News Archives: February, 2008
In a 10-K SEC filing today, Wells Fargo said, "[T]o maintain an investment rating of AAA for certain funds, we elected to enter into a capital support agreement for up to $130 million related to one SIV held by our AAA-rated non-government money market mutual funds. We are generally not responsible for investment losses incurred by our funds, and we do not have a contractual or implicit obligation to indemnify such losses or provide additional support to the funds." The company's filing continued, "Based on our estimate of the guarantee obligation at the time we entered into the agreement, we recorded a liability of $39 million in 2008. While we elected to enter into the capital support agreement for the AAA-rated funds, we are not obligated and may elect not to provide additional support to these funds or other funds in the future."
Wells Fargo becomes the 12th advisor to publicly disclose support and accounting losses to protect troubled securities in its money market funds. To date, Columbia, Credit Suisse, Evergreen, First American, Janus, Morgan Stanley, Northern, SEI, STI, TDAM, and Western have all disclosed money fund support actions from parent advisory firms. Wells holds $105 billion in money fund assets, including the $22.3 billion Wells Fargo Advantage Cash Investment, the $12.5 billion Wells Fargo Adv MMF, the $9.5 billion Wells Fargo Adv Prm Inv MM I, and new 13 bps Wells Fargo Adv Heritage Select. The company held $1.0 billion in three SIVs as of Feb. 1, said the filing.
Additional stories: Reuters' "Wells Fargo incurs $39 million loss from money funds".
Money market mutual fund assets increased by $19.34 billion to a record $3.428 trillion according to the Investment Company Institute's latest weekly asset series. Crane Data calculates the 52-week asset increase as a stunning $1.029 trillion, or 42.9%. Year-to-date, money fund assets have increased by $281.6 billion, or 8.9%, their fastest YTD start ever, and over 26 weeks (since 8/29) they've increased by $665 billion, or 24%. A massive institutional flight to quality and desire to delay the impact of Federal Reserve interest rate cuts added to already strong asset gains.
Retail money fund assets increased by $3.61 billion this week to a record $1.237 trillion, and have increased YTD by $75.2 billion, or 6.5%. Institutional money fund assets increased by $15.74 billion to a record $2.191 trillion; they have increased YTD by $206.3 billion, or 10.4%. Government institutional funds saw the largest inflows, $19.8 billion, while government funds also took the lion's share of retail inflows. Tax-exempt money funds saw outflows for the third-straight week, losing $832 million on the institutional side and $1.8 billion on the retail side. This marks the third straight week of tax-exempt outflows, due primarily to depressed (though since rebounding) yields due to limited supply and due to concerns over the impact of possible monoline insurance downgrades.
Money Fund Intelligence Daily shows the Crane Money Fund Average (taxable) falling 15 basis points to 3.15% and our narrower Crane 100 falling 14 bps to 3.31%. The Crane Tax-Exempt Money Fund Index rose 79 bps to 2.35% in the week through Feb. 27.
Fidelity Muni MM Fund Passes Vanguard to Become Largest Tax-Exempt. The $22.48 billion Fidelity Municipal Money Market Fund just surpassed the $22.46 billion Vanguard Tax-Exempt Money Market Fund to become the largest single tax-exempt money market mutual fund, according to our new Money Fund Intelligence Daily. The behemoths are trailed by the 3rd largest $18.2 billion Merrill Lynch Institutional Tax Exempt MF. The rest of the top 10 largest, holding from $11.9 billion down to $9.1 billion in assets, include: JPMorgan Tax Free MM Instit, Merrill Lynch CMA Tax Exempt, Federated Tax-Free Obligs IS, Fidelity Instit MM: Tax Exempt I, Western Asset Municipal MM, Goldman Sachs FSq T-F MMF Inst, and Morgan Stanley Active As Tax-Free. These top 10 account for 42.8% of all tax-exempt money fund assets.
As of Tuesday, Feb. 26, the highest-yielding (based on 7-day current yield) among the largest tax-exempt funds (over $2 billion) include: Dreyfus Tax-Ex Cash Mgmt Ins (2.75%), Federated Tax-Free Obligs IS (2.68%), Federated Municipal Obligs IS (2.68%), Evergreen Institutional Muni I (2.61%, this fund is profiled in the upcoming March issue of Money Fund Intelligence), Vanguard PA Tax Exempt MMF (2.59%), Vanguard Tax Exempt MMF (2.58%), Fidelity Instit MM: Tax Exempt I (2.56%), Vanguard NJ Tax Exempt MMF (2.47%), USAA Tax Exempt MMF (2.47%), and AIM TFIT Cash Reserve Inst (2.46%).
Tax-exempt money market funds have had yields plummet, then surge as funds transition their portfolios away from variable-rate demand notes, tender-option bonds and any securities with possible reliance on municipal bond insurers. Some funds briefly limited purchases during the height of the supply squeeze a week or two ago, and some may have even purchased taxable securities temporarily to fill the temporary void of top-rated paper.
Auction-Rate Security Uproar Grows as Investors Pay Price for Yield. Note: Earlier today, Capital Advisors Group hosted a conference call entitled "Realities of the Failed Auction Market". Replay will be available for 15 days at: 866-837-8032 (access code 1207705). Capital Advisor's director of research Lance Pan, who has been warning of the risks in auction-rate securities for years, recapped recent events, advised tactics, and called for more transparency in the market. Pan said, "There is no industrywide data.... The dealers have not shared."
The current barrage of press coverage on the heretofore unknown auction-rate security, and smaller auction-rate preferred security, sectors, continues unabated. Today's Wall Street Journal contains no less than three articles on the topic, with the most interesting being James Stewart's "Risks of a 'Safe' Investment Are Found Out the Hard Way". Stewart experienced the market freeze-up first-hand, saying of ARPS, "They were sold as a liquid, safe, slightly higher-yielding, tax-exempt alternative to money-market funds.... Last year, when some money-market funds turned out to hold some mortgage-backed securities and faced a liquidity crisis, their sponsors stepped in and redeemed the shares at face value. This seemed the only decent course, not to mention a good investment in customer loyalty. But when I asked a broker at Merrill Lynch if it would do the same for owners of these money-market equivalents, the answer was 'no'." He asks, "So is any fixed-income security short of U.S. Treasurys and the biggest, most liquid money-market funds safe at this point?"
Other ARS articles today include: WSJ's "Issuers Ask SEC for Break Amid Auction-Rate Woes", "Bond Marketer Criticizes Firms Over Auction-Rate Securities", Bloomberg's (yesterday) "Gross Says Auction Bonds an 'Old Maid' for Investors", and AP's "TI unable to sell securities at auction", among others.
Four Percent Funds Now Endangered Species as Yields Continue Slide.
As our top rankings tables above show, the number of money funds and bank savings accounts yielding 4% or higher is becoming quite thin. Four percent yields, already an endanged species, should become extinct within another week or two. The last retail money fund with a 4+% yield, Vanguard Prime Money Market Fund, fell by the wayside last week. Just institutional three money funds -- Oppenheimer Institutional Money Fund, Russell Money Market S, and Reserve Primary Institutional -- have 7-day yields above 4%, though the list is larger if we compound yields. (Crane Data's rankings all show simple, or current yields and rates.)
Money fund yields, which averaged over 5% seven months ago, have declined to almost 3.25%. Our Crane 100 Money Fund Index declined 0.05% yesterday to 3.34% (7-day current yield), and declined 0.18% over the past week and 164 basis points since August 25. The broader Crane Money Fund Average declined by 5 bps yesterday to 3.20%, down from 3.36% a week ago. Treasury money funds showed the sharpest declines, down 7 bps (Individual Treasury money funds averaged 2.26% while Institutional Treasury money funds averaged 2.50% as of Feb. 25) as flight-to-safety flows continue to push these yields towards zero. Tax exempt money funds, which had seen yields as low as 1.89% on average a week ago, have seen yields rebound. Our new daily Crane Tax Exempt Money Fund Index series shows yields (7-day current) averaging 2.33% yesterday, up 0.28% from Friday, and up 0.44% from a week ago.
Our Crane Brokerage Sweep Index shows rates falling to 0.88% for investors with $50 to $100K and our Crane CD Index shows 1-year certificates of deposit from large brokerages averaging 2.82%. Assets of money funds declined yesterday on mortgage security related outflows (which pay on the 25th of the month), but assets continued their record growth spurt in the past week, rising $12.1 billion to $2.78 trillion. (Our new Money Fund Intelligence Daily collects a subset of the money fund universe, the 300 largest funds.)
Crane Data Unveils New Look-and-Feel on www.cranedata.com.
Crane Data LLC, publisher of Money Fund Intelligence, has unveiled a new look-and-feel and new features to its website at http://www.cranedata.com. We hope you like the changes! We've moved the Crane 100 Money Fund Index, our daily 7-day current yield benchmark representing the 100 largest taxable money market funds, and our "Search" function into more prominent positions, and have moved up our "Link of the Day" feature so it displays "above-the-fold" on all browsers. The site now has "hotlink" previews via Websnapr, so browsers can see a glimpse of linked websites and pages before clicking through. We've also enhanced the graphics and readability, and have broken out our "Inside Money Fund Intelligence" to highlight features of our PDF newsletter and our XLS data file. We've also moved our "People" section up and moved our "About Crane Data" box down in order to offer regular readers faster access to our more popular sections.
We'll continue relentlessly enhancing and expanding our free and premium website content, so please keep the requests and feedback coming. E-mail President Peter Crane, Chief Technology Officer Shaun Cutts, or webmaster Kamil Grymuza or call 1-508-439-4419 to contact us.
Whistlejacket Downgraded, Other SIVs Affirmed, More Bailouts Coming? As expected, Standard & Poor's downgraded the debt of the Standard Chartered-sponsored SIVs Whistlejacket Capital Ltd. and White Pine Corp. Ltd. to 'D' (default). S&P also affirmed the ratings of a number of Citi-affiliated SIVs, as well as the AIG-affiliated Nightingdale SIV. Standard Chartered had previously said that it would back its structured vehicles, but the company withdrew its support following the SIVs move into receivership. Standard Chartered spokesman Tim Baxter tells us, "The situation evolved quite rapidly" to where the company "was no longer in control." The SIV, which Northern Trust said Friday is made up of high quality securities -- 65% AAA, 32% AA and 2% A-rated, had a higher NAV trigger than most. "There were limits on what we're allowed to do," says Baxter. On Friday, Northern Trust announced a capital support agreement to protect its money funds, STIFs and cash separate accounts. (See our "Northern Trust Provides Capital Support Agreement to Money Funds".) Several more fund advisors are expected to follow. Crane Data estimates that Whistlejacket, named for a famous racehorse (and cocktail), commercial paper (CP) and medium-term note (MTN) exposure totals about $4 billion in as many as 10 money funds. A December research piece by Bank of America analyst Michael Hecht identified a handful of advisors that held Whistejacket. The largest position was listed in Charles Schwab money market funds. However, Hecht noted Schwab as "seeing the sharpest drop-off in SIV exposure by year-end." Searches of EDGAR filings show Schwab's holdings may have matured. But one analyst tells us that many are actually medium-term notes which are likely still being held. We have attempted to contact Schwab but have yet to hear back.
New Kiplinger's Discusses Brokerage Sweep in "Little Guys vs. Brokers". The April issue of Kiplinger's Personal Finance magazine includes a reader question on Wells Fargo brokerage's new policy sweeping cash into a lower-paying bank option instead of a money market fund. The reader says Wells indicates that this is an industrywide trend and asks if this is true and whether there is anything that he can do. Contributing Editor Kimberly Lankford responds, "It's true. The trend started in 2000, when Merrill Lynch switched its customers' sweep accounts from money-market funds to lower-yielding, money market bank accounts. Since then, most brokerage firms that own banks have made the change, says Peter Crane, publisher of Money Fund Intelligence." Brokerages have responded to lower trading commissions by seeking other sources of revenue. The piece says, "[T]he average brokerage sweep account for balances of $50,000 to $100,000 was earning 1.05% [now 0.89%], says Crane, while the average money-fund account was earning 3.78% [now 3.46%]." Kiplinger's adds, "But you don't have to settle for a measly 1%. You just need to make the effort to move your cash into a money-market fund." Says Crane, "This really is a penalty for laziness." E-mail pete@cranedata.com to see our most recent Brokerage Sweep Intelligence, which tracks brokerage bank, money fund and CD rates.
Northern Trust Provides Capital Support Agreement to Money Funds. Northern Trust has entered into a "Capital Support Agreement" with several of its domestic and offshore money market funds, a short-term investment fund (STIF), and "other unregistered short-term investment pools" to provide capital to support fund NAVs due to investments in Whistlejacket Capital LLC and White Pine Finance LLC. The press release from Northern says, "Whistlejacket Capital LLC and White Pine Finance LLC have recently been downgraded by rating agencies. Although it was not obligated to do so, the Corporation entered into the Capital Support Agreements in order to provide stability to the Funds and investors in the Funds." Northern Trust will contribute the difference between the amortized cost value and the disposition or sale value of the securities, or an amount necessary to restore the funds' NAVs to either $0.995 or $0.9975. Northern becomes the 11th advisor to go public with support of its money market mutual funds. More support actions are likely to surface due to concerns over Standard Chartered's Whistlejacket SIV. Northern is the 16th largest manager of money funds, according to Crane Data, overseeing $57.3 billion, including the $14 billion Northern Institutional Diversified Assets (BDAXX) and the $12 billion Northern Trust Money Market Fund (NORXX). Northern's maximum capital contributions are capped at $229 million for the 4 domestic U.S. money funds, 2 offshore money funds, STIF and "Core Select Pool". "This is a liquidity issue.... When we look through this SIV, there is plenty of high-quality stuff that doesn't look problematic." said CFO Steven Fradkin on a conference call this afternoon. See other coverage: Bloomberg, Chicago Tribune, and MarketWatch.
Money Fund Assets Break Record $3.4 Trillion Despite Tax-Free Flows. The ICI's weekly totals show an increase of $20.86 billion in money market mutual fund assets the week ended Feb. 20 to a record $3.408 trillion, the first ever tally above $3.4 trillion. Retail assets grew $9.75 billion to $1.233 trillion; institutional assets grew $11.11 billion to $2.175 trillion. Tax-exempt retail assets fell by $988 million to $291.7 billion and institutional tax-exempt assets fell by $8.65 billion to $176.3 billion as lower yields due to lack on monoline-free supply drove away investors. Government funds experienced a huge surge on yet another flight-to-quality, rising $26.9 billion on the institutional side and $4.9 billion on the retail side. Money funds have increased by an unprecedented nine weeks in a row and are off to their fastest start ever. This follows 2007's gargantuan $740 billion increase, the biggest asset increase in history. YTD, money fund assets have grown by $261.9 billion, or 8.3%, and over 52 weeks assets have grown by almost $1 trillion ($989 billion, or 40.9%). Over the week ended Wednesday, our Crane 100 Index decreased from 3.54% to 3.46%, while our new daily Crane Tax-Exempt MF Index declined from 1.80% to 1.30% (7-day yields).
Whistlejacket Could Add to Fund Advisor Support Tab; Dresdner Backs K2. First the bad news. Yesterday, reports hit that the $7 billion Whistlejacket SIV had been forced into receivership and possibly default. This raises the possibility that more advisors could be forced to purchase or protect the SIVs troubled securities from any money funds still holding this debt. Crane Data counts at least six advisors that hold this name in their most recent filings, but only one shows a maturity date lasting into 2008. Standard & Poor's listed Whistlejacket as the 7th largest SIV held by rated money market funds with $1.95 billion in exposure in a November 2007 research piece (the number almost certainly has declined since). Though reports (see Bloomberg, Orange County Register, Wall Steet Journal, and Financial Times) indicate that parent Standard Chartered has walked away from its pledge to support the debt, this is unclear at present. Nonetheless, funds may have already taken steps, or may be in the process of doing so, to protect any AAA ratings and to assuage their investor bases. In other news, Allianz subsidiary Dresdner Bank has announced that it will support its structured investment vehicle, the much larger ($18 billion) K2. (See WSJ, MarketWatch and Bloomberg articles.) Dresdner joins Citi (Beta, Five, Sedna), HSBC (Cullinan), Bank of Montreal (Links), and WestLB (Harrier) in pledging support for affiliated SIVs; Standard Chartered had pledged support but the recent receivership has thrown this into question.
Standard and Poor's Rates JPMorgan Japanese Yen Money Fund AAA. Standard & Poor's recently "assigned its 'AAAm' principal stability fund rating to the JPY Money Market Fund, a new Japanese yen-denominated money market subfund of JPMorgan Global Funds". The fund is managed by J.P. Morgan Asset Management (U.K.) Ltd. and is aimed at European and Asian institutional and corporate clients for cash management purposes". The release says, "JPMorgan Global Funds is an Irish open-ended umbrella unit trust, which qualifies as an undertaking for collective investment in transferable securities (UCITS). The JPY Money Market Fund ... is distinguished by its high credit quality, low market risk, and liquidity. Its investments consist primarily of high quality short-term securities, money market instruments, and Japanese government securities held directly or through repurchase agreements". (For more on Japanese money funds, see too Crane Data News 5/1/07 "S&P Rates First Japanese Yen-Denominated Money Market Mutual Fund, Goldman Sachs Yen Liquid Reserves".) S&P also announced that is has withdrawn its 'AAAf/S1+' rating on GEAM Cash Plus Fund at the advisor's request. "GE Asset Management Inc. no longer markets the fund," said the release.
Yield Most Important Says JPMorgan 2007 Global Cash Mgmt Survey. JPMorgan Asset Management has released the results of its "2007 Global Cash Management Survey." The European-centric study reveals that yield was the most important factor among corporate treasurers globally when choosing money funds. The ninth annual survey was conducted last year in conjunction with the European Associations of Corporate Treasurers (EACT) says Robert Deutsch, head of global liquidity at JPMorgan Asset Management. The study says, "Treasurers thought that yield was most important when selecting AAA-rated money market funds. This marks a change in attitudes from 2006, when reputation and brand came top". Other survey results include: "Bank deposits remain most common instrument for surplus cash (with a 61% allocation)"; "Money market funds are the most used pooled investments (the average allocation to money funds declined from 80% in 2006 to 71% this year, [but] they remain the most used vehicle across all regions and market caps)"; "US treasurers are most likely to use pooled investments, with 63% of surplus cash allocated to this investment type, compared to an all-region average of just 30%"; among "pooled vehicle" buyers, 86% of respondents use money funds, 16% use enhanced yield, 22% use separate accounts, 18% use short-date funds, and 7% use total returns funds, and, finally, "before September, more treasurers were using and interested in using enhanced yield funds, however this trend reversed itself post September, reflecting risk aversion prevalent in the markets since last August."
Wells Fargo Talks "Risk in Corporate Cash Portfolios" in AFP Exchange. The latest issue of the Association of Financial Professionals' monthly AFP Exchange magazine features an article written by Wells Fargo MD of short-duration credit research Matthew Grimes and MD of business development John Slifer entitled "Risk in Corporate Cash Portfolios." (AFP is the former Treasury Management Association, an organization representing corporate finance pros.) The article discusses corporate cash management, investment policies and the "liquidity challenges" in the "market turmoil in the second half of 2007". Grimes and Slifer write, "When investors start questioning money market funds about their holdings, it is easy to see we are indeed experiencing unusual times.... The current liquidity challenges are another example of the repricing of risk. It doesn't matter to the market if the increased risk is real, only that there is market perception of additional risk. As a result, anything that has any subprime exposure has become largely illiquid.... Auction Rate Securities have had a sterling reputation ... until recently." Finally, the pair say, "The cornerstone of investment risk management s the properly written investment policy."
Dispelling More Myths: Money Funds Don't Buy Auction Rate Securities. We've been amazed by the number of errors and the amount of misinformation circulating about money market funds over the past six months, but it doesn't seem like reporters or analysts are showing much improvement. Following the Wall Street Journal's implication that tax-exempt money funds purchase auction rate securites (they don't) on Monday, several other publications have propagated the error. Dow Jones via CNN Money said incorrectly, "Between $250 billion and $360 billion of auction-rate securities are held by investors who range from money-market funds and corporations to wealthy individuals." Now, MarketWatch adds to the confusion with "Latest credit-market trap could hit closed-end funds". As we've said, money market funds are prohibited from buying auction-rate securities by Rule 2a-7, which requires a "hard put" or a non-negotiable option to exit a security for anything with a variable rate. (Corporations have also been prohibited from classifying ARS as "cash equivalents" for two years.) Also, the Financial Times, among the worst violators when it comes to stretching the facts on money market conditions, quotes Jon Schotz, CIO of Saybrook Capital, "Money market funds and corporate treasurers are trying to get out of auction rate securities because they are worried about liquidity and whether bond insurers will be downgraded." This too, is untrue, since money funds don't own any ARS. Finally, another recent error being made repeatedly involves money funds ability to hold securities with ratings below AAA or AA. While money funds would be reluctant to purchase a A or BBB security, they would be allowed to buy many securities at this level, and they certainly would be allowed to hold onto a security downgraded to such a level.
End to Fee Rebating In Offshore Money Market Mutual Funds Approaches. Our latest issue of Money Fund Intelligence contained an article entitled "Online Trading Portals Expanding Into Europe." In it, we discussed the practice of fee rebating, which is prohibited in the U.S. but which is commonplace among Dublin-based "offshore" money market funds. Vince Tolve, director of trade & client management at SunGard Transaction Network (STN) Money Market Portal, which recently expanded into Europe, told us, "I think the market continues to embrace the traditional U.S.-style, stable NAV money market approach.... Obviously, the rebating is a challenge for intermediaries. But Sungard's fully-disclosed model helps support our clients in this environment." SunGard MD Dave Mishoe tells us that it's becoming more common for funds to sell the low-cost "institutional" class instead of negotiating deals for specific clients. Crane Data expects fee rebating to eventually be banned in the U.K. and Europe as regulators there begin considering adopting U.S.-style money fund regulations, which mandate that all shareholders be treated equally. Tolve adds, "We'd love to see more standardization."
Money Funds Experiencing Fastest Ever Year-to-Date Growth in 2008. Money market mutual fund assets are off to their fastest year-to-date start ever in 2008, increasing $241.5 billion or 7.7% through Feb. 13. ICI's latest weekly figures show assets rising by $25.31 billion to a record $3.388 trillion. Institutional assets accounted for almost all of the inflows, rising $24.53 billion to $2.164 trillion. Over the past 6 weeks, money funds have averaged asset gains of $40 billion a week, and over the past 52 weeks money fund assets have skyrocketed by almost $1 trillion (up $993, or 41.5%). Tax-exempt money funds saw outflows with retail T-E funds down $1.85 billion and institutional T-E funds down $2.68 billion, as low yields related limited supply started driving investors into taxable funds. Money funds continue benefiting from lower rates and from a flight to safety. Yields on money funds continue lower, though they remain substantially above the Federal funds target rate of 3%. Our Crane 100 Money Fund Index has declined by 34 basis points over the past week to 3.54%, while our Tax-Exempt Index plunged 85 bps in the week to 1.85%. (Contact Pete to see a copy of our new Money Fund Intelligence Daily or for more details and historical data on the ICI's money fund asset series.)
SEC Chairman Cox Says Money Market Funds $1 NAV Not Threatened. Securities & Exchange Commission Chairman Christopher Cox, in testimony before today's Senate Banking Committee hearing hearing, said, "[T]he Commission staff has been active in working with the managers of money market funds as they cope with the downgrading of ratings and the declines in value of securities in which their funds have invested. Commission rules limit money market funds to investing in high-quality, short-term investments in an effort to ensure that these bedrocks of the financial system are reliable in all market conditions. Losses by a money market fund would be reflected by the fund re-pricing its securities below $1.00 (known as "breaking the buck"). Only one fund, and that of very modest size, has ever broken the buck [Community Bankers U.S. Govt MMF] since the development of money market funds in the 1970s. The Commission is closely monitoring the fund industry and while we have seen some instances of funds requiring infusions of capital from the corporate parents of fund advisers, we are not aware of any money market fund that is threatened with having to reprice below $1.00." (See Reuters article, "No money market funds below $1 threshold, SEC says".) Yesterday, rumors were circulated that a "Citi" money market fund broken the buck, though the information turned out to be false. (See our, "'Break The Buck' Rumors False, No Money Mkt Funds Trading Below $1".) The danger of a money market mutual fund dropping below $1 a share has declined dramatically over the past month as falling rates have boosted the value of existing holdings and as massive asset inflows have diluted the small remaining positions of SIV-related securities. Crane Data does not expect any money funds to break the buck over the current liquidity crisis.
"Break The Buck" Rumors False, No Money Mkt Funds Trading Below $1. Rumors circulated this morning that a money market mutual fund had broken the buck, or dropped below its $1.00 share price. These rumors are false. No money fund has declined in value, to our knowledge, and none are expected to. The dangers from SIV-related debt have been diluted by time and asset inflows, and the handful of defaults and downgrades have been met by bailouts or cash infusions by investment managers. This time rumors, allegedly based on comments by Miller Tabak and spread by HSBC Securities, among others, had centered around Citi, failed auctions and SIV support actions, which the grapevine mistakenly morphed into a possible issue with Citi money market funds. Legg Mason, which runs the Citi funds, said to Bloomberg, "None of the Legg Mason money-market funds have broken the buck at all." Again, rumors of a money fund breaking the buck are incorrect and were based on false information, likely circulated with malicious intent. Money funds experienced a number of similar false rumors during the ABCP Crisis of 2007. At least six separate incidents of losses or redemption freezes at enhanced cash private placement "3c-7" funds, boutique investment advisors, and local government pools all were erroneously called money market or cash funds over the past six months by reporters and market participants.
Threat to Tax-Exempt Money Funds Over, Poor Yields Now Main Concern. The danger that downgrades in municipal bond insurers MBIA, Ambac, etc., posed to tax-exempt money fund portfolios has passed say fund managers. However, as the Wall Street Journal points out this morning, the issue is now finding new supply to replace all the insured variable-rate demand notes and tender-option bonds that were "put" back over the past two weeks. (Tax-exempt funds have the option to return most securities to dealers every 1- or 7- days.) The Journal piece, "Funds Feel Dearth of Tax-Free Securities," points out the fact that municipal funds may at times invest in taxable securities and that some funds have recently reminded their investors of this fact. We don't expect any funds to have done this in any significant way, however, and would advise investors not to worry about this issue. The more important points, which the WSJ misses, are that the danger of monoline insurer downgrades has passed, and that temporarily poor yields are the primary result of the mini-crisis as money goes uninvested or as funds bid up the prices of the high-quality uninsured debt. The problem should correct shortly, however, as yield-sensitive money flows back into the more advantageous taxable sector and as new issuance fills the supply void.
Florida Selects Federated Investors to Manage Local Govt Inv Pool. CNNMoney reports that Federated Investors has won one of the largest money fund mandates in history, the management of Florida's $9 billion State Board of Administration's LGIP, or local government investment pool. Federated was the lowest bidder, beating out temporary pool manager BlackRock and BNY Mellon. The Florida pool halted redemptions in late November (see Crane Data 11/29 News) after a run on assets and several downgrades and defaults the non-rated pool's securities. The fund was frozen, then split into two pools by BlackRock, who was brought in to stabilize it. Florida says, "Governor Charlie Crist, CFO Alex Sink and AG Bill McCollum today, acting as Trustees for the State Board of Administration (SBA), confirmed Interim Executive Director Bob Milligan's recommendation to hire Federated Investors Inc. to manage the Local Government Investment Pool." The Governor added, "Federated Investors' tremendous experience and 53 years of past performance in investment management makes this firm an excellent choice to manage Florida's local government investment pool. Its outstanding record, along with its high quality customer service, will be a benefit to Florida's local leaders seeking a conservatively-managed investment fund." Spokeswoman Meghan McAndrew tells us, "Federated's extremely pleased that Florida selected us to manage its LGIP." The Florida pool, which has since stablized its asset base, is now AAA-rated by S&P. No other local government investment pools, almost all of which carry AAA ratings, have experienced similar problems.
Credit Suisse Takes $702 Million 4th Qtr Charge for Money Fund Damage. In what is by far the worst damage to a money market fund advisor from the liquidity crisis of 2007, Credit Suisse took a $702 million charge in its latest quarter over valuation losses in its "money market fund repositioning". (See the earnings release here). Credit Suisse purchased $8.43 billion of SIVs and ABS from its Credit Suisse Prime Inst MMF and "offshore" money funds and took paper losses of $835 million in total in 2007. "Positions are marked-to-market, and carry typical discounts to par of 15% to 20%," said the company's earnings presentation. The company, "Responded to highly stressed market conditions affecting money market funds" and the "actions [were] taken to maintain liquidity and to protect [the] client franchise," said the slides. The CS "Money market funds are now operating normally" with "no material exposure to SIVs, CDOs or US subprime", the company added. Crane Data expects the majority of money funds' paper losses to be recouped as troubled SIVs and ABS eventually sell off assets and pay creditors.
MFI: Online Money Market Fund Trading Portals Expanding Into Europe. The highly competitive online money fund trading portal and institutional money fund markets are approaching maturity in the U.S. Both portals and managers have been looking abroad for growth, particulary towards Europe. Several portals have recently launched, including ICAP's MyTreasury.com and Sungard STN, and others, like Citi Online Investments and ICD continue to bulk up their offshore fund lineups. Justin Rose, Investment Director for Standard Life Investments, recently told Money Fund Intelligence why they choose to distribute through portals. Rose says, "For an investment management company with no branch network, the growth in portals has enabled Standard Life Global Liquidity Funds to access a much wider investor base.... With new portals being launched in the offshore market during 2008 we confidently expect this distribution channel to grow dramatically." On money funds in Europe in general, Rose tells us, "Recent market events have certainly increased awareness of AAA rated money funds. The IMMFA 'treasury'-style funds have seen assets under management grow as investors withdrew from direct investment and viewed these funds as a 'safe haven.' The market events have been a tremendous stress test for the offshore money market business, and to date it has performed as expected." Enhanced cash funds are another matter, though. Justin Meadows of MyTreasury.com says, "[M]ost of the European corporates that we're talking to simply won't touch them at the moment."
Putnam Navigates Market Turmoil, Says Educating Clients Big Challenge. Each month, Money Fund Intelligence profiles a different money fund and family, discussing tactics and trends with portfolio and sales management. The February issue featured Putnam Investments, celebrating its 70th birthday, and the top-performing Putnam Prime Money Market Fund. Joanne Driscoll, managing director and money market group head tells us, "We were able to navigate the turmoil, and because our portfolios were not stressed, we were able to take advantage of many market opportunities." She also says, "I think another large challenge in today's market is educating the investor base. Many of the institutional assets are sold through portals, which does not always allow for direct client interaction by the investment manager.... We need to educate our clients that not all structures are created equal and that there are a lot of solid asset-backed CP programs that have performed as we have expected." VP Ben Filmore adds, "By leveraging our fixed income capabilities and the fine performance in our retail money market funds, we've been able to develop and market world-class, top-performing institutional money market products." Contact Crane or Putnam for a full copy of the profile.
Are Money Funds Lagging Inflation? Jaffe Says 'Yes', Crane Says 'No'. Financial columnist Chuck Jaffe discusses the risk of cash being eroded by inflation in a recent column, "One investment risk: Money fund yields are lagging inflation". He cites the flood of assets into money funds, saying, "As the Federal Reserve was slashing interest rates in recent weeks, billions of dollars in investor money was flowing into some of the most rate-sensitive investments out there, into funds that are almost certain to have a tough time keeping up with inflation." Jaffe cites 2007's CPI inflation rate of 4.1%. But other inflation indicators are much lower -- "core" CPI was 2.4% and the Fed's preferred GDP deflator was 2.2% in calendar '07. Jaffe says, "by the time current adjustments are complete, average money fund will yield about 2.5 percent". But he neglects to mention that money funds returned 5.0% in 2007 (as measured by our Crane 100 Money Fund Index), well above all inflation measures. Our Crane 100 averages 3.61% currently; it is expected to remain above 3.00%. Finally, inflation will likely `decline should the economy slow further. Crane Data believes money funds will continue beating inflation, and believes money funds have thoroughly outperformed inflation over their entire 35-year history. Jaffe quotes Crane, "The phrase 'Don't fight the Fed' applies to cash, too, where money market investors have to take what the Fed is giving. Right now, that means accepting inflation and low yields, which is not fun. But the big mistakes come when people get greedy, when someone fighting to preserve a yield of 5 percent takes risks far beyond the money market and blows up."
Bond Buyer Summarizes "Short-Term Credit Effects" in Municipal Market. In the most comprehensive article on the topic to date, Friday's Bond Buyer article "Short-Term Credit Effects: VR Notes, Auctions Point to Problems" discusses some possible problems caused in the short-term municipal money markets by potential downgrades of municipal bond insurers. It says, "The precise problems now being seen in the short-term market relate to the liquidity function of the securities held by money market funds. The dealers that sold the variable-rate demand obligations and the tender options bond floaters to the funds in the first place -- which provide a put or tender option if the investor wants to sell the bonds back -- can walk away if the bonds fall below the double-A rating.... It is those risks that have led funds to begin selling the short-term securities back to the dealers." The article adds, "Some TOB programs have taken proactive steps to ensure that the liquidity function is preserved, and to reassure the money market funds that are their clients." Overall, the biggest concern to date appears to be trouble with supply for money funds and the corresponding low yields on desired product. Muni money funds have already significantly reduced their potential exposure to downgrades via "putting" back supply to dealers and municipalites, and via new purchases of securities that aren't reliant on any muni insurer ratings.
February Issue of Money Fund Intelligence Features SEC, Putnam, Portals. The February issue of Money Fund Intelligence, Crane Data's monthly money fund news, performance and rankings newsletter, is now available. This issue features "Money Fund Regulation Q&A w/SEC's Bob Plaze", "Putnam Doing Justice in Money Market Space", and, "Online Trading Portals Expanding Into Europe". We also update subscribers on 2007's money fund bailouts, municipal money fund concerns, and, of course, fund performance. Our interview with S.E.C. assistant director of the Division of Investment Management Robert Plaze reveals that there have been 15 money fund advisors in total that have requested SEC permission to remove or protect troubled SIVs or other investments from their money funds. Plaze also discusses recent sweeps and valuation issues, as well as the reporting of money fund portfolio holdings. He tells MFI, "Fund advisers (and their affiliates) who write big checks to bail out MMFs are certainly incentivized to manage the fund more conservatively in the future and to try to avoid these situations. So I don't see moral hazard issues." In coming days, we'll also excerpt comments an interview with Joanne Driscoll and Putnam's money market team, and we'll discuss the European "portal" marketplace. To request a copy or subscribe, e-mail pete@cranedata.com.
Money Fund Assets Rise $46 Billion in Week, Up $215 Billion YTD in '08. ICI's weekly money fund asset totals show an increase of $46.25 billion in the week ended Feb. 6 to a record $3.361 trillion. Retail assets rose $10.17 billion to a record $1.223 trillion, and institutional assets rose $36.08 billion to a record $2.138 trillion. Tax-exempt money funds saw strong inflows, rising $7.69 billion to a record $482.19 billion, as concerns over municipal bond insurers were overwhelmed by attractive yields in the sector. Rate-sensitive institutional money continues to pour into money funds in an attempt to delay the impact of the Federal Reserve's recent rate cuts, while retail money experiences a surge of bonus-related cash, as well as money seeking shelter from a volatile stock market. Year-to-date, money fund assets have risen by $214.9 billion, or 6.8%. Over the past 52 weeks, money fund assets have grown by almost $1 trillion, rising $975 billion, or 40.9%. Money fund yields on average fell from 3.89% to 3.66% over the past week. They should continue lower to around 3.25% over the next 2-3 weeks.
"Investors Flock to Money Funds" Writes Wall Street Journal's Min Zeng. Min Zeng, who recently moved to Dow Jones from covering money markets at Bloomberg, examines the factors behind the boom in money funds in today's Journal. He says, "Several factors are behind the boom. The subprime-mortgage turmoil and uncertainty about economic growth have spooked investors who are turning to the comfort of safe and liquid assets. Money funds, which are required to invest in assets that mature in 13 months or less, fit those safe-harbor needs." Zeng continues, "Yields on money funds have also declined less than yields on their main competitors, such as Treasury bills and commercial paper, which have tumbled following aggressive rate cuts by the Federal Reserve. This lagging effect benefits investors who get better returns, while still enjoying the diversification money funds offer." Finally, the piece quotes Peter Crane predicting 20% growth in 2008, and quotes portfolio managers from Payden Cash Reserves and T. Rowe Price Prime Reserves on safety and inflows.
Crane Brokerage Sweep Indexes Fall Sharply, Many Below 1.0 Percent. Most brokerage sweep programs used to move spare cash balances into money market mutual funds. But almost all brokerage firms now use FDIC-insured bank deposit products for temporary cash balances, a trend which Merrill Lynch pioneered in the late 1990's. APYs on these "bankerage" products have always been stingy, but they are setting new record lows in the current falling rate environment. As of Feb. 1, our weekly Crane Brokerage Sweep Index shows an average rate of 0.91% (0.92% APY average) for customers with $25K to $50K balances and an average rate of 1.05% for customers with balances from $50K to $100K. Customers with $100K to $250K balances earn 1.43% on average. The $50K-$100K rate (1.05%) is down from 1.18% last week and down from 1.30% a month ago. The average money fund yield, as measured by our Crane 100 Index, has declined from 4.46% to 3.78% during the past 4 weeks, so most investors could earn significantly more interest in money market mutual funds. Rates, APYs and yields will all continue lower in coming weeks as the money markets digest the remainder of the Federal Reserve's unprecedented 1.25% in rate cuts. To request a sample copy of Crane Data's Brokerage Sweep Intelligence, which monitors brokerage sweep bank, money fund and CD rates on a weekly basis, e-mail pete@cranedata.com.
"Money Funds Still Hot in '08" to Grow 20 Percent Says Financial Week. The weekly Crain Communications publication article is subtitled, "Corporate cash should help boost assets 20% this year, after 31% surge in 2007". It says, "Despite reports that some money market mutual funds got entangled in the credit crunch of 2007, it was a very good year for such investments overall." The piece cites recent Crane Data estimates, saying, "Another year of phenomenal growth is in store for 2008, according to money fund guru Peter G. Crane.... Managers of money-market funds could see assets grow by 20% this year, to roughly $3.8 trillion, the founder of money fund research firm Crane Data said last week. And he expects increases of up to 15% in 2009, which would put assets above $4 trillion." The article also quotes Treasury Strategies Mike Gallanis on money funds' "lag effect" and The Reserve's Bruce Bent on "institutional investors that were abandoning direct investments in securities in favor of money-market funds". Crane Data projects that money market mutual fund assets will increase to $3.750 trillion in 2008 and to $4.313 trillion in 2009.
SEC Rejects Prime Money Funds for 15c3-3 Special Brokerage Reserves. Law firm Dechert LLP recently filed a supplement letter to the SEC on behalf of client Federated Investors on changes to Rule 15c3-3 and 15c3-1 under the Securities Exchange Act of 1934. Federated and others had requested that the SEC consider "prime" AAA-rated money funds for special reserve accounts for brokerage firms in addition to Treasury money funds, which the SEC had initially proposed in recent changes to Broker-Dealer Responsibility Rules. Federated now is pushing for Government money funds to be considered, evidently since it appears unlikely that prime funds will be okayed. "[W]e recognize that during this period of stress in the sub-prime debt markets, the Commission may be reluctant to move forward on our AAA-rated money market fund proposal" says the Jan. 7 letter. Federated CEO Chris Donahue said recently, "The SEC determined that prime money market funds would not be included in potential changes to the rule" and that Federated "is proceeding with efforts to enable the use of government & agency money funds."
Auction-Rate Securities Cover Headlines With Bristol-Myers Squibb Loss. The broader investment world is getting a crash-course in the arcane world of auction-rate securities as news of Bristol-Myers Squibb's $275 million impairment charge on an investment of $811 in ARS hit the wires this week. (See our "Link of the Day" and the Bloomberg article.) Auctions began failing in August, causing these securities to turn into longer-term holdings and causing an exodus from the formerly $300 billion sector. Though just 2% ($6 billion) of the sector has had problems, ARS were already reeling from an accounting decision to classify them as non-cash holdings. Today's Wall Street Journal article "Credit Woes Hit in Unlikley Places" says, "Bristol-Myers, which has traded auction-rate securities for nine years, is hardly alone. CFO Andrew Bonfield says his auditors, Deloitte & Touche, tell him they have around 70 clients who are dealing with issues like this." Other companies, like 3M and USAir, have taken smaller, similar charges. The demise of ARS is one reason for recent massive inflows into money market funds.
Crane 100 Index Declines 27 Bps for Week, 65 Bps for Month of January. Our Crane 100 Money Fund Index, the average 7-day current yield for the 100 largest taxable money market mutual funds, declined by 27 basis points (0.27%) in the week ended Friday (2/1) to 3.78%, and declined by 65 bps during the month of January (from 4.50% on 12/31 to 3.85% on 1/31). The broad-based Crane Money Fund Average fell from 4.07% to 3.40% from 12/31/07 to 1/31/08, while our Crane Tax Exempt Money Fund Index fell from 2.90% to 2.39% during January, according to the pending February issue of Money Fund Intelligence. Taxable assets tracked by Crane Data increased from $2.486 trillion to $2.641 trillion in January while tax exempt assets increased from $455.4 billion to $469.3 billion. Total money fund assets rose from $2.941 trillion to $3.110 trillion. We expect yields to continue plummeting over the coming week, and assets to continue higher once they rebound from temporary month-end outflows. The Crane 100 should move towards 3.0% by the end of February, and the top-yielding money markets should soon be under 4.0%.
More Details on Money Fund Capital Support and Cash Infusion Actions. Recent financial company earnings reports have shed more light upon the ten capital support or capital infusion actions taken by money market mutual fund advisors to date. Most recently, SEI Investments hosted a conference call where CFO Dennis McGonigle discussed the company's $25.1 million charge over a capital support agreement for three money funds. McGonigle notes that this amount "should not be taken as a loss estimate" but is the amount required by ratings agency S&P to maintain the fund's triple-A ratings. "Ultimately, we think [SIVs] Cheyne and Victoria will be successfully restructured, although we cannot predict the timing or the net impact on the holdings," he says. McGonigle noted in response to a question that Cheyne's underlying assets are still 96% AA or better and 67% AAA and that Victoria's assets are 76% AAA. "The issue is one of liquidity.... The credit quality of the underlying collateral remains strong.... We feel like we're pretty conservatively priced." Look for an updated version of advisor infusions and loss estimates to date in the upcoming February issue of Money Fund Intelligence.
