve for maturities ranging from one month to one year. This has made investing in government securities uncharacteristically attractive to prime funds, which have responded by allocating a percentage of fund assets to Treasury bills. During the third quarter, the Schwab Prime Money Funds extended their weighted average maturity (WAM) by placing investments further out on the curve, and shifting some investments from overnight government repo into term Treasury bills. Across the industry, prime MMFs continue to hold a significantly higher percentage of their portfolios in daily and weekly liquid assets than they did prior to the pandemic. Schwab's on-going focus on liquidity management provides substantial buffers above the daily and weekly regulatory minimums of 10% and 30%, respectively." They continue, "Although Treasury bill issuance remains high by historical standards, a key variable will be the supply/demand dynamics of any additional pandemic stimulus from Washington. Any new stimulus measures would likely be funded through the additional issuance of Treasury bills, which may create further support of higher yields. Prime MMF portfolio managers will continue to monitor the supply of MMF eligible, short term, high quality corporate debt, which is expected to be light, as banks and non-financial issuers remain flush with cash. This will likely keep prime, investible yields at low levels into the near future. Finally, we expect short term yields within the municipal sector to stay range-bound and to be increasingly influenced by taxable money market alternatives. Based on these and other factors related to the pandemic and the upcoming election, Schwab Money Funds are expected to remain defensively positioned and will continue to focus on liquidity and NAV stability." Finally, the update adds, "On September 24th, Charles Schwab launched six new Ultra money market fund share classes and standardized its management fee structure, in response to growing client demand and to reduce operating expense ratio complexity. More specifically, this launch included three Government/Treasury share classes and three Municipal share classes, each with a $1 million investment minimum and a 0.19% operating expense ratio cap. Additionally, all Schwab Money Funds standardized the management fee to 19 basis points, reducing the expense cap for the Investor Share classes ($1 minimums) to 34 basis points and the Schwab Government Money Fund - Sweep share class to 44 basis points. For additional details, please refer to the "Ultra Shares - Schwab Funds Announcement" on our website. Schwab's acquisition of TD Ameritrade was officially completed on October 6, 2020 and will create a company with approximately $6 trillion in client assets and 28 million brokerage accounts. The full integration is expected to last 18-36 months and we do not anticipate any material changes to the manner in which we manage our money fund operations or assets on behalf of our shareholders. We remain committed to providing our money market fund shareholders with stability of capital, liquidity and current income. The CSIM Money Market Investment Portfolio Strategist Team will continue to partner with Schwab client facing teams, in an effort to educate both clients and prospects about our suite of MMFs and the unique dynamics that play a critical role in our ability to offer these capital preservation strategies."
