As we covered in the May issue of our Money Fund Intelligence, the Investment Company Institute recently released its "2021 Investment Company Fact Book," an annual compilation of statistics and commentary on the mutual fund industry. Subtitled, "A Review of Trends and Activities in the Investment Company Industry," the latest edition reports that equity funds increased, bond fund inflows rose, and money market funds saw their assets skyrocket in 2020. Overall, money funds assets were $4.333 trillion at year-end 2020, making up 18% of the $23.9 trillion in overall mutual fund assets. Retail investors held $1.529 trillion, while institutional investors held $2.804 trillion. We excerpt from the latest "Fact Book" below. (Reminder: Please join us Thursday, May 20 (2-3pm), for our "Handicapping Money Fund Reforms" webinar.)
ICI writes, "Worldwide net sales of money market funds in 2020 totaled $1.3 trillion, compared with net sales of $706 billion in 2019.... The majority of inflows into money market funds in 2020 occurred in the United States, where money market funds saw inflows of $700 billion. However, the majority of the growth in net sales of money market funds came from Europe and the Asia-Pacific region. In Europe, money market funds experienced inflows of $250 billion in 2020, up sharply from $70 billion in 2019, and Asia-Pacific money market funds received $302 billion in inflows in 2020, a significant increase from $30 billion in 2019. The rest of the world received $43 billion in net sales in 2020, more than double the $20 billion in 2019."
They explain, "Generally, the demand for money market funds depends on their performance and interest rate risk exposure. As the difference between yields on short-term fixed-income securities and yields on long-term fixed-income securities narrows, money market funds tend to experience inflows because investors can reduce interest rate risk without sacrificing much yield by using a fund with a short duration."
The Fact Book continues, "As yield curves globally flattened or further inverted during the first quarter of 2020, investors typically would have exhibited a strong demand for short-term assets in general, such as short-term bond funds and money market funds. However, the increasing expectation of significant economic fallout brought on by the COVID-19 pandemic during the first quarter of 2020 led many investors to seek high-quality, short-term investments to preserve and build liquidity. As a result, government money market funds, especially those that invested in US government securities, were a popular investment."
ICI tells us, "Businesses and other institutional investors also rely on funds. For instance, institutions can use money market funds to manage some of their cash and other short-term assets. At year-end 2020, nonfinancial businesses held 20 percent, or $1.0 trillion, of their short-term assets in money market funds." (This is up from 18 percent in 2019, but down from 22 percent in 2013 and down from the peak of 40 percent in 2008.)
In its section (p. 88) on "Money Market Funds," the Fact Book states, "In 2020, money market funds received $691 billion in net new cash flows, up from $553 billion in 2019.... Government money market funds received substantial inflows ($835 billion) while prime money market funds and tax-exempt money market funds had outflows of $111 billion and $33 billion, respectively."
It adds, "Demand for government money market funds in March and April 2020 was shaped by the efforts of businesses, households, and governments to preserve or build liquidity. As market volatility and investor uncertainty peaked in March, investors of all types used government money market funds, which primarily hold securities issued by the US Treasury, to help them preserve liquidity."
ICI says, Government money market funds experienced inflows of $834 billion in March, followed by additional inflows of $342 billion in April. From May through December, government money market funds had outflows of $338 billion. Even though financial markets became significantly calmer after April, the bulk of the cash that flooded into government money market funds remained."
The section continues, "Meanwhile, prime money market funds experienced outflows of $139 billion in March 2020, 17.6 percent of their net assets at the end of February. In particular, institutional prime money market funds had outflows of $91 billion (29.1 percent of their total net assets at the end of February) and retail prime money market funds had outflows of $48 billion (10.1 percent of their total net assets at the end of February). A combination of factors may have contributed to these outflows. Investor demand for safe, liquid assets meant that some of the outflows from prime money market funds may have moved into government money market funds."
The Fact Book comments, "The 2014 reforms from the Securities and Exchange Commission (SEC) may also have played a role; for example, they granted funds the option to impose fees or gates on redemptions if their weekly liquid assets dropped below the 30 percent regulatory minimum. As weekly liquid assets of some institutional prime money market funds approached the 30 percent threshold, the pace of outflows accelerated because of the risk that a fund could impose a liquidity fee or redemption gate. Toward the end of March 2020, the Federal Reserve established a range of facilities to lend to virtually every sector of the economy, including to money market funds through the Money Market Fund Liquidity Facility. These facilities eased pressures on short-term credit markets and money market funds, and outflows from prime money market funds reversed. In April, prime money market funds experienced inflows of $49 billion, followed by inflows of $46 billion in May."
Finally, they write, "In March 2020, the Federal Reserve lowered the federal funds target rate twice. By the end of April, the federal funds rate was hovering at a little more than zero, and net yields on prime and government money market funds—which closely track short-term interest rates—had dropped significantly.... By year-end 2020, government money market fund net yields were 0.01 percent and prime money market fund net yields were 0.03 percent. To keep net yields above zero in 2020, many advisers reinstituted the expense waivers they had provided to their money market funds during the ultralow interest rate environment from 2009 through 2015. Consequently, the expenses waived by money market funds increased sharply from an estimated $1.2 billion in 2019 to an estimated $3.1 billion in 2020."
