Mutual fund technology firm Calastone published a blog piece entitled, "Money Market Services in Person - With Peter Crane, Founder, Crane Data." Calastone's Ed Lopez explains, "In the first of our in-person interviews, I speak with Peter Crane, founder of money market and mutual fund information company Crane Data. As a perennial commentator on the industry, he was a great place to start as we look to shed light on how the industry is changing, what money market investors are looking for and how fund providers/portals can make a real difference. With money market funds experiencing huge turbulence during the early part of the Covid-19 crisis as companies everywhere focused on liquidity and cash preservation -- how is this asset class, which is critical for corporate funding market, looking as we start 2021?"
Calastone first asked about the lessons of the March crisis. Crane answers, "People still haven't decided what the big lessons of the financial crisis were in 2007 and 2008. The real lesson is stuff happens and the overriding message for individuals and companies -- which is self-serving for near-cash assets like money market funds -- is to hold more cash. You need an extra buffer.... There's no way to prevent a once-in-100-year flood, whatever you do. It's the circle of life -- it's going to happen again. But it's always the run, never the blow-up, that causes the issues. When you're investing in a higher yielding option, it's not just the investment risk, it's the fact that it attracts hot money looking for yield. And the hottest money is going to bring extra risk because people may run faster."
On zero rates and money fund viability, Crane comments, "People fear negative yields because they don't know them. But the question for money market funds is whether they're covering their costs or subsidising. One of the misunderstandings is that with zero yield they must be waiving fees. But in general, fee waivers are almost always partial fee waivers, so they're making less money -- which is not good, but it's not the end of the world. That's what you saw in the US from 2009 through 2015, when rates were supposedly zero but were actually 15 or 20 basis points. Investors were seeing zero, but there was this little bit of fee income to sustain the funds. And of course, once rates go negative, as they have with Euro money market funds, they still charge their fee on the assets invested. And in fact, assets in Euro funds have had a surprising bump up recently. They are at record levels, which is just shocking considering they've been negative 0.4%, negative 0.5%, for over five years."
He continues, "But the thing that's really underappreciated about super-low rates is what they do to corporations', institutions' and individuals' income streams. Everybody thinks lower rates are good in general, and of course they presumably help entities that are borrowing on the other side. But higher rates have a real upside -- which is the income that pours out. The dividends alone that money funds generate normally are hundreds of billions of dollars: huge numbers."
Crane adds, "Most people think all prime funds are the same, all treasury funds are the same, all government funds are the same. But there are differences between the funds in each group and tiers of safety even among the safest type of funds. Checking each fund's prospectus or offer documents to find out what it can or can't buy is important, as a matter of due diligence."
Finally, discussing if money funds are too big to fail, Crane responds, "Money funds turned 50 last month -- the first one was the Reserve Fund that back in 2008 broke the buck. In general, they've had very rare periods of needing support. In 2008, the US Fed and Treasury stepped in and stopped the run, and everything was fine. It didn't cost them a dime. This time, they stepped in, threw all the money in the world at the problem, stopped the run and it didn't cost them a dime. People were saying 'well, next time we should do anything else but that'. But it worked like a charm. Why would you seek another solution?"
In other news, Barron's writes, "Money-Market Funds Create a New Term for Losing Money." They explain, "Although most experts don't think negative interest rates are likely, the fund industry recently began making its pitch to regulators for what to do just in case. Reverse distributions -- a paradoxical term that sounds almost Orwellian, like 'war is peace' -- are exactly what the Investment Company Institute, a fund trade group, describes in a December report about money-market funds. The report was meant to address concerns that U.S. money funds won't be able to maintain even zero yields after deducting their fees in a negative interest-rate environment -- as has been the case in Europe since 2014."
The article continues, "The ICI's paper describes a process in which instead of getting an income payment, a reverse distribution mechanism, or RDM, 'distributes a [constant net asset value or] CNAV money-market fund's negative yield by canceling shares in shareholder accounts. It offsets the daily negative yield accrued (i.e., a decline in the fund's net assets) by reducing the number of fund shares outstanding. This process allows the fund to maintain a constant NAV per share, typically $1.00.'"
Barron's explains, "RDMs create the illusion that investors aren't losing money by preserving the $1 NAV while share count declines. The purpose though isn't to deceive investors but to prevent NAVs from declining below $1 from fee and yield erosion in a negative-rate environment." Our Peter Crane comments, "In the current [zero interest rate] environment, [money funds] are waiving more than half of their fees.... So instead of charging [0.28%], they’re charging [0.13%] currently."
The piece continues, "Some money managers say maintaining a $1 NAV, even if share counts decline, is easier for brokers that sell funds to keep track of when they sweep cash in and out of funds every day.... The coronavirus remains an economic wild card, however. The Federal Reserve Bank 'has said they do not want to go negative, but you never say never,' Crane says. 'You get another huge shock to the economy to push us back down, and all of a sudden, negative rates and deflation could be a possibility, again.'"
The article continues, "So, if the RDM scenario is unlikely in 2021, why did the ICI publish a report detailing it at the end of 2020? One reason was to publicly make the RDM case. The ICI's 'putting this out there not only for people in the industry and their clients but also for the regulators themselves to help understand [RDMs] could work,' [Wells Fargo Asset Management's Jeff] Weaver says. The other was client concern. 'The topic of negative rates was so persistent through last year from the beginning [of the pandemic crisis] in March, you couldn't have a conversation with a client or colleague without a discussion about [it].'"
Lastly, the piece adds, "Certainly, if RDMs were to happen, educating investors would be challenging. 'This is something that would be new to most investors, especially retail investors,' acknowledges Jeff Naylor, the ICI's director of operations and distribution. 'We do highlight in the paper, the need for a communication strategy for both the funds and the intermediaries.'"
For more, see these Crane Data News pieces: "SIFMA on Negative Sweeps" (1/5/21); "ICI Ops on RDM, Negative Yields; N-MFP Holdings: Treasuries Still Half" (12/9/20); "ICI on Reverse Distribution Mechanism" (12/8/20); "More from Mini Fund Symposium: Dechert's Cohen on ESG, RDM, Reforms" (9/2/20); "N-MFP Holdings: Treasuries Half; JPM, Ignites on RDM, Negative Rates" (6/9/20); "European MMF Reforms Going Live, or Not? Economist Swipes at RDM Kill" (1/22/19); and "WSJ: Yu'e Bao Shrinking; Europe Still Unclear on RDM Ban; Weekly Holds" (11/1/18).
