The Treasury Management Association of New York's annual New York Cash Exchange conference featured a talk by Reserve founder and chairman Bruce Bent entitled, "All Money Funds Are Not Created Equal". Bent introduced himself to the audience, "I'm the guy who invented the money fund?" Referring to recent "interesting times" in the $3.5 trillion money fund business, he asked, "Are we having fun yet?"
Bent explained the importance of cash to Reserve, which has grown from $50 to $125 billion in assets over the past 14 months, and to all companies. "The essence of our all our lives is cash. No matter what industry you're in, and even if you're a charity, you need cash." He explained, "The management of cash is unique" and "antithetical" to stock investing. The tenets, he said, are "sanctity of principal, liquidity and a reasonable rate of return". A money fund "should bore you into a sound night's sleep" he told the NYCE crowd.
Citing a focus on performance, he said, "[People think that] the driving force in a money fund is yield -- it's not." He jokingly suggested that the test should be "knocking on doors at 3 a.m. to ask if you're sleeping". A lot of imposters claimed to be "just like a money fund," said Bent. But he added, "You is or you ain't, and there's a lot of ain'ts."
Bent urged more disclosure, though he doubted regulatory changes are needed for money funds. "People have questions. People have concerns," he said. Reserve, he says, has been disclosing daily portfolio holdings. Bent dismissed concerns about insider trading or revealing proprietary strategies to competitors by releasing money fund portfolios. He paraphrased Warren Buffett, saying, "If you don't understand it, don't invest in it."
Though Reserve didn't invest in SIVs, Bent defended the assets. He cited the diversified nature of asset-backed commercial paper as a major plus, saying, "To say that all SIVs are bad is wrong, and all subprimes are not bad." He added, "Suddenly you had an abandonment of a lot of products, [some of which were] really good products." Bent said of losses taken by some advisors, "I think a lot of this stuff will be recovered." Finally, he told conference attendees, "I don't think the world is coming to an end."
Crane Data President & CEO Peter Crane led a panel of veteran money market mutual fund professionals entitled "Safety First in Money Market Fund Investing: Lessons Learned" at the 2008 New York Cash Exchange, which opened Wednesday at the Hilton New York. The audience of corporate treasurers, money fund distributors, and institional investors heard three presentations from companies that managed to steer clear of the blowups and bailouts that have plagued a number of funds advisors.
Lynn Evans, Managing Director of BlackRock, discussed "Risks in Liquidity Investing" and reviewed a detailed timeline of the subprime market meltdown. Evans asked "What have we learned?" She cited "Incremental yield is accompanied by incremental risk; non-Rule 2a-7 funds are not the same as 2a-7 funds; ratings aren't everything; liquidity matters; cash investing is not a low-risk activity; and, those who cannot remember the past are doomed to repeat it" as the most important lessons. Evans said there was "no recognition of the risks taken" by funds, given that unlike any other product investors expect to "get their money back with no notice, at par, with interest".
Dreyfus Senior Credit Manager of Taxable Fixed Income Research Louis Geser then presented on "Guarding Against Risk Migrations in Taxable Money Market Funds". He discussed the "asymmetrical" risk of money funds, and said, "Risk is a limited resource and should be assumed only to the extent that the risk taker is compensated." Geser added, "Disciplined, rigorous 2a-7 advisors need to provide a risk management 'margin of safety' because the types of risk" -- correlations, concentrations, dispersions, transitions and arbitrages -- "are more complex and more difficult to diversify away, and are harder to precisely anticipate."
Finally, Fidelity Investments' Senior V.P. Deb Watson talked on "Client Reactions to Market Turmoil". She cited liquidity in the marketplace, fund, and portals, as well as the flight to quality, as major issues, and noted an "increased scrutiny of holdings and 2a-7 compliance." Credit processes of the manager were also among investor concerns. More emphasis was being placed on portfolio composition, maturity distribution, and headline exposure, she told the NY Cash Exchange. Watson also noted a dramatic increase in the frequency of shareholder communications.
"The average daily volume of total outstanding repurchase (repo) and reverse repo agreement contracts totaled $7.06 trillion in the first quarter of 2008, a 21.5 percent increased over the $5.81 trillion during the same period in 2007," says the latest SIFMA Research Quarterly.
Daily repos outstanding averaged $4.3 trillion in Q1, up 20.4%, and reverse repos averaged $2.76 trillion, up 23.2% from a year ago. Treasury notes accounted for the majority of repo trades (66.4%), followed by Federal agencies (11.2%), Treasury bonds (7.7%), Treasury bills (6.9%), and Other (7.9%), which includes discount agencies, TIPS, and more.
The quarterly, published by the Securities Industry and Financial Markets Association says outstanding money market securities grew 2.7% in the latest quarter to $4.2 trillion as of Q1 2008. SIFMA's "money markets" totals include commercial paper, which declined slightly to $1.78 trillion, and large time deposits, which totaled $2.42 trillion.
"Asset-backed commercial paper declined by 4.0 percent in the first quarter to $783.6 billion, due in large part to the aftermath of market dislocations, expiration of some mortgage collateralized programs and sponsors bringing more assets onto their balance sheet," says SIFMA.
"Similar to the Fed's introduction of the Term Auction Facility in December, the Term Securities Lending Facility and Primary Credit Dealer Facility have helped ease pressure on the commercial paper market as rates dropped through March. However, the 90-day CP rate rose in April as the market remains under pressure amid concerns about the effect of a slower economy and consumer credit weakening on ABCP. As noted in a recent JP Morgan report, concerns about the banking sector continue to weigh heavily on the short-term markets, as expressed by the elevated LIBOR-to-Treasury spread," said the report.
At last week's Treasury Management Association of New England conference, Capital Advisors Group Director of Investment Research Lance Pan urged the audience of corporate treasurers and money fund professionals attending his "Check-Up on Institutional Money Market Funds Presentation to, "preserve the sanctity" of the money fund. "It's truly a great product," he said.
Pan discussed past episodes of troubles, but said, "No other securities product can claim the level of recognition and success of the money market fund." He explained that money funds "price artificially at $1.00" and in exchange they "handcuff themselves" in regards to what investments they can purchase.
He poignantly reminded attendees that, "Liquidity is a state of mind," explaining the dangers of an unanticipated run on assets. Of the only single episode of a fund "breaking the buck" in history, Community Bankers, Pan said the fund "broke the buck because the sponsors allowed it to break the buck." Pan also said, "There needs to be liquidity that's not market dependent." He cited the pain that SIVs caused and reminded listeners of the "formal procedure" that the FDIC mandates bank-affiliated money fund advisors go through "before the bank can hand over the blank check."
Finally, Pan told the Boston audience, "At the end of the day a money fund does deserve to be an important part of a treasury portfolio." But he says to, "Do your due dilligence and make sure the money is properly managed." He added to large investors, "We can influence how they manage," citing examples of funds changing investment behavior based on the concerns of investors.
Rumors of the demise of money fund asset growth were greatly exagerrated, as assets continued their post-tax outflow surge in the latest week. The Investment Company Institute reports that money fund assets increased by $11.17 billion in the week ended Wednesday, May 21, to $3.509 trillion. Assets are $27 billion below their pre-April 15 record level. They have increased by $90.9 billion in the last three weeks and have increased by $364.5 billion year-to-date (11.6%).
Retail money funds showed outflows of $7.8 billion to $1.227 trillion, while Institutional money funds showed inflows of $18.97 billion to $2.282 trillion. Institutional General Purpose funds rose $23.17 billion and Institutional Government funds declined by $4.64 billion. Retail Government funds declined by $1.02 billion, Retail General funds declined by $11.00 billion, and Retail Tax Exempt funds increased by $4.22 billion.
Assets have increased by $1.011 trillion, 40.5%, over the past 52 weeks, though they should pause next week due to the Memorial Day Holiday weekend and month-end. `We expect assets to resume their climb over the summer, though the pace should cool as the market prepares for a possible hike in rates later this year.
Money fund yields continued inching lower, though they have yet to fully reflect the Federal Reserve's likely final April 30 1/4-point cut (to 2.0%). The Crane 100 Money Fund Index declined by one basis point yesterday and by three basis points over the past week to 2.33%. Money funds have declined just 14 basis points since the Fed cut. Yields should continue inching lower in coming weeks, though they should stabilize around the 2.25% level.
Bank of America spokesman Jon Goldstein tells Crane Data that its Columbia Management unit will be moving its money market mutual fund management operations to Boston. The move had been anticipated since the appointment of former Putnam executive Paul Quistberg as head of cash and the departure of Randy Royther. Quistberg reports to Fixed Income Investments and Liquidity Strategies chief Stephen Peacher.
Goldstein tells us that about 30 positions will be impacted, and that the moves will occur "now through the end of September. It's going to be a phased approach." He adds that some individuals will choose to relocate from Charlotte. He tells us, "It's part of a natural evolution of our fixed-income and cash business. This will allow us to leverage some of our resources through closer geographic proximity."
Sources also say that Columbia Managing Director and Head of Global Capital Sales Fred Berretta has changed roles and is now with parent company Bank of America. The distribution of Columbia's massive $200+ billion money fund complex will be handled by teams reporting to Columbia Management's Jeff Peters.
Crane Data Founder and President Peter Crane speaks today at the Treasury Management Association of New England's 2008 Conference in Boston on the topic "Is Your Money Market Fund Safe? Examining The Crisis in Cash". Crane answers with a resounding "Yes", citing money market mutual funds nearly spotless record of safety, their extensive body of evolving regulations, and the sector's enthusiastic support from both investors and fund sponsors. No money market mutual funds have "broken the buck" during the current crisis, and none are expected to, says Crane.
The Great Liquidity Panic of 2007-8 is nearly ended. While the episode was painful for fund advisors, who likely will end up losing hundreds of millions on soured extendible ABCP and SIV investments, this is a mere fraction of their almost $15 billion in annual revenue -- more than Hollywood earns at the box office, says Crane. Money fund investors came out unscathed. He says to keep in mind that money market mutual funds have survived similar events in the past, including the 2001 default of Pacific Gas & Electric and the 1994 spate of "derivatives" bailouts. Nineteen ninety four also saw the only case in history of a fund "breaking the buck" as the tiny ($82 million) Community Bankers U.S. Government Money Fund was liquidated at $0.96.
Crane cites money funds' protective quality, maturity and diversity regulations -- Rule 2a-7 of the Investment Company Act of 1940 -- as one of the keys to their success. Money market mutual funds are not allowed to invest in lower quality or longer maturity instruments, and they are only allowed to own a 5% maximum position in any single issuer. Money funds also are exempt from other mutual funds' "mark-to-market" requirement, using "amortized cost" accounting.
Funds have also withstood the unprecedented stress in the money markets due unprecedented inflows, over $1 trillion over the past year, which were helped in part by the Fed's interest rate cuts. Prudent investment policies and actions by the vast majority of fund advisors were instrumental too. Extremely diversified investors bases, long track records of performance, and of course deep-pocketed parent companies didn't hurt either. Money funds continue to stand while almost every "cash" substitute around them has faltered; their record of safety has only grown during the recent crisis, says Crane.
The Puget Sound Business Journal reported Friday (in "Fund woes freeze some Costco cash") that Costco Wholesale Corp. is "among a handful of publicly traded companies in Washington trying to pull out of what are called 'enhanced cash funds' and reporting losses from those investments on their balance sheets." The piece says Costco had $1 billion in enhanced cash funds at one point and now holds $371 million in three ("3c-7" private placement) funds -- Columbia Strategic Cash, BlackRock Cash Strategies and Merrill Lynch Capital Reserve Fund.
The article says that Costco has taken a "$2.8 million writedown" and continues, "In recent filings with the Securities and Exchange Commission, the three companies say they expect more of their funds will be available later this year, although the companies reported there could be more losses and they are not certain how long it might take to get access to all their money."
The piece says, "The Columbia Strategic Cash Portfolio Fund was the largest of the enhanced private fund pools, with about $40 billion invested, said Peter Crane, who tracks the money-market industry through his Boston-area company, Crane Data LLC. Overall, about $200 billion in investments were tied up in enhanced cash funds, said Crane."
The entire "enhanced cash" sector appears to have evaporated. Crane Data estimates that it now totals a mere $35 billion, and is likely on its way to zero. However, forgotten in all the panicky headlines is the money that was made in additional yield, amounts that still dwarf the actual realized losses seen in the sector. While it will take some time, we believe enhanced cash will eventually claw its way back. In the meantime, though, look for more stories on loss disclosures taken by large investors.
Money fund pioneer The Reserve goes live this week with its new Reserve Treasury & Repo Money Market Fund, which will initially offer an Institutional Class (TRPXX), a Liquidity Class (TRLXX), and R Class (Retail, TRRXX). The Institutional class will have a $35 million minimum and charge 13 basis points, the Liquidity I class will have a $20 million minimum and charge 16 bps, and the R will have no minimum and charge 1.06% (it includes a 0.25% 12b-1 fee).
HighMark Capital Management, a subsidiary of Union Bank of California, has also just filed to launch HighMark Treasury Plus Money Market, which, like other HighMark funds, will offer Retail A, Fiduciary and S (Sweep) shares. This fund too will be a Treasury & Repo offering, and will be distributed by PFPC Distributors. The Retail A shares will charge 0.55%, the Fiduciary shares will charge 0.30%, and the Sweep shares will charge 0.85%.
Interest in the formerly tiny Treasury and Government money market fund sector exploded in the second half of 2007 as as a flight to quality cast suspicion of anything not government guaranteed. While the shift into these funds has abated, concerns about volatile price swings in Treasury securities and asset flows in Treasury funds have no doubt increased the attractiveness of a repurchase agreement (repo) "liquidity bucket". (Repo holdings, which make up 22.0% of all taxable money fund holdings, tend to have overnight maturities, making them the most liquid of money fund investments.)
Treasury money fund assets increased by over 136% over the 12 months through 4/30/08, according to Money Fund Intelligence, while Government money fund assets increased by 130%. This compares to an increase in "Prime" money fund assets of 26% during the past year. Treasury and Government fund assets declined sharply in April, however, down 5.9% and 3.9%, respectively, as the concerns over the safety of money funds have subsided.
While it briefly appeared as if the party was ending for money market mutual fund assets, following a 3-week, $118 billion decline in late April, the inflows have returned with a vengeance. The latest weekly totals from ICI show money fund assets continuing their strong post-tax-season rebound, rising $25.8 billion to $3.498 trillion. Last week funds jumped $54 billion and it appears likely that assets will shortly retake their record levels just above $3.5 trillion.
Institutional investors once again drove the inflows, with a gain of $30.54 billion to $2.265 trillion. This puts assets back to a mere $2 billion below their pre-April 15 record level, and pushes the institutional funds' total of all money fund assets to a record 64.7%, almost two-thirds of the overall total. Just decade ago, these percentages were reversed, with Retail money funds accounting for 63% of all money fund assets.
Retail money funds showed outflows of $4.77 billion to $1.233 trillion, but these assets are still up a brisk 22% ($224 billion) over the past 52 weeks. Institutional assets, however, have increased by a massive 53.6% since May 2007, or $790 billion. Overall money fund assets remain up by over $1 trillion over the trailing 52 weeks, an increase of 40.8%. Year-to-date, money funds have gained $353 billion, or 11.2%, following their record-breaking increases of $763 billion (32.0%) in 2007.
As we've said recently, we expect money fund inflows to slow from this torrid pace, though the increases should remain in the double-digits. Even the possibility of higher short-term interest rates later this year shouldn't be enough to reverse the harmonic convergence of events pushing cash into money markets.
Deutsche Bank's DB Advisors has become the first money market mutual fund complex to sign up for Clearwater Analytics money fund transparency initiative. DB will provide money fund portfolio holdings, initially twice monthly, and additional information to Clearwater's new money fund module, which will allow for flexible summary reporting and risk measurement outputs on the fund portfolios.
DB's Joe Sarbinowski and Kevin Bannerton tell us, "The rationale and reason is to continue to build confidence in the money fund industry. We've weathered the storm, but clients are looking for more transparency and analytics, and a way to make more informed decisions around risk attributes." They add, "We will respond to what the market needs as far as frequency," but that their client survey indicated that daily holdings would be "overkill". Investors need to respond to auditors and investment committees, and to immediately gauge their headline risk, the two say.
Sarbinowski tells us, "It's not so much about the frequency or the holdings; people want to know what the information means." it has to be "in-depth enough that clients can feel comfortable with the investment decisions we make". He says the new tool will go above and beyond holdings, "providing the flexibility to look at various data formats". It will provide information such as ABCP credit enhancements and liquidity support, a spectrum of maturities, and information on the financial sponsor for RFI's.
Regarding SIVs, which were held by over 2/3 of money fund advisors, DB says it has no more as of its April 30 filing and didn't hold any problem issues or have to infuse capital to support their money market funds. "We're happy that that's a past story for our product," says Sarbinowski. Bannerton says that the "lack of understanding around asset classes" added to the past turmoil. "If we can educate around risk attributes, we may prevent a knee-jerk reaction."
"This is to try to make investors lives easier to see what is happening in the porfolio," DB says. "There may be an acute focus now," but the need for transparency is a longer-term trend and goes beyond money funds says Bannerton. "There will be a new standard of surveillance. Clients want to see that processes are in place to monitor risk on an ongoing basis." DB Advisors, which is the new name for Deutsche Bank's global institutional investment management business, says they're ramping up for a July 1 launch.
The Investment Company Institute, which last week held its annual General Membership Meeting, will host another semiannual meeting of its two-year old Institutional Money Market Fund Committee on Thursday, May 15. The IMMFC group was formed in "an effort to share best practices and to discuss how companies are dealing with ongoing regulatory changes in the industry" founding Chairman Bob Deutsche told us in the July 2006 issue of Money Fund Intelligence."
While previous meetings have been hushed, low key affairs, those gatherings also didn't have any particular pressing concerns. But attendance should be heavy at this latest meeting, considering the problems that have beset money fund advisors this year. A number of new invitees will be in attendance this time too, so the discussions and debate should be lively.
Concerns by some over the appearance of collusion too may have limited the effectiveness and scope of previous discussions. But new Chairman Bill Hoppe hopes to gather a consensus and rally the industry around a few action points. We suggest the Committee focus its attention on educating the broader public about the safety of money market funds in general, and about the safety and mechanics of asset-backed commercial paper and other money market securities in particular.
Knee-jerk panic reactions by large investors, funds and others bear much of the blame for the current turmoil in the money markets. While fund investors and corporate treasurers were, in the main, well-versed in the products and potential risks, their bosses and the public at large were all too quick to pull the ripcord on major segments of the commercial paper market. This irrational liquidity panic caused much, if not all, of the damage we've seen to date. We believe a more spirited defense of the safety of extendible ABCP and SIV related CP and MTNs could have prevented much of the flight, meltdown and losses.
We recently asked Mark Amberson, Director of Short-Term Investments for Russell Investments, if he had any suggestions for other money fund managers and money market investors. Below, he offers the first of what may become a new "Tip of the Month" feature on www.cranedata.com. Amberson suggest managers look into the "tactical purchase of floating rate notes". He tells us, "Look to choose a floating rate note index that is temporarily expensive vs. other money market indices. When the index reverts back to historical norms vis-a-vis other indexes, you likely will enjoy nice rate resets."
We then asked Amberson, "What are the most commonly used indexes for FRNs (floating rate notes)?" He answers, "The most common floating rate note indexes for money fund eligible FRN's are: Fed funds (effective, open, or target), one and three month LIBOR, Prime, and, to a lesser extent, 3-month Treasury bills." He explains, "A portfolio manager has to make sure that the index chosen is highly correlated with money market rates, in order to utilize the maturity shortening provisions of Rule 2a-7."
Finally, we asked Amberson about the recent brouhaha over LIBOR. He comments, "While it has dropped a lot since the late April fuss about it, it's too early to tell if there will be any long term structural changes to the calculation of LIBOR. I have seen some proposals, like a US bank-based LIBOR, but I think it's too early to say what the ultimate outcome will be. I will say that the uncertainty surrounding LIBOR makes choosing and pricing a LIBOR based FRN particularly challenging now."
Last week, we wrote about some of the statistics and commentary on instutional money market funds and flows available in the recently-released "2008 Investment Company Fact Book. This excellent resource, published by ICI, also comments on record retail money fund inflows and shows a table breaking cash flows into U.S. Government and General Purpose money funds.
The Fact Book says, "Retail money market funds, which are principally sold to individual investors, received net new cash of $172 billion in 2007, following an inflow of $96 billion the previous year. Money fund yields followed the pattern of short-term interest rates, remaining steady in the first part of 2007 then falling off somewhat in the latter part of the year. The difference between yields on money market funds and those on bank deposits remained at just under 4 percentage points for much of the year before narrowing about 80 basis points by year-end. Nevertheless, the yield on retail money market funds by year-end 2007 remained quite favorable when compared to the historical experience of the past 15 years."
While ICI's statistics show General Purpose Institutional money fund assets rising at over twice the rate of Government Institutional money fund assets in the first half of 2007 -- $53 billion (to $983 billion) vs. $22 billion (to $329 billion) -- this reversed in the second half of the year. Government Inst funds saw $249 billion of net new cash flow (to $583 billion) in the second half vs. $131 billion (to $1.123 trillion) for General Purpose ("Prime") Inst money funds.
ICI's new publication also shows that Businesses accounted for over half of the new institutional inflows into money funds, rising $123 billion, or 31.2%, in 2007. (Business assets in Institutional and Retail money funds total $518.1 billion, or 58.4%, in a Table entitled, "Assets of Institutional Investors in Taxable Money Market Mutual Funds by Type of Institution and Type of Fund".) However, Nonprofits grew at the fastest rate (74.7%), followed by "Other", which includes "state and local governments, funds holding mutual shares, and other institutional accounts not classified" (46.7%).
Mutual fund industry trade group the Investment Company Institute released its "2008 Investment Company Fact Book"" yesterday. This extensive collection of mutual fund analysis, facts and figures contains a host of important comments and tables relating to money market mutual funds. ICI summarizes, "Net new cash to money market funds surged in 2007, likely reflecting the attractive yields on retail money market funds and the influence of the financial markets' turmoil and associated declines in short-term interest rates in the latter part of the year."
The Fact Book says, "Institutional money market funds, used by businesses, pension funds, state and local governments, and other large investors, had inflows of $488 billion in 2007, following inflows of $151 billion the previous year. Inflows to institutional money market funds likely were boosted by two factors. First, short-term interest rates fell considerably in the last three months of 2007 as the Federal Reserve eased monetary policy. Institutional money market funds tend to receive inflows when short-term interest rates decline because the yields on these funds lag behind those available on competing products such as direct investments in commercial paper and short-term U.S. Treasury instruments."
It continues, "Second, the turmoil and illiquidity in credit markets that began in August 2007 may have prompted corporate treasurers to make greater use of institutional money market funds. Some corporate treasurers -- cognizant of the lack of liquidity in short-term credit markets and concerned about their ability to adequately monitor and assess credit quality -- may have taken the opportunity to redirect some portion of their companies' liquid assets away from direct purchases of short-term instruments and toward institutional money market funds. At year-end 2007, U.S. nonfinancial businesses held a record 31 percent of their short-term assets in money market funds."
On the surge in government fund assets, ICI says, "Difficulties in the credit markets also influenced the type of money market fund institutional investors gravitated toward. Investors faced with uncertainty about the extent of exposure to certain securities, such as extendible notes or those issued by structured investment vehicles (SIVs) backed by sub-prime mortgages with deteriorating credit quality, appeared to seek out the liquidity and safety of money market funds that invest primarily in U.S. government securities.... As of year-end 2007, U.S. government money market funds accounted for 34 percent of total assets of taxable institutional money market funds, up from 25 percent at year-end 2006."
Look for more excerpts from the ICI Fact Book in coming days.
The following is excerpted and updated from our May Money Fund Intelligence, which was published yesterday.... The first issue of Crane Data LLC's flagship Money Fund Intelligence was published two years ago to the day. At the time, the newsletter was a mere 8 pages and covered only the 150 largest money market mutual funds. But the company, founded by money fund expert Peter Crane and computer and statistics guru Shaun Cutts, benefited from excellent timing. Money fund yields were approached 5% and cash was coming back into vogue. Over our first two years, MFI has quickly expanded into the most widely read publication in the money markets and money fund industry, with over 700 readers.
On our 2nd birthday, we wanted to familiarize new readers and visitors with our mission to bring "faster, cheaper and cleaner" money market and mutual fund information to both investment professionals and investors. While we intend to cover and track everything related to money markets, savings, and mutual funds, our core focus has and will be on money market mutual fund performance and the money fund business. Crane Data LLC's website, http://www.cranedata.com, now hosts over 1,300 visitors a day. While the majority are still money fund professionals, the site is seeing growing interest from the institutional, and retail, investor community, as well as from issuers, regulators, and services. This growing "nexus" of money market people and information is what makes our products and company special.
We've taken pride in breaking a number of news stories impacting the money fund industry, and we've particularly enjoyed our position as a "debunker" of incorrect information during the most recent liquidity crisis. We will do our best to continue to arm industry participants and the public at large with accurate facts and figures on money market mutual funds and money fund investing. Please keep the tips and information coming!
We hope you've enjoyed Money Fund Intelligence and www.cranedata.com so far! (If you're not already, we hope that you'll consider subscribing and supporting us, particularly if you're a regular user of the free site.) We will continue to pursue our mission of faster, cheaper and cleaner money market mutual fund information. Crane Data would like to thank our subscribers, supporters, and information providers. We owe you a debt of gratitude, and we look forward to serving you in the years ahead. Please don't hesitate to contact us if we can be of assistance. Sincerely, Peter G. Crane, Founder, President & Publisher, Crane Data LLC
The Dreyfus Corporation has filed a supplement to its Dreyfus Money Market Funds prospectus stating that the fund will disclose its portfolio holdings daily. Mutual fund news source ignites alerted us to this filing, and posted a story today entitled "Dreyfus Makes Bold Move on Money Fund Disclosure". (To see Dreyfus holdings page, click here.)
The filing says, "Each Dreyfus money market fund will disclose daily, on www.dreyfus.com, the fund's complete schedule of holdings as of the end of the previous day. The schedule of holdings will remain on the website until the fund files its Form N-Q or Form N-CSR for the period that includes the date of the posted holdings."
The ignites.com article quotes Dreyfus spokeswoman Patrice Kozlowski, "Dreyfus has taken this step in recognition of the industry's move towards greater transparency of money market fund holdings."
The article adds, "Money fund watchers say that while Dreyfus -- which went relatively unscathed by mortgage-backed securities exposure -- may gain some short-term marketing ground by being the first to disclose money fund holdings on such a regular basis, it's the analytics behind the holdings that investors really seek."
It also quotes our Pete Crane, "I would say daily holdings are going overboard. Investors are asking for the holdings, but what they really want is a breakout." Once the SIVs are gone, "I don't think people will really care. It's like looking at the control panel of a 747. It's not going to make you fell any better."
Clearwater Analytics, CacheMatrix, Crane Data, and others have projects underway to obtain and analyze daily holdings, and other fund companies have been disclosing holdings more frequently (in some cases daily and weekly on request). We'll undoubtedly hear more on this topic in coming weeks.
Legg Mason (LM) reported its first quarterly loss ever, "primarily driven by non-cash charges to support money market funds." The "previously announced support for money market funds" added a $291 million after tax and adjustment loss, and total "net money market fund support" charges were $472 million in the quarter and $508 million over the past two quarters. The company also announced steps to raise capital "to provide additional support for the money funds, if needed," said President & CEO Mark Fetting on today's earnings conference call.
Fetting noted improving conditions of late, saying that "various Fed actions have effectively halted the contagion," in the credit markets. The advisor has engaged in three types of support for its money funds to date -- letters of credit (LOCs), total return swaps, and purchases in securities. Legg Mason, which runs the Citi and Western funds, said it has reduced its structured investment vehicle-related (SIV) holdings from $4.5 billion, or 6% of $167 billion, in October to $2.9 billion, or below 2% of $176 billion, in March. One-quarter of the remaining SIVs are in bank-sponsored programs.
CFO C.J. Daley said, "We have taken deliberate and thoughtful steps to support our money fund business." He added that the support was in the best interests of both money fund and Legg Mason shareholders. "Both interests are aligned," he said on the call. Legg cited improvements in the credit and SIV markets of late, saying the "mark-to-market" loss estimates had decreased in April. "It was a good credit month," said the company in response to an analyst question.
Legg Mason's Western Asset subsidiary has seen assets increase by 10.7%, or $10.8 billion, in the first quarter, to $111 billion, according to Crane Data's recently released quarterly, Money Fund Intelligence Distribution Survey. (The company includes "offshore" and international money fund assets in its $176 billion figure.)
To date, at least 13 advisors have purchased or sought guarantees for over $30 billion in securities, at a "mark-to-market" cost of over $3 billion, in order to prevent their money market mutual funds from suffering losses and potentially "breaking-the-buck". While there undoubtedly will be more more disclosures, the threat that mortgage-related debt poses to money market funds is receding as the final portions of SIV debt are paid in full, purchased or protected.
The most recent issue of our Crane Data's quarterly Money Fund Intelligence Distribution Survey looks at the asset growth of fund families that have had "bailout" events and contains a table listing all of the advisors that have publicly disclosed support actions to date. Crane Data estimates that money fund managers to date, on paper, have lost over $2 billion on the purchase and/or protection of almost $30 billion in securities.
Note that Legg Mason's earnings this morning -- see our "Link of the Day" -- may push these totals upwards slightly as the company increases its loss estimates of previously taken support actions to a total of $508 million.
While the final accounting tallies could grow as large as losses of $5 billion on $50 billion of securities, we believe that actual losses will total from $500 million to $1.25 billion, or 1% to 2.5% of defaulted or downgraded SIV assets. This is based on backing out expected recovery rates, given that SIVs may be 10 times worse than historical loss rates on CP, which are well above 99%. These loss totals also would be a mere fraction of money funds' annual revenues, which are approaching $15 billion.
MFI Distribution Survey found that advisors supporting their money funds haven't seen outflows. Asset increases for advisors experiencing bailouts averaged 0.1% in April, compared to 1.8% gains for all families (and 2.3% for the 25 largest). Funds experiencing support actions grew 6.0% over the last 3 months, vs. growth of 13.7% for all funds. Bailout fund assets have grown 30.0% the past 12 months vs. 48.2% for all fund assets.
The only "support-related" fund family to show significant outflows for the last 1-month, 3-month and 12-month periods is `Credit Suisse, which posted declines of 34.0%, 39.9%, and 61.7% over these periods. For a full listing of fund family asset rankings and changes, see the new Money Fund Intelligence Distribution Survey.
Yields on money market mutual funds continued their march lower in April, according to our monthly Money Fund Intelligence statistics. The bellwether Crane 100 MF Index fell from a (7-day) yield of 2.76% on March 31 to 2.47% as of April 30, 2008. A year ago, the index of the 100 largest taxable money funds was 4.98%, and on Dec. 31, the Crane 100 was 4.49%. The broader Crane Money Fund Average, which tracks 865 taxable money market mutual funds, declined from 2.26% to 2.08% currently. It has fallen from 4.85% on April 30, 2007.
Treasury fund yields rose for the month of April, increasing from 1.36% to 1.61% for Institutional funds and 1.04% to 1.19% for Treasury Individual money funds. Government Institutional Money Fund yields fell from 2.46% to 2.22% in the latest month, and Government Individual yields fell from 2.05% to 1.85%. Prime Institutional yields declined by 34 basis points to 2.73%, while Prime Individual yields, on average, declined by 31 bps to 2.29%. Tax Exempt Money Fund Yields rose from 1.86% to 2.05% on the month.
Rates should continue lower in May, though they appear to be taking their sweet time digesting the Fed's latest 1/4-point rate cut. Markets anticipate that this could be the last Fed move for this series, so money fund rates should stabilize slightly below current levels. Longer-term and LIBOR-linked money market rates have actually risen slightly, so money fund yields may even start inching higher once the latest Fed move lower is digested.
The pending May issue of Crane Index and Money Fund Intelligence will contain our full series of money fund and cash investment averages. The new issue will also feature a discussion with `Vanguard Prime Money Market Fund manager David Glocke, a celebration of Crane Data and Money Fund Intelligence's 3rd birthday and a review of our first two years, and of course coverage of all the news impacting the world of money market mutual funds.
Money market mutual fund assets plunged in the latest week, falling $65.43 billion to $3.418 trillion, according to the Investment Company Institute's latest weekly series. Outflows totaled $118 billion over the past 3 weeks, the first significant downturn in assets since January 2007 and the first 3-week consecutive decline since early 2006. While this may signal that the largest cash buildup in history may be at an end, keep in mind the volatile nature of weekly money fund assets, the significant impact of tax-payment outflows and the seasonal effects of normal month-end related outflows on money fund asset totals.
Retail money market mutual fund assets, now 36% of the total, declined by $18.22 billion to $1.232 trillion, while Institutional money fund assets declined by $47.21 billion to $2.186 trillion. Taxable assets accounted for $12.53 billion of the Retail drop and $46.84 billion of the Institutional drop. Year-to-date, money fund assets have still increased by $273.7 billion, or 8.7%, and the rolling 52 week increase retreated back below the $1 trillion level (up $971 billion, or 39.7%).
We expect inflows into money funds to be large next week, though the days of gangbuster 40% growth indeed are likely history. The beginning of the month always brings strong fund inflows as dividends, bond coupons and new funding payments hit money market accounts.
The Federal Reserve's most recent quarter-point cut (to 2%) hadn't been announced in time to impact this week's flows, but this should push more institutional cash into money funds. However, as expectations spread that the Federal Reserve may be done with its latest series of rate cuts, the substantial rate advantage that money funds have held over direct money market instruments will soon vanish.
Though money funds hope that investors who came for the yield will stay for the safety and liquidity, and past history indicates that most of the money indeed will remain, they'll no longer have the massive tailwind of falling rates to drive assets. However, money funds should remain attractive due to a continued preoccupation with quality in a volatile marketplace, and due to funds' unblemished record of safety during the current liquidity squeeze.
Two of the most widely used short-term benchmarks used in the money markets -- Treasury bill rates and LIBOR -- have been criticized recently for being too volatile, too narrow, and too detached from the reality in the broader short-term funding markets. Treasury rates have been pushed to abnormal lows, while the London Interbank Offered Rate's woes have been well-documented recently. LIBOR's thin reporting base, European focus, and voluntary "honor-system" reporting have market participants discussing alternatives.
Today's Wall Street Journal writes "New York Rate System to Challenge Libor", which discusses plans by prime brokerage behemoth ICAP Plc to "launch a new measure of U.S. interest rates in response to concerns about the accuracy of the current [LIBOR] benchmark."
WSJ writes, "The rate system, which is being set up by ICAP PLC, a London broker-dealer with offices in New York, is aimed at giving banks and market participants a new gauge of what it costs banks to borrow money. ICAP intends to start publishing the rate, which will be called the New York Funding Rate, or NYFR, as soon as next week, said Lou Crandall, chief economist at Wrightson ICAP."
Other short-term index alternatives are being discussed as well, such as money fund averages, commercial paper indexes, or other broader money market benchmarks. Crane Data, of course, is in the short-term benchmark business with our Crane 100 Money Fund Index and suite of Crane Money Fund Indexes, Brokerage Sweep Indexes, and nascent collections of bank savings and CD averages.
We would be happy to discuss the pros and cons of various benchmarks, and would be happy to share sample of our monthly Crane Index product, which contains a number of different money market indexes and averages.