Daily Links Archives: July, 2019

U.K.-based Investment Week writes "Vanguard launches sterling money market fund." The brief says, "The Vanguard Sterling Short-Term Money Market fund was launched today (17 July) with the A sterling share class carrying an ongoing charge figure (OCF) of 0.15%, while the "institutional plus" sterling share class OCF costs 0.10% per annum.... Matthew Piro, head of product, Europe, said the fund would focus on short-dated and high-quality investments with a view to minimising risk." Another update on the new fund, posted by Portfolio Advisor," tells us, "Vanguard could have 'missed a trick' by failing to incorporate an environmental, social and governance overlay on its first money market fund domiciled in the UK. The announcement comes as rival passives giant Blackrock prepares to unveil an ESG money market ETF this month. The Vanguard Sterling Short-Term Money Market Fund will be targeted at retail, intermediary and institutional clients.... Vanguard already looks after £240bn in money market strategies via its team with fixed income; however, this is the first UK product it has launched. It has managed money market products for over 40 years." It adds, "In June 2018, JP Morgan launched the Ultra Short Income Ucits ETF with sterling, euro and US dollar versions of the fund and a TER of 0.18%. It is not a money market fund but has been touted as a cash alternative. Within money markets, Commerzbank offers three UK-domiciled ETFs, while Lyxor offers the largest product in the space with the £1.2bn Smart Cash ETF."

The Federal Reserve Bank of New York's research blog, Liberty Street Economics, features the article, "How Do Large Banks Manage Their Money?" Written by Jeffrey Levine and Asani Sarkar, the piece explains, "As the aggregate supply of reserves shrinks and large banks implement liquidity regulations, they may follow a variety of liquidity management strategies depending on their business models and the interest rate differences between alternative liquid instruments. For example, the banks may continue to hold large amounts of excess reserves or shift to Treasury or agency securities or shrink their balance sheets. In this post, we provide new evidence on how large banks have managed their cash, which is the largest component of reserves, on a daily basis since the implementation of liquidity regulations." The piece adds, "Banks primarily hold liquid securities to meet ongoing operational funding needs and cover sudden liquidity needs in periods of stress. A bank's business model determines its services and client relationships and, in turn, its types and amounts of funding.... The Liquidity Coverage Ratio (LCR) requires banks to publicly report their prospective net cash outflows in times of stress over a thirty-day calendar period, by balance sheet category. These quarterly reports provide insight into banks' liquidity management decisions." In conclusion, the articles says, "Why do large U.S. banks hold considerable amounts of low-yielding cash, other than to meet liquidity requirements? Our analysis shows that large banks have a long-run desired cash level and they manage their actual cash balances closely to their desired amounts. However, this desired amount varies over time with the composition of each bank's balance sheet (which in turn is strongly influenced by its business model, more generally), and the opportunity cost of holding cash relative to earning assets."

Website Citywire wrote last month that "12 PMs exit as Invesco reorganizes management teams." They explain, "The firm has made changes to the lineup on a raft of funds as it reorganizes management teams following the close of its OppenheimerFunds acquisition on May 24. Twelve portfolio managers have left Invesco as a result of its efforts to align management teams following the acquisition of OppenheimerFunds, according to a memo seen by Citywire.... According to LinkedIn, eight of the 12 departed portfolio managers were originally OppenheimerFunds employees." Invesco's Greg McGreevey comments, "These changes affect only about 3% of Invesco's total investment professionals globally, and we have plans in place to minimize disruption for our clients, our employees and our business." The article explains, "Fixed income managers Ruta Ziverte, Rashique Rahman, Jill Reiter and Helena Lee have all left the firm.... Robert Waldner has been removed from the $1.6 billion Invesco Short Term Bond fund, the Core Plus Bond fund and the $26.4 million Invesco World Bond fund, but is not leaving the firm.... Meanwhile, the Invesco global liquidity team will take over management of the combined firm's cash funds, which include the $556.9 million Invesco Oppenheimer Government Cash Reserves fund, the $1.7 billion Invesco Oppenheimer Government Money Market fund and the $334.8 million Invesco Oppenheimer Ultra-Short Duration fund. As a result ... Adam Wilde and Christopher Proctor, who previously managed these funds, have left the firm, according to a memo." Invesco President & CEO Marty Flanagan adds, "We're working to further integrate our two businesses thoughtfully and at speed, which will help us achieve our objectives: delivering a superior investment experience to clients while achieving the scale and operating efficiency that will benefit our shareholders and our long-term business." For more, see `Crane Data's June 3 News, "Oppenheimer Funds Now Invesco Oppenheimer" and our Oct. 22, 2018 News, "Invesco Buying OppenheimerFunds.")

Website BankRate.com writes, "Wealthfront boosts cash account APY to 2.57%, a top nationwide rate." They tell us, "At a time when many brick-and-mortar banks continue to offer puny returns on deposits, the Wealthfront cash account yield keeps rising.... [Late last month] Wealthfront raised its cash account yield six basis points to 2.57 percent APY. Just last month it boosted its annual percentage yield (APY) on the account to 2.51 percent. Back in March, Wealthfront was only offering 2.24 percent APY on this account. Keep in mind, however, that the Wealthfront Brokerage account works a little differently than a traditional bank’s savings or money market account." The article explains, "`Wealthfront isn't a Federal Deposit Insurance Corp. (FDIC) bank. But it does work with participant banks. Once your funds are deposited into a Wealthfront cash account, they are swept to a participant bank, and then the funds are eligible for FDIC insurance, according to Wealthfront. East West Bank, Associated Bank, TriState Capital Bank and Citibank N.A. are Wealthfront's program banks.... It's ... important to know which participant bank your money is being swept to, especially if you're in danger of exceeding FDIC limits at a bank due to your funds with Wealthfront and an account that you might already have, or may open in the future, with one of the program banks." The piece adds, "Wealthfront is making an effort to have one of the top APYs around." They quote a statement from Wealthfront, "We have been overwhelmed by the response to the launch of our high-interest cash account and we want to make choosing our cash account a no-brainer and eliminate the need to comparison shop."

The Financial Times says "ESG money market funds grow 15% in first half of 2019." The article explains, "Money market funds that incorporate environmental, social and governance metrics are growing rapidly, with a spurt of activity by big asset managers such as State Street Global Advisors, BlackRock and DWS. Assets in the sector rose 15 per cent to $52bn during the first half of 2019, after growing 1 percent through all of 2018, according to research from Fitch Ratings. This pool of assets is still very small compared with the total $6tn money market sector.... Investor interest started picking up late last year, after DWS, a key participant in the sector, converted an existing US money market fund to be an ESG fund, said Alastair Sewell, senior director of funds and asset management at Fitch." The FT piece continues, "Amundi is the largest provider of ESG money funds and the majority of the market is based in Europe, but Fitch expects that to start to change. BlackRock and SSGA launched US funds in January and July, respectively.... Some observers doubt whether the growth is durable: Peter Crane of Crane Data, who tracks money market funds, said that the topic might be a 'fad' and it was telling that the largest money fund providers such as Fidelity were still waiting on the sidelines." It adds, "The money market funds using ESG criteria are prime funds, which invest in commercial paper and other private instruments rather than treasuries or other government securities. This means their primary exposure is to the financial sector. As such, governance -- one of the three pillars of ESG -- has always been an implicit consideration in the fund managers' investment decisions, Mr. Crane notes, questioning the need for ESG labels in the first place. 'If everyone's doing ESG, then why do you need ESG funds?' he asks." Note: Crane Data shows ESG money market funds as totaling $758 million as of June 30. We currently show none of the European money funds tracked by our Money Fund Intelligence International as "ESG" specific.)

Mutual fund industry news source ignites featured the article, "SSGA Latest to Go Green With Money Fund" earlier this week. They wrote, "SSGA last week launched the ESG Liquid Reserves Fund, which the Boston-based shop touts as 'the first fully ESG-focused money market fund.' The launch follows ESG-linked money fund rollouts from other providers including BlackRock and DWS. In April, BlackRock rolled out the Liquid Environmentally Aware Fund, which invests at least 80% of assets in holdings that meet its sustainability criteria and now represents $344.7 million. Meanwhile, DWS last year converted an existing money fund into the ESG Liquidity Fund, which 'takes into consideration' ESG factors in choosing securities, according to fund materials. That fund represents about $367 million in assets.... The SSGA product launch also follows the 2019 Global Cash Outlook piece that SSGA published earlier this year, which notes that running ESG cash strategies 'presents unique challenges due to investor expectations, regulatory requirements and the nature of the underlying assets.'" The piece quotes our Peter Crane, "You're very limited in how much ESG you can actually get.... It's a thing now [ESG money funds]. There's no doubt about it." The ignites article adds, "Despite the buzz, ESG money funds are unlikely to attract assets quickly, says Neal Epstein, VP in the funds and asset management group at Moody's Investor Service. Corporate treasurers and institutional investors tend to put other factors first -- namely, liquidity and safety, and then yield -- in choosing money funds, he says.... In all, State Street's money fund assets represented about $92 billion as of the end of May, making it the 13th-largest provider of such products, after Northern Trust ($113 billion) and Morgan Stanley ($118 billion), according to Crane Data." (See Crane Data's July 3 News, "SSGA Goes Live with ESG Money Market Fund.")

Ten years ago, in July 2009, we wrote about the SEC's first Money Market Fund Reform Proposal following the Great Subprime Liquidity Crisis and Reserve Primary Fund "breaking the buck." Our July 1, 2009 News story, "SEC Releases 197-Page Text of Proposed Money Market Fund Reform," which eventually tightened maturity and quality guidelines and led to a second round of reforms 5 years later. (Watch for a Link mentioning the 5-year anniversary of the second round of reforms later this month.) We explained in 2009, "The SEC has released the full text of its proposed "Money Market Fund Reforms". The 197-page document's summary says, 'The Securities and Exchange Commission is proposing amendments to certain rules that govern money market funds under the Investment Company Act. The amendments would: (i) tighten the risk-limiting conditions of rule 2a-7 by, among other things, requiring funds to maintain a portion of their portfolios in instruments that can be readily converted to cash, reducing the weighted average maturity of portfolio holdings, and limiting funds to investing in the highest quality portfolio securities; (ii) require money market funds to report their portfolio holdings monthly to the Commission; and (iii) permit a money market fund that has 'broken the buck' (i.e., re-priced its securities below $1.00 per share) to suspend redemptions to allow for the orderly liquidation of fund assets. In addition, the Commission is seeking comment on other potential changes in our regulation of money market funds, including whether money market funds should, like other types of mutual funds, effect shareholder transactions at the market-based net asset value, i.e., whether they should have 'floating' rather than stabilized net asset values. The proposed amendments are designed to make money market funds more resilient to certain short-term market risks, and to provide greater protections for investors in a money market fund that is unable to maintain a stable net asset value per share.' The SEC says on Background, 'Money market funds are open-end management investment companies that are registered under the Investment Company Act and regulated under rule 2a-7 under the Act. They invest in high-quality, short-term debt instruments such as commercial paper, Treasury bills and repurchase agreements. Money market funds pay dividends that reflect prevailing short-term interest rates and, unlike other investment companies, seek to maintain a stable net asset value per share, typically $1.00 per share.... This combination of stability of principal and payment of short-term yields has made money market funds one of the most popular investment vehicles for many different types of investors.... Due in large part to the growth of institutional funds, money market funds have grown substantially over the last decade, from approximately $1.4 trillion in assets under management at the end of 1998 to approximately $3.8 trillion in assets under management at the end of 2008.... One implication of the growth of money market funds is the increased role they play in the capital markets.... As a consequence, the health of money market funds is important not only to their investors, but also to a large number of businesses and state and local governments that finance current operations through the issuance of short-term debt." After a comment period, the SEC went on to approve the 2a-7 amendments in January 2010. (See our Jan. 27, 2010 News, "SEC Approves Money Market Fund Reform Proposals, Hosts Webcast.")

Another release, entitled, "Pacific Funds Adds to Its Fixed-Income Lineup with the Launch of Pacific Funds Ultra Short Income," tells us, "Pacific Funds expanded its lineup of fixed-income products recently with the launch of Pacific Funds Ultra Short Income designed to seek income, preserve capital and protect against interest-rate volatility. Pacific Funds Ultra Short Income is actively managed by Pacific Asset Management (PAM), the sub-advisor for Pacific Funds' five other fixed-income funds." Dominic Nolan, senior managing director for Pacific Asset Management, comments, "Given the uncertain interest-rate environment, ultra-short funds have become an increasingly popular strategy for investors. Our new Pacific Funds ultra-short product seeks to provide more yield than typical money-market funds in exchange for a small amount of incremental risk. We believe our experience and expertise in capturing corporate credit opportunities will add value." The release adds, "The new fund falls under Morningstar's ultra-short bond category, which in 2018 experienced a 32% increase in net inflows over the prior year." Finally, Kevin Byrne, CEO of Pacific Global Asset Management, says, "We added the Pacific Funds Ultra Short Income fund to meet our clients' needs. This ultra-short offering is a timely complement to our existing family of fixed-income funds."

The Liberty Street Economics blog, published by the Federal Reserve Bank of New York, posted a new piece, "From Policy Rates to Market Rates—Untangling the U.S. Dollar Funding Market." It asks, "How do changes in the rate that the Federal Reserve pays on reserves held by depository institutions affect rates in money markets in which the Fed does not participate? Through which channels do changes in the so-called administered rates reach rates in onshore and offshore U.S. dollar money markets? In this post, we answer these questions with the help of an interactive map that guides us through the web of interconnected relationships between the Fed, key market players, and the various instruments in the U.S. dollar funding market, highlighting the linkages across the short-term financial products that form this market." They explain, "In today's monetary policy framework of ample reserves, the Fed sets two rates to steer short-term interest rates in accordance with its policy target, the fed funds target range: the interest rate paid on reserves that depository institutions hold overnight at the Federal Reserve (IOR), and the rate offered to a wide range of lenders at the overnight reverse repurchase agreement facility (ON RRP). IOR is the primary tool used to influence overnight rates in the banking system, while ON RRP acts as a supplement to IOR. As discussed in the recently published report Open Market Operations during 2018, these two 'administered' rates have proven effective at ensuring interest rate control, namely by maintaining the effective federal funds rate (EFFR) within the Federal Open Market Committee's (FOMC) target range and by steering short-term interest rates so that the stance of policy is transmitted into broader financial markets." Finally, the blog adds, "And so to answer our original question, changes in administered rates reach markets where the Fed does not intervene through the web of interconnected relationships between both onshore and offshore participants and through a host of short-term financial products. These interlinkages and connections are the basis for the efficient pass-through of monetary policy."

CNBC.com writes "Stashing cash still pays, but maybe not for long," which says, "It was fun while it lasted. Only recently have savers reaped the benefits of higher deposit rates -- the annual percentage yield banks pay consumers on their money -- after they hovered near rock bottom for years. Since the Federal Reserve raised the federal funds rate nine times in three years, the highest yielding rates are now paying as much as 2.5%, up from 0.1%, on average, before the Fed started increasing its benchmark rate in 2015. However, those gains could be lost if the Fed starts lowering its benchmark rate." The piece adds, "The last few years of interest rate hikes have had a significant effect on what savers have been able to earn on their money. In 2018, high-yielding savings accounts even outperformed the stock market for the first time in over a decade. But with an end to rate hikes for now, savers won't continue to see the same upward momentum, and as the probability of a rate cut increases so does the likelihood that those deposit rates will come down. Some already have. Ally Financial was the first to cut its online savings rate, to 2.1% from 2.2%, in an announcement on June 25."

A filing for the Ireland-registered Federated International Funds PLC's Federated Short-Term U.S. Treasury Securities Fund describes a "Notification of Compulsory Redemption of Shares of Federated Short-Term U.S. Treasury Securities Fund." It says, "The purpose of this letter is to notify you of a decision taken by the board of directors of the Company (the 'Board') to compulsorily redeem all of the Shares in issue in the Fund and subsequently to close the Fund. This decision has been taken in the light of the limited asset size of the Fund. As a result, the Board has determined that it is no longer economic or in the interests of Shareholders as a whole to continue the Fund and, therefore, in accordance with the provisions of the Constitution, has decided that it would be in the best interests of Shareholders in the Fund to redeem all remaining Shares of the Fund, to close the Fund and seek to have the Fund's approval withdrawn by the Central Bank. It is intended to close the Fund to (i) new investors on 25 April 2019 and (ii) new subscriptions from Shareholders on 29 May 2019. It is also intended to compulsorily redeem all Shares in the Fund on 5 June 2019."

Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics and summary on Tuesday. Our weekly holdings track a shifting subset of our monthly Portfolio Holdings collection, and the latest cut (with data as of June 28) includes Holdings information from 77 money funds (up from 76 on 5/31), representing $1.662 trillion (up from $1.571 trillion) of the $3.305 (50.3%) in total money fund assets tracked by Crane Data. (For our latest monthly Money Fund Portfolio Holdings numbers, see our June 12 News, "June Money Fund Portfolio Holdings: Repo, CP Up, T-Bills Down, Again," and watch for our 6/30 monthly Holdings to ship on July 10.) Our latest Weekly MFPH Composition summary again shows Government assets dominating the holdings list with Repurchase Agreements (Repo) totaling $677.9 billion (up from $629.2 billion 4 weeks ago), or 40.8%, Treasury debt totaling $464.4 billion (up from $460.3 billion) or 27.9%, and Government Agency securities totaling $276.1 billion (down from $281.9 billion), or 16.6%. Commercial Paper (CP) totaled $83.3 billion (up from $73.7 billion), or 5.0%, and Certificates of Deposit (CDs) totaled $77.3 billion (up from $72.8 billion), or 4.7%. A total of $42.4 billion or 2.6%, was listed in the Other category (primarily Time Deposits), and VRDNs accounted for $40.6 billion, or 2.4%. The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $464.4 billion (27.9% of total holdings), Federal Home Loan Bank with $195.4B (11.8%), Fixed Income Clearing Co with $126.0B (7.6%), BNP Paribas with $79.2 billion (4.8%), RBC with $54.4B (3.3%), Federal Farm Credit Bank with $52.7B (3.2%), JP Morgan with $37.7B (2.3%), Wells Fargo with $34.4B (2.1%), Mitsubishi UFJ Financial Group with $29.4B (1.8%) and Barclays PLC with $29.1B (1.8%). The Ten Largest Funds tracked in our latest Weekly include: JPMorgan US Govt ($140.3B), Fidelity Inv MM: Govt Port ($117.6B), Goldman Sachs FS Govt ($105.4B), BlackRock Lq FedFund ($93.9B), Wells Fargo Govt MMkt ($80.2B), Federated Govt Oblig ($78.4B), BlackRock Lq T-Fund ($69.9B), Fidelity Inv MM: MMkt Port ($61.1B), JPMorgan 100% US Treas MM ($59.3B) and Goldman Sachs FS Trs Instr ($59.0B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary, or our Bond Fund Portfolio Holdings data series.)

The Federal Reserve Bank of New York's Liberty Street Economics blog writes, "How Large Are Default Spillovers in the U.S. Financial System?" They comment, "When a financial firm suffers sufficiently high losses, it might default on its counterparties, who may in turn become unable to pay their own creditors, and so on. This 'domino' or 'cascade' effect can quickly propagate through the financial system, creating undesirable spillovers and unnecessary defaults. In this post, we use the framework that we discussed in 'Assessing Contagion Risk in a Financial Network,' the first part of this two-part series, to answer the question: How vulnerable is the U.S. financial system to default spillovers? The main challenge in estimating the expected value of default spillovers is that it requires knowledge of all the bilateral claims between each pair of nodes. Such granularity of data is not publicly available. Moreover, for some financial firms in less regulated parts of the financial system, such data may not even exist, except in fragmented form inside the firms themselves." The blog adds, "Both worst-case and best-case networks show large bank holding companies, broker-dealers, and AIG being highly interconnected. However, the worst-case network has more connections, with AIG, JPMorgan Chase, and especially Lehman Brothers, having a large exposure to Citibank. The two networks thus illuminate how the failure of a single firm such as Lehman Brothers could have vastly different default spillover effects depending on the particular firms with which it is connected."

The Wall Street Journal writes "Goldman Sachs, Ally Financial Beat the Fed to a Rate Cut." The article tells us, "Goldman Sachs Group Inc. and Ally Financial Inc. aren't waiting around for the Federal Reserve to cut interest rates. Goldman told customers Thursday it was cutting the rate on its Marcus high-yield savings account to 2.15% from 2.25%, following Ally's decision to lower its online-savings rate to 2.1% from 2.2%. The cuts show that banks are positioning themselves for the Fed to lower rates later this year." Ally comments, "Interest rates are on the downswing and projected to fall further." The Journal piece continues, "Goldman didn't offer customers an explanation but suggested they explore its high-yield certificates of deposits. Goldman said in a statement that 'rates on certain products change based on market conditions.' The central bank began raising rates from near zero starting in 2015 at a pace that allowed banks to charge borrowers more while keeping deposit costs in check. That gave Goldman, Ally and other online-only banks an opening to lure savers with above-market yields." But it adds, "The Fed's decision to pause rate increases earlier this year took the pressure off banks to pay depositors more, and the possibility of a cut is giving them cover to go down. For every 10 basis points -- 0.1 percentage point -- that Ally lowers its savings rate, the company boosts its earnings by 3%, said Vincent Caintic, managing director for Stephens Inc.... Ally and Goldman are still paying savers well above the rest of the industry. The average interest rate on a savings account has stayed steady at 0.1% in 2019, according to Bankrate."