News Archives: January, 2008
Money Funds Break $3.3 Trillion; 52-Week Gains Approach $1 Trillion. ICI's latest weekly money fund asset series shows an increase of $40.4 billion in the week ended Jan. 30 to a record $3.315 trillion. Retail money fund assets increased by $16.16 billion to a record $1.213 trillion and institutional money fund assets increased $24.24 billion to a record $2.102 trillion. Year-to-date, money fund assets have grown by $168.6 billion, or 5.4%. Over 52 weeks, money funds have grown by almost $1 trillion -- an eye-popping $959 billion, or 40.7%. ICI also released its official monthly mutual fund totals yesterday. Money fund assets increased by $763.2 billion, or 32.4%, to a record $3.117.6 trillion, last year, making 2007 far and away the best year in money funds' 35-year history. Money funds paradoxically gained huge amounts of assets due to 2007's credit squeeze in the asset-backed commercial paper market as institutional investors fled the direct investment market for the shelter of funds. Funds also benefited from institutional money seeking to delay the impact of Fed rate cuts, and from retail money seeking higher yields than banks and brokerage programs.
Federated Investors CEO Chris Donahue Is Hearing About "Rollups". Yesterday, Federated Investors President & CEO J. Christopher Donahue spoke at Citi Investment Research's 2008 Financial Services Conference, and gave an upbeat assesment of the outlook for money market mutual funds. He says of 2007, "This was by far the best year in history for asset growth overall, and for money market asset growth in particular [where assets were up $63 billion, or 36% in '07]." Donahue says, "What they [money fund investors] really want, in their heart of hearts, is daily liquidity at par." He says Federated has been hearing about "rollups," or outsourcing opportunities, on the money fund side. (Reserve Chairman Bruce Bent echoed this sentiment at a talk earlier this week, saying Reserve too has been approached about managing others' money fund assets.) On critical mass for money funds, Donahue said, "Clients want a full array ... products that can handle daily liquidity at par for big bunches of money." Regarding SIVs, he says they all "continue to pay on time and in full" and that remaining holdings will all be gone by summer. On concerns over muni insurers and tax-exempt money funds, Donahue says, "We don't expect these issues to cause any credit or liquidity problems." Donahue also commented on the Rule 2a-7 money fund regulations, "They have withstood stress tests and have shown themselves to be very strong." Finally, he says money fund assets continue to grow strongly. "The customers have decided that these are an excellent place" to weather current market conditions.
Federal Reserve Cuts Fed Funds Target Rate 1/2 Percent to 3.0 Percent. The Federal Reserve today announced announced yet another cut in its benchmark Fed funds target rate, this time reducing short-term rates by 50 basis points to 3.0%. This marks the fifth Fed cut since Sept. 18, when the central bank started bringing rates down (by 50 bps) from 5.25% in response to the seizure in the asset-backed commercial paper market. The Fed has since cut on Oct. 31 (25 bps), Dec. 11 (25 bps), and Jan. 22's surprise 75 bps cut. The Fed's statement says, "Financial markets remain under considerable stress, and credit has tightened further for some businesses and households. Moreover, recent information indicates a deepening of the housing contraction as well as some softening in labor markets." The Fed's moves downard so far total 2.25 percent, while money fund yields, as measured by our Crane 100 Index, have fallen from about 5.0% to just under 4.0%. Thus, money fund yields will continue falling and should stabilize at around 3.0% a month from now. We expect this to be the Fed's last move for some time.
Reserve Hosts "Cash Management Outlook" Media Advisory Event. Yesterday, The Reserve invited about 20 financial reporters to a talk in New York entitled "Cash Management Outlook: A recap of 2007 headlines and what it may mean to investors in 2008". The first-of-its-kind press event featured Reserve Founder & CEO Bruce Bent and Crane Data President Peter Crane discussing the market turmoil and SIV bailouts of 2007, the record growth of money market funds, and the outlook for money funds in 2008. Financial Week wrote on the event, "Investors flocking to money-market funds", and said, "Managers of money market mutual funds could see assets grow by 20% in 2008, Peter G. Crane, founder of money fund research firm Crane Data, said at a press briefing today. Mr. Crane expects increases of up to 15% in 2009.... Bruce Bent, father of the modern money-market fund and chairman of cash management company the Reserve, said a substantial portion of inflows at his firm were coming from institutional investors that were abandoning direct investments in securities in favor of money-market funds." E-mail Pete to request a copy of his "Money Funds in the Headlines & Cash Management Outlook '08" slides.
Lots of Treasury and Govt MMFs Among Largest Asset Gainers in 2007. Crane Data's latest Money Fund Intelligence Distribution Survey, a quarterly publication that looks at money fund family market share and sales trends, features a table of the 25 money funds with the largest dollar increases for 2007. Ten of the 25 were Prime funds, 8 were Treasury and 7 were Government or Federal funds. The Biggest Money Fund Asset Gainers in 2007 were: 1. Fidelity Cash Reserves (FDRXX), which grew $22.8 billion, or 26%, to $111.1 billion; 2. Vanguard Prime MMF (VMMXX), which grew $19.7 bil., or 28%, to $90.1 bil.; 3. Goldman Sachs FS Prm Ob Ins (FPOXX), which grew $18.0 bil., or 99%, to $36.2; 4. Reserve Primary Instit (RPFXX), which grew $17.1 bil., or 124%, to $30.9 bil.; 5. Fidelity Instit MM: Treas Port I (FISXX), which grew $14.2 bil., or 252%, to $19.8 bil.; 6. Dreyfus Treas Cash Mgmt Inst (DTRXX), which grew $13.2 bil., or 390%, to $16.6 bil.; 7. Columbia Treasury Reserves Cap (CPLXX), which grew $11.0 bil., or 394%, to $13.8; 8. Wells Fargo Adv Govt MM Inst (GVIXX), which grew $11.0 bil., or 147%, to $18.5 bil.; 9. Federated Government ObI IS (GOIXX), which grew $10.5 bil., or 135%, to $18.2 bil.; and, 10. Goldman Sachs FS Treasury Ob Inst (FTOXX), which grew $9.8 bil., or 527%, to $11.6 bil.
Morgan Stanley's Money Funds Ask SEC to Perform Principal Transactions. A recent SEC filing for Morgan Stanley's money market mutual funds has requested an "order to permit the Funds to engage in principal transactions in certain money market instruments with MS & Co." Morgan Stanley follows a number of other fund advisors with affiliated broker-dealers, such as Goldman Sachs, in requesting permission for its funds to purchase money market securities from its dealer. The filing says, "[T]he Advisers and MS & Co. are functionally indepdendent" and that "MS & Co. is one of the world's largest dealers in Taxable Money Market Instruments". Morgan Stanley is among the top 10 repurchase agreement dealers, is one of 22 primary Treasury dealers, is the "fifth largest manager of MTN (medium-term note) programs", and is "a major participant in both the primary new issue market and in the secondary dealer market for Tax-Exempt Money Market Instruments," says the application. Following consolidation in the dealer community, some money funds have had difficulty obtaining competitive bids when excluding their own affiliated broker-dealers.
Benchmark Crane 100 Money Fund Index Falls 0.27 Percent in Week. Money market mutual fund yields plunged this week, falling 27 basis points, from 4.32% to 4.05% from Friday, January 18 through Jan. 25, according to the benchmark Crane 100 Money Fund Index. Yields should continue moving sharply lower in the coming week as the money markets digest the remainder of the Federal Reserve's surprise 75 bps rate cut Jan. 22, and as cash markets anticipate a possible further 1/4- or 1/2-point rate cut by the Fed Jan. 30. The top-yielding funds also dropped this week -- No. 1 Institutional fund Reserve Primary fell from 4.87% to 4.74% and former No. 1 Russell MMF S fell from 4.89% to 4.71%, while Individual fund leader Fidelity Cash Reserves fell from 4.62% to 4.46%. Bank money market deposit accounts and brokerage sweep rates also plummeted, with No. 1 Countrywide Savings cutting its rate from 5.11% to 4.88%. Other banks also reduced rates sharply (see Bank Deals "The Plummeting Savings Accounts and CD Rates"). The Federal Reserve began reducing its bellwether Fed funds target rate from 5.25% on Sept. 18, 2007 to its current 3.50% level. Back in mid-September, our Crane 100 Index, an average 7-day yield of the 100 largest money market mutual funds, was yielding 5.06%.
Federated Sets Record Straight on Muni Money Fund Risk From Insurers. In a conference call with investors yesterday, Federated Investors discussed rumors and concerns in the marketplace over municipal debt and monoline insurers, and addressed any potential impact to money market funds. Federated Senior VP and CIO Debbie Cunningham said as of early January, "The liquidity crunch has officially ended," citing the drop in LIBOR rates and the Fed's recent statement that "Strains in the money markets have eased somewhat". She added, "Federated remains very comfortable with the issuers in all of its money funds". Mary Jo Ochson, Senior VP and CIO of Federated's Tax-Exempt Money Market Group expanded on the issues in the tax exempt marketplace, saying, "We have total confidence in the 'put' process." She explained that funds rely on the bank or broker for liquidity of variable rate demand notes (VRDNs), not on the insurers. Regarding tender option bonds, she expressed confidence, adding, "TOBs were created by investors, not Wall Street."
Concerns About Municipal Money Funds Overblown Say Fund Managers. The recent downgrade of Ambac by Fitch Ratings has caused dislocations in the municipal marketplace and has brought up concerns over the possible impact on tax exempt money market funds. While some municipal issues are trading at crazy 6+% yields and a number of funds are "tendering" or putting back bonds, the market is still liquid (unlike the previous SIV crisis). The larger money funds have already taken protective actions or are negotiating solutions rather than panicking and dumping securities. The $200 billion tender-option bond market represents a major segment (probably 15%, or $70 billion) of the $472 billion in tax exempt money funds holdings. Possible downgrades of bond insurers MBIA, Ambac, and, to a lesser degree, others, have raised concerns about liquidity clauses (needed to turn long-term bonds into money fund eligible securities) being terminated, but funds in the main will not force to sell or "put back" because of any future downgrades. (Contrary to some reports, money funds don't have to sell downgraded securities, and there have been no downgrades of short-term ratings to date.) Funds have been aware of the threat for months, and have been renegotiating TOB contracts to remove their limited reliance on the insurers. Thus, while funds will continue reducing their exposure to insurers in case no bailout arrives, speculation of a widescale flight from the sector is incorrect. Crane Data does not expect tax exempt money market funds to be harmed or even significantly impacted by these events, and investors should have little reason for concern.
Surprise Huge Fed Cut Pushes Money Fund Asset Totals to $3.3 Trillion. The Investment Company Institute's weekly money fund asset totals show a sharp increase of $64.4 billion to a record $3.252 trillion. Institutional money funds led the surge with an increase of $52.33 billion to a record $2.055 trillion, while Retail money funds also jumped by $12.09 billion to a record $1.196 trillion. The bulk of the increase occurred in general purpose funds; tax-exempt funds saw modest outflows. Over 52 weeks, money fund assets have increased by an unbelievable $861 billion, or 36%. Crane Data expects money market mutual fund assets to record their largest single-week inflow in history in the coming week as institutions "ride the lag", seeking to delay the impact of sharply lower short-term interest rates. Yesterday, funds experienced a single-day record increase of $29.2 billion according to our new Money Fund Intelligence Daily. Yields should continue moving sharply lower. Our Crane 100 Money Fund Index fell 5 basis points yesterday to 4.14% and has fallen 23 basis points over the past week.
Money Funds Should Continue Annualizing With 365 Days in Leap Year. After being asked, we consulted the SEC about whether annualizing with 366 days during the current leap year is okay. The Commission said no, directing us to an old letter from Gene Gohlke, which states, "We have been informed that a number of money market funds, including the registrant, have recently been advertising and publishing annualized 7-day yield quotations based on a multiplier of 366/7 rather than the 365/7 multiplier specified by applicable commission rules. Apparently, those using the 366 multiplier are doing so because 1984 is a leap year with 366 days. Computations for advertised yields of money market mutual funds were standardized by pertinent provisions of Forms N-1 and N-1A and Rule 482. Rule 483 does not provide for the use of 366 days in leap years.... If the Registrant is using a 366 day multiplier, please switch back to 365 as soon as possible." The SEC 7-Day Yield Formula, the standard measure of performance for money funds, is the sum of 7 days' dividends, multiplied by 365/7*100.
Florida State Board Announces Finalists to Run Its "Money Market Fund". The Florida State Board of Administration has announced the three investment manager finalists chosen to bid to run its beseiged money market fund-like government investment pool. Federated Investors, BlackRock, and The Bank of New York Mellon have been chosen and will give oral presentations to see who will win the $9.88 billion mandate. Applicant needed 5 years of experience managing an S&&P AAAm prime institutional fund with over $10 billion in assets, so only a handful of respondents qualified. Following a run on assets triggered by SIV and mortgage-related holdings, the Florida Board took the unprecedented step of halting redemptions in its local government investment pool (LGIP) (see our Nov. 29 article, "State Board Halts Redemptions in Florida Local Govt Investment Pool"). BlackRock was brought in as temporary manager and split the formerly $25 billion LGIP into two pools. The higher quality "Pool A" fund has stabilized, obtaining a AAA rating from S&P and staunching outflows. Pool B is being liquidated as debt comes due. The Florida pool had previously been the largest LGIP in the country.
Crane Data Launches Money Fund Intelligence Daily With Indexes, Assets. Today, Crane Data LLC introduces its new Money Fund Intelligence Daily, a service tracking yields, assets, dividend factors and maturities on the 300 largest money market funds. Yesterday, money fund assets jumped by $6.95 billion to $2.636 billion (we track 85% of total money fund assets on a daily basis). Prime Institutional funds took in the bulk of inflows, $5.75 billion, while Tax-Exempt money funds saw modest outflows. Yields fell sharply in reaction to the Fed's surprise 75 basis point move. The Crane Money Fund Average declined by 9 basis points to 4.07%, while the Crane 100 MF Index fell to 4.25%. Treasury fund yields fell the hardest, declining by 25 basis points. MFI Daily includes our flagship Crane Money Fund Indexes and allows subscribers to track daily fund asset flows by category and by individual fund. MFID includes assets, 1-day yields, 7-day yields, 30-day yields, AMs (average maturities), and daily and weekly changes in both assets and 7-day yields. MFI is e-mailed daily and includes an XLS attachment, a summary of assets and yields, and a daily news briefing from http://www.cranedata.com. Ask Pete for a sample copy.
SP Rates HSBC Govt 'AAAm', Lehman Dublin Enhanced Cash 'AAAf/S1'. Standard & Poor's Rating Services has rated HSBC Investors U.S. Government Money Market Fund 'AAAm' in principal stability, the highest rating for a stable net asset value (NAV) fund. HSBC Investments is the advisor and Northern Trust is the custodian. The fund's objective "is to provide shareholders with liquidity and as high a level of current income as is consistent with the preservation of capital". The fund invests 80% of its assets in "obligations issued of guaranteed by the U.S. Government, its agencies, or instrumentalities with maturities of 397 days or less". HSBC is the 25th largest manager of U.S. money funds with over $20.5 billion. The HSBC complex was the fastest-growing money fund family in 2007, according to Crane Data's Money Fund Intelligence Distribution Survey. S&P also assigned a 'AAAf/S1' (non-money fund) rating to Lehman Brothers Liquidity Funds PLC Short Term Select Fund, which has a beyond enhanced cash "targeted return of U.S. dollar one-month LIBOR plus 50 basis points (bps)". Lehman also offers the AAAm-rated Dublin-based money funds, Lehman Euro Liquidity Fund, Lehman Sterling Liquidity Fund, and Lehman US Dollar Liquidity Fund. S&P also recently rated LGIM Liquidity Funds Plc - LGIM Sterling Liquidity Fund 'AAAm', managed by London-based Legal & General Investment Management Ltd..
Federal Reserve OMC Cuts Fed Funds Target Rate 75 Bps to 3.5 Percent. The Federal Reserve Board issued this statement, "The Committee took this action in view of a weakening of the economic outlook and increasing downside risks to growth. While strains in short-term funding markets have eased somewhat, broader financial market conditions have continued to deteriorate and credit has tightened further for some businesses and households. Moreover, incoming information indicates a deepening of the housing contraction as well as some softening in labor markets.... The Committee expects inflation to moderate in coming quarters, but it will be necessary to continue to monitor inflation developments carefully. The Fed funds target has been reduced from 5.25% in August; market participants speculate that another cut may occur at the Fed's regular meeting next Thursday. Money fund yields should follow the Fed lower and should fall from the current 4.32% to just over 3.5% over the next month. Money fund assets should see their strongest weekly inflow in history next week, as institutional investors attempt to delay the impact of the lower rates on their cash by moving to money funds. We guess that over $200 billion will move into funds in the coming week.
Fund Democracy Wants SEC to Monitor Monthly Money Fund Holdings. Fund Democracy, a self-described "mutual fund shareholders advocate" run by Mercer Bullard, has teamed with an odd consortium of parties to petition the SEC to "adopt a rule requiring that money market funds make nonpublic monthly electronic filings of their portfolios to enable the Commission to monitor more closely the funds' risk of loss of principal," we learned from Investment News. The January 16th letter argues that bank regulators would favor banks over money funds, and that "a fund manager will one day decline to bail out its money fund". The letter urges the SEC to monitor "both the reasonableness of portfolio pricing and the risk of loss of principal". Alas, the author's seem unaware of the prevalence of existing monthly holdings posted on fund company websites, and seem unfamiliar with money market securities, which don't "trade" on exchanges like stocks and bonds. Crane Data does not believe the requested disclosure is necessary or wise.. While urging more reporting, Fund Democracy says, "The regulation of money market funds is arguably the single greatest success story in the history of financial services regulation. Rule 2a-7 has become a model for private funds and foreign governments who offer interests in cash management vehicles."
Tax Exempt Money Funds Sheltered From Ambac, MBIA Downgrades. Concerns have escalated in the municipal bond market over the possible downgrade of bond insurers Ambac and MBIA, which, until recently insured as much as half of all municipal debt issuance (now about 1/3 -- see article). As we noted in December, some have speculated that the $470 billion municipal money fund market, via their tender option bond and variable-rate demand note holdings, may be adversely impacted by this turmoil. Muni funds have been taking steps to extricate themselves -- "putting" back TOBs and VRDNs to dealers and seeking amendments to liquidity provisions to exclude any reliance on the insurers -- but funds appear immune from any serious fallout for several reasons. Money funds don't require a AAA rating; they merely need a "First Tier" (top short-term) rating (A-1, P-1). Contrary to rumors, funds also don't need to act following any downgrades (save a default), they just cease buying new issuance. Plus, tax-free money funds tend to be "retail" money (62%), which is much slower to react to market concerns. Finally, money funds have multiple layers of protections via high quality requirements, assuring that underlying collateral too is of the highest quality, and via ultra-short maturities and extreme diversity. (See Bloomberg's "Ambac's Insurance Unit Cut to AA From AAA by Fitch Ratings".)
SIV Damage Estimates Shrinking in Latest Quarterly Earnings Reports. More details are emerging on the actions that advisors have taken to remove or support troubled SIV holdings from their money market or "enhanced cash" funds in the latest round of quarterly earnings reports. US Bancorp disclosed on its earnings call that a "pre-tax asset valuation loss" of $107 million applied to the purchase of $3.0 billion in securities from its FAF (First American Funds) unit. Their still-very conservative loss estimate of 3.6% is much lower than a couple prior outliers, including STI's 16%. It also appears in-line with early-crisis loss estimate such as Evergreen and Credit Suisse's. (Crane Data's January issue of Money Fund Intelligence included a listing of all the bailouts to date with amounts purchased and losses taken. We believe eventual troubled SIV losses will be less than 1% for money funds.) Also, enhanced cash pressures and losses appear to be easing. In the midst of BlackRock's stellar earnings, was a smaller-than-expected $24 million charge for support of its Cash Strategies "enhanced cash". Today's WSJ says, This included "$18 million in funding put up by BlackRock in support of the funds' net asset values, and a $12 million charge for capital support agreements". In other news, S&P just suspended the AAAf/S1 rating on Washington's King County Local Government Investment Pool, due to a lack of information on its Mainsail II SIV-lite holding (which is in the midst of liquidation).
Institutional MF Assets Break $2 Trillion, Driving Totals to New Record. Money fund assets jumped again in the latest week, rising $13.55 billion to an all-time record $3.189 trillion in the week ended Wednesday said the ICI. Institutional money fund assets increased by just $2.47 billion. But the gain, plus asset revisions by ICI, pushed this week's (and last week's) institutional totals past $2 trillion for the first time ever. Corporate inflows were temporarily weakened by a Jan. 15 tax payment date, but they should resume with a vengeance as the market "gets short" ahead of an expected January 31 1/2-point rate cut. Retail money funds rose by $11.84 billion to a record $1.184 trillion. "Prime" or general purpose money funds took in $15.0 billion while Treasury and Government money funds lost $1.8 billion as investors continue to unwind their "flight-to-safety" moves made during the height of the SIV panic. (Read about the sharp rebound in the Fed's asset-backed commercial paper asset totals in today's "Link of the Day".) ICI currently tracks 2,017 money funds in total, with 1,171 classified as institutional and 846 classified as retail.
SEC: Money Fund Sweeps "Normal Oversight of Mutual Fund Industry". Yesterday, we reported that the SEC's "sweeps" were focusing on money market funds (see "SEC Conducts Sweep Inspection of Money-Mkt Funds" Says BoardIQ and see today's "Link of the Day: SEC Requests Money-Market Data" says WSJ). Today, we received a statement from the U.S. Securities & Exchange Commission. SEC spokesman John Nester says, "This is part of our normal oversight of the mutual fund industry. Our examiners are visiting a representative sample of money market mutual funds to better understand how fund advisors are responding to current conditions in the credit markets. We are looking at how funds complied with Rule 2a-7 that sets standards with respect to asset holdings, valuation and board oversight. Information from these reviews will assist the Commission and its staff in evaluating whether the rule is working effectively."
"Fidelity #1 in Money Market Funds" Says Full-Page Ad in WS Journal. Fidelity Investments took out a full-page ad in yesterday's Wall Street Journal touting its money market mutual funds. We believe it is the first time a full-page money fund ad has run in The Wall Street Journal and the first time an ad has shown both institutional and retail money funds. The ad says, "Fidelity is #1 in money market funds. Managing more assets than anyone.... It's easy to see why. A broad selection of money market fund choices and consistent, strong performance.... So if you're looking for an alternative to stock market volatility or simply want the opportunity for your cash to work hard, consider a money market leader." The piece displays current 7-day yields and "% of Lipper peers beaten" over 1-, 5-, and 10-year periods in a table showing both its retail and institutional money fund lineups. (Most of the funds beat 90+% of their peers in the table.) It includes an 800 number, link to Fidelity.com/moneymarkets and of course disclaimer text. (It's on page A5.) Fidelity indeed manages far more assets than anyone in the money fund space, with Crane Data showing it with $365 billion in domestic U.S. assets. JPMorgan ranks 2nd with $224 billion; BlackRock is third with $220 billion; Federated is 4th with $204 billion; and, Vanguard is 5th with $182 billion.
"SEC Conducts Sweep Inspection of Money-Mkt Funds" Says BoardIQ. BoardIQ.com, a Money Media publication geared towards fund boards of directors, wrote yesterday on recent SEC sweep inspections of money market mutual funds. Unsurprisingly, fund managers, lawyers, and this article say regulators are interested in illiquidity determinations (money funds may only hold 10% in their illiquid "basket"), shadow pricing (money funds don't use "mark-to-market" but must price occassionally to assure that the market price doesn't deviate materially from its "amortized cost" pricing), and the "implied guarantee" of advisors consistently backing their funds (have boards and investors come to expect advisor bailouts?). While an autopsy is undoubtedly warranted following the Great ABCP Squeeze of 2007, we should perhaps make sure the beast is dead first. Following debate, Crane Data doesn't expect any significant modifications to Rule 2a-7. Money market fund regulations worked like a charm during the current crisis, bending but not breaking. The market has already removed the risk that a liquidity drought in structured investment vehicles (SIVs) and extedible asset-backed commercial paper posed to fund valuations. We're aware of just one fund company that's been contacted regarding an SEC sweep focusing on money funds to date, but we're interested in learning more.
Money Market Mutual Fund Investors Say Goodbye to Five Percent Yields. If you look at our "Top 5" rankings tables above, you'll notice that just one fund, Russell Money Market Fund S (RMMXX) and just one bank, Countrywide, pay over 5% yields currently. We expect both to be gone very soon, possibly as early as tonight, as money markets prepare for a possible 50 basis point cut in the Federal funds target rate at the end of this month. This will mark the end of 5% yields, which have been available since the launch of http://www.cranedata.com over a year ago. Note that Crane Data uses 7-day simple yields for money funds (not compound) and rates for banks (not APYs), so some of these effective rates may linger over 5 longer. Retail investors have been living with sub-5% yields for some time now; they may eventually even have to get used to sub-4% returns on cash. Yields broke above 5% following an extended Fed campaign that moved funds rates from a record low of 1% in June 2003-2004 to a peak of 5.25% in June 2006. Savers will miss 5% rates dearly, though it remains to be seen just how low the Fed, and rates, will eventually go. Five percent was indeed a magic number for money funds, causing assets to flood into the sector in pursuit of yields that were attractive on a nominal, on a real, and on a historical basis.
Is NAV Protection "Isolated Default" Insurance Ready for a Comeback? While money market mutual funds are of course not guaranteed by the Federal Deposit Insurance Corporation (FDIC) and while every money fund goes to great lengths to tell its investors that they're not insured or guaranteed, there have been a number of cases of funds carrying insurance policies in the past. Some funds carried "NAV protection" or "isolated default" policies, which would insure against certain loss events in a portfolio. The concept withered after 9/11, when insurance rates skyrocketed, and after the California energy crisis and default of Pacific Gas & Electric in early 2001. Now, however, we're hearing discussions about an eventual revival in the concept, which should heat should, as we expect, advisors holding SIV debt purchased from their funds recover their money. Fidelity Investments pioneered the concept in 1998, with the launch of its own "captive" Bermuda insurance company. Back in its heydey, companies such as ICI Mutual, MBIA and Zurich American all offered these "isolated default policies", and fund groups like Federated, Vanguard, UBS and USAA all had policies in place. Most of these, however, had lapsed long before 2007's ABCP crisis.
Goldilocks of Cash: Money Funds Perfectly Positioned in Current Market. The flood of new assets into money market mutual funds has continued in 2008, which beg the questions: Why? And, where is it coming from? The thought occurred to us that money funds occupy the "Goldilocks" space in the cash maturity spectrum -- not too short and not too long. Repurchase agreements, which are primarily overnight, are a bad place to be when the Fed lowers rates since your rate drops almost immediately. And longer-maturity "cash" options have been savaged by exposure to asset-backed and mortage sectors. The implosion of the enhanced cash, ultra-short bond, and bank loan sectors has made the option of going out longer than a month relatively dangerous. Money funds also occupy the "Goldilocks" position on the quality scale -- Treasuries are leaving investors much "too cold" with ridiculously low yields, and direct investments are much "too hot", particularly under duress sectors like auction rate securities. Diversified, high quality money funds, which have a maturity profile of 34 days, allow institutional investors the safety, liquidity and the ability to delay the impact of lower rates for a period that seems "just right".
Rate Cut Expectations, January Seasonal Inflows Fuel MF Asset Gusher. The Investment Company Institute reports that money market mutual fund assets increased by $48.7 billion to a record $3.165 trillion in the week ended Jan. 9. Expectations of a 50 basis point cut in the target Federal funds rate, coupled with seasonally strong January inflows (due to bonuses, divididends, budgeting), drove assets sharply higher across the board. An easing of fears in the money markets, along with a rebound in the asset-backed commercial paper market, helped shift the bulk of inflows into general purpose, or prime, money funds this week. Prime money funds, which invest in commercial paper, CDs, and corporate debt, saw inflows of $33.7 billion on the institutional side and $3.7 billion on the retail side. Tax-exempt retail funds also saw significant inflows of $6.1 billion. Government and Treasury funds had been seeing large inflows at the twin troughs of the crisis in August and November. Money market funds experienced record inflows in 2007, breaking the $3 trillion barrier and increasing by over $720 billion, or 30%.
Crane 100 Return 5% in 2007; Indexes Continue Lower in December. Money market mutual funds, as measured by the Crane 100 Money Fund Index, returned 5.01% for calendar 2007. The Crane 100 returned 0.38% in December, 1.18% for Q4'07, and returned an annualized rate of 4.24% over 3 years, 2.90% over 5 years, and 3.64% over 10 years through December 31, 2007. The Crane 100 began 2007 with a 7-day annualized current yield of 4.98% (and spend the first half of the year there) and ended the year yielding 4.49%. For calendar 2007, the broad Crane Money Fund Average returned 4.79%; the Crane Institutional MF Index returned 5.09%; the Crane Individual MF Index returned 4.62%; and, the Crane Tax Exempt MF Index returned 3.17%. Among subcategories, the Crane Prime Institutional MF Index returned 5.23% and the Prime Individual Index returned 4.78% in 2007. Average maturities of money funds decreased in December, with the Crane 100 AM (average maturity) declining from 41 to 38 days on average. (AM measures the average length of time for a money fund portfolio to turn over.) See the January issue of our Crane Index or Money Fund Intelligence for a full listing of index returns by category.
Intelligence Interview: Marc Pfeffer and Milestone Treasury Obligations. The January 2008 issue of Money Fund Intelligence contains an interview with Milestone Capital Management's Chief Investment Officer and Portfolio Manager Marc Pfeffer. This month's MFI "fund profile" focuses on Milestone Treasury Obligations and the flight to Treasury funds during the recent credit squeeze. Below, we excerpt a couple of the highlights. Pfeffer tells MFI, "Before this whole credit crunch, Treasury funds would under-yield prime funds by between 5 and 10 basis points.... Now, you have spreads of 50-100 basis points between Treasury funds and prime funds. People don't care about yield anymore, they just care about the safety." On Milestone's status as a women-owned firm, Pfeffer says, "It's a nice door opener. But at the end of the day, even if we receive some money because there is a woman- or minority-owned initiative at a firm, if we didn't service our clients and didn't perform well for them we wouldn't keep that money."
Online Money Market Fund Trading Portals Break $300 Billion in Assets. Driven by the unprecedented surge in institutional money fund assets in 2007, online money market mutual fund trading portals have broken above $300 billion in assets outstanding, according to Crane Data's latest estimate in the new January issue of Money Fund Intelligence. New entrants in the "portal" space, including offerings by UBS, Wachovia, and Union Bank of California, have added to growth. The addition of high-yielding funds to menus, including new top-yielding and/or restricted funds from Dreyfus, Fidelity, Janus, and Reserve, among others, has also driven the asset totals upwards. Portals' money fund assets grew by approximately 35% in 2007, slightly less than the overall growth of institutional money funds. They now account for about 15.5% of the $1.95 trillion in total institutional money fund assets, though the market share is down a touch from mid-2007's 16%. Portals continue to add features and analytics too. Institutional Cash Distributors (ICD, www.icdfunds.com) just announced a strategic parnership with Clearwater Analytics to add accounting, compliance and performance reporting. ICD also has added new funds from Barclays, RBS, Northern Trust, Reserve, Deutsche, and Standard Chartered. See MFI for a full listing of portals, asset levels and news updates.
Worries About Money Funds "Appear Quite Overblown" In New Barron's. In his second blow for sanity in 4 weeks, Barron's Jack Willoughby describes why money market mutual funds won't be "sunk by the mess" involving structured investment vehicles, or SIVs. The piece, "Staying Afloat in a Sea of Worry," says, "But worries about one important sector -- money market funds -- appear quite overblown.... [T]here's no evidence of a widespread or calamitous problem." He cites Bank of America Securities analyst Michael Hecht's recent reports on SIV exposure, "The major money-market funds are exposed far less to structured investment vehicles ... than some investors fear.... By August, the exposure will be nada." It also quotes our Peter Crane, "Money funds have come under some pressure, and there are still some more troubles to come, but they've fared quite well, compared with other investment vehicles. The losses, when they are finally tallied, will be in the millions, not in the billions that are predicted." Barron's recaps the nine protective actions by money fund advisors to date, and shares BoA's "SIV Wind-Down" exposure table. It cite's Hecht's call to buy asset managers with heavy money fund exposure, including Federated Investors (FII), BlackRock, Legg Mason, and Schwab.
Assets Rebound From Year End Outflows; 2007 Sets Increase Record. Money market mutual fund assets increased by $2.48 billion to $3.113 trillion in the week ended Jan. 2, reports the Investment Company Institute. This followed two weeks of modest outflows when funds lost $10.1 billion. The year 2007 will still undoubtedly go down as the largest single-year asset increase in money fund history. Cash fund assets increased by a stunning $722 billion, or 30.2%, over the past 52 weeks. (ICI's official calendar numbers won't be tallied for weeks.) Over $553 billion of the increase happened in the second half of the year, when credit concerns and Federal Reserve rate cuts drove institutional cash into the diversified, higher-yielding money fund pools in droves. While some concerns over residual SIV holdings linger, money funds should continue to see strong inflows into 2008 as securities lenders, pension funds and other institutions "ride the lag" of Fed rate cuts by shifting from repo and overnight investments into longer-maturity-profiled (34 day) money market funds.
State Street Takes Charge for Fixed Income Lawsuits; Money Funds Fine. State Street Corporation announced a $279 million charge to "establish a reserve to address legal exposure and other costs associated with the underperformance of certain active fixed-income strategies managed by State Street Global Advisors (SSgA), the company's investment management arm, and customer concerns as to whether execution of these strategies was consistent with the customers' investment intent". See Crane Data's 8/29 News, "State Street Limited Duration Bond Fund Wrongly Called Enhanced Cash". The charge does not involve SSgA or State Street money market funds, however, including flagship SSgA Prime Money Market Fund and State Street Institutional Liquid Reserves. State Street Chairman & CEO Ron Logue said on today's conference call, "We have avoided any subprime investments in our money market products and have none of this exposure in our U.S. registered and unregistered money market products.... We are not abandoning the fixed-income space, and we are committed to rebuilding." On CP programs, CFO Ed Resch adds, "The commercial paper has continued to attract liquidity in the marketplace although at increased spreads.... At this time, we believe that we do not need to consolidate the conduits."
New Year Looking Good For Money Mkt/Fund Recovery as Rates Plunge. Money markets, which had already been recovering due to previous Federal Reserve rate cuts and due to a coordinated effort by Central Banks worldwide to supply liquidity, got more good news over year end as rates plunged. Federal funds closed at an average of 3.06%, well below the target 4.25%, on Dec. 31, according to the Federal Reserve's daily interest rate series. LIBOR, commercial paper, and of course Treasury rates have all moved steadily downward since mid-December. While this isn't good news for savers, lower rates continue to push fund NAVs over $1.00 and continue to drive new cash into funds (from the repo and direct CP markets). Expectations of additional Fed cuts, coupled with January's traditionally strong inflows (due to bonuses, budgeting, dividends and bond coupon payments), will likely push money fund assets up sharply in coming weeks. Another rate cut and asset surge should finally put to final rest recent concerns about any money fund "breaking the buck" due to the recent SIV ABCP crisis.
Money Fund Returns (4.99%) Beat Stock Returns in 2007; Repeat in '08? Money market mutual funds, as measured by our Crane 100 Money Fund Index, returned 4.99% in 2007. This compares to a total return of 3.53% for the Standard & Poor's 500 Index, the most widely used benchmark for stock market returns. The Dow Jones industrial average performed better, with a 6.4% return in '07, but money funds remain competitive nonetheless. Money fund yields, currently at 4.5%, remain well above their 5-year average annualized return of 2.85% and above their 10-year average return of 3.65%. Yields should continue drifting lower as funds digest teh end of a Dec. 11 Federal Reserve 1/4-point rate cut, and as the market prepares for an expected rate cut at the end of January. But we still expect cash funds to return over 4% in 2008 (our estimate is 4.25%), so money market funds should continue regaining market share from longer-term asset classes. Over the previous 10 years, the 100 largest money funds have returned: 1997 5.36%, 1998 5.30%, 1999 4.93%, 2000 6.18%, 2001 3.98%, 2002 1.56%, 2003 0.88%, 2004 1.07%, 2005 2.93%, and 2006 4.77%.
