News Archives: March, 2008
Over the weekend, Crane Data Founder & CEO Peter Crane appeared on Consuelo Mack's WealthTrack, a financial TV show airing on most PBS stations. This week's show featured "hedging against volatile market swings". (See the full video here.) Mack asked about how to differentiate among "not equal" cash equivalents. Crane replied, "You really need to look for 'money market in the title, whether it's a money market mutual fund ... or bank money market deposit account. If it says 'money market', it gives you that daily liquidity, and those investments have yet to be impaired."
Mack also asked, "Are there any money market funds that are vulnerable?" Crane told her, "It's always possible. As they tell you in the prospectus, these things are not guaranteed. But it's highly unlikely. There have been 12 instances to date where advisors have purchased troubled securities out of the funds in order to protect investors. That's the most probably outcome if something further occurs." He added that though money funds aren't FDIC insured, they can't invest in non-cash investments like auction-rate securities.
Crane also said, "Though it pains savers, you have to take what the Fed gives you. It hurts, but now's not the time to take risks." He recommended tax-exempt money market funds, like the largest Fidelity Municipal Money Market Fund (FTEXX), for those in the highest tax bracket or two, and added on municipal money fund safety, "It would take severe events to breach the $1.00 NAV."
Money market mutual funds breathed a huge sigh of relief this week as the supersized 75-basis point Federal funds rate target reduction worked its immediate magic on fund NAVs and flows. No additional bailout events or defaults surfaced, cash continues to flood into the sector, and the remaining vestiges of troubled SIV securities continue to roll off and out of fund portfolios. While there's always the chance of another assault, it appears that money market mutual funds will escape the liquidity crisis with no funds "breaking the buck".
The most recent leg of the panic flight to Treasuries subsided, with investors finally awakening to the fact that low yields would likely cause them more pain than the remote threat of losses in the prime sector. The outflows from Treasury back into "Prime" pushed Treasury and repo yields back above 1%, removing the pain of temporary partial fee waivers on the highest expense Treasury funds.
With quarter-end Monday, the pressure to show clean, no-risk, low cash level balance sheets will be removed, as the "window-dressing" that accompanies these public reporting periods passes. Fears of repo counterparties such as Bear Stearns also receded as the Fed made it clear that it stands ready to fight any attack on liquidity and confidence driven by hedge funds and speculators.
It is again too early for an autopsy, but money funds overall are thrilled to return to their everyday problems, like how to get a decent yield in their fund. Short-term cash investors too should quickly shift their attention from the remote danger of principal loss to the ridiculously low yield environment.
Money market mutual fund assets broke above the $3.5 trillion level for their first time ever, reports the Investment Company Insitute in its latest weekly survey. Money funds grew by $37.93 billion to a record $3.506 trillion in the week ended March 26 as the Federal Reserve's 75 basis point rate cut drove yet another surge of interest rate sensitive cash into the higher-yielding money funds. Year-to-date, money fund assets have grown by $361.5 billion, or 11.5%, while over 52 weeks money fund assets have skyrocketed $1.074 trillion, or 44.1%. Money fund assets broke through $3.0 trillion in November 2007, broke the $2.0 trillion barrier in 2001 (and again in 2005), and broke above $1.0 trillion in 1997.
Institutional assets rose by $37.9 billion to a record $2.243 trillion. Following two weeks of outflows, general purpose (or "prime") institutional money fund assets rebounded by $24.5 billion, to $1.311 trillion, as the two-week surge into government institutional funds begins to subside. Government instutional funds (including Treasury) rose by $7.5 billion to $745.6 billion, following a two-week surge of $40.6 billion. Tax-exempt inflows also rebounded, with these funds rising $4.0 billion, or 2.22%, to $185.7 billion.
Retail money fund assets rose by $1.9 billion to a record $1.263 trillion. Prime and government funds saw inflows while tax-exempt funds saw outflows. Money market fund assets have increased for an unprecedented 14 weeks in a row and have yet to show a weekly decline in 2008.
Crane Data estimates of money fund asset growth of 20% in 2008 and we expect 15% annualized growth for money fund assets over the next 4 years (including '08). This would put total money fund assets at an astounding $7 trillion by 2012. Not only is the flight to safety and interest rate arbitrage driving flows, but money funds continue to benefit from a decades-long neglect of cash, a shift away from bank accounts, brokerage deposits, and direct investments, and a total meltdown of competing higher-risk, ultra-short market sectors.
Our Crane 100 Money Fund Index fell sharply, as would be expected during a week following a 75 basis point rate cut. The Crane 100 dropped from 3.04% to 2.74% from March 19 through Wednesday, March 26. The benchmark of the 100 largest taxable money funds tracks $1.67 trillion, or 60.6% of all taxable money fund assets.
Federated Investors (FII) President & CEO J. Christopher Donahue spoke yesterday at a Banc of America Securities conference in Boston and discussed the flight to quality, SIVs, Treasury fee waivers, functional equivalency, consolidation, and asset growth. Donahue said Federated has grown its money fund assets by $28 billion year-to-date, and has added "$14 billion in state funds such as Florida and Texas".
On near-zero repo and Treasury rates, he said, "[L]ast week because of the tremendous demand for Treasury-only repo ... we were actually doing repo at 28 bps. This meant that some of the government funds with expense ratios of 100 bps were in a position where a waiver was necessary in order to have a 5 bps yield.... This meant that we shared with some of our partners (25% Federated/75% partner) that particular waiver. The net effect of all of this to Federated on the few days that this was done was a few thousands of dollars, an inconsequential amount." Donahue adds that similar waivers also occurred following 9/11 and when Fed funds was at 1%.
Donahue said that of the 30 SIVs created, Federated purchased 4. On the funds' $1.5 billion (less than 2%) holdings in Sigma Finance, he says, "We are comfortable with our position and ... [expect it] will continue to pay off on-time and in full until they mature in August of this year." On the Fed rate cycle, he said, "We have been in this business since the '70's. What we have seen historically is that we end up with higher highs and higher lows in each Fed cycle." The company continues its work on 15c3-3, saying, "The other opportunities are part of our effort to continually expand new ways of using money funds."
When asked why there hasn't been more consolidation, Donahue said, "Overall, the money fund industry is solid and is very, very resilient, and has been able to withstand some of the most dramatic and unexpected changes in the short-term that any of us have seen. And we've been in it the whole time."
MarketWatch's John Spence writes about troubles at ultra-short bond funds, particularly Schwab Yield Plus, and what this means for money-market funds. The article, "Woes At Ultra-short Bond Funds Raise Concerns Over Money Markets," says, "More news Tuesday of major outflows from an ultra-short bond fund continued to raise concerns among investors who had sought to park their cash in an investment with safe short-term returns only to find themselves caught up in the current turmoil in the credit markets."
Spence quotes Peter Crane, "The main threats to money-market funds -- such as SIVs, monoline bond insurers and the muni market -- are being digested and worked out.... It's extremely unlikely for any money-market funds to break the buck at this point, especially after the Federal Reserve rate cut." Crane tells MarketWatch, "[M]oney-market funds have more protection than ultra-short bond funds, including better asset quality, shorter durations and more diversification.... The real saving grace for money-market funds during the liquidity crisis is that investors have not blinked."
This article follows previous YieldPlus stories from Bloomberg (see our "Link of the Day") and The San Francisco Chronicle ("Higher-yield bond funds run into trouble"). See also Bloomberg's "Auction-Rate Freeze May Breed Fund Bargains: Jane Bryant Quinn".
In other ultra-short news, both Moody's (Aaa-MR1) and S&P (AAAf-S1+) rated the new Bear Stearns Current Yield ETF, which went live yesterday.
The difference in yield between Treasury money market funds and Prime money market funds has never been greater. Prime funds yielded on average from 0.15% to 0.50% more than Treasury funds during the year prior to August 2007, when the spread blew out to 0.81% in August. In September, the spread broke 1.00%, then came back in for October, before moving out to over 1.50% in December and January.
The spread came back in for February, but has since broken 2.0% on Crane Data's Money Fund Intelligence Daily index series. Treasury Institutional money funds yielded (1-day) 1.03% yesterday vs. 3.19% for Prime Institutional, while Treasury Individual money funds yielded 0.69% (net) vs. 2.83% for Prime Institutional. While the spreads aren't as pronounced on the 7-day yields and while they're expected to come back in as new Treasury supply comes online later this week, the price of safety has never been greater.
Crane Data believes that far more money will be lost by investors via lower Treasury yields than ever will be lost any exposure to troubled SIV holdings. Of course, all money market funds are safe and investors have experienced no losses or halts in redemptions to date. But flight-to-safety Treasury investors risk the very real potential of market whiplash and possibly even principal losses for direct buyers. Some funds have closed to new or large "portal" investors due to the ridiculously low yields.
While Treasury bills have no credit risk, their concentration and lack of liquidity make these perhaps even riskier than prime money market funds. Prime funds offer greater liquidity, diversity, and less threat of price movements, the only real threat to a fund's NAV. Treasury funds without repo holdings hold longer WAM (weighted average maturities) and exposure to interest-rate risk. (See the October 2007 issue of Money Fund Intelligence for a recent study showing and argument that Prime funds are safer than Treasury money funds.)
We learned from Strategic Insight's SimFund Filing product that a number of money market mutual funds have made SEC filings to update or change strategies recently. Funds continue to update tax-exempt prospectuses to allow investment in taxable securities or cash, with Federated Municipal Cash Series being the most recent example. (Fundfiling.com subscribers may access the documents here.)
Other funds are updating investment policies to include, exclude or modify repurchase agreement and/or asset-backed commercial paper policies. Some funds are changing from prime to government investments, some are updating illiquid securities policies, some are updating redemption policies, and some are expounding upon overall portfolio risks. Some of the changes have been driven by the NAIC, the National Association of Insurance Commissioners, which has suddenly become more stringent in granting its approval for money market funds. (See the upcoming April issue of Money Fund Intelligence for our full article.) The volume of changes appears to be unprecedented.
Among the notable highlights: Williams Capital Liquid Assets Fund (not tracked by Crane Data) is changing its investment objective "from a Aaa/AAAm-rated prime money market fund to an Aaa/AAAm-rated U.S. government money market fund, effective on or about June 1, 2008"; State Street Institutional Investment Trust is limiting repos to "those member banks of the Federal Reserve System and broker-dealers whose creditworthiness the Advisor considers satisfactory"; and, Ambassador Money Market Fund, like many funds, will reserve the right to "suspend the redemption of shares of the Fund temporarily under extraordinary market conditions".
The Investment Company Institute, the trade group representing mutual funds, reports that money market mutual fund assets increased by $13.59 billion to a record $3.468 trillion in the week ended March 19. This represents the 13th week in a row that money fund assets have increased. Year-to-date, money fund assets have grown by 10.3%, or $328 billion. Over the past 52 weeks, assets have skyrocketed by $1.04 trillion, or 42.6%.
Retail money fund assets increased by $14.8 billion to $1.261 trillion, but institutional assets decreased by $1.2 billion to $2.207 trillion. YTD, retail assets have increased by $99.3 billion, or 8.5%, while institutional assets have increased by $224 billion, or 11.3%.
Government money funds have led the surge recently, rising $142 billion, or 23.9%, on the institutional side and rising $30.2 billion, or 17.2%, on the institutional side. ICI shows Government Institutional funds now totalling $142.5 billion, or 33% of all institutional assets, and Government Retail assets totalling $205.2 billion, or 16% of all retail money fund assets.
Money market fund assets briefly declined due to a March 14 corporate tax payment date, but inflows have surged over the past two days as institutional money moves to delay the impact of lower rates. Both institutional and individual investors also continue their flight to safety and flight to liquidity, driving an unprecendented buildup in money fund assets.
Morgan Stanley Investment Management today announced the launch of a new "generally exempt from state income taxes" fund, Morgan Stanley Institutional Liquidity Funds: Government Securities Portfolio (MUIXX). The company says, "This portfolio invests in U.S. Treasury obligations and certain U.S. Government securities.... The portfolio will not invest in repurchase (repo) agreements."
Like other MSIM funds, Govt Securities has Institutional, Service, Investor, Administrative, Advisory, and Participant classes. The Inst class had a 1-day yield of 1.99% yesterday and does not have a 7-day yield yet. The fund's closing time is at 3:00 p.m. Morgan Stanley is the 12th largest manager of U.S. money market mutual funds with $90.8 billion in assets, according to our Money Fund Intelligence XLS.
Government Securities funds, as opposed to general "Government" money funds, will only invest in agencies such as FFCB (Federal Farm Credit Bank) and FHLB (Federal Home Loan Banks), and TVA (Tennessee Valley Authority), in addition to U.S. Treasury obligations. These funds will not invest in FHLMC (Freddie Mac), FNMA (Fannie Mae), or FMAC, which are normally taxed at the state level.
Other fund complexes use names like Government Tax Avdantaged (`AIM), Federal (BlackRock, Goldman), Govt Oblg Tax Managed (Federated), and Govt Prime (Dreyfus), to describe their offerings in the state-tax-free sector.
As we wrote in the March issue of our flagship Money Fund Intelligence, another piece of evidence showing the shift into money funds by corporations comes from the Federal Reserve's recently-released quarterly Z.1. statistical series. Crane Data noted the massive buildup in securities lending and funding corporation dollars last quarter (see MFI 12/07), but the fourth quarter also showed a huge increase, a rise to $592 billion.
While the household sector remains the largest demographic in the Fed's series, nonfinancial corporate businesses continue to rank second. Corporations hold $592 billion, up 10% in the fourth quarter and up 37.4% in 2007. Life insurance companies too show a significant increase in money fund holdings.
Though the increases in assets to money market funds are no doubt inflated by temporary flight-to-safety factors, they occur within the context of a decades-long increase in money fund usage by corporations and other institutions. Thus, while we can't expect the 40% growth rates of institutional money fund assets to continue, we do expect most of the recent gains in assets to remain in funds.
Look for more statistics on corporate usage in money market mutual funds in coming months, as the Investment Company Institute prepares to release its annual Fact Book, which includes a number of statistics on institutional money fund investors.
For those money market mutual funds that lived through the one percent Federal funds rate environment of mid-2003 through mid-2004, the possibility of zero or negative yields on money funds was very real. While today's environment still leaves plenty of breathing room, even for the highest-expense funds, some Treasury funds are already feeling a squeeze due to temporarily razor-thin repo rates. A precipitous drop in Bear Stearns repo positions and moves by other broker-dealers to decrease reliance on repo have squeezed supply.
We hear that some repo is trading at around 0.3%, a situation which leaves some higher expense repo-heavy Treasury fund yields potentially in the red. Though managers expect new Treasury supply to remedy this situation within a couple of weeks, some are scrambling to examine alternatives for waiving expenses and sharing these waivers with intermediaries on higher expense "service", "B" or "C" shares.
Back in 2003-2004, only a handful of B or C shares, those with expenses over 1%, began waiving expenses to establish a minimum yield of, for example, 0.05%. No fund yields went negative, and we don't expect any to allow this currently, but the situation did raise some thorny accounting and regulatory issues. We'll be examining this today, so let us know if you have any thoughts.
A look at our Money Fund Intelligence Daily numbers, which track only the largest money funds, show Treasury funds with yields still comfortably above 1%. On the Individual side, Vanguard Treasury MMF (VMPXX) is the highest-yielding at 2.47% (as of 3/17) while JPMorgan 100%% US Trs MM Res (RJTXX) is the lowest-yielding at 1.63%. Among Treasury Institutional funds, Vanguard Admiral Treasury MM (VUSXX) is the highest yielding at 2.70% and Goldman Sachs FS Trs Ins Ins (FTIXX) is the lowest-yielding at 1.75%.
The Federal Reserve Board of Governors voted to reduce the benchmark Federal funds target rate to 2.25% from 3.0% today. This marks the Fed's sixth move in 6 months, and its second super-sized 75 basis point cut in two months. The Fed began cutting from 5.25% with a 50 bps move on Sept. 18, which was followed by two 1/4-point cuts on Oct. 31 and Dec. 11., a 75 bps move Jan. 22 and a 50 bps move Jan. 30.
The Fed's statement says, "Recent information indicates that the outlook for economic activity has weakened further. Growth in consumer spending has slowed and labor markets have softened. Financial markets remain under considerable stress, and the tightening of credit conditions and the deepening of the housing contraction are likely to weigh on economic growth over the next few quarters."
It continues, "Inflation has been elevated, and some indicators of inflation expectations have risen. The Committee expects inflation to moderate in coming quarters.... It will be necessary to continue to monitor inflation developments carefully.... Today's policy action, combined with those taken earlier, including measures to foster market liquidity, should help to promote moderate growth over time and to mitigate the risks to economic activity. However, downside risks to growth remain. The Committee will act in a timely manner as needed to promote sustainable economic growth and price stability."
Money fund yields, as usual, will follow the Fed funds lower. Our Crane 100, currently at 3.14%, should decline below 3.0% by next week, and should stabilize somewhere around 2.40% in about 37 days (the average maturity of money funds).
The near-death experience of Bear Stearns and continued stresses in the short-term funding markets have caused some to ask whether money market mutual funds will see any fallout. We don't think money funds will be impacted by events surrounding Bear, though a series of broker-dealer downgrades and defaults would be cause for concern due to the shrinking supply of quality short-term paper.
Today's USA Today writes, "Analysts say quality bond funds should stay safe", saying, "Despite the latest upheaval in the credit markets -- fed by the collapse of Bear Stearns (BSC) -- most investors have little to fear about the safety of their investments in money market funds and high-quality bond funds, analysts say."
The piece, and others, note that SIPC insurance covers brokerage accounts, and that money funds should not be impacted. It quotes BankRate's Greg McBride, "These funds will move heaven and Earth to preserve their $1 net asset value... If they break the buck, money would flow out the door to their competitors at the drop of a hat."
S&P also said yesterday, "[B]ased on the positive developments regarding Bear Stearns (pending acquisition by JPMorgan A-1+ and support by the Fed), S&P's Fund Ratings Group has determined that rolling overnight repo with Bear Stearns in S&P rated funds is consistent with our money market fund criteria and fund credit quality ratings criteria."
Bear Stearns doesn't run money market funds (though BlackRock and others run some for it), but it does offer clearing services for money market "portals", including its own Bear Stearns Corporate Cash. The company has also reportedly placed the launch of its "cash-plus" ETF, Current Yield Fund (YYY), on hold due to events.
Pacific Investment Management Company, or PIMCO, a subsidiary of Allianz Global Investors, has filed to launch a new institutional money market fund, `PIMCO Money Market Fund P. The fund will be managed by Paul McCulley, will have a minimum investment of $5 million, and will have an expense ratio of 0.42%.
The new fund, "Seeks maximum current income, consistent with preservation of capital and daily liquidity," according to its SEC filing (available via Simfund Filing.com). PIMCO MMF P will be distributed by Allianz Global Investors. The transfer agent is National Financial Data Services and the custodian is State Street Bank And Trust.
Though a giant in the bond mutual fund space, PIMCO has been surprisingly absent from the short-term and money market mutual fund sector. The company ranks 82nd out of 83 money fund managers, and advises a mere $206 million in money fund assets via its PIMCO Money Market Inst, according to our latest Money Fund Intelligence XLS. (The company also offers a $437 million retail fund, PIMCO Money Market Fund A, but this fund doesn't report to Crane Data.)
Note: In other news, Peter Rizzo from S&P tells us, "Please note that based on the positive developments regarding Bear Stearns (pending acquisition by JPMorgan A-1+ and support by the Fed), S&P's Fund Ratings Group has determined that rolling overnight repo with Bear Stearns in S&P rated funds is consistent with our money market fund criteria (a.k.a. principal stability fund) and fund credit quality ratings criteria."
Money market mutual fund yields, currently averaging 3.14% (as measured by our Crane 100 Money Fund Index, the average 7-day yield of the 100 largest taxable money funds), have declined from a level of 4.50% at the start of the year, and have declined almost two full percentage points since the liquidity squeeze began last August. For those wishing to plot the descent, the Crane 100 was 5.04% on Aug. 31, 2007, 4.95% on Sept. 30, 4.79% on Oct. 31, 4.56% on Nov. 30, 4.5% on Dec. 31, 2007, 3.85% on Jan. 31, 2008, and 3.27% on Feb. 29, 2008.
As Peter Crane told Barron's in this week's "Where to Stash the Cash" piece, "Money-market mutual funds, money-market bank accounts, -- anything in cash has seen yields fall through the floor recently, and the outlook is for more of the same. (Welcome Barron's visitors!)
With expectations running high for another big cut, probably 75 basis points, in the Federal Reserve's Fed funds target rate this Tuesday, savers should brace for more pain. Money fund yields follow the Fed with a lag of about a month, so yields should slide over the coming weeks to between 2.25% to 2.5%. (The Fed funds target is currently 3.0%, but should drop to either 2.5% or 2.25% on Tuesday following the Fed meeting.) The top-yielding money funds, already below 4.0%, should move towards and perhaps even below 3.0%.
High net worth savers may find some temporary solace in abnormally high tax-exempt money fund yields, but these undoubtedly will be fleeting. Most will have to resign themselves to the fact that 5% yields are gone, and that 2-3% is now the highest one can expect to earn on a true "safe harbor" investment. If savers have learned anything during the recent credit crisis, it's that you take what the Fed gives you. Don't get greedy!
The Reserve is poised to launch two new funds, Reserve Primary II Fund and Reserve U.S. Government Fund II, which will be open for trading until 5:30 p.m. Eastern. This will make Reserve just the second fund family to remain open past the 5:00 p.m. trading barrier. BlackRock has been the sole option for anyone investing from 5:00 until 5:30 since it moved its deadline back in 1996 with its flagship BlackRock TempFund, BlackRock TempCash, and BlackRock T-Fund.
The new Reserve funds will be managed similarly to their "sister" funds Reserve Primary Fund and Reserve U.S. Government Fund, which are currently open until 5:00 p.m. Reserve, the 13th largest and oldest money fund manager, runs $73 billion in U.S. money fund assets and over $100 billion in total "cash" assets (including offshore money funds and bank deposit programs).
Several other firms have been looking at extending their deadlines too, but operational difficulties and limited market supply options have prevented other funds from following to-date. A number of the largest institutional money funds currently have 5:00 p.m. trading deadlines, including (among others): Goldman Sachs FS Prm Ob Ins, JPMorgan Prime MM Capital, Dreyfus Instit Cash Adv IA, Fidelity Instit MM: MM Port I, Federated Prime ObIigations IS, DWS MM Series Instit.
Note: For a listing of trading deadlines for all money market funds, see the latest edition of our Money Fund Intelligence XLS. (See column 'BE'.) To request a copy of MFI XLS, e-mail Pete.
Trusco Capital Management, a subsidiary of SunTrust Bank, announced that it will change its name to RidgeWorth Capital Management. Its liquidity and fixed-income products will be advised by a new subsidiary StableRiver Capital Management. The company says, "The STI Classic Funds, , which are advised by Trusco, will take on the new name of the Adviser on March 31, and become the RidgeWorth Funds."
Trusco Capital's STI Classic money funds rank 23rd among money fund managers with $25.6 billion in assets. Funds include STI Classic Prime Quality MMF, STI Classic Inst Cash Mgmt, STI Classic Inst US Govt, and STI Classic Inst US Treasury, among others.
As we noted in our story "SunTrust Discloses Backing of STI Classic Funds, 'Not a Precedent'", SunTrust took one of the largest writedowns of any institution to support its enhanced cash and money market mutual funds, fueling speculation that the company is preparing to exit the money market fund business. (See also, "SunTrust's STI Classic Funds Obtains No-Action Letter on Cheyne SIVs".) The company denies that it is preparing the advisory unit for sale.
U.S. Securities & Exchange Commission Director of the Division of Trading and Markets Erik Sirri testified before the House Committee on Financial Services on "Municipal Bond Market Turmoil" yesterday and included a number of comments on money market mutual funds." Sirri's money fund-related comments, available in full here, include: "The Commission staff is closely monitoring the potential effects of the developments in the municipal auction-rate securities markets on mutual funds, including money market funds.... Tax-exempt money market funds, with $465 billion under management, are key investors in municipal securities and part of the $3.3 trillion money market fund industry. Money Market funds typically have as their investment objective the generation of income and the preservation of capital. To help meet this objective, they are required by rule 2a-7 under the Investment Company Act to limit the securities in which they invest to high-quality, short-term instruments that the funds' advisers determine involve 'minimal credit risks'."
He continues, "As much as 30% of the municipal securities currently held by tax-exempt money market funds is supported by bond insurance.... Some of the securities may be eligible for investment by money market funds because of the insurance that monoline insurers provide.... The Commission staff recognizes that a significant downgrade in a monoline insurer's rating could result in the securities becoming ineligible under rule 2a-7 for investment by money market funds."
Sirri says, "The credit ratings only create a 'floor' below which the funds may not invest, however, and consitute one among several risk-limiting conditions of rule 2a-7. Since its adoption in 1982, rule 2a-7 has continued to serve the purposes that the Commission intended. It is notable that, despite the current liquidity crisis, money market funds and their sponsors have not asked the Commission for any changes to the risk-limiting conditions of rule 2a-7, including the credit rating floor."
Again, the full comments are available here.
Bear Stearns ("BSAM") today announced the pending launch of the Bear Stearns Current Yield Fund (www.yyyfund.com). The institutional "YYY" fund, which goes live March 18, "aims to generate higher returns than an average money market fund". It will will be one of the first "enhanced cash" ETFs, and will likely be the closest thing yet to a money market mutual fund ETF.
The press release quotes Jeff Lane, Chairman & CEO of BSAM, "The Bear Stearns Current Yield Fund is an innovative vehicle which allows investors to manage short-term fixed income. Through Triple-Y, investors have access to a talented management team, with a long and successful track record in this space. In addition, the Fund offers full transparency of holdings every day on the internet, liquidity via exchange trading and institutional class fees for all investors."
The release adds, "Triple-Y is managed by a team of fixed income professionals at BSAM, led by senior portfolio manager Scott Pavlak. Mr. Pavlak has more than 20 years of investment experience and has been managing portfolios similar to Triple-Y for over 15 years." Pavlak says, "Utilizing a disciplined investment process, we seek to add value through sector allocation, security selection, yield curve positioning, and duration management. We use a conservative approach which aims to maximize income for our investors, while preserving capital."
The fund's institutional "units" will be available only in blocks of "millions" initially and the fund will have an expense ratio of 0.35%. It will "seek as high a level of current income as is consistent with the preservation of capital and liquidity.... The Fund is not a 'money market fund' relying on Rule 2a-7 of the Investment Company Act and is not subject to the requirements applicable to money market funds, nor is it an objective of the Fund to maintain a target share price as would be the case for a money market fund," says the prospectus.
It remains to be seen whether the new fund can overcome market concerns about "enhanced cash" funds. But the fund's relatively conservative investment policies, which include a looser 5% per issuer diversification policy than money funds and which allow for 15% in "illiquid" securities (vs. money funds' 10%), and transparency of holdings should help. YYY should be a nice test to see whether the marketplace has a need for a brokerage-traded and intraday "cash-plus" vehicle.
In our latest monthly "profile", Money Fund Intelligence interviews Mathew Kiselak, portfolio manager of the top-ranked Evergreen Institutional Municipal Money Market Fund. We excerpt some of his comments below. Kiselak says, "On the VRDN front, there's good and bad news. The good news is that only a small percentage of VRDNs are backed by monoline insurers. The majority are backed by bank letters of credit. Some of these banks are having issues, but we're not really seeing a series of downgrades, so they're all eligible. However, even at 5% of the marketplace, it's a supply that we need."
The Evergreen manager continues, "We're not buying insured VRDNs currently because there is continued uncertainty about liquidity, and we don't want to run the risk of losing the put option. On the other hand, with synthetic floaters or TOBs, we have more flexibility in what we require with regards to drop-away provisions. We've always looked at underlying collateral, but it's paramount now."
Finally, we ask Kiselak, "Is there a threat of anyone breaking the buck?" He says, "We've structured the portfolio to stand on its own without monoline insurance. In this day and age, most large mutual fund companies have a seasoned in-house credit research staff. Everybody understands the market environment and challenges. You really have to be on the ball these days, and I strongly believe that our team is very capable of meeting the challenges that exist in today's marketplace."
The March 2008 issue of Crane Data's flagship Money Fund Intelligence is now available for download by subscribers. The latest newsletter features the articles: "Corporate Safety Thrust Benefiting Money Funds", which describes the huge shift in cash balances from active to passive investments; "Evergreen Perpetually Tops in Muni Money Market", a profile of the top-ranked (5-year and 10-year) Evergreen Institutional Municipal Money Market Fund; and, "Canadian Money Funds: Preparing for Takeoff?", a discussion of money funds in Canada. We also update subscribers on the latest SIV and support action news, as well as a number of personnel changes in the money fund industry. MFI is now 30 pages and tracks 1,300 funds, representing 93% of all money market fund assets.
The lead article examines Treasury Strategies recent results showing a flight away from all liquidity and short-term investment options save money funds and bank deposits/sweep accounts. We also look at other recent statistics showing a massive shift away from complexity and direct market investment, which has powered the $1 trillion cash buildup in money market funds over the past 52 weeks.
Our latest Money Fund Intelligence XLS, which contains data, rankings and percentiles by fund type, has also been posted to http://www.cranedata.com. Our money "Fund Family" asset rankings now show that No. 1-ranked Fidelity Investments has surpassed $400 billion in assets! The Boston-based company increased its money fund totals by $12.8 billion in February and has increased by a stunning $143.2 billion, or 55%, over the past 12 months. To request a look at the latest copy, e-mail us at: sales@cranedata.us.
While Crane Data doesn't believe that investors and advisors will necessarily benefit from spending time analyzing money market mutual fund portfolio holdings, we're happy to assist those whose bosses insist or those that have time to kill. As Saturday's Wall Street Journal article "Money Funds Opening Up" indicates, asking for fund holdings has become quite popular. The WSJ says, "Investors can get some broad information about their fund by visiting its Web site and looking at its 'composition' or 'fact sheet'.... For more details, investors can look at a list of all of the funds' holdings, either on its Web site or on the Securities and Exchange Commission's Edgar Web site: http://www.sec.gov/edgar/searchedgar/mutualsearch.htm.
Money market mutual funds have been required to disclose holdings to investors semiannually, though the majority of institutional funds disclose monthly (and did so even prior to the recent credit crisis). Many are now disclosing even more frequently, particularly those that have had particular holdings called into question. You can use Crane Data's Resources page to click straight to the money fund information on fund family websites. (Most semiannual and annual reports, which contain holdings, or N-Q filings, are just one or two clicks away.) For professionals, Crane Data's pending `Money Fund Wisdom website and Money Fund Intelligence XLS will soon have "hotlinks" to holdings.
Alas, money fund holdings are like subatomic particles -- by the time you look for them, they're gone. Many do not even have CUSIPs and the shifting nature of the short-term money markets, particularly now, defy simple categorization. The profile of money fund securities has changed dramatically over the decades as the number of AAA-rated corporations in America has dwindled to a handful. So even the most experienced investors will not have a clue about whether an obscure "conduit" name, maturity date, and a series of footnotes is safe or not. Average maturity profiles of 37 days on average indicate that funds in effect turn over their entire portfolios every month, which quickly make past holdings lists useless.
We argue that money fund investing has become an extremely complex business, best left to professionals. Just as it would be silly to ask to see the controls of a Boeing 747 after hitting an air pocket, investors are better served monitoring the yield, and trusting in the brand names of the professional manufacturers and distributors, and trusting in funds' 35-year history of safety, having never lost a penny of individual investors' money.
Today's Wall Street Journal features, "Money Funds Can't Shake SIVs", which recaps the latest batch of structured investment vehicle (SIV) bailouts. The paper says, "Troubles with structured investment vehicles are continuing to plague taxable money-market funds. As a result, investment-management companies and other providers of money-market funds, such as Wells Fargo & Co., Credit Suisse Group, Janus Capital Group Inc. and Northern Trust Corp., have disclosed they are buying assets of troubled SIVs or have pledged to do so if need be. These purchases threaten to cut into earnings at some fund-management companies." The article continues, "A main concern has been whether such troubles would cause funds to 'break the buck,' or see their net asset values fall to less than $1 a share.... Money-fund researcher Crane Data recently counted a dozen such publicly announced SIV-support moves and accounting losses from fund companies."
Crane Data now counts at least 17 money fund advisors that have taken action to protect or remove downgraded or defaulted securities from their portfolios. Note that, contrary to some reporting, these funds would not have "broken the buck" without these actions -- advisors would move long before the $1.00 a share was endangered. Twelve of the 17 advisor infusions to date are public, with several being much larger than others. The list includes: Columbia, Credit Suisse, Evergreen, First American, Janus, Morgan Stanley, Northern, SEI, STI, TDAM, Wells Fargo, and Western.
There likely will be at least 3 more due to the recent Whistlejacket default. But Crane Data considers it highly unlikely that any money fund NAVs will fall below $1.00 a share, and does not expect any investors to be impacted. Advisors, however, are already feeling the fallout as the first round of departures related to these events are occurring. (See our March issue of Money Fund Intelligence for this "People" news.)
Note too today's news release, "Legg Mason Announces Update of Money Market Fund Support"). "LM announced that it has obtained a letter of credit from a large bank to provide support to a Structured Investment Vehicle (SIV) holding in a money market fund. The Company also provided an update of the combined impact on its anticipated quarterly earnings.... Legg Mason is confident in the overall soundness of the funds and committed to satisfying its client objectives of principal stability, credit quality, and current income, although no guarantees can be given."
Money market mutual fund assets increased for an unprecedented 11th straight week, gaining $22.64 billion to a record $3.451 trillion, according to the Investment Company Institute. Retail money funds gained $3.66 billion to a record $1.240 trillion while Institutional money funds gained $18.98 billion to a record $2.210 trillion.
Money fund assets have increased by $304 billion, or 9.7%, year-to-date, and they haven't decreased since Dec. 19's modest $3.6 billion outflow. Since August 1, money funds show just three weeks with declines -- including a $24 billion month-end outflow 10/31 and an 8/29 month-end $14.4 billion outflow. Money funds have averaged $27.1 billion a week in inflows over this 32-week period, gaining a record-shattering $866.5 billion, or 33.2%. Over the past 52 weeks, money funds have increased by a spectacular $1.018 trillion, or 41.9%.
Both general purpose, or "prime", money fund assets and tax exempt assets rebounded following two weeks of outflows. Prime institutional funds increased $7.8 billion in the week and have increased by $125 billion YTD. Prime retail funds inched up $803 million and have increased by $47 billion YTD. Government retail funds have increased by $23 billion YTD and government institutional funds have increased by $102 billion YTD. Tax exempt money funds grew by $2.6 billion (institutional) and $2.4 billion (retail) in the latest week, and assets have increased by $6.9 billion YTD.
Chicago-based Treasury Strategies Inc. is preparing to release the results of a recent flash survey of 135 corporate treasurers and their liquidity investment practices. The responses show that large investors have shifted their cash portfolios dramatically from active management to passive management over the past six months. TSI's statistics show money market mutual funds and bank demand deposit and sweep accounts as huge winners in the ongoing market turmoil, while CP, enhanced cash, notes & bonds, ARS, and even repo and term deposits all declined dramatically. From July 1, 2007, through Jan. 1, 2008, the percent using money funds inched up from 78 to 79%, but the balances grew by a massive $514 billion, or 32%, from $1.622 to $2.136 trillion, projects TSI.
Bank deposits and sweep accounts combined grew even faster, rising from $782 billion to $1.061 trillion, a gain of 36%. Money funds now account for a record 40.7% of corporate liquidity holdings vs. 29.5% as of mid-year 2007. Bank deposits & sweeps account for 20.2% vs. 14.2%. TSI's Tony Carfang tells us that the overall level of corporate liquidity fell by $250 billion to $5.25 trillion, and that the shifts are unprecedented. The study also shows that corporate holdings of enhanced cash funds and auction rate securities, both of which had been minor holdings even before their troubles, unsurpringly registered declines.
The Investment Company Institute's weekly statistics and Crane Data's calculations show money market mutual fund assets rising by over $1 trillion the past 52 weeks and rising by $868 billion since mid-2007. The Federal Reserve's money supply numbers show bank savings deposits growing by $108.9 billion since July 2, 2007, from $3.844 trillion to $3.953 trillion, or 3%. Over 52 weeks, bank deposits (as measured by the Fed) grew by $209.4 billion. Look for more survey results from Treasury Strategies as they release their full results in coming days, and look for the full tables and discussion in the March issue of Money Fund Intelligence.
BlackRock, the nation's second largest manager of money market mutual funds with $242 billion, just published a paper analyzing the mortgage market contagion of 2007 and its impact on money markets. "Market Turbulence Exposes Risks of Liquidity Investing," available on BlackRock's website, discusses the genesis and impacts of the market's problems, and includes a "historical perspective" on the turmoil, mentioning 1994's Community Bankers U.S. Government Money Market Fund, the only money fund to ever "break the buck", and the 1970 Penn Central CP default.
BlackRock says, "Even some investments regarded as the most conservative were effected, with more than one investment manager stepping in to buy troubled securities out of their money market funds rather than allowing the impact to harm the fund." Among the "Lessons Learned": "Incremental yield is always accompanied by incremental risk"; "Ratings aren't everything"; "Liquidity matters"; "Non-Rule 2a-7 funds are not the same as Rule 2a-7 funds"; "Cash investing is not a low-risk activity", and, "Those who cannot remember the past are condemned to repeat it". The paper concludes, "The turmoil that began in the summer of 2007 and continues today serves as a reminder of the significant risks inherent even in this most conservative asset class. We believe it also demonstrates the importance of professional cash management."
Finally, in a section about BlackRock's cash management, it says the company avoided "the most troubled products", adding, "In fact, as many investors were holding paper with no liquidity, we were selectively buying high-quality ABCP programs at a discount."
Naperville, Ill.-based Calamos Investments announced the launch of retail A, B, and C share complements to its Institutional class of the Calamos Government Money Fund. Chairman John P. Calamos says, "Liquidity, low risk, and performance are principal considerations for institutional and retail clients alike, and we believe Calamos Government Money Market is well positioned to address those needs. The addition of retail share classes provides more investors with access to Calamos' experienced team and to our risk-conscious approach to cash management."
In other new fund news: Reserve, which recently broke above $100 billion in total cash assets (including money funds, offshore money funds and FDIC-insured bank products), filed to launch a new Reserve Treasury & Repo with Institutional, Liquidity I, II, III, IV, V, Treasurer's Trust, Investor I, II, III, and R shares.
Fidelity's recent annual report says "Fidelity's money market funds attracted more than $87 billion in net flows, far exceeding 2006's record of more than $47 billion."
Finally, S&P affirmed its AAAm rating on the Florida Local Government Investment Pool as management transitioned from interim manager BlackRock to new manager Federated.
Yields continued sliding in February 2008. The Crane 100 Money Fund Index, a measure of the 100 largest taxable money market mutual funds' 7-day (simple, annualized) yields, fell by 58 basis points (or 0.58%) to 3.27% during the month. The broader Crane Money Fund Average, a measure of 850 taxable funds, declined from 3.40% to 2.87% during February. Meanwhile, the Crane Tax Exempt Money Fund Index plunged then rebounded during the month, ending a mere 2 basis points lower at 2.36%.
Over the past six months, as the Federal Reserve has lowered its target Fed funds rate from 5.25% to 3.00%, the Crane 100 has fallen from 5.01% to 3.27%, the Crane Money Fund Average has declined from 4.76% to 2.87%, and the Crane Tax Exempt Index has dropped from 3.38% to 2.36%. A year ago, the Crane 100 was 4.99%, the Crane MFA was 4.88% and the Crane T-E was 3.13%.
The highest-yielding retail and institutional money funds have already fallen below 4%, and top-yielding bank savings Countrywide just reduced its rate from 4.25% to 4.16%. The remaining handful of banks paying over 4% should fall by the wayside very soon as expectations of yet more Fed cuts dominate the money markets. Yields should continue drifting lower ahead of the Federal Reserve's March 18 meeting, when markets expect another 50 basis point, and perhaps even a 75 bps, cut.
For more on the February 2008 Crane Money Fund Indexes, including the components, calculation methodology and latest copy of our Crane Index product, or for information on our suite of money market performance benchmarks in general, contact us at: info@cranedata.us.
