Daily Links Archives: January, 2011

"Money Funds Come Out of the Shadows" writes Bloomberg BusinessWeek. The article, written by Chris Condon, says, "Investors in U.S. money market mutual funds, whose shares they expect to stay steady at $1, will see something new beginning the week of Jan. 31 -- and it has fund companies nervous. Under rules passed last year, the U.S. Securities and Exchange Commission will disclose, with a 60-day lag, a measure of each fund's worth known as "shadow" net asset value, or shadow NAV. Money funds, unlike other mutual funds, book the value of holdings at the price paid for them. They also round collective holdings to the nearest penny, so even a realized loss of less than half a cent goes unnoticed. Beginning with data for last November, shadow NAVs will show holdings at market prices and to four places past the decimal, revealing fund values typically ranging from $0.9995 to $1.0005." It adds, "To educate consumers, fund companies such as Vanguard and BlackRock put articles on their websites and sent them to customers. Fund trade group Investment Company Institute also released a paper and held a press seminar. Their message: Don't worry -- a shadow NAV slightly above or below $1 is normal. According to [iMoneyNet's Mike] Krasner and Peter Crane, president of money fund research firm Crane Data, companies are right in most cases to tell investors not to fret." "Anything below $0.999 will be an outlier," Crane says.

Federated Investors, Inc. Reports Fourth Quarter and Year-End 2010 Earnings, saying, "Through challenging equity and fixed income markets in 2007 and 2008, Federated's money market assets increased by $182 billion. As markets recovered in 2009 and 2010, Federated's money market products experienced $80 billion in net outflows, reflecting industry-wide trends. At the same time, Federated acquired $17 billion in assets from other money-market providers. Federated's money market assets have increased a total of $102.4 billion since the end of 2006 to $276.0 billion at Dec. 31, 2010." The company will host a conference call at 9am Friday. In other news, the ICI reported its weekly "Money Market Mutual Fund Assets" report, saying, "Total money market mutual fund assets decreased by $3.80 billion to $2.757 trillion for the week ended Wednesday, January 26, the Investment Company Institute reported today. Taxable government funds decreased by $3.25 billion, taxable non-government funds increased by $4.23 billion, and tax-exempt funds decreased by $4.78 billion."

"SEC Proposes Private Fund Systemic Risk Reporting Rule" says a release posted Tuesday on the U.S. Securities & Exchange Commission's website. While no word yet on whether money market funds may be involved in the new Federal Stability Oversight Council's determination of non-bank companies as systematically important, this release takes the first shot at "liquidity funds" or "unregistered money market funds". It says, "The Securities and Exchange Commission today proposed a rule to require advisers to hedge funds and other private funds to report information for use by the Financial Stability Oversight Council (FSOC) in monitoring risk to the U.S. financial system. The proposed rule would implement Sections 404 and 406 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The proposal creates a new reporting form (Form PF) to be filed periodically by SEC-registered investment advisers who manage one or more private funds. Information reported on Form PF would remain confidential.... Under the proposal, larger private fund advisers managing hedge funds, "liquidity funds" (i.e., unregistered money market funds), and private equity funds would be subject to heightened reporting requirements. Large private fund advisers would include any adviser with $1 billion or more in hedge fund, liquidity fund, or private equity fund assets under management. All other private fund advisers would be regarded as smaller private fund advisers and would not be subject to the heightened reporting requirements." The SEC explains, "Large liquidity fund advisers would provide information on the types of assets in each of their liquidity fund's portfolios, certain information relevant to the risk profile of the fund, and the extent to which the fund has a policy of complying with all or aspects of the Investment Company Act's principal rule concerning registered money market funds (Rule 2a-7)."

"Fund companies brace for new SEC money fund data" writes Reuters. The article says, "The U.S. mutual fund industry is bracing for fallout from new data on money market funds that will be made available next week. Some in the industry expect they will need to reassure investors if they see funds valuing their shares at less than $1 apiece. The U.S. Securities and Exchange Commission on Monday will publish data showing shadow prices for money funds as of November 30, a new monthly disclosure required following the financial crisis. Changes in interest rates, inflows and other factors mean money market fund shares often have shadow prices worth just above or below the $1 per share 'net asset value' at which they sell shares to the public. Funds can claim $1 NAVs if their shadow prices are between $0.9950 to $1.0050." Reuters quotes Peter Crane, "The ICI is trying get ahead of the shadow NAV story.... We live in a world of two decimal points. `The third decimal point can concern you, but worrying about the fourth decimal point is ridiculous."

Reuters writes "Moody's drops one money fund rating method change", which says, "Short-term rates analysts on Monday praised a decision by Moody's Investor Services to drop a proposed change to its money fund rating methods after fund managers said it would damage the industry. Although Moody's, one of the top three credit rating agencies, had announced last Tuesday that it would drop a proposal to factor a money fund's sponsorship into consideration of its overall creditworthiness, the news was still filtering through markets on Monday." The article quotes Alex Roever of JPMorgan Securities, who wrote in his weekly update, "These changes are a positive for the money fund industry. Without them, some funds, particularly those who hold smaller assets under management and traditionally have received less attention from sponsors' management, would have been at risk of losing their top-tier ratings." (See also Crane Data's Jan. 19 News "Moodys Backs Down From MMF Ratings Change Proposals, Keeps AAA", which said, "Moody's Investors Service published a press release entitled, 'Update on Money Market Fund Ratings Methodology' yesterday, which indicates that the ratings agency is backing away from its controversial proposals to switch from its AAA money fund rating scale and to heavily weight sponsor support in ratings.")

This Wednesday afternoon, weather permitting, Crane Data's Peter Crane, BofA Global Capital Management's Paul Quistberg, and Fidelity Investments' Michael Widrig will speak at the next meeting of the Treasury Management of New England in Providence at Citizen's Financial. The description says, "Money fund expert Peter Crane will give a presentation entitled, 'Money Market Funds, Cash Investing, and Regulatory Change,' and will give an overview of recent developments in money market mutual funds. Crane will discuss money fund asset trends, pending regulatory changes, and a number of other issues impacting the $2.8 trillion money fund marketplace. This will be followed by a Q&A with Paul Quistberg, BofA Global Capital Management MD & Head of Cash Investments and Fidelity Investments Institutional Portfolio Manager, Michael Widrig. Both money market veterans will provide an 'Update on Current Conditions in the Money Markets' and will discuss their money market investing strategies. Panelists will talk about what they're buying how they're adjusting to new regulations and the ultra-low yield environment, and how they're positioning themselves for possible rising rates in the future." Crane will also be speaking at the TMANE's Annual Conference May 4 in Boston with a session entitled, "Money Market Mutual Fund Update: Regulations, Rates & Risks." Finally, as we mentioned Friday, both ICI and BlackRock will be hosting Webinars on Tuesday discussing the pending disclosure of "shadow" NAVs. (See Friday's News and Link of the Day, or click here for info on the ICI webinar, at noon, and click here for info on the AFP/BlackRock webinar, at 3:30pm.)

A press release says, "The Investment Company Institute (ICI) will host a webinar and conference call on Tuesday, January 25 to present new research on money market funds, titled Stable NAVs and Shadow Prices of U.S. Money Market Funds. This paper explains and examines the factors that can impact money market funds' per-share market values, known as 'shadow prices.' On January 31, 2011, the SEC will begin publishing a snapshot of money market funds' shadow price data with a 60-day lag -- a requirement that was included in the SEC's adoption of new regulations in January 2010 to require enhanced liquidity, credit quality and maturity standards for money market funds. ICI Chief Economist Brian Reid will host the webinar and call with members of the media and public beginning at 12:00 p.m. EST.... Webinar participants can view the slides, listen to the presentation and participate in the Q&A via the web address below: http://www.myeventpartner.com/Investment1." In other news, the latest weekly "Money Market Mutual Fund Assets" report says, "Total money market mutual fund assets decreased by $35.08 billion to $2.761 trillion for the week ended Wednesday, January 19, the Investment Company Institute reported today. Taxable government funds decreased by $21.01 billion, taxable non-government funds decreased by $12.08 billion, and tax-exempt funds decreased by $1.99 billion." Outflows were likely driven by a spike in repo rates caused by a quarterly tax payment date, the long Holiday weekend, and snow storms in the East, according to Crane Data's Peter Crane.

A new Reuters article "Stern Advice: Don't toss that money fund out with the trash" says, "Wall Street hotshots have long disparaged money market mutual funds with a 'cash is trash' epithet. Their point: Money invested in these funds earned low returns and wasn't being put to use in more rewarding stocks and bonds. Money funds have seemed even less appealing in recent years. Their long-cherished and promoted practice of holding their share price steady at $1 got blown at the end of 2008, when the Reserve Primary Fund's inability to meet redemptions in a dysfunctional credit market caused it to drop the price to 97 cents a share. Since then, regulators and industry players have been talking about ways to make money funds more safe but, so far, most of that is still at the mulling-it-over stage." Writer Linda Stern asks, "Did I mention that money funds are now yielding between 0.03 and 0.07 percent, according to Crane Data?" They quote Publisher Peter Crane, "That means it would take between 600 and 900 years to double your money." The piece adds, "But, wait. Money market mutual funds have their purpose, and their rewards. It's just that you may have to think about them differently now than you did before." See also, Investment News' "What Eileen Rominger's appointment means for fund biz".

A press release sent out yesterday (not yet available online) says, "Institutional Cash Distributors (ICD), the world's largest independent portal distributor, which services more than $55 billion in assets traded through its platform, announced today that it has expanded its distribution and sales coverage outside the United States, Europe and Asia, into Canada. The effort in Canada is being lead by Jim Etten, a 14-year veteran of the cash investment business, with a decade of experience working with Canadian corporations." The release continues, "Global corporate treasury departments are readily adopting electronic trading portals to efficiently place their core and operating cash. Canadian corporations are some of North America's most profitable and dynamic companies, and they are increasingly looking for the same short-term investment services and products that U.S. and European-based corporations have been utilizing through ICD for over eight years. ICD is the only registered independent portal distributor in Canada, which allows the firm to conduct business in major Canadian cities, including Toronto, Calgary, Montreal and Vancouver, operating under an international dealer license." Etten says, "Canadian corporations have been early adopters of many of the best technology practices in treasury, and using a web-based portal to effectively consolidate their investment needs follows that trend." Jeff Jellison, CEO of ICD North America, adds, "ICD is a global firm with a large international sales force and client base, and we are excited to move forward with our expansion into the Canadian market. With North American corporations increasingly holding more and more cash on their balance sheets, our independent global trading and service platform continues to be the choice for many of the world’s Fortune 1000 companies, and we are fully committed to supporting the Canadian market."

Morningstar writes "The Error-Proof Portfolio: Wring a Little Extra From Your Cash". The article, by Christine Benz, says, "Assuming you don't have an immediate need for the cash in a particular account where you're earning close to nothing, it's well worth centralizing those assets into the highest-yielding investment you can find. By shopping around and consolidating, you may be able to qualify for higher-yielding products that are unavailable to those with smaller sums to invest, such as jumbo certificates of deposit or cheaper share classes of a given money market mutual fund. Now, I don't want to overstate the yield pickup you'll achieve by consolidating into a higher-yielding investment. One-year CD rates at bankrate.com were recently just about 1.3%, and even good, low-cost money market funds have SEC yields that are just barely in positive territory. But 1.3% on a $20,000 investment is $260--better than the 0% you may be earning on some of your cash if you haven't been paying close attention. Brokerage sweep accounts, where your money is often moved if you sell a security and haven't specified a higher-yielding alternative, are notorious for their low yields. Assuming you've decided to consolidate your cash holdings in an effort to pick up a higher yield, here are some key considerations to bear in mind...."

The latest weekly "Money Market Mutual Fund Assets" report says, "Total money market mutual fund assets decreased by $2.18 billion to $2.796 trillion for the week ended Wednesday, January 12, the Investment Company Institute reported today. Taxable government funds decreased by $7.61 billion, taxable non-government funds increased by $9.25 billion, and tax-exempt funds decreased by $3.82 billion.... Assets of retail money market funds decreased by $6.58 billion to $940.65 billion. Taxable government money market fund assets in the retail category decreased by $1.00 billion to $165.84 billion, taxable non-government money market fund assets decreased by $4.24 billion to $567.55 billion, and tax-exempt fund assets decreased by $1.34 billion to $207.27 billion.... Assets of institutional money market funds increased by $4.39 billion to $1.856 trillion. Among institutional funds, taxable government money market fund assets decreased by $6.62 billion to $650.97 billion, taxable non-government money market fund assets increased by $13.49 billion to $1.081 trillion, and tax-exempt fund assets decreased by $2.47 billion to $123.91 billion."

ICI reports money market fund assets to the Federal Reserve each week. Revisions are due to data adjustments, reclassifications, and changes in the number of funds reporting. Historical weekly money market data back to January 2008 are available on the ICI website.

Their comment letter says, "The Dreyfus Corporation welcomes the opportunity to comment on the money market fund reform options discussed in the 'Report of the President's Working Group on Financial Markets'. Dreyfus manages approximately $405 billion in assets, including approximately $287 billion invested in over 190 investment company portfolios, of which approximately $205 billion is invested in 49 domestic money market mutual funds structured within the confines of Rule 2a-7 under the Investment Company Act of 1940.... We commend the PWG's fair and balanced consideration of the potential for each Policy Option to reduce money market funds' susceptibility to runs. We were particularly pleased that the PWG was guided by a concern for mitigating possible adverse consequences of further regulatory change, such as the potential flight of assets from money market funds to less regulated or unregulated vehicles, and that the PWG recognized potentially effective Policy Options for reducing systemic risk without requiring the extreme act of transitioning to a floating net asset value for money market funds.... We believe first and foremost that it is unnecessary to obsolete Rule 2a-7, stable NAV money market funds in order to reduce systemic risk. Accordingly, we do not support the Policy Option of adopting a floating NAV for money market funds.... Among the other Policy Options discussed in the Report, we believe a private emergency liquidity facility is the one Policy Option that would effectively reduce money market funds' susceptibility to runs and enhance their ability to withstand runs.... We believe the remaining Policy Options, some of which pose potential adverse consequences, ultimately would be unsuccessful in mitigating systemic risk, particularly during a liquidity crisis."

USA Today's "Money market funds propose their own emergency backstop" says, "The money fund industry is proposing a private fund to shore up money market mutual funds if they're overwhelmed by investor redemption demands. The proposal by the Investment Company Institute, the funds' trade group, would create a private liquidity fund that would swing into action if a money fund had large redemptions that would force it to pay out less than $1 a share. The fund would make collateralized loans to funds that need extra money to meet large redemptions. Money funds try to keep their share price at a constant $1 a share; interest is paid in fractional shares. To consumers, the $1 share price seems much like a bank account, even though money funds are not insured by the government." The article continues, "The fund industry is proposing the liquidity fund partly to reassure investors and partly to head off a proposal that funds abandon the constant $1 share price for a floating price, much as stock and bond funds have. The President's Working Group raised the idea of floating share prices for money funds in October, and fund companies have nearly universally reacted in horror." USA Today quotes Peter Crane, "There's not a single company or interest group that's in favor of it."

On Friday, Bloomberg wrote "FDIC Bank-Fee Change May Drive Near-Zero Short-Term Interest Rates Lower". The article said, "A planned change in deposit insurance fees for U.S. banks may lower already near-zero short-term interest rates, according to strategists at Barclays Plc, Bank of America Merrill Lynch and the Royal Bank of Canada. The Federal Deposit Insurance Corp. proposed broadening the base for deposit insurance fees to banks' liabilities, rather than domestic deposits. The plan is designed to fund depositor protection while shifting the burden to larger lenders whose reliance on riskier funding may pose greater threats to the financial system. Increased FDIC fees may cut into banks' interest income and drive money market rates lower, the strategists said. The volume weighted average for overnight fed funds, the so-called effective rate, may slide by as much as 0.1 percentage point if the FDIC change is implemented, according to Wrightson ICAP LLC, a Jersey City, New Jersey research unit of ICAP Plc." Bloomberg added, "Even lower short-term interest rates will potentially make it even harder for the $2.8 trillion money-market fund industry to retain customer assets. The FDIC changes will add to catalysts for lower money-market rates, chiefly the Fed siphoning of about $1 trillion in Treasuries from the market through its debt purchases by June, according to New-York based Brian Smedley, a strategist at Bank of America Merrill Lynch, a unit of Bank of America Corp."

Wells Fargo Advantage Funds writes in its latest "Overview, strategy and outlook," "For several years now, a contracting supply of eligible money market investments has plagued money fund managers. And while the U.S. commercial paper (CP) market does not tell us the whole supply story, it is illustrative of the entire picture.... Total CP outstandings have fallen to just over $1.0 trillion from nearly $1.6 trillion at the end of 2008. And while outstandings have fallen in almost every category, asset-backed commercial paper (ABCP) has been hit the hardest and is now almost half of what it was at the end of 2008. Total financial CP, which does not include ABCP, has also declined significantly, falling more than 25% from $713 billion at the end of 2008 to $534 billion at the end of 2010." Wells' Dave Sylvester also writes, "We are not terribly optimistic about the possibility for an increase in supply in the money markets. In commercial paper, while we might see an increase in the industrials sector, overall it is a small part of the picture, as financial paper and asset-backed paper comprise 87% of all commercial paper. ABCP outstandings are likely to decline again next year as off-balance-sheet financing becomes less attractive under new regulations. Repurchase supply will probably be flat, as the additional collateral that would come from an increase in issuance by the U.S. Treasury is likely to be offset by Federal Reserve purchases under its second quantitative easing (QE2) program. And after the fits and starts in the European bank credit market this year, we suspect that market participants are unlikely to want to add to those names. The decline in supply argues for tighter credit spreads as top-quality names become scarcer. It should be noted that narrowing spreads on supply issues do not mask increased credit concerns."

Vanguard's Bill McNabb writes "Chairman: 2010 highlights, concerns for 2011." It asks, "What concerns do you have about 2011 and beyond? McNabb says, "I'd point to three areas: The first is financial reform -- what goes on in Washington, D.C. The Dodd-Frank legislation, signed in July 2010, was more of a starting line than a finish line for financial reform. It's a blueprint with many details that have yet to be drawn in. Researchers are still conducting studies, new regulatory bodies are still ramping up operations, and new rules are still being written. We're watching the process very closely. For instance, there are some interest groups that want to fundamentally alter the way money market funds work, essentially turning them into short-term bond funds. This would eliminate a low-risk and stable cash management tool for millions of investors. We are working very hard to ensure that the interests of mutual fund investors are front and center in the financial reform discussions." In other news, see ICI's "Money Market Mutual Fund Assets.

US Banker writes "'Shadow' Boxing". The piece says, "As the economy brightens and capital issues resolve, one question is whether banks will now step out of the shadow of the so-called shadow banking system. In separate investor presentations this month, the chief executives of two banking powers based in the southeast offered competing views on the issue. Generally defined as the constellation of securitization vehicles, broker-dealers, money market mutual funds and the like that competes with traditional depositories, the shadow system cut banks' share of lending in half over the final 25 years of the 20th century. BB&T Corp. CEO Kelly King predicted that the reversal of disintermediation." US Banker quotes, "We're now getting ready to go through a couple of decades where" the banking industry will "get most of that market share back." The article adds, though, "Capital One Financial Corp. CEO Richard Fairbank argued, however, that while deposit funding is essential, traditional banks ... lack a proportional capacity to produce assets." Fairbank comments, "What happened to the assets? The assets were taken off the shelf of banks over the last 20 years by national players like Capital One and so on in many of the consumer businesses.... I don't see any prospect any time soon for that going in the other direction."

Federated writes in its latest "Month in Cash: The Fed's in no rush" that a "Rate hike could come in late summer." Debbie Cunningham says, "Resisting various economic, political and policy crosscurrents, short-term interest rates finished December virtually unchanged from a month earlier. The static nature of the cash-yield curve was unusual given that overnight rates (repos and fed funds) tend to trade lower for liquidity reasons as the year-end approaches, while the brighter economic picture that emerged in recent weeks might have been expected to nudge higher one- to 12-month London interbank offered rates (Libor). Overnight fed funds closed at 18 basis points (compared to just 5 basis points at year-end 2009), one-month Libor was unchanged from a month earlier at 0.261%, three-month Libor finished up half a basis point at 0.303%, and six- and 12 month Libor closed lower by half a basis point at 0.456% and 0.781%, respectively.... Looking ahead, we are prepared to begin shortening weighted average maturities as the date of the first Fed rate hike draws nearer. Yet after having gone to extraordinary lengths to prevent deflation and revive a lackluster economic recovery, the Fed is highly unlikely to call a premature halt to its creative and super-accommodative monetary policies before it sees unambiguous improvement in employment, housing and expectations for future inflation. We expect that such gains will become apparent as the year unfolds, suggesting the FOMC could begin raising interest rates as early as August or September 2011."

MarketWatch writes "Pimco short-maturity ETF fills a niche". The article says, "An actively managed exchange-traded fund from bond giant Pimco has attracted investors seeking to boost the paltry yields in the cash portion of their portfolios. Pimco Enhanced Short Maturity Strategy Fund (MINT) has grown to nearly $800 million in assets in little more than a year.... The short-maturity fund is one of Pimco's most successful early offerings and is also one of the largest actively managed ETFs." The MarketWatch piece continues, "Pimco Enhanced Short Maturity Strategy Fund seeks to provide a better return than money-market funds and targets investment-grade debt securities with extremely short durations. The ETF had an SEC 30-day yield of 0.66% as of Dec. 29, according to Pimco, while the fund charges a management fee of 0.35%." It adds, "Jerome Schneider, the portfolio manager, said the ETF is designed for investors who will need to deploy cash in the intermediate term, such as a few weeks, months or even years. The fund offers 'a relatively safe and attractive yield.'"

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