Barron's writes on money market funds and sweeps in, "Money Markets Pay 4.5%. If You're Getting Less on a Sweep Account, It's Time for 'Cash Sorting.'" Columnist Jack Hough discusses Schwab's lower-yielding bank sweeps vs. purchased money funds and tells us, "[I]t's entirely normal for money-market funds to pay more than bank deposits. Bank accounts are FDIC insured, whereas money markets can dip in value. That has never happened at Schwab and has been exceptionally rare elsewhere, but even so, a bit more risk deserves slightly higher returns." (Note: Please join us for Crane's Bond Fund Symposium, which will be held March 23-24, 2023, in Boston, Mass. Click here for the agenda, and clients and ultra-short bond fund professionals are welcome to join us for the cocktail party at the Hyatt Regency March 23 from 5-7pm.)
Hough explains, "Now the natural order of things has been restored, and bank accounts are no longer the place to go for yield. But rates have gone up so quickly that savers might not realize how large the return for yield shopping has grown. The one-month Treasury yield has shot up from 0.04% two years ago to 4.66% this past week. Many banks and brokers are doing a dance called the Sweep Account Slow-Foot, raising payouts at a near imperceptible pace. If you're getting less than 4% on anything more than spending money, you can do better."
The Barron's piece says, "Sweep policies vary widely. Fidelity says that its default option is Fidelity Government Money Market fund (SPAXX), which recently yielded 4.18%. But it also offers two other choices for its brokerage accounts: a Treasury money market, and something called FCASH, described as a taxable interest-bearing cash option."
It adds, "Last month, BofA Securities double-downgraded Schwab shares to Underperform, citing the risk of 'cash sorting.' That's what Schwab calls customers leaving low-interest deposits for more competitive rates.... Money leaving low-interest sweep funds, even if it's headed to Schwab's own money-market funds, could obviously cut into profits."
In other news, the SEC released its latest quarterly "Private Funds Statistics" report recently, which summarizes Form PF reporting and includes some data on "Liquidity Funds," or pools which are similar to but not money market funds. The publication shows overall Liquidity fund assets were higher in the latest reported quarter (Q2'22) at $328 billion (up from $313 billion in Q1'22 and up from $319 billion in Q2'21).
The SEC's "Introduction" tells us, "This report provides a summary of recent private fund industry statistics and trends, reflecting data collected through Form PF and Form ADV filings. Form PF information provided in this report is aggregated, rounded, and/or masked to avoid potential disclosure of proprietary information of individual Form PF filers. This report reflects data from Third Calendar Quarter 2020 through Second Calendar Quarter 2022 as reported by Form PF filers." (Note: Crane Data believes the largest portion of these liquidity fund assets are securities lending reinvestment pools.)
The tables in the SEC's "Private Funds Statistics: Second Calendar Quarter 2022," with the most recent data available, show 80 Liquidity Funds (most of which are "Section 3 Liquidity Funds," which are Liquidity Funds from advisers with over $1 billion total in cash), up 1 from last quarter and up 4 from a year ago. (There are 52 Section 3 Liquidity Funds out of the 80 Liquidity Funds.) The SEC receives Form PF reports from 40 Liquidity Fund advisers (22 of which are Section 3 Liquidity Fund advisers), up 1 from last quarter and up 3 from a year ago.
The SEC's table on "Aggregate Private Fund Net Asset Value" shows total Liquidity Fund assets at $328 billion, up $15 billion from Q1'22 and up $9 billion from a year ago (Q2'21). Of this total, $324 billion is in Section 3 (large manager) Liquidity Funds. The SEC's table on "Aggregate Private Fund Gross Asset Value" shows total Liquidity Fund assets at $335 billion, up $17 billion from Q1'22 and up $5 billion from a year ago (Q2'21). Of this total, $331 billion in is Section 3 (large manager) Liquidity Funds.
A table on "Beneficial Ownership for Section 3 Liquidity Funds" shows $100 billion is held by Other (30.8%), $65 billion is held by Private Funds (19.9%), $64 billion is held by Unknown Non-U.S. Investors (19.9%), $16 billion is held by SEC-Registered Investment Companies (4.9%), $5 billion in held by Pension Plans (1.5%), $9 billion is held by Insurance Companies (2.8%) and $3 billion is held by Non-Profits (0.9%).
The tables also show that 66.4% of Section 3 Liquidity Funds have a liquidation period of one day, $310 billion of these funds may suspend redemptions, and $281 billion of these funds may have gates. WAMs average a short 31 days (30 days when weighted by assets), WALs are 49 days (51 days when asset-weighted), and 7-Day Gross Yields average 1.35% (1.30% asset-weighted). Daily Liquid Assets average about 50% (53% asset-weighted) while Weekly Liquid Assets average about 60% (65% asset-weighted).
Overall, these portfolios appear shorter with a heavier Treasury exposure than money market funds in general; almost half of them (36.5%) are fully compliant with Rule 2a-7. When calculating NAVs, 71.2% are "Stable" and 28.8% are "Floating." For more, see our Jan. 27 News, "SEC Proposes Amendments to Form PF Large Liquidity Fund Reporting."
