News Archives: July, 2008
The Investment Company Institute released its monthly "Trends in Mutual Fund Investing: June 2008" last night, which showed taxable money fund assets declining by $62.5 billion, or 2.1%, last month to $2.910 trillion and tax-free money fund assets declining by $6.6 billion, or 1.3%, to $496.8 billion. ICI's Month-End Portfolio Holdings of Taxable Money Market Funds table showed large increases in government agency securities, commercial paper and certificates of deposit, and large decreases in repurchase agreements, U.S. Treasury bills, corporate notes and Eurodollar CDs.
Commercial paper remains by far the largest holding in taxable money funds. MMFs held $714.4 billion in June, up $15.3 billion for the month. CP accounts for 24.6% of money fund assets, up from 23.5% the prior month but down from 31.5% a year ago. (ICI's CP totals don't break out but include ABCP, which accounts for 43.5% of the total CP market.) Repo was the second largest holding in June with $536.6 billion, down $48.8 billion from May. Repo represents 18.4% of assets, down from 19.7% in May and 19.7% a year ago.
U.S. Government agency securities rank third with $376.7 billion (12.9%), up $20.9 billion in June (from 12.0% in May). CDs rank fourth with $310.7 billion (10.7%), up $9.9 billion, while corporate notes rank fifth with $304.7 billion (10.5%), down $11.4 billion. Corporate notes have declined sharply from their year ago level of $362.1 billion, or 16.9% of assets. (Most SIV MTNs, or medium-term notes, would have appeared here a year ago.)
Single digit holdings of taxable money funds include: Treasury bills ($212.6 billion, or 7.3%); Eurodollar CDs ($144.8 billion, or 5.0%); bank notes ($96.1 billion, or 3.3%); other Treasury securities ($60.1 billion, or 2.1%); and ICI's "Other" category ($149.5 billion, or 5.1%). T-bills and other Treasury securities combined ($272.8 billion) declined $23.9 billion in June, from 10.0% to 9.4%. But they've increased by $181.7 billion over the past year, more than doubling their percentage (from 4.2% in June 2007) and almost tripling their dollar total (from $91.1 billion).
Over the past 12 months, taxable money fund assets have increased by $765.6 billion, or 35.7%. Year-to-date, taxable money fund assets have increased by $$267.7 billion, or 10.1%, while YTD tax-free money fund assets have increased by $31.7 billion, or 6.8%.
UK Treasury website GTNews.com unveiled a barrage of articles written by European money market mutual fund providers, portals and participants. While we hope to cover some of the worthier pieces in more detail in coming days and in our next Money Fund Intelligence, for now we list a summary of highlights from some of the articles below.
First, Kathleen Hughes of JPMorgan Asset Management writes in "Short-term Investors Get Smart," "The problems in the financial markets over the last year have seen money market funds become the short-term investment instrument of choice. But this spotlight has also meant that they have come under more scrutiny and investors are asking more questions about these funds." Hughes explains, "`The strategies that have benefited most from the past year's market dislocation have been short-term bank deposits, government securities and AAA-rated, stable net asset value (NAV) money market funds (MMFs)."
Next, Kevin Thompson of Fidelity International writes, "Money Market Funds Weather the Credit Storm," explains, "One certainty for treasurers in these trying markets was that treasury-style money market funds (MMFs) stood firm. Ever since the market turbulence began in earnest last summer, a wide range of investors have sought refuge in MMFs. The general flight to quality in the credit markets over the last six months has led to relatively higher yields for these funds. MMFs are investments that attract the highest credit and liquidity ratings from rating agencies, since the fund managers only invest in short-term highly rated securities such as certificates of deposit, commercial paper and government bills. Corporate treasurers are the dominant class of investors in these funds but other institutions are also catching on. A wide variety of investors from local authorities to hedge funds are using liquidity funds as places to park their short-term un-invested cash."
Invesco's Karen Dunn Kelley writes, "Money Market Funds Evolving from Market Turmoil," who says, "[W]e were flooded with shareholder calls from corporate treasurers and other institutional investors trying to understand what was in their MMF and with concerns about the liquidity in the marketplace. Corporate treasurers have invested in MMFs for years and have not had to be concerned or answer questions regarding the composition or the safety of their money market investments."
Other pieces include: "Cash Management Perspectives on Short-term Investments, by David Rothon of Northern Trust, "Harnessing Technology to Simplify Investment Decisions" by Basak Toprak on Citi's portal, "Investing Through the Liquidity Crisis" by Kirk Black on The Bank of New York Mellon's portal, "Managing Corporate Cash Reserves During Turbulent Times by Alain Kerneis of Goldman Sachs Asset Management, and "Post Sub-prime: The Impact on Treasurers Managing Liquidity" by Francois Masquelier of The European Association of Corporate Treasurers (EACT).
Finally, Ben Poole of GTNews adds a section summary with "Short-term Investment Strategies for Treasurers."
Money market funds are preparing for a surge of cash from extendible notes and some vestiges of SIV-related debt set to mature over the next month. Since the credit crisis started last August with the extensions of Broadhollow, Luminent and Ottimo Funding, portfolios have become steadily more conservative. But a nice-sized portion of some fund's assets have been waiting out these extensions and the longer-maturities of MTNs (medium-term notes) and other 1-year securities. So the new looming problem, one which money funds are likely happy to have considering the past year's turmoil, is supply.
In this week's Financial Week, Megan Johnston writes an article entitled, "Maturing paper could hit money fund yields." She says, "The one-year anniversary of the credit crunch has some ominous overtones for money market mutual funds, with extendible notes and paper issued by some corporations and structured investment vehicles maturing at the same time that cash continues to pour into money-market funds.
J.P. Morgan Securities' Alex Roever and Cie-Jai Brown have been pointing out for weeks, "[M]oney market funds will see substantial cash inflows as they redeem extendible notes put back to issuers at the beginning of the credit crisis." JPM estimates that tens of billions in "x-notes" will mature over the next seven weeks. They add, "We think some of this new cash will be reinvested in corporate floaters." Last week, Roever added, "While we maintain that much of the forthcoming refinancing of maturing x-notes and other debt will take place in the money markets, we caution investors that all of these issuers will not be treated as equals."
FW also cites Moody's latest "Portfolio Management Activities of Large Prime Institutional Money Market Funds" study, saying, "Already, money funds have been whittling risky investments out of their portfolios. Asset-backed securities, including those backed by collateralized debt obligations and mortgages, dropped to 1.1% of assets at the 15 largest prime institutional money-market funds as of the end of last year, from 2.9% a year earlier." It adds, "Extendible asset-backed commercial paper and extendible notes were 1.7% and 3.1%, respectively, of portfolio assets as of December; that's down from 6.3% and 10.2%, respectively, a year earlier."
SIFMA's response to one of the recent SEC proposals on NRSROs (but not the two related to Rule 2a-7 and money market funds -- comments on these are due Sept. 5) says, "The Securities Industry and Financial Markets Association's (SIFMA) Credit Rating Agency Task Force, in a comment letter filed with the Securities and Exchange Commission (SEC) on parts one and two of the SEC's proposed rules for credit rating agencies, broadly supports the SEC's efforts to address the issues relating to credit ratings of structured finance products, as well as improve the ratings process in general. In the letter, the Task Force notes the need for greater disclosure and increased transparency of the credit ratings process, while at the same time suggesting modifications to the proposals which it believes will make them more effective."
"We support the goals outlined in the SEC's proposal of improving disclosure of ratings methodologies, addressing conflicts of interest, and improving the transparency of ratings performance," said Deborah Cunningham, chief investment officer at Federated Investors and co-chair of SIFMA's Credit Rating Agency Task Force. "We encourage the SEC to ensure its ratings proposals are as effective as possible in achieving these goals, and in helping to prevent the credit-rating related issues which contributed to market turmoil over the last year."
"Better disclosure of information and more transparent and clearer explanations of ratings and the ratings process, combined with more frequent scrutiny of each rating, will, taken together, help boost investor confidence," said Boyce Greer, president, fixed income and asset allocation division at Fidelity and co-chair of SIFMA's Credit Rating Agency Task Force. "Providing investors with improved understanding of the basis for and limitations of credit ratings will undoubtedly be beneficial to the global markets."
The SIFMA letter concludes, "We support the efforts by the SEC to promote investor confidence in credit ratings, increase accountability in the rating process, and reduce conflicts of interest in the ratings process. The recent market turmoil has revealed a crisis in investor confidence in NRSRO ratings of structured securities. The lack of transparency concerning information made available to NRSROs, rating methodologies, the inputs and assumptions underlying such methodologies, the level of examination of underlying data, and the ongoing surveillance process hinders investors in their ability to utilize credit ratings as part of an independent, comprehensive approach to risk assessment. Similarly, the lack of easily accessible, comparable performance information prevents users of credit ratings from evaluating the rating performance of different NRSROs. Accordingly, the Task Force believes that the proposed requirements for increased disclosure under Rule 17g-2 and Form NRSRO discussed above are an appropriate step in light of the overall goal of increased transparency and will both allow investors to rely on NRSRO ratings with a fuller understanding of the bases and limitations of such ratings and encourage NRSROs to improve their rating processes. In order to make additional strides toward these goals, however, we hope that the SEC will take steps to further enhance and revise these proposed amendments along the lines we recommend in this letter."
The Investment Company Institute's latest weekly money fund totals show assets increasing by $8.81 billion to $3.507 trillion the week ended July 23, 2008. Retail assets grew $2.70 billion to $1.231 trillion and Institutional assets grew $6.11 billion to $2.276 trillion. Year-to-date, money fund assets have increased by $362.7 billion, or 11.5%, though assets remain below their record level of $3.536 trillion set the week of April 9 this year.
In other news, a press release says, "The Performance U.S. Treasury Money Market Fund, a Trustmark proprietary mutual fund, has been assigned Standard & Poor's "AAAm-G" principal stability fund rating. The fund commenced operations in September 2007 and is managed by Trustmark Investment Advisors, Inc. The fund seeks to provide investors with the highest possible current income as is consistent with preservation of capital and liquidity. To achieve its investment objective, the fund normally invests its assets in short term direct obligations of the U.S. Treasury."
Finally, some Product News from Crane Data. Next week, we will release our quarterly Money Fund Intelligence Distribution Survey, which tracks sales trends, market share and asset metrics. We've also recently launched Money Fund Intelligence Daily, which provides daily dividend factors, 1-day, 7-day and 30-day yields, assets and maturities on our Crane Indexes and over 300 of the largest money funds. We're also now publishing Brokerage Sweep Intelligence, which tracks bank, money fund and CD options from the nation's largest brokerages. Finally, we're preparing for the "beta" release of Money Fund Wisdom, which will allow subscribers to build custom reports and peer groups from our database of historical money fund performance information. E-mail Pete or call 1-508-439-4419 for samples or for more details.
Moody's assigned a AAA/MR1+ (money fund) to the new HSBC Canadian Dollar Liquidity Fund, "reflecting the high credit quality and underlying liquidity of the portfolio, together with the disciplined investment process and, effective risk management structure of the investment adviser, HSBC Global Asset Management (USA) Inc." The new sub-fund of HSBC Global Liquidity Funds PLC launched yesterday, becoming the sixth AAA rated Canadian money market mutual fund.
Moody's says, "The objective of the fund is to provide security of capital and liquidity together with an investment return which is comparable to normal Canadian Dollar denominated money market interest rates. The fund will aim to achieve its investment objective by investing in a diversified portfolio of high quality money market instruments denominated in Canadian dollars. These will include certificates of deposit, commercial paper, medium term notes, floating rate notes, banker acceptances, government bonds, treasury bills, Eurobonds, asset backed securities and corporate bonds." It adds, "During the investment ramp-up stage, Moody's expects the fund will have a larger percentage of assets in short-term cash while the manager becomes more acquainted with the cash flow patterns of its fund's institutional shareholders."
Other "offshore" money funds rated AAA-MR1+ by Moody's include: the Dublin-domiciled Daiwa Gaika MMF - Canadian $ Portfolio and Fidelity Inst. Cash Fund Plc - Canadian Dollar, and the Luxembourg-domiciled Nomura Multi Currency MMF - Canadian $ MMF. S&P rates the Bermuda-domiciled `Butterfield Money Market Fund Limited - Canadian Dollar Class AAA. (S&P also shows a AAA rating for the new HSBC fund, though a release has yet to be issued.) In addition, Moody's rated the only domesticly-available Canadian AAA money fund, AIM Trimark Canadian Dollar Cash Mgt Fund.
Crane Data wrote in its March 2008 Money Fund Intelligence, "AIM, Fidelity, Legg Mason and UBS are some of the major U.S. money fund names that offer Canadian money market funds, either domestically or via "offshore" funds. Other big fund names in Canada include: RBC, TD, CIBC, BMO, Franklin, Dynamic, and AGF. The Canadian money fund market totals just $60 billion, according to the Investment Funds Institute of Canada (IFIC). It is almost entirely retail in nature, as institutions have yet to warm to pooled products. But multinationals are inquiring, and those on the ground expect institutional money funds to materialize and prosper in coming months."
As we mentioned in yesterday afternoon's "Link of the Day," BlackRock's Mark Rimmer just posted an article on European Treasury website GTNews, entitled "Guide to Money Market Funds - Part I: The Current Landscape". The piece describes events and asset growth in the U.K., European and "offshore" money market fund space, but we particularly enjoyed Rimmer's comparison of money market mutual funds vs. bank deposits.
Rimmer writes, "When the money market turbulence first erupted in August 2007, many European investors favoured bank deposits because they felt that they understood exactly where their risk lay and that the associated risk would be lower than if they invested in a triple-A rated money market fund (MMF). Some investors were nervous about MMFs without really understanding them and the benefits of the fund structure. The tide has since turned, as the recent flurry of write-downs from banks has made investors wary of the concentration risk of having their precious cash invested with a small number of banking names, preferring instead to invest in a triple-A rated MMF that spreads their exposure over a very large number of issuers (50-100)."
He adds, "As the market turbulence spread, investors looked for more secure and effective ways to manage their cash and short-term investments. This resulted in a 20% increase of assets invested in triple-A rated, treasury-style MMFs in the second half of 2007 alone."
When comparing bank deposits and money funds, Rimmer cites the following differences: "Concentration risk: Bank deposits concentrate risk 100% in one banking name while MMFs diversify risk across at least 50-100 highly rated, short-term issuers. Credit risk: An IMMFA MMF is triple-A rated by one or more credit rating agency; most banks are rated AA or lower. The credit crisis has exposed significant risk on banks' balance sheets.... The market has witnessed billions of dollars of write-downs, and expects total write-downs related to the sub-prime problem to be at least US$400-500bn, split between both investment and deposit-taking commercial banks."
In addition, Rimmer also cites these differences: Ring-fencing of assets: Most MMFs are Undertakings for Collective Investment in Transferable Securities (UCITS) compliant and are thus standalone entities in their own right. Their assets are entirely ring-fenced from their parent investment manager and from the custodian. In contrast, by investing in a bank deposit, an investor is effectively placing its cash on a bank's balance sheet." And, finally, "Independent scrutiny of portfolio: The rating agencies scrutinise a money fund's portfolio on a frequent basis to ensure the mark-to-market value could support a full redemption of assets. They also ensure that certain other investment requirements (minimum of 50% of the portfolio invested in A1+/P1, the balance in A1/P1, maximum maturity of any one security of 13 months and issuer concentration limited to 5-10%) are being followed to attain or retain a triple-A rating."
Today, Clearwater Analytics announced the availability of the its new Money Fund Transparency platform, which "provides risk analytics, holdings and performance metrics online in a standardized format" and "provides detailed qualitative information on the fund, the manager, and the organization as a whole." When the program goes live in early August, information will be available on Clearwater's website, on several money fund portals, and on participating fund manager's websites, says the company.
The press release says, "While money market funds do provide information on their holdings, the information is not made available in a standardized format and it is difficult and time consuming to evaluate. Clearwater's Money Fund Transparency platform presents risk analytics, holdings and returns in an easily accessible, legible, and consistent format permitting efficient fund analysis, comparison, and selection. The risk analytics include exposure to issuers, sectors, asset classes, credit ratings, duration and other critical measures."
"[I]t is difficult to collect and compare risk and return information in an efficient manner," says Tim Muindi, assistant treasurer of VeriSign. "A fund that participates in this initiative is addressing an important need and is sending a strong signal about their confidence in the fund's holdings and risk profile, which in turn provides me with an enhanced level of understanding and confidence in my investment decision."
Antoine Hamelin, treasury manager at eBay, adds, "Clearwater's platform will change the way in which Money Funds share and publish their information. The platform consolidates the information and research I need into one comprehensive view so that I can make informed decisions."
Invesco Aim becomes the second company, following Deutsche's DB Advisors, to sign on with Clearwater. EVP Bill Hoppe says, "The ability to better communicate and provide customers with essential investment information is central to our success. The introduction of Clearwater's Money Fund Transparency platform provides a dynamic channel to publish meaningful, timely, and comprehensive fund analytics and holding information on our funds to the investing public."
Clearwater will host a series of Money Fund Transparency Webinars to demo the new reports on July 24, 28 and 29 at 2:00 pm EDT.
This article is excerpted from the July issue of Money Fund Intelligence. As most are aware by now, the trend towards online money market trading "portals" has been one of the major new developments in money fund investing over the past decade. While many of the early portals focused on fund lineups and trading, a second wave of entrants is adding compliance, reporting, and fund transparency in order to create a more efficient user experience. A major driver behind this latest wave of technology is Denver-based Cachematrix.
Cachematrix now "powers" custom trading solutions for 10 different money fund portals, and is preparing to launch at least two more trading systems in coming months. Managing Director Jim Etten tells us, "Cachematrix now provides portfolio holdings reports alongside existing monthly fact sheets, prospectuses, SAI's, annual and semi-annual reports, as well as other critical money fund information." On frequency, Etten says most portfolio holdings ("over 90%") are updated monthly, but some are twice monthly and some are quarterly.
On technology, Etten says, "Our software is built and deployed in a modular fashion. When we sit down and talk to a prospect, they can build systems based upon the software modules that are needed for their client base.... In addition, once a system is built, Cachematrix provides the hosting, data security and the necessary software upgrades to meet the ever increasing market needs.... Over the last couple of years, we've built up our inventory of software modules." These include "a Compliance Trading module, Future Dated Trading, Dual Authorized Trading, Portfolio Analytics, and Batch Trading modules.
How did Cachematrix come about? Etten says, "Well it started with Comerica. Financial institutions were seeking a competitive advantage in growing and retaining their corporate client base and, especially with Sarbanes Oxley, corporate demand for portals was heating up. Banks were calling us and saying, 'Would you be interested in doing a white label of this technology as we need it for our client base?' We looked at the market and set our goal to become the leading technology provider in the space. We still see tremendous growth in this market."
"For mutual fund families, specifically those that have not yet built a system, it's a costly proposition to build internally from scratch. Over the years we have developed the infrastructure and experience to deploy and continually upgrade the software needed for these firms, and in most cases we can do it in half the time and for half the costs they would incur themselves. We definitely have found our niche in the market." Etten says. Contact Pete to request a copy of the full MFI article.
Deutsche Bank's DB Advisors hosted its second quarterly conference call yesterday, entitled, "Today's Money Market Environment and the Importance of Transparency." Head of Americas Institutional Liquidity Management Kevin Bannerton and Head of Liquidity Portfolio Management, Americas, Joe Benevento discussed current market events, such as the GSEs, regional banks, and ABCP, but the presentation focused on "Money market transparency," or "Providing investors with additional disclosure regarding money market fund holdings so that they can make more informed decisions about the risk characteristics of a fund."
Benevento told listeners, "Any asset with contingent or headline risk seems to have trouble funding in the short-term market." On GSEs, he says, "Without question, you're going to see agency spreads widen" and "shortening portfolios." Finally, on ABCP, he says, "What we're witnessing this year is a lot of tiering and sorting and a recovery in this market.... Transparency is driving tiering and pricing. Just as our customers are asking us for detail, we're asking ABCP [issuers] for details."
Bannerton says its clients are asking for: more tools to understand risk, a need for evidence of greater surveillance, more confidence in managers, standardization, and a user friendly format for categorizing holdings. The company is the first to partner with Clearwater Analytics to attempt to build an industry standard for fund holdings reporting and risk analytics. (See our article "DB Advisors, Clearwater Going Live With Fund Transparency Initiative".)
Deutsche says the solution must be free and web-based, "leveraging the expertise of various stakeholders." Examples of attributes investors might want to see included: sector, security, maturity and CP breakdowns, fund sizes, credit quality and maturity, repo collateral, NRSRO distributions, country allocations, program sponsors, ABCP credit and liquidity support, and performance. DB adds that initially it will be disclosing holdings twice a month, because they "don't want to put their portfolio at a disadvantage" by revealing it too frequently. To listen to conference call replay, click here.
State Street Global Advisors has filed to launch SPDR S&P Commercial Paper ETF, we just learned from Strategic Insight's SimFundFiling. Once live, this product likely will become the first true "cash" or "money market" ETF offering, as well as the first cash "index fund". The ETF will be advised by SSgA Funds Management and distributed by State Street Global Markets. The full filing may be seen here, and more information may be found at www.SPDRETFs.com once the fund is launched.
The SEC EDGAR filing says, "The Fund, using an 'indexing' investment approach, seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the S&P Commercial Paper Index.... The S&P Commercial Paper Index measures the performance of the U.S. one-to three-month commercial paper market. The Index includes commercial paper issued by corporate issuers with a maximum program size of at least $2 billion. Asset-backed issuers are not eligible. To be included ... commercial paper must: (1) be priced by the Interactive Data Corporation; (2) have a remaining maturity of between 31 and 91 days; and (3) have a current rating from at least" S&P, Moody's or Fitch."
The new ETF will be run by Todd Bean, SSgA principal and portfolio manager in the U.S. Cash Management Group, Steve Meier, senior managing director of SSgA and a member of the firm's Global Fixed Income portfolio management team, with responsibility for U.S. cash, cash collateral and short-duration portfolio management, and Jeff St. Peters, vice president and senior portfolio manager within the Global Cash Management unit of SSgA's Fixed Income group. The fund will pay dividends and will fluctuate in value. It may also invest in repo and money market funds.
Previous short-term, fixed-income ETFs, such as Bear Stearns Current Yield (YYY), Wisdom Tree U.S. Current Income Fund (USY), and Barclays 1-3 Year Lehman Treasury ETF, have turned out to be enhanced cash funds with longer maturities and/or invested in lower quality securities than permitted by money market funds. SPDR S&P Commercial Paper ETF appears to be the closest ETF yet to a money market fund, though it too likely won't be able to use the moniker. For more on "near-cash" ETFs, see our previous stories: "Bond ETFs Benefitting As Customers Seek Better 'Sweeps'", "More Ultra-Short ETFs on the Way: SPDR Lehmans from SSGA", "Bear Stearns Files to Launch First 'Cash' ETF, Current Yield Fund".
Since the Subprime Liquidity Crisis began almost a year ago in the money markets, mutual fund companies have been steadily increasing their already substantial disclosure and communications with investors. We're now seeing another wave of communications with several firms launching one-off or quarterly conference calls, some adding weekly e-mail updates, and all increasing their output of information in general.
Portfolio holdings and portfolio composition remain a focus. This morning, Deutsche Bank's DB Advisors is hosting a conference call entitled, "Quarterly Liquidity Management Webcast Series: Today's Money Market Environment and the Importance of Transparency," where Kevin Bannerton and Joe Benevento are giving an "update on developments in the short-term fixed income markets and discuss the recent challenges." (Like many, the call is open to institutional investors only.) The call should also mention Deutsche's recent initiative with Clearwater Analytics (see Crane Data's May 15, 2008 News "DB Advisors, Clearwater Going Live With Fund Transparency Initiative") to provide "money fund transparency".
Federated Investors has also announced that it will host another "Institutional Money Market Update" and will provide these "updates on a quarterly basis throughout 2008". Subtitled "Pursuing stability, liquidity and relative safety in turbulent markets," the July 30 call is also open only to institutional investors. Federated and CIO Debbie Cunningham have been in the forefront of the open communications movement, hosting conference calls, speaking with media, and posting numerous articles and updates on their website.
Reserve is sending e-mail alerts and hosting confercence calls "to reassure investors" who are asking, "Is my money fund safe?" "Real basic stuff," MD Eric Lansky tells us. Dreyfus have also been hosting regular client conference calls.
Oppenheimer Funds recently announced a "Weekly Dose" PDF e-mail update with yields, assets, and a portfolio composition breakout. HSBC too has been sending frequent economic and market updates to investors. Also, Goldman Sachs recently posted an update on Fannie and Freddie.
The increase in communications of course corresponds to the heightened level of scrutiny in the "cash" sector following a wave of fund support actions and following troubles with enhanced cash, auction rate securities, and now bank deposits. With new questions over Fannie Mae, Freddie Mac, and now regional bank holdings, money funds now know the drill. They're disclosing holdings more frequently, telling investors why their current investments are still safe, and discussing steps they're taking, and have taken, to assure investors that their $1.00 is still $1.00.
As we've written on www.cranedata.com and in our monthly Money Fund Intelligence newsletter, the Association of Financial Professionals recently released the results of its "2008 AFP Liquidity Survey," the third annual study of large corporations' cash and short-term investment behavior. Today, we take a more detailed look at their section on Investment Policies.
AFP found that 81% of organizations have a written "cash" investment policy and that most review their policies once a year. As we mentioned in our previous article, "AFP Survey Shows Money Funds Main Beneficiary of Flight-to-Safety," bank deposits and treasury bills are allowed by all organizations, and money funds are the third most popular allowable investment with 82% permitting. CP is permitted by 66%, agency securities by 59%, repo by 55%, eurodollar deposits by 49%, municipal securities by 36%, ABS by 31%, ARS by 18%, VRDNs by 17%, SMAs by 17%, and enhanced cash vehicles are allowed by just 15%.
AFP's survey says, "Most organizations have a written document that defines their policies for short-term investments. Written cash investment policies outline the acceptable investment vehicles and the percentage of an organization's portfolio that may be invested in those vehicles, along with the maximum maturity allowed and the minimum credit rating necessary for each investment vehicle. Maintaining a written investment policy is considered a best practice and often is used as part of an organization's efforts to comply with regulations under Sarbanes-Oxley. More recently, a number of organizations have reviewed their written investment policies in response to the turmoil in the credit markets over the past year."
It continues, "Eighty-one percent of organizations have a written document that outlines the organization's policies on cash investments. But the likelihood of an organization having such a written guideline is more pronounced among large organizations, those that are net investors and those with investment grade ratings. Significant percentages of smaller organizations, along with those that are net borrowers and those with non-investment grade credit ratings do not have a written investment policy. Thirty-five percent of organizations with annual revenues under $1 billion do not have a written cash investment policy compared to just five percent of those with annual revenues greater than $1 billion. Just over a quarter of net borrowers (27 percent) do not have a written cash investment policy while 29 percent of organizations with non-investment grade ratings do not have one."
Finally, AFP's Liquidity Survey says, "In devising their cash investment policies, most organizations look to balance their desire for safety and liquidity with their desire to generate a competitive rate of return. Still, for most organizations, the most important objective for their cash investment policy is safety of principal. Three-quarters of financial professionals indicate that the primary focus of their organization's cash investment policy is to protect their investment principal. For 23 percent of organizations, the primary objective of cash investment policies is to optimize liquidity." For the full survey results, click here.
The following is excerpted from the July issue of Money Fund Intelligence. Los Angeles-based TCW Group celebrates its 20th anniversary running TCW Money Market Fund this year. This month we interviewed Portfolio Manager Barr Segal, who has been involved with the Trust Company of the West's money fund since its inception in 1988 and has been running the fund since 1999.
Segal says, "I think that the biggest challenge in managing a money market fund is always providing protection of principal and liquidity while resisting the temptation to take too much risk. The trick is providing a decent yield while you're still meeting the two major reasons investors want a money market fund -- they want their money back in full and they want it available every single day. You can't violate either of those two requirements."
He continues, "The other big challenge, particularly since the SEC put Rule 2a-7 into effect, is differentiation, because a lot of money funds over time have started to look more and more like each other. There's a desire to, of course, raise assets. How do you do that? Well you have to differentiate yourself somehow."
"These two challenges are like high tide and low tide. When the credit cycle is in good shape, there's a tendency to differentiate. Of course that's exactly what happened the last several years. Many funds decided to go get extra yield by investing in things like SIVs and asset-backed commercial paper backing CDO's, etc. That then leads to the next challenge which is still protecting principle and providing liquidity when you have a credit crisis, which of course happens after a credit bubble," says Segal.
Segal adds, "We resisted that temptation and did not get involved in any of these structures which became quite illiquid and quite a problem. So our investors have slept very well at night. The nature of the business is that many funds will try to drive the yield higher by taking what will turn out to be excessive risk. It goes in market cycles."
E-mail info@cranedata.us for a full copy of the interview.
Friday saw a flurry of money fund ratings moves from agencies Standard & Poor's and Moody's. The two biggest moves: Moody's withdrew its Aaa/MR1+ rating from offshore Standard Chartered Global Liquidity Fund USD, as Standard Chartered exits the money fund business, and S&P rated Federated Money Market Management Fund AAAm. Federated's new 13 bps, $100 million minimum Premier Share Class had been put on hold for a number of months, but the fund is now live.
S&P also withdrew the AAAm rating on AMF Money Market Fund, run by Shay Assets Management, and downgraded ratings on AMF Ultra Short Mortgage Fund (to Af from AAAf). It also withdrew ratings on AMF Short U.S. Govt Fund and AMF Ultra Short Fund. The AMF website says, "However, in response to the unprecedented turmoil and dislocation in the mortgage securities market, the Fund has temporarily discontinued accepting new purchase orders for the AMF Ultra Short Fund, AMF Ultra Short Mortgage Fund and the AMF Short U.S. Government Fund. Given these circumstances, the Board believes that the benefits derived from having ratings no longer justify the cost, and the decision was made to terminate the rating." (Crane Data does not track AMF Money Market Fund.)
Moody's also downgraded the market risk ratings on two offshore enhanced yield funds, Morgan Stanley US Dollar Enhanced Yield Fund and MS Euro Enhanced Yield Fund. It affirmed the funds' Aa ratings, but cut the USD Enhanced Yield's MRR from MR1 to MR5 and cut the Euro Enhanced's MRR from MR1 to MR2 "to reflect the very high level of price volatility ... as a result of their sizeable investment in asset-backed securitities at a time of extreme market turbulence."
Finally, Capital One Funds have filed to reorganize and merge into corresponding Fidelity funds. If approved, Capital One Cash Reserve Fund would merge into Fidelity Inst MM: Prime MMP III, and Capital One U.S. Treasury MMF would merge into Fidelity Inst MM: Treasury Port III.
Concerns about the formerly-government sponsored mortgage giants Freddie Mac and Fannie Mae took center stage in the financial markets this week, but initial reporting indicates that money market fund managers continue to have faith in Fannie and Freddie. While short-term debt rates rose, the modest 5-10 basis point jumps in rates indicates that the money markets are far from in a panic mode, and sources tell us that investors continue to view the agencies' debt as money fund-worthy. (See also today's Federal Reserve announcement, "Board grants New York Fed the authority to lend to Fannie Mae and Freddie Mac if necessary" and Treasury's "Paulson Announces GSE Initiatives".)
JPMorgan's Alex Roever writes in his latest "Short-Term Fixed Income" report, "It's also true that money market and other short-term investors are running out of places to put their prodigious portfolios. There are few, if any places to hide. In any case, we see no reason to duck discos, or any other short-dated senior level agency debt. We would continue to be buyers at current levels."
Government agency debt represents the third-largest holding of money market mutual funds (11.6%), following commercial paper (CP) at 25.0% and repurchase agreements (repo) at 19.2%. Freddie Mac and Fannie Mae account for about 20% of all agency issuance, according to estimates, though this debt is also used to back a portion of repo holdings. Thus, money funds likely hold in the range of $340 billion of the over $850 billion in agency discount ("disco") debt, and approximately $70 billion in Fannie and Freddie debt (primarily discount notes).
Saturday's Wall Street Journal discusses the issue in, "Better Debt Than Stock?" The Journal says, "[E]ven as the stock market panicked, investors were more sanguine when it came to Fannie and Freddie's debt. Sound crazy? Actually, it makes perfect sense.... Debt investors, meanwhile, haven't been as worried by the capital conundrum because they remain confident the government will, if necessary, back the companies' liabilities. They are probably right to think that a worst-case scenario would run along the lines of the Bear Stearns bailout: The stock gets creamed, but debtholders are all right."
The agencies continue to hold the highest short-term ratings, though there have been minor signs of weakness in government-only money fund assets. Our Money Fund Intelligence Daily shows Government Institutional Money Funds declining by $858 million on Thursday, though they remain up $2.9 billion over the past week. Overall money fund assets rose $7.04 billion Thursday, and have risen $47.68 billion in the week through July 10.
Friday's New York Times features the article "Rethinking Money Market Funds". The piece discusses support actions taken by money fund advisors to date, saying, "During the last year, big banks and investment companies have committed more than $10 billion to shore up money market funds that were tainted by the mortgage mess." It says at least 17 companies "have moved to bolster funds" and adds, "Regulators say six or seven other investment firms have orchestrated bailouts that have not been made public."
The Times continues, "Money market funds have not experienced such turmoil since 1994 , when about 50 of them had to be rescued because of gyrations in interest rates." It cites disclosures, support actions and/or securities purchases by the following companies: Legg Mason, Credit Suisse, Bank of America, SunTrust, Morgan Stanley, Dresdner Bank, Janus, Lehman Brothers, Wachovia, U.S. Bancorp and TD Waterhouse, HSBC, Northern, SEI, and Wells Fargo.
The piece says, "Experts say fund investors are unlikely to lose money." It also cites the massive recent growth of money fund assets, saying, "The upshot is that assets of money funds have swollen to a record $3.5 trillion since the credit crisis began last year, according to Investment Company Institute data. That is an increase of $900 billion, or 35 percent."
Finally, the Times quotes: Alex Roever, "I think the damage has been done;" Bruce Bent, "Wall Street will respond by offering the next iteration of the questionable paper. If there is demand, we will come;" and Peter Crane, "There is still an awful lot of walking wounded investment money out there. Money funds should be a big beneficiary of that."
Denver-based Community Bank Funding Company, which is affiliated with Republic Financial, is seeking to expand the investor base in its Capital Markets CD (CMCD) product to include money market mutual funds. The company has been packaging FDIC-insured certificates of deposit issued by community banks into AAA-rated, 144A medium-term notes programs with a floating rate, 1-year term.
CBFC President Rich Marshall tells us, "We are actively targeting money market funds and are contemplating inserting a 7-day put to ensure liquidity.... The notes are backed by FDIC-insured CDs -- [so it's] U.S. Government risk. The investor is getting 'full faith and credit' at a 25 bps pickup." He says the company uses Wilmington Trust as its as trustee and just completed a joint-marketing deal with SunGard STN for an eTN (electronic trading network) platform for institutions to purchase CDs.
Marshall says, "The structure allows money funds to buy CDs that are FDIC insured." CBFC, he says, owns a patent to this process, and they hope "securitized CDs" to become a new asset class. Marshall notes that community banks represent $3 trillion out of the $13 trillion in the banking system. He also expects the product's yield to be very competitive. "The reason we're having to pay the increased yield, we're the new kid on the block," he tells us.
While it remains to be seen whether the product will find a home in money market funds, it's clear that funds are actively seeking new, ultra-safe diversified sources of supply. Over the past year, money funds have shifted their investment allocations to compensate for the drop in asset-backed commercial paper supply. Though Treasury, government agency and repo have filled the void, bank CDs have also been popular.
Standard & Poor's, which began hosting its Annual ABCP Conference yesterday (it continues today), just released a compilation of recently published ABCP research, including a new overview "Asset-Backed Commercial Paper Market May Be Down, But It's Not Out." This flurry of recent publications is meant, "To enhance transparency and provide insight to ABCP market participants." They include: "Standard & Poor's Global Approach To ABCP Conduit Administration," "How Standard & Poor's Analyzes Interest Rate Risk For Asset-Backed Commercial Paper," and "Analyzing Payment Waterfalls In ABCP Conduits."
S&P summarized, "U.S. asset-backed commercial paper (ABCP) outstandings nearly doubled to $1.2 trillion between 2004 and 2007 before abruptly reversing course last September, leading some market observers to conclude that this market had strayed too far from its original purpose -- that is, to provide commercial banks with an alternative, capital markets-based funding source for their core corporate borrowers. Notwithstanding the recent downturn, Standard & Poor's Ratings Services believes that ABCP remains a bedrock business that serves an important and viable commercial function in the global economy. In our view, the original model that existed long before the recent market dislocation, and the factors that made it successful, remains as healthy as ever. In fact, we are seeing signs that the market has begun to take steps toward a relaunch -- an ABCP 2.0, so to speak."
The "Down But Not Out" piece summarizes the troubles in the marketplace last August -- Broadhollow Funding, Ottimo Funding, Luminent Star Funding, KKR Atlantic and KKR Pacific Funding Trust.
It says, "The events related to market value ABCP issuers led many investors to turn away from the entire ABCP market through the end of 2007. Many money market funds, the largest segment of the ABCP investor base, adopted policies restricting any new investment in any ABCP regardless of market value risk, in part to assuage their large institutional investor clientele who appeared to be concerned with minimizing potential headline risk. Following the laws of supply and demand, this retrenchment caused a severe increase in ABCP interest rates -- the few remaining investors were able to demand dramatically higher rates. Some money market funds returned to the market in early 2008, but in many cases only after adopting policies limiting ABCP investments to the large bank-sponsored and fully supported programs.... In addition, investors generally tightened their diversification guidelines by reducing exposure to any single program and also established conservative guidelines for the maturity of these investments."
The July issue of Crane Data's monthly Money Fund Intelligence newsletter is out and the XLS version is now available for download on the website. This month's MFI feature articles include: "Blow to NRSROs; MFs Brace for 2a-7 Change," which discusses the proposed regulatory changes to money funds; "Safety in the West: TCW Money Market Fund," an interview with TCW portfolio manager Barr Segal; and, "Cachematrix Discusses Portal Technology."
MFI also contains a brief on whether "A Rule 2a-7 for Europe?" is likely, with comments from Institutional Money Market Funds Association Secretary General Nathan Douglas on the status of standardization and definition of the term "money market fund" in Europe.
Every issue of Money Fund Intelligence features extensive performance statistics on over 1,300 money funds, including 7-day and 30-day yields, 1-month, 3-mo, YTD, 1-year, 3-yr, 5-yr and 10-year returns, assets, expense ratios, average maturities, and more. We list rankings for 7-day yields and 1-year returns, and include a number of top-performing and largest fund tables.
The publication also features our Crane Money Fund Indexes, as well as comprehensive news coverage of practically all the news impacting money market mutual funds. Call 508-439-4419 or write Pete (pete@cranedata.us) to see a sample issue.
Money fund assets rebounded in the latest week, rising $896 million to $3.456 trillion, following a 3-week decline of $65.0 billion. The ICI's latest weekly series shows retail money funds rising $2.5 billion to $1.210 trillion and institutional assets falling $1.6 billion to $2.246 trillion in the week ended July 2. Funds should see very large inflows in the coming week as quarter-end pressures ease and as new dividend, bond coupon and other payments hit money market accounts.
Year-to-date, money fund assets have increased by $311.6 billion, or 9.9%. Over the past 52 weeks, assets have increased by $896 billion, or 35.0%. Institutional assets continue to represent almost two-thirds of the total, 65.0%. While the huge institutional surge brought on by falling rates and last fall's safety panic has abated, money funds should continue to benefit from their status as one of the only "safe harbors" to remain open during the past 10 months of money market squalls.
Money fund yields rose slightly on the week but fell slightly in June. Our Crane 100 Money Fund Index, the average current yield of the 100 largest taxable money funds, fell from 2.34% to 2.27% in June. Over the past week (through July 4), the Crane 100 moved from 2.24% (annualized) to 2.28%. The Index was 4.96% a year ago (6/30/08). For the month, the Crane 100 returned 0.19%, for the quarter 0.61%, YTD 1.46%, and over 1-year 4.02%.
As of June 30, our Crane Money Fund Average yielded 1.96%, our Institutional MF Index yielded 2.24%, our Individual MF Index yielded 1.80%, and our Tax Exempt MF Index yielded 1.28%. These are preliminary estimates. Final returns, and returns by sub-type (such as "Prime Institutional") are published in new July issue of Money Fund Intelligence and Crane Index.
"No-action" letters from money funds requesting permission to support troubled securities continue to trickle in on the Securities & Exchange Commission's "Division of Investment Management Staff No-Action and Interpretive Letters" web page. The latest is for Allianz Dresdner Daily Asset Fund, advisor Dresdner Advisors LLC, and parents Dresdner Bank AG and Allianz AG. While the fund is a money market fund under the Investment Company Act of 1940, we don't track it and see no other listings of the fund. It may be a variable annuity vehicle or an "offshore" fund; we're seeking clarification.
The fund had requested permission to purchase $110 million of Sigma Finance securities, which represented 3.67% of the $3 billion fund. The Allianz fund becomes the second money fund advisor to disclose the purchase of Sigma, which is still an "Eligible Security" under Rule 2a-7. The May 2 letter says, "Due to current conditions in the credit markets, including the illiquidity of certain types of asset-backed debt instruments, including the Securities, the current market value of the Securities, as determined by an independent third-party pricing agent, is less than its amortized cost value. The Adviser and the Trust's Board of Trustees continue to monitor the extent of the deviation between the net asset value per share of the Fund determined using amortized cost and market value."
The "no-action" letter continues, "The Adviser has determined that it would be advisable to sell the securities. However, because of the absence of liquidity in the market ... the Adviser believes ... that it would not be in the best interests of the Fund and its shareholders to dispose of the Securities in the market. Nonetheless, subject to obtaining the no-action assurance requested in this letter, the Purchaser is prepared to purchase the Securities in their entirety from the Fund for cash at each Security's amortized cost (including accrued and unpaid interest)." Allianz becomes the 17th advisor to disclose support actions for money market funds.
Another letter was also posted to the SEC site. HSBC Global Asset Management filed to extend a termination date on its previously disclosed "letter of indemnity" to protect the NAV of the HSBC Investor Money Market Fund. The June 25 letter requests an extension of the support termination date from June 24, 2008, to Dec. 31, 2008. To see the full list of SEC "no-action" letters released to date, click here.
The July issue of our flagship Money Fund Intelligence will feature an interview with Institutional Money Market Funds Association spokesman Nathan Douglas, discussing a new initiative by the London-based trade association for providers of triple-A rated money market funds to lobby for U.S. style regulations for money funds in Europe. The most recent issue of U.K.-based Treasury website GT News also features an article, "Money Market Funds: Navigating a Course Through the Market Storm" that reviews several presentations from the recent London conference, "Money Fund Forum Europe 2008". It appears momentum for a European Rule 2a-7 is building.
IMMFA Chairman Donald Aiken and a number of others have begun calling for a "pan-European definition of MMFs," changing IMMFA's prior stance of lobbying for a separate "Liquidity" fund designation for U.S.-style money market funds. Europe currently has no regulations defining the term "money market fund", and previous efforts to standardize encountered resistance from more liberal investment policy "money funds" such as those in France. But the French "Tresorerie Dynamique" funds have seen assets decline by over half over the past year, and other cash-like and enhanced cash funds have experienced problems, making "true" money fund providers painfully aware of the need to differentiate themselves.
The GT News' article says, "Despite the positive aspects of MMFs, there are, of course, still lessons to be learned from the market crisis. One of the main lessons that came through in almost all of the sessions at the Forum was the need for clear industry definitions on what can be called a MMF. As IMMFA's Aiken pointed out, not all cash fund structures are the same and some funds, for example in the enhanced cash area, have been hit hard in the market turmoil due to their portfolio mix. A strong definition, particularly in Europe, would help boost investor confidence."
GT News also cited comments from Kathryn Kerle of Moody's, saying, "Kerle stated that the money markets are starting to recover from the events of the last 12 months, but the crisis is not yet over. MMFs have performed well so far, thanks to widespread financial support from parents, continued investor confidence and changed investment strategies on the part of management firms. The same, however, can not be said for enhanced cash funds, which have suffered badly from the liquidity crisis."
The Association of Financial Professionals, the trade group for treasury managers, has just released its "2008 AFP Liquidity Survey," which shows that "companies have become increasingly conservative with cash holdings and short-term investments." Organizations "appear to be less-focused on securing higher rates of return ... and more concerned with preserving principal and ensuring access to their cash," says AFP spokesman Billy Treger.
The new survey (click here to access) "examines organizations' holdings of cash and short-term investments, as well as the credit crisis and its impact on investment strategies." AFP President & CEO Jim Kaitz says, "Companies are clearly holding onto cash and making safer investments in this economic climate. Rate of return is taking a back seat to safety of principal."
The survey's introduction says, "The failure of the ARS market left a number of organizations with investments in their short-term investment portfolio that were illiquid. As a result of ARS market failure and overall market volatility, organizations kept a greater proportion of their short-term investments in safe and liquid vehicles. This 'flight-to-quality' manifested itself in the return to bank deposits, treasury bills and money market funds as favorite investment choices."
Money market mutual funds remain the largest component of organizations' short-term investments with a 39.4% allocation, up from 30.9% last year. Bank deposits were second with 25.0% (down from 27.1% in '07). Enhanced cash and auction rate securities, which only represented 2.2% and 5.1%, respectively, last year, plunged to 1.6% and 0.9% allocations. T-bills, agency security and Eurodollar deposit allocations rose, while CP, repo and separately managed accounts all declined over the past year.
Among other money fund-related findings: 82% of companies allow the use of money market funds vs. 66% for CP, 18% for ARS and 15% for enhanced cash; the use of CP, repo, and ARS dropped significantly; just 25% of organizations use an "electronic, multi-family trading portal to execute at least some of their short-term investment transactions", and 80% of money fund transactions among those using portals are executed through the portal.
