News Archives: December, 2008
The Investment Company Institute, the trade group representing the mutual fund industry, released its monthly statistics for November on Tuesday, which showed that overall mutual fund assets fell by $261.7 billion to $9.355 trillion. Mutual fund assets fell by 2.7% in November and have fallen by $2.666 trillion, or 22%, YTD in 2008. Meanwhile, money market mutual fund assets rose by $130.2 billion, or 3.6%, in November to $3.736 trillion, and these assets have risen by $628.4 billion, or 20.2%, year-to-date in 2008.
Money funds now represent 40% of mutual fund assets, their highest percentage since 1990, when cash accounted for 46% of all funds. From 1979 through 1990, money market mutual funds represented anywhere from 40.8% (1986) to 77.1% (1981) of all fund assets. Before 1979, money fund assets represented a mere $10 billion out of the fund industry's total $55.8 billion (1978). Money funds had shrunk (or rather stock funds had grown) to approximately 25% of funds assets for most of the 1990's and 2000's. (See the ICI Fact Book for historical asset totals.)
ICI reports that money funds had inflows of $122.4 billion in November vs. $143.5 billion in October. (Inflows don't include reinvested dividends while our asset change figures do include these.) Institutional funds had inflows of $108.8 billion while Individual funds had inflows of $13.6 billion in November. As we've previously reported based on ICI's weekly and Crane Data's daily data, the strong money fund inflows have continued in December.
One reason money fund flows have been so strong is the "Liquid Assets of Stock Mutual Funds" total, which ICI reports as 5.4% in their latest month. Stock and bond funds have steadily increased their holdings in "cash," which often means money market funds, from 4.2% a year ago and from a record low of 3.4% during the summer of 2007. This total remains well below stock and bond funds' historical cash positions, which averaged 6.4% during the 1990's and 8.3% during the second half of the 1980's. If stock and bond funds (and other institutional investors) continue to build their cash positions, this should remain a bullish factor for money fund asset growth.
Finally, ICI's monthly statistics show that the total number of taxable money funds fell from 546 to 544 in November (down 5 from November '07), and the number of Tax-free money funds fell by two to 253 (down 6 over the past year). Thus, ICI tracks 797 money fund "portfolios" down from 808 a year ago.
Money market mutual funds are on course to return their lowest annual rate since 2004 and post their fastest two year asset growth spurt since 1980-1981. Our Crane 100 Money Fund Index, an average of the 100 largest taxable institutional money funds, is projected to return 2.50% in 2008, following a 5.00% return in 2007 and a 4.77% return in 2006. Money fund assets should end the year near their current record $3.8 trillion, an annual increase of approximately 21.1%, up $663.5 billion. This follows a `record $760.0 billion increase in 2007, a gain of 31.9%.
The past 10 years of Crane 100 MF Index returns are as follows: 1999 - 4.93%, 2000 - 6.19%, 2001 - 3.99%, 2002 - 1.58%, 2003 - 0.89%, 2004 - 1.08%, 2005 - 2.94%, 2006 - 4.77%, 2007 - 5.00%, and 2008 - 2.50%. The past 10 years of asset growth for money funds, according to the Investment Company Institute, are as follows (dollar increase, percentage increase): 1999 (+261, 19.3%), 2000 (+232, 14.4%), 2001 (+440, 23.8%), 2002 (-13, -0.6%), 2003 (-220, -9.7%), 2004 (-139, -6.8%), 2005 (+144, 7.5%), 2006 (+327.9, 15.9%), 2007 (+760.0, 31.9%), and 2008 (+663.5, 21.1%).
Though the latest Crane 100 7-Day Yield Index of 1.23% remains well above its levels of 2003-2004, we could see rates again test the 1.00% level. It appears, however, that the latest round of Fed rate cuts is not being passed through to funds, which have only dropped just 14 basis points over the past two weeks, so we may see money fund rates stabilize just above 1.00%. (In past cases of rate cuts, the majority of the cuts would already be reflected in the first two weeks.)
Though asset growth should slow as funds lose the tailwind of falling rates, and as ultra-low yields gradually reduce the attraction of cash, Crane Data continues to expect money funds to attract assets in 2009. Continued concerns with practically every other asset class should assure that money fund assets continued to grow, even with meager 1.0% returns on average. We're estimating approximately 10% asset growth in 2009, which would bring the overall asset total to almost $4.2 trillion.
In other news, see The Boston Globe's "And the winner is...."," which crowns Bob Litterst of Fidelity Cash Reserves "Fund Manager of the Year" in its Boston Capital column. The article says, "Earning top-shelf returns was one thing. Keeping a money market fund out of trouble at the same time was a more dramatic feat. At least 25 of 91 mutual fund complexes tracked by Crane Data LLC had to bail out or otherwise lend financial support to their money funds, according to Peter Crane, who runs the Westborough money market research firm."
CNBC's Squawk Box ran a segment this morning entitled, "Up Against a Wall of Cash," which discussed whether the huge balances in money market funds and bank savings are fuel for a stock market rally. The news brief, "Discusses whether cash is still king, with Peter Crane, of Crane Data's Money Fund Intelligence, and Jon Najarian, of OptionMonster.com." You can view the recorded video piece here.
Crane tells CNBC's Erin Burnett, "Cash in the mattress isn't all it's cracked up to be, especially if you have kids like me." On zero yields, he says, "You get a medal for that in 2008." Crane says the bubble in Treasuries applies to longer-term securities. "In the cash markets, you're talking about days or weeks, so a zero percent yield, even a slightly negative, were we to see it actually see it stay down there, wouldn't be intimidating to this kind of money. The money moving into money market funds is in the millions and billions. It's institutional money, so FDIC insurance just doesn't do it for those guys," he says.
Optionmonster's John Najarian makes the bullish stock argument and cites today's Bloomberg article (see our "Link of the Day"), saying, "The eight previous times we've seen this much cash and a market capitalization at these levels, we've seen a jump of 23% over the next six months.... So I think that a lot of the cash on the sidelines will be committed.... I would focus on some of the big companies that have been hording cash."
Crane counters, "There's a little truth to the 'Wall of Cash' theory, but it seems that every time the market's down the strategists trot out this [line] -- 'There's $2 trillion in money funds; there's $3 trillion; now there's $3.8, almost $4 trillion' -- but that cash tends to stick there. It's institutional money.... Cash competes with cash. Over time, it can fuel the market, and certainly the relative valuations matter, but most of that money is there for payroll, it's there for down payments, it's there for checking-account purposes that have nothing to do with the stock market."
Burnett asks, "What of deflation?" Crane responds, "Theoretically you could see negative yields.... I joke that there is nothing new about negative yields. We used to call them checking accounts. If you pay $8 a month, $10 a month, you're paying someone to hold your money. If you lose less than everyone else, you're winning."
CNBC's graphics for the piece included additional content. "You will see cash come out, but as a trickle, not a wave," Crane tells CNBC. They also cite Crane in saying, "Fears of numerous funds closing or going out of business are unfounded. Those cases we have seen are isolated incidents."
Money market mutual fund assets increased by $34.4 billion to a record $3.808 trillion in the week ended Wednesday, according to the Investment Company Institute's latest figures. Assets have surged by $351.8 billion, or 10.2%, over the past 12 weeks, following a decline $129.2 billion, or 3.6% in the four weeks prior, which included outflows related to the the Sept. 16 "breaking of the buck" by Reserve Primary Fund.
Year-to-date in 2008, money market mutual fund assets have increased by $663.5 billion, or 21.1%. Over the past two years, assets have increased by a mindblowing $1.426 trillion, or 59.9%. Money market mutual funds now account for approximately 40% of all mutual fund assets, based on ICI's October total fund base of $9.600 trillion. Institutional assets have fueled the massive buildup, now accounting for a record high 2/3 (66.4%) of overall money funds assets
Prime Institutional money funds regained their status as the largest piece of the money fund pie, rising $34.1 billion, or 3.0%, in the latest week to $1.173 trillion. Prime Inst funds have increased assets for 7 straight weeks and for 10 out of the last 11 weeks. They've increased $120.2 billion, or 11.4%, over the past 12 weeks following a precipitous 4-week decline of $398.8 billion (down 27.5%) in September. Overall Institutional money fund assets increased by $36.2 billion to $2.527 trillion.
Government Institutional funds, including Treasury Institutional funds, increased by $2.4 billion to $1.170 trillion, following a decline of $7.7 billion last week. Government & Treasury Institutional funds have risen by $193.0 billion, or 19.8%, over the past 12 weeks, and they have risen by a monstrous $477.2 billion, or 69.2%, since Sept. 3. But recent outflows from Treasury funds have halted the sharp rise in this series. (Though ICI doesn't break out Treasury assets from the Government category, Crane Data's Money Fund Intelligence Daily shows Treasury Institutional fund assets decreasing $18.3 billion in the week through Dec. 23.) Tax Exempt Institutional money fund assets decreased by $342 million to $184.3 billion.
Retail money fund assets decreased by $1.75 billion to $1.282 trillion. General Purpose ("Prime") Retail assets increased by $572 million to $720.1 billion. Government Retail assets fell by $1.6 billion to $264.4 billion, while Tax Exempt Retail assets fell by $719 million to $297.2 billion. Retail assets have increased a "mere" $47.1 billion, or 3.8%, since early September with an increase in Government funds and modest outflows from Prime and Tax Exempt funds.
Throughout the past 17 months of money market mutual fund stresses, nobody has been more visible and eloquent in communicating with investors and the broader marketplace on events in the cash sector than Federated Investors' Senior Vice President and Chief Investment Officer for Taxable Money Markets Deborah Cunningham. Cunningham keeps her "foremost spokeswoman of the money fund industry" title secure with yet another recent conference call and published communication, this one entitled simply, "Current issues in the money market fund industry." Below, we excerpt some of the highlights.
First, Cunningham is asked, "How does the Fed's 75-to-100 basis-point cut in the target federal funds rate impact money fund investors?" She answers, "It shouldn't have as dramatic an impact as it may seem simply because many short-term rates, including the market federal funds rate on overnight bank loans between banks (the Fed's target is simply an intended rate, not a required rate) are already trading in the new target range. [Indeed, Crane's Money Fund Intelligence Daily has shown money fund rates decline a mere 8 basis points over the past week.] Rates on highly rated commercial paper and overnight repurchase agreements have been hitting new lows in recent weeks, too. The Fed's move will likely add to downward pressure on these and other short-term instruments money market funds purchase."
She is also asked, "How is this low-yield environment affecting the way Federated money market funds operate? Cunningham responds, "We recognize and appreciate that our clients view us as providing a vital cash management service, and our goal of managing money market funds to provide a $1 NAV and daily liquidity at par has not changed. The current environment is putting pressure on money markets, where funds by law must be invested in shorter-term instruments with an average maturity of no more than 90 days. We have many products that invest in highly rated government agency and corporate securities, where yields have fallen, but our Treasury-related offerings have been impacted the most because the universe of investment options is limited. We have taken steps to offset the lower yields on these Treasury money market funds, including waiving certain fees."
"What does it mean when Treasury securities have a zero or negative yield? For Treasury securities to have a negative yield, the investor not only would accept no return for his or her investment in a Treasury security, but effectively would be willing to accept a return of below-zero for the security of owning Treasurys. This happened briefly recently in the secondary markets, where investors trading with one another were willing to accept a three-month T-bill yield of negative 0.01%. This occurred the same day the Treasury auctioned four-week T-bills at zero yield, meaning after four weeks, buyers of the bills would get back only what they paid, with no interest. There are ways yield could be considered negative without an actual negative interest rate on Treasury securities, such as when the securities are purchased through a fund or intermediaries where expenses more than offset the Treasury yields," she says.
Finally, Federated asks, "Where should money market investors look for higher yielding alternatives? Cunningham writes, "Investors looking for yield should consider one slight step out the credit spectrum from Treasury products to government agency products. Federated government agency money market funds invest primarily in U.S. Treasury and government agency securities, including repurchase agreements that are fully collateralized by U.S. Treasury and government agency securities. Government agency money market funds can provide an alternative to investors who are seeking relative safety through Treasury-only products. `An additional alternative a bit further out the credit spectrum would be other high quality funds, such as Federated prime money market funds, that provide a relatively safe and liquid investment solution via investments in bank certificates of deposit, commercial paper and other high quality, non-government-related paper."
The London-based Institutional Money Market Funds Association, or IMMFA, recently sent a survey to members entitled, "Considerations for the future structure of money market funds," asking a number of questions about members preferences regarding potential money fund regulatory and structural changes. IMMFA writes, "The industry and its regulators are in the process of reviewing the key features of money market funds, both in the United States and the European Union." The organization seeks "to enable IMMFA to participate in that review process by seeking views on the future features of the product."
IMMFA says, "The prolonged credit crisis has put unprecedented pressure on money market funds, including both constant net asset value funds (CNAV, e.g. IMMFA funds and 2a-7 funds) and variable net asset value funds (VNAV, e.g. French tresorerie reguliere and dynamic funds, and enhanced yield funds). In particular, a large number of money market funds have experienced significant shareholder redemptions. In the absence of liquid markets, those funds have found it difficult to sell assets at fair value prices to meet redemption payments." IMMFA says some funds have been suspended and others have received sponsor support.
It says, "From the perspective of money market fund sponsors, the cost of providing support to their funds had not been factored into their fee, and consequently calls into question the economic viability of the current product structure. From the perspective of central banks, the systemic importance of money market funds had not been properly appreciated, and consequently calls into question whether and under what conditions, it is reasonable for funds to expect central bank liquidity support.
Questions include: Should the maximum WAM be altered? Should a "formal minimum maturity ladder for liquidity purposes" be implemented? Should IMMFA funds "be subject to formal individual shareholder and client segment concentration limits" or "be subject to more stringent diversification limits?" The survey also asks whether shareholders should bear the costs of any credit events, and whether "IMMFA funds should continue to maintain a constant net asset value." Finally, they also ask whether funds should create "loss reserves" to protect against future credit events.
Standard & Poor's Ratings Services late last week issued a brief "Clarifications For Rated Money-Market Funds Involving Uninvested Cash And Weighted Average Maturity," which addressed several issues which have come up in the unprecedented near-zero yield environment. These include: "Uninvested Cash Held In Noninterest-Bearing Transaction Accounts," "Treatment Of Uninvested Cash In A Fund's Weighted Average Maturity (WAM) Calculation," and "Criteria Concerning WAM Limits For Principal Stability Funds".
Under "Uninvested Cash Held In Noninterest-Bearing Transaction Accounts", S&P says, "Rated funds are permitted to hold more than 5% of total fund assets in uninvested cash with its custodian if the following provision is met: The fund and custodial bank represent to Standard & Poor's that uninvested cash is being held in a non-interest-bearing transaction account with a custodial bank that has elected to participate in the FDIC Temporary Liquidity Guarantee Program (FDIC TLGP) and that those monies are covered without limit under the FDIC TLGP. If the above representation were not satisfied, highly rated funds can hold up to 5% of their assets in a highly rated custodial bank as per our issuer diversification guidelines and minimum credit quality criteria."
Regarding "Treatment Of Uninvested Cash In A Fund's Weighted Average Maturity (WAM) Calculation," the NRSRO says, "We understand general industry accounting practice excludes uninvested cash from a fund's weighted average maturity calculation. For example, if a fund is invested 50% in a 90-day T-bill and the other 50% is uninvested, the SEC-calculated WAM would be 90 days. For Standard & Poor's principal stability fund rating purposes, uninvested cash deposited with its custodial bank should be treated as an overnight investment for WAM calculation purposes. Therefore, in the example described above, the fund would have a WAM of 45.5 days."
Finally, S&P is not sympathetic to triple-A rated Treasury and Government funds wanting to extend WAMs to boost yields. Its "Criteria Concerning WAM Limits For Principal Stability Funds" section states, "Standard & Poor's is aware of the challenging environment facing managers because of various factors, including the limited supply in the short-term Treasury market, the continued easing of the Federal Funds Rate, and the general flight to quality. Despite these pressures, given potential risks from changing interest rates and heightened dilution concerns, we feel that any extension of our WAM criteria for 'AAAm' rated funds (a WAM limit of 60 days or less) would be inconsistent with a fund's 'AAAm' principal stability rating."
S&P adds, "A 'AAAm' fund is defined as having extremely strong capacity to maintain principal stability and limit exposure to principal losses because of credit, market, or liquidity risks. Although 'AAAm' criteria limit the WAM of a fund to 60 days or less, criteria for funds rated 'AAm' or 'Am' allow a maximum weighted average maturity beyond this 60-day limit. 'AAm' rated funds have a maximum allowable weighted average maturity of 75 days or less, while 'Am' funds have a maximum allowable weighted average maturity of 90 days." In other S&P news, see "Two Wisconsin Investment Series Cooperative Funds Rated 'AAAm'."
Total money fund assets declined by $2.96 billion to $3.775 trillion in the latest week, reported the Investment Company Institute Thursday evening. This marked the first weekly decline in overall money fund assets since Sept. 24. Over the prior 11 weeks, money fund assets had increased by $321.2 billion, or 9.3%.
General purpose (or "prime") Institutional money fund assets rose by $4.6 billion to $1.139 trillion, their sixth straight weekly increase. These assets have risen by $103.6 billion, or 10.0%, since Oct. 8. Assets of Prime Institutional funds had fallen by $418.5 billion, or 28.8% in the 4-week period from Sept. 10 through Oct. 8. Almost half of this decline occurred during the week ended Sept. 17, when Reserve Primary Fund "broke the buck".
Government & Treasury Institutional funds dropped by $7.3 billion to $1.168 trillion, suffering their first decline in 13 weeks. From Sept. 10 through Dec. 10, these funds grew by $485.2 billion, or 70.3%. Tax Exempt Institutional money fund assets decreased by $1.8 billion to $184.7 billion, their second consecutive weekly decline.
General Purpose Retail assets increased by $2.7 billion to $719.7 billion, their fifth straight weekly gain. Government Retail funds fell by $632 million to $266.0 billion. Tax Exempt Retail assets declined by $507 million to $297.9 billion.
Year-to-date, money fund assets have increased by $630.5 billion, or 20.0%, on track to post their second-best increase in asset terms ever (behind last year's $760 billion flood). Institutional assets have increased by $508.0 billion, or 25.6%, while Retail assets have increased by $122.5 billion, or 10.5%.
Yesterday, Bloomberg TV featured a rare money market mutual fund manager interview, "RiverSource Jackson Sees Lower Money Market Yields." Jamie Jackson of RiverSource, an Ameriprise Financial subsidiary, talked with Bloomberg's Betty Liu about the "implications of yesterday's Federal Reserve policy decision for bonds and money market funds."
Jackson says of the Fed cuts, "It's been a continuation of yields falling across all of the high-quality assets.... It's record-low yields for Treasuries and also for just about anything that Tier 1 money market funds are able to invest in." He interprets the Fed comment about rates staying low "for some time" as being "`at least 9 months, probably more like a year."
"I don't think it will kill the money market funds," Jackson says of the new rock-bottom rates. "We've seen very low yields before and money market funds have been able to deal with it. So what will happen is yields will continue to drop.... [But] money market funds don't necessarily invest in Fed funds.... It's good for companies, but bad for cash investors."
Finally, Jackson says, "In a vacuum, zero yields are not something that people would flock to, but there have been so many issues with so many other asset classes.... There's also a flight to quality in the retail world where people just want preservation of principal, and money market funds are still a good vehicle for that." Money funds' now meager returns "look pretty good relative to what most people have had in their portfolios the last 12 months," he tells Bloomberg.
In other news, Today's Wall Street Journal exaggerates the plight of money funds in "Money Funds Feel the Pull of Fed's Moves", saying, "The Federal Reserve's interest-rate cut two days ago may be threatening the recovery of the money-market-fund industry from September's shock waves." Also, `Reuters writes, "Credit Suisse quits managing US money0market funds". (See our "Link of the Day" too.)
The U.S. Securities and Exchange Commission's Director of the Division of Investment Management Andrew J. "Buddy" Donohue spoke Monday at the ICI 2008 Securities Law Developments Conference in Washington. His talk, entitled, "2008: Important Accomplishments, Meaningful Lessons and Getting Back to Basics," centered on money market mutual funds. Donohue says 2009 will see a "review of the money market fund model and its regulatory regime."
He says, "I expect that regulators and the fund industry will have a common goal of conducting a wholesale review of the money market fund model, its attributes and the regulatory requirements applicable to it and updating those regulatory requirements where and as necessary. I further expect that this endeavor will be guided by the fundamental principle that the money market fund model and its regulation should be tailored to best meet the liquidity and capital preservation needs of fund investors. It is with this principle in mind that I very much look forward to reviewing the recommendations of the ICI's Money Market Fund Working Group."
Donohue continues, "Events of the past year have been particularly challenging to money market fund managers, regulators and, most especially, money market fund investors. In 2008, we saw the first 'breaking of the buck' by a widely-held money market fund, and the impact and aftermath of that event continue to be assessed. It is essential that we take the experience of money market funds from the last several months and draw from it to consider important lessons. For instance, money market funds have twin goals of providing liquidity, typically on a same-day basis, and preserving capital to maintain a stable net asset value of $1.00. At times these goals can conflict."
He says, "Interestingly, our current money market fund regulations contain strong provisions related to credit quality, maturity and diversification. These provisions are geared toward preserving capital and enabling a money market fund to maintain a $1.00 NAV. Liquidity, on the other hand, has not been a particular focus of our money market fund regulations. It is liquidity, however, that has been one of the greatest challenges for money market funds since the beginning of the credit crisis in August 2007."
Finally, Donohue says, "But we also should remember that the money market arena saw some important accomplishments this past year. For one thing, many money market fund sponsors or their parent firms were willing to voluntarily step in and assist money market funds facing credit or liquidity challenges by entering into asset purchase or credit support arrangements. The Division staff has been active in working with the managers of money market funds as they have been coping with events of the past several months. I applaud the money market fund industry's willingness to voluntarily come to the support of funds when that support is structured to benefit all fund shareholders. And I applaud the Division staff for its timeliness, responsiveness and helpful assistance in working with money market firms."
The Federal Reserve Board of Governors voted to reduce its `target Fed funds interest rate to "a target from zero to a quarter percent" from its previous 1.00%, their 10th cut in the past 15 months. While the zero yields will place pressure on money market mutual fund fees, we do not expect it to deal a critical blow to the sector due to the fact that most money market rates remain well above the Fed funds target."
The Fed's statement says, "The Federal Open Market Committee decided today to establish a target range for the federal funds rate of 0 to 1/4 percent. Since the Committee's last meeting, labor market conditions have deteriorated, and the available data indicate that consumer spending, business investment, and industrial production have declined. Financial markets remain quite strained and credit conditions tight. Overall, the outlook for economic activity has weakened further."
"Meanwhile, inflationary pressures have diminished appreciably. In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate further in coming quarters. The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability. In particular, the Committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time," says the Fed.
It continues, "The focus of the Committee's policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve's balance sheet at a high level. As previously announced, over the next few quarters the Federal Reserve will purchase large quantities of agency debt and mortgage-backed securities to provide support to the mortgage and housing markets, and it stands ready to expand its purchases of agency debt and mortgage-backed securities as conditions warrant. The Committee is also evaluating the potential benefits of purchasing longer-term Treasury securities. Early next year, the Federal Reserve will also implement the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses. The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity."
Look for more analysis in coming days, but see previous Crane Data commentary on the subject, including "Taking Another Look at Money Funds Yielding Under One-Half a Percent," "Video: Crane Says Money Fund Yields May Fall to Less Than Zero," and "First Money Fund Pays Negative Yield Story in MFI Incorrect."
As we added to our News article Monday, "Our Money Fund Intelligence Daily statistics from Friday (12/12) show that among the 500 largest money funds there are three funds with negative 7-day yields (though investor returns remain positive due to capital gains), five funds with zero yields, and 13 funds with 0.01% yields. Forty one funds have yields of 0.05% or lower (5.4% of assets), 89 funds have yields of 0.25% or lower (13.3% of assets), and 147 funds (23.2%) have yields of 0.50% or lower. Our Crane 100 yielded 1.40% and our broader Crane Money Fund Average yielded 1.08% as of Friday. Finally, remember that the majority of these funds too are Treasury funds, which may see yields rebound as year-end pressures abate."
The latest quarterly Federal Reserve Z.1 "Flow of Funds" Survey was released last week, containing a number of tables relating to money market mutual funds. The 124-page Third Quarter 2008 edition shows that the largest investors in money market mutual funds continue to be the household sector, funding corporations, including securities lenders, and nonfinancial corporate businesses. There was surprisingly little change from the previous quarter.
Money fund assets held by the household sector increased by $41 billion to $1.452 trillion in Q3, representing 43.0% of the $3.377 trillion tracked by the Fed. This percentage is up 0.8% in the quarter, but down 1.6% over the past 12 months (even with a $202 billion increase). Household money fund assets as a percentage of money funds' total have steadily declined over the past 5 years as institutional assets have increased at a faster pace.
The second largest segment in the Fed's Z.1 Table L.206 "Money Market Mutual Fund Shares" was "Funding corporations," which are defined as, "Funding subsidiaries, nonbank financial holding companies, and custodial accounts for reinvested collateral of securities lending operations." This segment decreased by 0.3% to 21.5% of assets, declining $2 billion to $726.8 billion. Securities lenders and other funding entities have increased their share of money funds' total assets by 3.6%, or $224.4 billion over the past year, and these assets have more than doubled since yearend 2006, when they totalled just $311.3 billion.
Nonfinancial corporate businesses represent the third largest money fund investors demographic with $618.0 billion, or 18.3% of all assets. Assets here decreased by $6.9 billion in Q3 and increased by $96.9 billion over 12 months. Life insurance companies hold $244.8 billion (7.3%) in money funds; Nonfarm, noncorporate businesses hold $102.3 billion (3.0%); Private pension funds hold $95.3 billion (2.8%); and State and local governments hold $83.2 billion (2.5%). The Fed also lists "Rest of the world" at $38.9 billion (1.2%) and "State and local government retirement funds" with $15.2 billion (0.5%).
The Fed's Z.1 series, which also contains tables of "Total financial assets" held by money market mutual funds, shows total money fund assets increasing by $33.3 billion, or 1.0% in Q3, and increasing by $576.6 billion, or 20.6%, over the past 12 months.
With the Federal Reserve Board of Governors meeting Monday and Tuesday to debate whether to cut their benchmark Fed funds rate below one-percent, we wanted to take another look at the portion of money market mutual funds that might be further impacted by lower rates. We examined our latest monthly data series, as well as our daily series from Friday, and found that the percentage of funds yielding below 0.5% remains relatively small.
Treasury money funds, which represent the majority of assets that have been and likely will be impacted by fee waivers to prevent negative yields, represent approximately 20.4% of all money fund assets. Government money funds, which may be impacted, represent another 18.5% of assets. But Prime assets, which are paying yields comfortably above 1.0%, still represent the biggest slice of money fund assets, at 43.5%. Tax-Exempt money funds represent an additional 17.6%.
As of Nov. 30, Crane Data shows 239 taxable money funds out of 910 with yields of 0.50% or lower. These funds, primarily Treasury money funds, represent 17.9% of all taxable assets and have an average expense ratio of 0.52%. As of Nov. 30, 155 money funds had yields of 0.25% or lower, representing $194.1 billion in assets, while 64 funds had yields of 0.05% or lower, representing 2.4% of assets.
Crane Data estimates that money market mutual funds are currently bringing in revenue at an annualized rate of $12.55 billion. Funds at or under 0.25% represent $978 million in revenue, or 9.3%, while funds at or under 0.5% represent $2.0 billion, or 19.0% of revenues. Fee waivers would vary according to yields, but we'd guess that a half-point cut would eventually cost money funds about a billion in revenue, or just under 10.0%.
Our Money Fund Intelligence Daily statistics from Friday (12/12) show that among the 500 largest money funds there are three funds with negative 7-day yields (though investor returns remain positive due to capital gains), five funds with zero yields, and 13 funds with 0.01% yields. Forty one funds have yields of 0.05% or lower (5.4% of assets), 89 funds have yields of 0.25% or lower (13.3% of assets), and 147 funds (23.2%) have yields of 0.50% or lower. Our Crane 100 yielded 1.40% and our broader Crane Money Fund Average yielded 1.08% as of Friday. Finally, remember that the majority of these funds too are Treasury funds, which may see yields rebound as year-end pressures abate.
Money market mutual fund assets continued to climb in the latest week, rising $34.49 billion to a record $3.777 trillion, according to the ICI's latest weekly statistics. This marks the 11th consecutive weekly increase. Money fund totals have risen by $320.3 billion, or 9.3%, since October 1. Year-to-date, money fund assets have increased by $632.5 billion, or 20.1%.
Institutional funds continued to lead the surge, rising $35.53 billion to a record $2.495 trillion. General Purpose (or "Prime") Institutional funds continued their recovery and led the move higher, rising $23.1 billion, or 2.1%, to $1.134 trillion. Government Institutional funds (including Treasury funds) rose $14.39 billion, or 1.24%, to $1.175 trillion. Tax Exempt Institutional funds declined by $1.96 billion to $186.5 billion.
Retail money fund assets declined by $1.0 billion to $1.282 trillion. General Purpose Retail funds rose $1.2 billion to $717.0 billion, Government Retail funds fell $296 million to $266.7 billion, and Tax Exempt Retail funds fell by $1.9 billion to $298.4 billion. ICI's data tracks 1,983 funds through the week ended Wednesday.
Crane Data's Money Fund Intelligence Daily shows asset growth slowed yesterday, as funds prepare for tax-related outflows on the 15th of the month. Our Daily series increased $2.6 billion. Outflows are appearing in the Treasury Individual sector (down $3.0 billion yesterday and down $5.3 billion on the day), and Prime Institutional funds continue to gain assets (up $2.97 billion yesterday and up $20.9 billion in the week through Thursday).
In other news, the Federal Reserve's weekly H.4.1 series shows that usage of its Asset-backed commercial paper money market mutual fund liquidity facility continued to fall, declining $11.1 billion to $40.8 billion. Its new Money market investor facility continues to go unused with zero assets. Both numbers indicate that money funds and money markets continue their return to normalcy. (See also Bloomberg's story.)
Yesterday's Bloomberg article "Money-Market Fund Yields May Fall to Less Than Zero," on the possibility of Treasury fund yields going negative, was followed by a barrage of stories, plus radio and TV pieces, on the topic yesterday. Below, we excerpt statements from Crane Data President Peter Crane's late afternoon interview on Bloomberg TV.
Bloomberg first asked us to clarify the difference between '`breaking the buck' in money funds and the current situation with Treasury yields. Crane responds, "Breaking the buck is where you would see a loss drop the NAV from $1.00 to $0.99 or lower. This is a case of negative yields, and it's still theoretical ... [where] your expenses would outweigh your income." Crane says negative yields are nothing new; checking accounts charging monthly fees used to be commonplace.
Host Matt Miller then cites the 1800's when people used to pay their bank to hold their gold. He asked, "Is that where we're going?" Crane responds, "In a true negative yield environment, that would be the case. I joke 'Cash in the mattress isn't all it's cracked up to be. `You'd be silly to hold physical cash, and of course FDIC insurance doesn't do much for IBM or the State of Minnesota." Crane continues, "You have to remember, all these yields are annualized. I tried to look at how much a 0.5% negative yield would cost you, and on $100,000 it would be something like $1.37 a day. So you're not talking about a real [significant] loss of principal."
How many more funds may have to trim fees? "There aren't a whole lot being forced to waive fees now, and remember they're just waiving part of their fees.... If the Fed cuts again by one-half and if Treasury bill yields stay down, they'll get a lot of company." Crane Data's November issue of Money Fund Intelligence XLS showed 79 funds, or 2.2% of total assets, yielding from 0.00% to 0.25% and 92 funds, or 6.6% of assets, yielding from 0.26% to 0.50%. Thus a total of 169 out of 1,331 funds would likely be impacted by a 50 bps cut.
Finally, Bloomberg asks whether funds would continue waiving fees, stop investors from coming in, or would investors get less than a dollar back? Crane says, "It's uncharted territory, so we don't know. But I look at it and I think they would actually charge by the month. So instead of earning interest income, you would sell shares at the end of the month to pay your fees, similar to that checking account example.... Investors in money funds are of course free to take their money at any moment.... If the loss, or cost, became too great they could move elsewhere. That's part of the Fed's plan. The Fed and the money fund business, I think, would be happy to have an excuse to push investors back into the Prime money market funds that a lot of them left earlier."
NOTE: See Crane Data's Peter Crane talk about the possibility of negative yields in money market funds on Bloomberg TV today at 4:12pm.
This month Money Fund Intelligence spoke with Mike Kitchen and Rich Williams, portfolio managers of the Cavanal Hill Funds, which until recently were known as the American Performance Funds. The $4 billion money fund complex's Cash Management, U.S. Treasury, and Tax-Free Money Market Funds are advised by Cavanal Hill Investment Management, a wholly-owned subsidiary of Bank of Oklahoma.
As with previous fund profiles, we first ask, "What is the biggest challenge in managing your money fund?" Kitchen responds, "It's always been about balancing the need for credit-worthiness and liquidity and return. Creditworthiness and liquidity should always be the top priorities, but the events of the past couple of months have made this even more obvious. What's happened underscores the need to do your own homework because ratings don't always capture the complete risk picture on any name. That's always been the case, and even more so now."
On Cavanal Hill's size, Kitchen says, "It's possible to be closer to your shareholder base with fund complexes of our size.... Of course, we're not as small as we used to be. Four billion is smaller than many, but it's still sizeable compared with where we started.... Although a lot of funds have had ABCP in varying sizes, the more that you have the more analysis you have to do, the more complicated the analysis is."
Kitchen tells us, "We definitely shortened maturities in the Cash Management Fund over the past few months; we've suspended ABCP investments. If you look at our holdings, we haven't been major players in the ABCP space anyway. But we thought it was wise to suspend purchases altogether for a while." On new securities, he says, "We've probably looked at everything that everyone else has looked at.... We've always stressed safety and liquidity before yield and the holdings tend to be classic, traditional money market holdings."
Kitchen says, "Clearly we are going to see lower rates... [But] the Fed funds bullet has basically been spent. How much good is lowering the funds target level from here going to do? [You have to wonder], especially because the effective rate has been below that a good chunk of the time anyway. The money fund is a very important source of funding for Corporate America. It's anybody's guess as to how far they are going to go. The challenge is keeping the quality up, yet earning enough yield to overcome the lower levels."
Finally, we asked, "How about Treasuries?" Kitchen says, "Yeah, they are definitely low, reflecting what's going on in the market. There is still is a voracious demand for Treasuries and agencies because of the flight to quality and safety.... Definitely, you're seeing the Treasury funds out there reflecting the lower rates. It's going to stay there for some time." For a copy of the full Cavanal Hill interview, e-mail Pete.
The December issue of Money Fund Intelligence stated that Goldman Sachs' Financial Square Treasury Obligations and GS Treasury Instruments "became the first money funds ever to pay a negative yield." This is incorrect. While a couple of share classes of these funds have reported negative 7-day yields, their daily 1-day yields, returns and dividends have remained positive. No "negative yields" have been passed through to investors.
A Goldman Sachs spokesperson tells us that the Treasury funds maintain an 'active trading strategy' and that 'short-term capital gains paid through' have assured that investors continued to receive positive dividends from the funds. Note that the 7-day yield formula that money funds are mandated to use by the SEC excludes capital gains and losses. But that investors actual returns and dividends, which are normally credited daily and paid monthly, include any realized gains and losses. (Though rare, gains do occur in money funds, especially Treasury funds.)
While a false alarm this time, the issue of 'negative yields' remains very real for money market funds. Should the Federal Reserve cut interest rates again, especially if they cut beyond another 1/4-point, some funds may indeed find themselves with expenses over and above the interest income they generate. Funds currently are waiving any amounts above their interest income in order to maintain positive yields (or to keep yields at zero). But this may become more difficult should rates decline further.
Money funds have begun discussions on how to handle a negative dividend, should it be needed. Crane Data assumes that it would be handled the exact opposite of a how dividends are currently handled. A daily negative credit would be accrued, and the account would be charged at the end of the month (instead of the dividend accruing then paying). Thus, a "negative dividend" would not involve "breaking the buck". But rather shares would be sold from the account in order to pay fees monthly, which would not be much different from how checking accounts used to charge a monthly fee. We'll undoubtedly be researching more in the coming days, so let us know if you have any comments.
Yesterday, we released the latest copy of our flagship Money Fund Intelligence publication. The December issue features the articles, "Comeback Kid: Support Helping Money Funds" and "Zero Yield Threshold: Severe Pain for MFs?" These discuss the startling surge in money fund assets and the potential damage wrought to money fund revenues by lower interest rates, respectively. We also interview the managers of the formerly-named American Performance Funds in our monthly portfolio manager interview entitled, "Low Profile OK With Cavanal Hill Funds."
The lead story in the new MFI says, "The barrage of support measures taken by the U.S. Treasury, Federal Reserve, and other Government entities appears to have money market mutual funds well on the road to recovery. Though Government and Treasury funds continue to gain the majority of inflows, overall money fund assets have risen for 10 straight weeks and have hit new record highs the past 7 weeks in a row."
Crane Data also doesn't believe the damage will be severe with additional Fed rate cuts. While we don't believe the Fed will cut any lower due to sensitivity to money fund and money market concerns, "we don't believe another 1/4-point, or even a 1/2-percent move, would cause critical damage to money funds' revenue streams," says the December issue. "Money funds with yields of 0.25% or lower represent just 2.2% of money fund assets," says the new MFI.
Finally, our monthly Crane Index series shows that yields and returns continued lower in November. The Crane 100 7-day yield was 1.61% as of Nov. 30, while the broader Crane Money Fund Average fell to 1.13%. The Crane Institutional MF Index fell to 1.28%, the Crane Individual MF Index fell to 0.99%, and the Crane Tax-Exempt MF Index fell to 0.83%. Look for more from our latest monthly issue in coming days. (To request the latest issue of Crane Index or Money Fund Intelligence, call 508-439-4419.)
Money market mutual funds had until the end of business yesterday to renew their participation in the US. Treasury's Money Market Fund Guarantee Program. It appears that virtually all money market mutual funds have done so, applying to renew their Treasury $1.00 NAV insurance. Nine out of the top 10 and thirteen of the 15 largest managers of money funds -- Fidelity, JPMorgan, Federated, BlackRock, Dreyfus, Schwab, Vanguard, Columbia, Wells Fargo, Western (Legg Mason/Citi), First American, Northern, and AIM (Invesco) -- all have posted notices declaring their participation. We expect the rest to follow.
The program extension announcement (see the Nov. 25 Crane Data article, "Treasury Extends Temporary Guarantee Program for Money Mkt Funds") said, "The U.S. Treasury Department today announced an extension of Treasury's Temporary Guarantee Program for Money Market Funds until April 30, 2009 to support ongoing stability in this market. All money market funds that currently participate in the program and meet the extension requirements are eligible to continue to participate.... The temporary guarantee program will continue to provide coverage to shareholders up to amounts that they held in participating money market funds as of the close of business on September 19."
Some fund groups, like First American, JPMorgan, and Northern, have excluded Treasury funds from coverage, while some, like Columbia, have also excluded Government money funds. The cost of the program is the same as before, approximately 1 basis point a quarter. The premium cost is 1.5 basis points for the 4 1/2-month (Dec. 19 through April 30) period (2.2 basis points for funds with NAVs of $0.995 to $0.9975), and payments for the extension were "based on a fund's net asset value as of September 19." Other fund groups announcing their participation via website announcements or via SEC filings include: Barclays Global, Cavanal Hill, Evergreen, MainStay, PIMCO, Prudential, SIT, SunAmerica, UBS, UCM (Utendahl), and Virtus.
The Treasury's extension announcement added, "The program currently covers over $3 trillion of assets. The Secretary may extend the program until September 18, 2009; however, no decision has been made to extend the program beyond April 30, 2009. If a fund does not participate in this extension, that fund will not be eligible to participate in any potential further extension of the program." See the new December issue of Money Fund Intelligence for more details on the Treasury Guarantee and other Government support programs.
S&P's press release says, "Standard & Poor's Ratings Services' Fund Ratings group said today that securities guaranteed under the Federal Deposit Insurance Corp.'s (FDIC) Temporary Liquidity Guarantee Program (TLGP) are consistent with our principal stability fund ratings criteria for rated money-market funds. Exposure to such instruments will not affect ratings as long as the instruments meet the guidelines outlined below."
The statement continues, "Standard & Poor's has determined that the guarantee of debt issued under the FDIC's TLGP will permit us to assign such debt the same rating as we currently rate the U.S. government ('AAA' for long-term debt or 'A-1+' for short-term debt) as outlined in "U.S. Guarantee Of Bank Debt Conforms With Standard & Poor's Guarantee Criteria," published Nov. 21, 2008, on RatingsDirect. However, although the U.S. government supports the credit quality of these instruments, a fund's investment advisor should prudently manage the instruments' potential market and liquidity risks."
S&P says the following "limitations apply for FDIC TLGP guaranteed securities in highly rated money-market funds (rated 'AAAm', 'AAm', and 'Am')": 1) No more than 5% invested with any one issuer; 2) Legal final maturities of two years or less; and, 3) Securities with legal final maturities of more than 397 days but less than two years count toward the fund's 10% illiquid/limited liquidity basket. They add, "In addition, we will evaluate exposures to FDIC TLGP guaranteed securities on a case-by-case basis in funds with limited assets and funds with a volatile and/or concentrated shareholder base. We consider these limits to be appropriate for highly rated funds given these investments' idiosyncratic risks and the absence of a fluid secondary market due to their relative newness."
Finally, the release states, "Standard & Poor's Fund Ratings Group opinions on FDIC TLGP securities speak to their consistency with our principal stability fund ratings criteria and do not address whether such instruments meet applicable regulatory requirements."
Money market mutual fund assets rose for the 10th week in a row, increasing $29.1 billion to a record $3.743 trillion. The Investment Company Institute's weekly statistics showed retail assets increasing $6.7 billion to $1.283 trillion and institutional assets increasing $22.34 billion to $2.460 trillion in the week ended Dec. 3. Since Sept. 30, 2008, money fund assets have grown by $286.7 billion, or 8.3%, and assets have grown by $598.5 billion, or 19.0%, over the past 52 weeks.
Government Institutional funds accounted for almost the entire increase, rising $260.9 billion, or 29.0% during this period. They rose by $12.0 billion in the latest week to $1.160 trillion. General Purpose ("Prime") Institutional assets rose by $7.1 billion, their 4th consecutive increase (up $55.5 billion over the past five weeks), to $1.111 trillion, while Tax Exempt Institutional funds increased by $3.2 billion to $188.5 billion.
General Purpose Retail funds increased by $4.0 billion, their 3rd consecutive increase, to $715.8 billion, while Government Retail funds added a mere $540 million to $267.0 billion. Tax Exempt Retail money fund assets rose $2.1 billion to $300.4 billion. Assets should continue moving higher in the next week or two, but they should then experience seasonal declines due to Holiday spending and year-end "window dressing".
In other news, Standard & Poor's Paris released a report entitled, "Money-Market Fund Support Strains Fund Managers And Bank Sponsors," which says, "Once considered among the safest of investments, certain enhanced cash and money-market funds have joined the many that the global credit market downturn has affected as a result of declining net asset values (NAVs) in their underlying investments."
S&P says, "Fund managers' and bank sponsors' actions in recent months to preserve the safety of the funds have strained the profitability, liquidity, and capital of a few asset managers rated by Standard & Poor's, notably `Legg Mason Inc. Others (Bank of America Corp., Barclays Bank PLC, Credit Suisse, and SunTrust Banks Inc.) have also provided billions of dollars in aggregate support to their sponsored money-market funds.
"With credit markets still shaky, we believe that the potential for further deterioration in market values -- particularly for enhanced-cash funds -- may lead to more investor redemptions and require fund managers and bank sponsors to continue to support their funds," said Standard & Poor's credit analyst Francoise Nichols. "This could result in Standard & Poor's taking negative rating actions on some issuer ratings in certain cases. We do not expect potential rating actions to be widespread across the sector, however."
Finally, see the New York Times article on Reserve, "Embattled, Fund Shifts Cost of Suits To Investors". Also note that the December issue of our flagship Money Fund Intelligence, which will feature an interview with Cavanal Hill, a review of Government support programs and support actions, and our usual extensive news, will be available along with our monthly performance rankings, statistics and indexes, on Monday morning.
Below, we cite some of the highlights from Moody's "Money Market Funds Update" Teleconference. The call, which featured an "Overview of Money Market Funds Markets, a Funds Analytics Update, a U.S. Government Programs Review, and an Outlook for the Sector, gave a nice summary of events and issues. It also revealed that over 1/3 of the 100 largest money funds have received some kind of parental support, that almost all of the temporary outflows from Institutional Prime funds went into Institutional Government funds, and that we might even see a "reexamination of the CNAV product".
Moody's Senior V.P. Henry Shilling first gave the industry overview, saying, "The liquidity turned credit crisis in money market funds that began in July of 2007 and which took a decided turn for the worse following the Lehman Brothers Chapter 11 filing on Sept. 15 has had a profound impact on constant net asset value money market funds both in the U.S. and in Europe. In fact, the stresses that money market funds have been exposed to over the last 17 months have been unprecedented, without parallel in the 37-year history of the existence of money market funds. The experiences are expected to have a material effect on the industry in the future.... That said, money market fund assets in the U.S. are now at peak levels of $3.7 trillion while European funds are not that far off their highs at about $615 billion."
Shilling says their were 12 P-1 to D (default) downgrades in the period prior to Lehman Brothers, including Ottimo, Axon and Cheyne Finance. "Liquidity dried up and spreads widened.... In response, money market funds built up liquidity while at the same time they withdrew from the ABCP market and structured market generally, along with other liquidity investment pools." During the pre-Lehman phase, money market conditions improved but remained challenging, investors maintained confidence in money funds, and no funds broke the buck.
Shilling cited the huge buildup in Prime Institutional fund assets prior to September. He says, "This development ultimately meant that less stable, hot money was finding its way into money market funds, through portals or direct routes, the effects of which we observed after 9/15, and also much larger dollar amount exposures that fund companies had to support to preserve their prime funds' net asset values, both in terms of dealing with liquidity and impaired securities.
As for parental support, our research indicates that between August of 2007 and the end of August 2008, based on a review of activities involving the top 100 prime funds -- these include both rated and unrated funds -- a total of 32 funds received support through Sept. 12. Another five funds held Lehman paper, including one that had already received support previously, for a total of 36 funds within the top 100 that received support in one form or another to that date. This compares to 145 funds that, according to our research, received parental support prior to August of 2007, and the order of magnitude is staggering."
To listen to the full replay, click here, or see the upcoming December issue of Money Fund Intelligence for a full discussion of Moody's outlook, the state of government support programs, and the current status of the money fund industry in aggregate.
Moody's hosted a "Money Market Funds Update Teleconference" this morning at 9 a.m., which discussed money market funds and fund analytics, U.S. Government support programs, and the outlook for the sector. Look for more details on the Moody's call tomorrow and in the pending issue of Money Fund Intelligence. Moody's also released an additional support document entitled, "U.S. Treasury Extends Temporary Guarantee Program For Money Market Funds." (See also Monday's Crane Data News, "Moody's Believes MMIFF, Govt Support Programs Alleviating MM Strains".)
The new paper, written by Moody's VP & Senior Credit Officer Marty Duffy says, "The U.S. Treasury Department last week announced an extension of Treasury's Temporary Guarantee Program for Money Market Funds until April 30th, 2009 to support ongoing stability in this market. All money market funds that currently participate in the program and meet the extension requirements are eligible to continue to participate. Moody's believes that the Program, which is financed through the Exchange Stabilization Fund, has substantially improved confidence of investors in money market funds across all sectors."
It continues, "Since it was first announced in September, the pace of redemption activity in Prime money funds has slowed -- and in some cases reversed. As more stable cash flows have translated into a reduction in the need for money funds to sell assets into disorderly markets, second order benefits including reduced spreads have also been in evidence. We also believe that the industry's widespread participation in the program in concert with other initiatives undertaken by the US Treasury and Federal Reserve, will continue to bolster investor sentiment and mitigate the likelihood of suspended redemptions in money market funds. Continued improvement in money market sentiment may also prompt funds that have already deferred redemptions to reopen."
Moody's Special Comment says, "The direct impact of the Program on Moody's ratings is rather limited, because the Program's guaranty payouts occur after a participating fund's constant share price declines significantly and a fund suspends redemptions. In addition, not all shares are covered by the Program. However, the existence of the temporary guarantee as anticipated has dampened redemption pressures, and therefore has reduced the risk of forced sales of short term assets by prime money market funds whose balances have steadied since the announcement of the Treasury plan in September."
Finally, it says, "In addition, Moody's believes that the collective impact of recently announced governmental programs is alleviating strains in money markets by adding to secondary market liquidity. Such programs include: Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF); Commercial Paper Funding Facility (CPFF) and the Money Market Investor Funding Facility (MMIFF). (Also, see our "Link of the Day" today on the extension of these programs.)
While consolidation has yet to surface among money market mutual funds, fund name changes and complex rebranding continue to pick up. Recently, we've seen the ABN Amro/Aston Funds become the Fortis Funds, the BNY Hamilton Funds become Dreyfus Institutional Reserves, the Lehman Brothers Funds become Neuberger Berman, and the Phoenix Insight Funds become the Virtus Insight Funds. Now, the `Bank of Oklahoma-affiliated American Performance Funds have changed their name to the Cavanal Hill Funds. (Our upcoming December issue of Money Fund Intelligence will feature an interview with Cavanal Hill Portfolio Managers Mike Kitchen and Rich Williams.)
The company's name-change notice says, "Although our name is changing, we remain committed to providing the same dedication to service and performance you have come to expect from our fund family.... Each fund's investment management team, objective, strategy and ticker symbol will remain the same.... Renaming our fund family to Cavanal Hill Funds provides a clear association between the fund family and its long-standing investment adviser, Cavanal Hill Investment Management, Inc., a wholly-owned subsidiary of Bank of Oklahoma."
In other news, Standard & Poor's has rated Oppenheimer Money Market Fund, Orange County Money Market Fund, and Orange County Educational Money Market Fund 'AAAm'. The Oppenheimer release says, "Standard & Poor's Rating Services said today that it assigned its 'AAAm' principal stability fund rating to the Oppenheimer Money Market Fund Inc. The rating -- the highest assigned to money-market mutual funds -- is based on our analysis of the fund's credit quality, market price exposure, and management.... The Oppenheimer Money Market Fund Inc. has been in operation since 1974 and serves a retail client base. The fund targets a stable $1.00 net asset value and will be managed in a manner consistent with a 'AAAm' rated fund."
Regarding Orange County, California, S&P says these funds are "[T]he first 'AAAm' ratings assigned to a California county government investment pool. The ratings are based on our analysis of the funds' high credit quality, low market-price exposure, and management. The ratings reflect the funds' extremely strong capacity to maintain principal stability and to limit exposure to principal losses due to credit, market, and/or liquidity risks. We review pertinent fund information and portfolio reports weekly as part of our ongoing rating process."
Moody's will host a "Money Market Funds Update Teleconference" this Wednesday, Dec. 3, which will give an overview of money market funds and markets, a fund analytics update, a review of U.S. Government support programs, and an outlook for the sector. The company also recently released a paper entitled, "Money Market Investor Funding Facility and Other Federal Measures Promote Liquidity in Short-term Markets," which reviewed the various Federal Reserve and Treasury support measures taken to date. Below, we excerpt from this publication.
The Special Comment's Summary Opinion states, "Moody's believes the Money Market Investor Funding Facility (MMIFF) launched on November 21 by the Federal Reserve Bank of New York will, in concert with other recent initiatives by the U.S. Government and monetary authorities across the globe, alleviate strains on money markets by adding to secondary market liquidity and reinforcing investor confidence in short-term markets." (Note that money funds didn't use any of the new facility in its debut last week, a sign of easing stresses in the money markets. See Fed's "Factors Affecting Reserve Balances" for the weekly MMIFF totals.)
"The MMIFF provides an additional source of liquidity through a facility that will purchase eligible money market instruments from eligible money market funds. The MMIFF, together with the ABCP Money Market Mutual Fund Liquidity Facility (AMLF) established September 19, 2008 and the Commercial Paper Funding Facility (CPFF) established on October 7, 2008, adds purchase capacity for longer-term assets in the short-duration markets and reinforces the U.S. Treasury Temporary Guarantee Program for Money Market Funds (which remains in effect through April 30, 2009 unless extended). The MMIFF will provide secondary market liquidity for a money market fund's bank-related holdings, thereby improving a fund's ability to liquidate these holdings to meet sudden redemptions," says the paper.
Moody's adds, "By providing support to the money market funds, the MMIFF and the AMLF will also provide indirect assistance to banks as well as other money market fund management firms. Since the beginning of the crisis, these firms have been shoring up prime money market funds in connection with their exposure to impaired securities and, to a more limited extent, to alleviate liquidity strains."
They also note, "Assets in money market funds have reached an all time high at $3.7 trillion. Recently, the pace of redemption activity in prime money funds has slowed -- and in some cases reversed. The more stable cash flows have reduced the need for money funds to sell assets into weak markets. As a result, spreads have tightened."
Finally, Moody's says, "The cumulative effect of the Federal programs has improved market access to short-term borrowers and increased flexibility to prime money market funds in particular. While strains on the market had resulted in shortening of money market tenors on investments, weighted average maturities in prime money market funds have begun to extend, and we are seeing evidence of momentum in funds purchasing instruments over longer time horizons."
