News Archives: August, 2008
While overall mutual fund assets declined in July, money market mutual funds continued to be the bright spot in the fund business. Money fund assets increased by $85.1 billion, or 2.5%, in July to a record $3.487 trillion, according to the Investment Company Institute's monthly "Trends in Mutual Fund Investing". Taxable money funds rose 2.8% to $2.986 trillion while Tax-Free funds rose 0.5% to $496.6 billion. Year-to-date through July 31, money fund assets increased by $380.2 billion, or 12.2%, while total mutual fund assets declined by $433.3 billion, or 3.6%.
In ICI's latest (separate) weekly series, money fund assets decreased by $625 million to $3.573 trillion in the week ended August 27. Month-to-date in August, money funds have increased by about $44 billion. They remain just below their record level of $3.575 trillion, set two weeks ago. Year-to-date figures through this week show money funds up by $428 billion, or 13.6%, and over 52 weeks funds have increased by a whopping $810 billion, or 29.3%.
ICI also released its "Month-End Portfolio Holdings of Taxable Money Market Funds," which shows big increases in Commercial Paper (up $36.8 billion, or 5.2%, to $751.2 billion), U.S. Government Agency Securities (up $28.3 billion, or 7.5%, to $405.1 billion), U.S. Treasury Bills (up $12.7 billion, or 6.0%, to $225.4 billion), and Bank Notes (up $10.8 billion, or 11.3%, to $106.9 billion). Declines were seen in Corporate Notes (down $14.3 billion, or 4.7%, to $290.4 billion), Other Treasury Securities (down $3.36 billion, or 5.6%, to $56.8 billion), and Repo (down $808 million, or 0.2%, to $535.8 billion). Corporate notes likely declined partially due the final runoff of a number of SIV-related medium-term notes (MTNs) during July.
CP remains the largest percentage of money fund holdings, representing 25.1% of assets. (ABCP makes up 43.5% of total CP, according to the latest Federal Reserve figures.) Repo is second with 17.9%, Agencies are third with 13.6%, and CD are fourth with 10.6%. Corporate notes (9.7%), T-Bills (7.5%), Other (4.9%), Eurodollar CDs (5.0%), Bank Notes (3.6%), Other Treasury Securities (1.9%), and Banker's Acceptances (0.1%) round out the totals as of July 31, 2008.
A series of comments has been posted seconding Vanguard's initial objection to the SEC's July 1 proposal, "References to Ratings of Nationally Recognized Statistical Rating Organizations," to remove NRSROs from the language of Rule 2a-7, the regulations governing money market funds. In comments to date, the mutual fund industry has been unanimously opposed to removing the mandated "First Tier" outside ratings agency requirement. September 5 is the deadline for feedback.
Two fund board chairs added their thoughts recently. Michael Scofield, Chairman, Evergreen Board of Trustees, wrote, "The Boards of Trustees of Evergreen Money Market Trust and Evergreen Select Money Market Trust strongly oppose the Commission's proposal to eliminate references to the credit ratings issued by nationally recognized statistical rating organizations in Rule 2a7.... The Board believes that NRSRO credit ratings serve an important independent role in assessing the quality of money market fund investments. We are in favor of improving the quality of NRSRO credit ratings, and we support the Commission's efforts in this regard. However, we believe that simply eliminating references to NRSROs would significantly weaken the investor protections of Rule 2a7 and place an inappropriate burden on trustees of money market funds."
Also, Virginia Stringer, Board Chair, First American Funds, wrote, "We are responding to your recent proposal to eliminate references to ratings issued by nationally recognized statistical rating organizations (NRSROs) from Rule 2a-7 under the Act. As we explain in more detail below, we are greatly concerned with the implications of replacing ratings provided by NRSROs, which have vast infrastructures and substantial expertise, with credit and risk determinations made by fund boards, whose members almost uniformly lack the knowledge and background necessary to make credible credit assessments.... We strongly urge the Commission to reconsider its proposed changes so that, if NRSROs are to be off the table, investment advisers, not fund boards, would have primary responsibility for credit evaluation."
Finally, Crane Data's own Peter Crane commented to the SEC, "If it isn't broken, don't fix it. We fear that the proposed change will be seen by money fund investors and the broader financial press as a weakening of standards. Given the current extremely sensitive environment, it is the wrong time to make a change that might cause investors to question the motives behind such a move.... Money market mutual funds, currently almost $3.6 trillion, have proven to be one of the greatest success stories in the history of financial products. The SEC's Rule 2a-7 deserves much of the credit, protecting individual investors from ever experiencing a "breaking of the buck". We urge the Commission to let the dust settle from this current crisis before making any changes to the current regulatory regime."
Today's Wall Street Journal writes "New Credit Hurdle Looms for Banks", which follows a series of stories citing a large amount of floating-rate debt coming due and wide spreads in some funding markets. The stories neglect to point out, however, that there is always a large amount of corporate debt coming due, and that overall rates remain substantially lower than they were a year ago. Some of the buyers of floating-rate debt, such as enhanced cash funds, SIVs and securities lenders, have retreated from the market. But increased demand for supply from money market funds should more than compensate for the demise of the relatively minor enhanced cash sector.
The Journal says, "The crunch will begin next month, when some $95 billion in floating-rate notes mature. J.P. Morgan Chase & Co. analyst Alex Roever estimates that financial institutions will have to pay off at least $787 billion in floating-rate notes and other medium-term obligations before the end of 2009. That's about 43% more than they had to redeem in the previous 16 months." Later the Journal says, "Representatives of the banks said they're fully able to meet their floating-rate note obligations, either because they've already lined up the necessary funds or because they have ample customer deposits they can tap."
Bloomberg wrote an article yesterday (following a piece a week ago), entitled, "Merrill, Wachovia Hit With Record Refinancing Bill". The article cites the same JPM study but incorrectly refers to "specialized money funds." They should have said, "enhanced cash funds." The piece says, "The trouble now is demand from specialized money funds that readily bought the debt, swelling their assets under management to $200 billion in August last year, has evaporated amid their own losses. The funds, referred to as enhanced cash funds and run by firms such as Bank of America, now hold about $50 billion, according to Peter Crane, president of Crane Data LLC, a Westborough, Massachusetts firm that tracks money-market funds."
Bloomberg and others have also cited the shift towards retail deposit-gathering by a number of large banks and brokers. While there undoubtedly are continued stresses in the market, Crane Data believes these articles are more reflective of reporters looking for some late-summer excitement rather than an indication that concerns have approached the levels of last March and November.
While the floating-rate and asset-backed markets are suffering, they're still functioning, albeit at reduced levels. And companies still have access to both the long-term bond market and the short-term commercial paper market, as well as to traditional bank deposit avenues for funding. Though they may have to pay a premium over Fed funds, keep in mind that the Federal funds target rate is still 325 basis points below its level of a year ago.
As Democrats descend on Denver to kick off their convention this week, a number of mutual fund professionals will also head to the mountains, to Matrix Financial Solutions' annual "Get Connected" conference in Keystone, Colorado. Crane Data's Peter Crane and Matrix's Michael Rice will give a presentation on Monday morning entitled, "The State of the Money Fund Business & Money Market Portal Update."
Crane will say, as regular readers of www.cranedata.com are aware, that the state of the money fund industry is strong, but in serious flux. Money funds have been through their most eventful year in history the past 12 months. They've seen almost 20 advisor bailouts, though none resulted in any funds "breaking the buck" or halting redemptions, and money funds are seeing a `new, unprecedented level of scrutiny. But this will likely recede as the risk to money funds fades, Crane will argue. Meanwhile, money funds, which have seen inflows of near $1 trillion and continue to reach new records, will continue to grow briskly due to their record of safety and due to a sudden lack of "cash" alternatives.
The talk will also discuss Crane's most recent estimates of the size of the money market mutual fund online trading portal marketplace -- $350 billion, or 15% of the overall $2.334 trillion institutional money fund market. While portal growth has surged alongside money fund growth, growing competition and a backlash over portals' involvement with enhanced cash funds present challenges to providers. In addition, the pair will talk about recent technology, content and feature enhancements on portals, and the expansion of portals into the bank trust sector by offerings such as the Matrix Money Market Portal.
Regarding Matrix's portal, Rice cites diversification, information and execution as three keys. He says, "Banks trust departments need access to sweep vehicles that provide same-day liquidity.... The alternative is to use a 'portal' that provides access to a variety of money market products using a web-based interface. Portals provide execution, settlement and performance analysis in a single interface, which streamlines and simplifies the process for delivery of trade instructions and allows for 'single wire' settlement of all transactions."
"What's happening is that the majority of money market platforms are targeting large corporations directly and leaving the banks largely under-served," says John Moody, President of Matrix Settlement and Clearance Services. "We want to give our bank customers the ability to take sweep and liquidity management to the next level, giving them the tools to service smaller public and privately held companies, and do it through the bank branch." To request a copy of Crane and Rice's Powerpoint, e-mail pete@cranedata.com.
While it was recorded over a month ago, we just noticed a video interview on the Wells Fargo Advantage Funds's Institutional Cash Management website with Executive V.P. and veteran Portfolio Manager David Sylvester. In a Q&A session run by Wells Key Account Manager Pete Syslack, Sylvester discusses media coverage of, shareholder perceptions on, and the outlook for growth in money market mutual funds.
Sylvester says, "The media has sometimes painted funds that are cash-like funds, but not truly money funds, that encountered difficulty as money funds. Of course, we know that no money fund has had difficulty with its $1.00 NAV." He criticizes some of the press coverage during the crisis, explaining, "A news story is really only as good as the sources, and sometimes the sources ... have a different agenda." He cites coverage of monoline insurers, which frequently quoted hedge funds betting against the companies, as egregious.
Syslack also asks Sylvester about a [Crane Data] prediction that money funds would grow to $7 trillion by 2012. He answers, "Seven trillion is an awfully big number. However, money funds have surprised us in the past with their growth. We've doubled assets since 2000 despite a contraction ... and low rates.... I think investors are attracted to money funds for their proven safety and the managers' ability to manage in good times and in bad. I don't think $7 trillion is impossible to achieve."
When asked about fund managers that chase yield, Sylvester responds, "When I talk to shareholders, what they talk to me about is a stable NAV. They talk about liquidity, and then they talk about yield. But if you look at the agenda of any investment conference, most of the topics are enhancing yield. I think the danger of looking too much at yield, from a portfolio management standpoint, is that you're out of synch with what the shareholder's really want. What they want is stability and safety."
At the time of recording, Sylvester liked banks, which have "direct access to the central bank's" balance sheet, and Fed funds and LIBOR-based floaters. He also notes that government funds, of which Wells has the largest (Wells Fargo Govt MM Inst), have just "a relatively modest yield giveup to prime funds." Finally, Sylvester also mentions Muni funds, noting the yield pickup available in AMT paper. Click here to watch the full video.
The fund ratings units of NRSROs have been busy recently. Moody's quietly downgraded two "enhanced cash" funds last week, and issued an extremely rare money market fund downgrade. The company also began rating a number of variable rate demand preferred (VRDP) issues. S&P also issued two London-based AAAm principal stability, or money fund, ratings last week.
In one of the first actions apparently based on the depth of the advisor's pockets, Moody's downgraded the rating on Resolution Liquidity Funds' Euro, USD and GBP shares, formerly the Abbey Liquidity Funds, from Aaa/MR1+ to Aa/MR1+. Moody's release says, "[T]he rating action is primarily driven by the agency's view that the investment advisers money market funds investment processes and credit personnel have only recently been introduced, coupled with the inability of the agency, given the absence of financial data, to adequately assess the financial profile of RAM's parent, Pearl Group or related entities." Moody's Christos Costandinides, says, "The lack of transparency with regard to RAM's parent, Pearl Group, prevented Moody's from fully assessing the parent company's ability to provide financial support to each of the firm's stable GBP1.00, USD$1.00, EUR1.00 net asset value (NAV) funds, should it become necessary in the future."
Moody's also downgraded Lehman Brothers Enhanced Libor Fund's "market risk rating" from MR1 to MR3, and downgraded the variable-NAV, Luxembourg-domiciled, and London-based Legg Mason USD Dollar Money Fund's MRR from MR1 to MR3. The fund's Aaa and Aa ratings, respectively, remain unaffected. Moody's says of the Lehman fund, "The downgrade of the fund's market risk rating reflects the relatively higher level of volatility that the fund's net asset value (NAV) may continue to experience due to current market conditions and the fund's exposure to ABS securities, largely Home Equity ABS and CMBS." It says of the Legg fund, "The Fund has been managed as a variable net asset value enhanced cash portfolio. Moody's observes that recent changes in the Fund's portfolio duration profile and structure as well as volatile market conditions in mortgage asset-backed markets have led to a reclassification of the Fund, under Moody's rating guidelines, from (non-CNAV) 'money market fund' to (short duration) 'bond fund'."
Moody's also rated a number of new money fund eligible, auction rate replacement Nuveen Variable Rate Demand Preferred Shares (VRDPs) P-1. Finally, S&P recently rated U.K.-based `St. James's Place Cash Unit Trust AAAm and Ethias Euro Liquidity Fund Acc, a subfund of Robeco Liquidity Funds AAAm. The St. James's Place fund will be managed by State Street Global Advisors (SSgA).
Earlier this week, S&P published "European & Offshore 'AAAm' Rated Fund Indices (as of July 31, 2008)," a summary of Euro, Pound Sterling and US Dollar yield averages, asset totals, and portfolio statistics. S&P's numbers show flat yields and record assets for Dollar and Pound funds, and rising yields and falling assets for Euro funds in July 2008.
S&P's 'AAAm' European and Offshore EUR Index showed a 7-Day Yield of 4.44%, a 30-Day Yield of 4.37%, an Average Maturity of 28 days, assets of E97.37 billion, and a Credit Quality of 83% A-1+/17% A-1 as of July 31. S&P's 'AAAm' GBP Index showed a 7-Day Yield of 5.25%, a 30-Day Yield of 5.32%, an Average Maturity of 36 days, assets of L66.66 billion, and a Credit Quality of 80% A-1+/20% A-1. S&P's 'AAAm' USD Index showed a 7-Day Yield of 2.27%, a 30-Day Yield of 2.27%, an Average Maturity of 35 days, assets of $350.66 billion, and a Credit Quality of 86% A-1+/14% A-1. "Standard & Poor's Offshore Principal Stability Fund indices are performance indicators of offshore 'AAAm' rated funds that maintain either a stable or constantly rising net asset value," says the report.
S&P's update says, "In a reverse trend to that of June 2008, euro-denominated 'AAAm' rated principal stability funds experienced a slight drop in their net assets, dipping below E100 billion, with a negative 3.8% decrease. Dollar and sterling-denominated funds enjoyed substantial inflows for the month of July with sterling-denominated 'AAAm' rated funds, experiencing their greatest inflow of assets since April 2007 with a 10.65% increase for the month, equating to more than a L6 billion inflow. Net assets continue to be at historical highs and funds are expected to continue substantial growth throughout the remainder of 2008.
Finally, S&P says, "Investment managers are continuing to operate very conservative mandates overnight liquidity, still at the fore. On average, rated 'AAAm' funds have been operating with 20%-25% in overnight cash deposits and weighted average maturities are well within Standard & Poor's Ratings Services' fund rating guidelines of 60 days. The credit quality of funds remained above historical levels, despite a slight fall in the percentage of euro funds holding Standard & Poor's rated 'A-1+' securities."
A recent question on the Association for Financial Professionals' (AFP's) "Treasury & Cash Management Discussion List" asked about the top-yielding Treasury Institutional Money Market Funds ranked by 1-day yield. While we suggest that investors moving to Treasury funds out of fears of "breaking-the-buck" are downright paranoid, there are plenty of legitimate, or tax, reasons to move to Treasury funds. (And of course if the boss tells you to do it, you do it.) Below, we list the current top-performers among our Money Fund Intelligence Daily (which lists only funds over $1 billion) as of Friday (8/15), along with their 1-day (annualized) yield.
Top-Yielding Treasury Institutional Money Funds (32 total). No. 1): Morgan Stanley Inst Liq Treas Inst (MISXX, 2.00%); No. 2): DWS ICT Treasury Port Inst (ICTXX, 1.97%); No. 3 (tie): Columbia Treasury Reserves Cap (CPLXX, 1.96%), Federated Treasury ObIig IS (TOIXX, 1.96%), Fidelity Instit MM: Treas Port I (FISXX, 1.96%), and SSgA US Treasury Money Market (SVTXX, 1.96%); No. 7): Goldman Sachs FS Trs Obl Inst (FTOXX, 1.95%); No. 8 (tie): First American Treas Obligs Z (FUZXX, 1.94%) and JPMorgan US Trs Plus MM Inst (IJTXX, 1.94%); and, No. 10: Wells Fargo Adv Trs Plus In (PISXX, 1.93%).
Top-Yielding Treasury Individual Money Funds (39 total). No. 1): Columbia Treasury Reserves Liquid (NTLXX, 1.81%); No. 2): Columbia Treasury Reserves Adv (NTRXX, 1.71%); No. 3): Federated Treasury Oblig SS (TOSXX, 1.71%); No. 4): Goldman Sachs FS Trs Obl Adm (FGAXX, 1.70%); No. 5 (tie): First American Treas Obligs Y (FOCXX, 1.69%) and JPMorgan US Trs Plus MM Prem (PJTXX, 1.69%); No. 7): BlackRock Lq T-Fund Dollar (TFEXX, 1.67%); No. 8 (tie): BNY Hamilton Treasury MF Prem (BHTXX, 1.67%), Evergreen Institutional Treas IS (EITXX, 1.67%), and Fidelity Instit MM: Treas Port III (FCSXX, 1.67%).
Our Money Fund Intelligence Daily tracks daily dividends, 1-day, 7-day, and 30-day yields, assets and AM (average maturities). Its fund list was recently expanded to over 400 funds representing over $3.0 trillion of the $3.5 trillion in money fund assets. MFI Daily includes daily news and commentary on yield and asset trends, plus daily Crane Indexes on yields and assets.
We wrote in late June ("SEC Proposes 'Alternate Path' to Reduce Ratings Reliance in Rule 2a-7") about the SEC's "Proposed rules regarding references to ratings of Nationally Recognized Statistical Ratings Organizations". As we mentioned then, we didn't expect the proposal to go over well with fund companies, and the first substantial comment letter supports this contention. Vanguard is the first fund company to come out strongly against the Commission's proposal in its recently-posted comment letter.
The response by Vanguard Chairman & CEO John Brennan says, "The Vanguard Group strongly opposes the Commission's proposal to eliminate references to credit ratings in Rule 2a-7 -- a rule that has provided a strong regulatory framework for money market funds since its adoption 25 years ago. As a leading provider of money market funds dedicated to the best interests of shareholders, it is our view that the proposed elimination of NRSRO ratings would remove an important investor protection from Rule 2a-7, weaken investment standards, and, potentially, pose a risk to the long history of stability of the $3.5 trillion money market fund industry."
Vanguard's response also says, "NRSRO ratings provide an independently established baseline for money market fund investments and are a valuable assurance to investors that money market fund investments are not subject to unnecessary risks. Vanguard understands the urgency of the Commission's concern over the integrity of NRSRO ratings and the role that misplaced reliance on potentially flawed ratings may have played in recent credit market problems. And, we are very supportive of the Commission's efforts to address the root problems of flawed ratings and undue reliance on them in certain sectors of the financial markets."
But, Brennan adds, "We are concerned, however, that the Proposed Rule misses the mark with respect to money market funds. In fact, for money market fund investors, greater regulatory emphasis on Rule 2a-7's existing requirement of independent minimal credit risk analysis and a comprehensive examination program are better solutions to any concerns about undue reliance on credit ratings. Ratings -- even if occasionally imperfect -- protect investors by establishing a uniform, minimum credit quality for all money market funds. Removing that investor protection is akin to outlawing seat belts with the hope that drivers will be less likely to be injured if a defective belt fails in a crash."
Finally, Vanguard notes the SEC's past introduction and support of ratings in money funds. The company says, "Recent events do not suggest that the need for these safeguards has diminished; if anything, they suggest that an even more restricted universe for eligible money market fund securities is entirely appropriate in the best interests of shareholders. As a result, the Commission must continue to support a regulatory framework for money market funds that will protect investors from the loosening of credit standards."
As we noted in our "Link of the Day" and "People" news yesterday, the co-inventor of the money market mutual fund, Henry "Harry" Brown, passed away recently at the age of 82. Brown and co-founder Bruce Bent launched The Reserve Fund in 1972, which pioneered the way for the $3.5 trillion money market mutual fund business, which brought small investors hundreds of billions of dollars in interest income over the past 35 years. Money fund accounts are held by almost 40 million individuals and businesses, and the sector brings in more revenue a year that Hollywood does at the box office, approximately $14 billion.
Today's Wall Street Journal writes in its "Remembrances" obituaries, "Co-Inventor of Money-Market Account Helped Serve Small Investors' Interest", Henry B.R. Brown co-invented the money-market mutual fund, a high-interest financial instrument taken up by millions of small investors starting during the long bear market of the 1970s. But when Mr. Brown, who died Aug. 11 at age 82, and his business partner, Bruce Bent, dangled their prospectus in front of Wall Street investment houses, they were quickly shown the door. Too expensive, complained brokers used to sitting on their clients' money without paying interest. Too complicated, complained bankers accustomed to calculating interest quarterly. Possibly illegal, sniffed the Securities and Exchange Commission, which sat on Brown & Bent's registry application for months."
The Journal quotes Peter Lynch in his book "One Up on Wall Street," "There ought to be a monument to Bruce Bent and Harry Brown, who dreamed up the money-market account and dared to lead the great exodus out of the Scroogian thrifts."
It adds, "Reserve Fund opened in 1972 to a less-than-resounding response, leaving the two founders with second mortgages they had used to fund their enterprise and no clue whether it would pan out.... Help came in the form of a laudatory January 1973 article in the Sunday New York Times, in which the founders said they were mostly aiming at corporate investors and investment counselors, but were also open to individuals. The next day brought a hundred callers, says Mr. Bent. By the end of 1973, the partners had $100 million under management and investors in the second half of the year received a 9% yield."
We extend our deepest condolences to the Brown family and friends of Brown.
Money market mutual funds are celebrating SIV-free status. Almost all of the major complexes have received, or are about to receive, their final structured investment vehicle payments. The threat of a Sigma Finance, the largest of the non-bank supported finance companies, default impacting money funds is now gone. The company paid off the final holdings of Federated and some others today, and Fidelity received its last Sigma payment earlier this month. We were unable to find any money funds with Sigma holdings maturing after next week.
The Subprime Liquidity Crisis, which began August 6, 2007, with the surprise extensions of EABCP issuers Ottimo, Broadhollow and Luminent Funding, recently passed the one-year mark. But it is thankfully coming to a close, at least for money market mutual funds, due to their 13-month maturity maximum. Funds are seeing the final vestiges of SIV MTNs (medium-term notes) mature. A year ago, almost half of all money funds held some SIV debt, but now a mere handful of funds own any.
Fidelity Investments, by far the largest money fund manager with over $410 billion (a 12.5% market share), became SIV-free on August 1, according to its most recent portfolio holdings. No. 2-ranked JPMorgan appears to be receiving its last Sigma payment today, along with final K2 and Links Finance payments, both bank-affiliated SIVs. JPM is also scheduled to see a final Five Finance payment next Wednesday.
Federated Investments disclosed on recent conference calls that its final two Sigma notes, of $250 million and $200 million, matured on Aug. 5 and Aug. 18. Federated President & CEO Chris Donahue says of their final SIV holdings, including Citi-backed Beta, Dresdner-backed K2, and HSBC-backed Asscher, "We remain comfortable [with these] ... and continue to see the winding down of the final notes maturing in August."
OppenheimerFunds Vice President of Cash Strategies Jesse Levitt says the company is celebrating 'SIV-free' status today, "Some portals and investors have been screening for SIV-free portfolios, so we're thrilled to now meet those requirements."
The following is excerpted from this month's Money Fund Intelligence, which interviewed Mary Jo Ochson of Pittsburgh-based Federated Investors, the fourth-largest manager of money funds with $230 billion. Federated was among the first to offer a tax-free money market fund and currently offers the most extensive lineup of state-specific tax-free funds with 16.
As Senior VP, Senior PM, and CIO for the Tax-Exempt Money Market Group, Ochson has been there since the beginning of tax-free money funds, 26 years ago. We first asked, "What's the difference between these new money-fund eligible securities being issued by closed-end funds and the old auction-rate securities?"
Ochson explains, "The most important difference is that variable-rate demand preferreds (VRDPs), the new securities being issued by the closed-end funds, have an unconditional put, a contractual obligation, for the investor to put back the security to a high-quality financial institution. Auction-rate securities had no contractual obligation for the investor to put them back to the underwriter. There was no put. It's as simple as that.... There seems to be a misperception in the marketplace that they're (VRDPs) somehow related to an auction process. There is no auction."
Are there any worries about monoline insurer downgrades impacting money funds? Ochson says, "The concerns are diminishing because the use of monolines has gone down tremendously. Many of the monoline insurers, that historically have made up from 20% to 50% of the muni money markets, are rated too low to be eligible under Rule 2a-7. So they are not in use. There are certain monolines that are still being used as credit support in the municipal money funds, such as FSA, Assured Guaranty, and Berkshire Hathaway. We are continuously monitoring the market and the credit quality of these insurers on an ongoing basis, and we are comfortable using them.... We obviously saw the [recent Moody's] downgrade warning. That's just part of our credit monitoring system."
Ochson tells us, "There were no bailouts of the muni money funds. The primary reason is that the structured instruments in the muni money funds, which are primarily variable-rate demand notes (VRDNs) or tender-option bonds (TOBs), have as part of their structure a contractual obligation for a high-quality financial institution to honor a put to buy back their securities. To my knowledge, no money fund has ever lost a tender facility (put) in the muni money funds since the credit crisis started last August. When the insurers got to a certain rating level, the muni funds would put the securities back to the liquidity providers.... Each put was honored, nobody broke a buck, and nobody needed a capital infusion. It was an orderly process."
Standard & Poor's Ratings Services assigned a 'AAAm' money-market rating to Invesco Aim's Short-Term Investments Co. (Global Series) Plc - U.S. Dollar Treasury Portfolio scheduled to launch on Aug. 18, 2008. The AAA is based on S&P's "analysis of the fund's credit quality, market price exposure, and management." Since the liquidity squeeze began a year ago, a number of new AAA-rated Treasury funds have launched, particularly in the "offshore" space.
Other AAA-rated, Dublin- or Cayman-domiciled "U.S.-style" Treasury money market funds include: BNY Mellon US Treasury, Federated US Treasury Securities, Goldman Sachs Treasury Liquid Reserves, JPMorgan Treasury, and Western Asset US Treasury Reserves. See Crane Data's April 1 News article, "Demand for Offshore Money Fund, Local Govt Inv Pool Ratings Jumps" and S&P's "AAAm Principal Stability Funds Continue To Enjoy Tremendous Growth In Europe".
The new STIC Global PLC fund "is an investment company with variable capital incorporated in Ireland in 1995 and established as an umbrella fund under UCITS regulations." The company now offers four subfunds: a US Dollar Portfolio, a Sterling Portfolio, a Euro Portfolio, and now a US Dollar Treasury Portfolio.
S&P's release says, "The STIC U.S. Dollar Treasury Portfolio's investment objective is to provide as high a level of current income in US Dollars as is consistent with the preservation of capital and liquidity by investing in direct obligations of the U.S. Treasury. The fund consists of five share classes: Corporate, Command, Select, Institutional, and Reserve."
A study released yesterday by Greenwich Associates says, "A significant number of institutions says they are considering or have already suspended their securities lending program, either temporarily or permanently." The survey, entitled, "After Credit Crisis Breakdowns, Institutions Overhaul Practices in Securities Lending Pools and Short-Term Funds," polled "141 corporate pension funds, public pension funds, endowments, and foundations, including 120 with at least $1 billion in assets under management."
Greenwich says, "During the worst of the crisis last year, a significant proportion of U.S. institutions experienced either an unexpected interruption in liquidity or unanticipated risks and credit exposures in securities lending pools and short-term investment funds, and a relatively small number of institutions were forced to realize losses." The survey cites the heavy concentration of the securities lending industry, saying 117 of the 141 institutions polled use Bank of New York/Mellon, State Street Bank & Trust, or Northern Trust.
The release also says, "In the wake of these dislocations, institutions are reviewing their policies governing securities lending pools and short-term investment funds, and are considering implementing the following changes: Evaluating the costs and benefits of the securities lending program, and discontinuing or modifying it; Stepping up their oversight of fund investment practices, increasing the frequency of communications with managers; and, Tightening investment guidelines by restricting investment in SIVs, CDOs and other structured, securitized product or limiting investment to government securities."
"Based on our research results, it seems safe to say that both institutions and their providers had become a bit too complacent in the run-up to the credit crisis.... The credit crisis served as a difficult reminder that there are no free lunches in investing," says Greenich Associates consultant Dev Clifford.
Today, we list the top-performing AAA-rated money market mutual funds for July 2008, compliments of our monthly Crane Corporate publication. Over 57% of all Taxable money fund assets, or $1.599 trillion, tracked by Crane Data's Money Fund Intelligence are rated triple-A, the highest rating for money funds, by S&P, Moody's, and/or Fitch. These 545 funds, which make up our Crane AAA Money Fund Index, returned 1.94% (annualized) on average in July, and have returned 1.45% (unannualized) year-to-date, and 3.37% over the past year.
The No. 1-performing AAA-rated fund is Reserve Primary Instit ($48,791, 2.75%); next is Reserve Primary Liquid I ($7,452, 2.72%). (We list assets, then annualized monthly yield in parenthesis.) Third-ranked fund is Russell Money Market Fund S ($7,850, 2.70%); 4th is Marshall Prime MMkt Fund I ($3,385, 2.68%); 5th is Oppenheimer Institutional MM E ($6,600, 2.68%); 6th is Oppenheimer Institutional MM L ($1,265, 2.68%); 7th is Putnam Prime Money Market I ($14,173, 2.67%); 8th-ranked is Reserve Primary Liquid II ($234, 2.67%); 9th is Fidelity Instit MM: Prime MMP Inst ($10,460, 2.62%); and 10th-ranked is Citi Institutional Cash Reserves O ($9,896, 2.62%).
Triple-A rated funds ranked 11 through 20 include: Reserve Primary Liquid III ($889, 2.62%); Credit Suisse Inst MMF Prime A ($8,247, 2.60%); Dreyfus Instit Cash Adv Inst ($48,290, 2.60%); ABN AMRO Instit Prime MMkt Y ($1,762, 2.59%); Morgan Stanley Inst Liq Prime Inst ($33,473, 2.57%); Citi Institutional Cash Reserves L ($490, 2.57%); Morgan Stanley Act As Instit ($3,063, 2.57%); Fidelity Instit MM: Prime MMP I ($10,050, 2.56%); AIM STIT Liquid Assets Inst ($23,125, 2.55%); and Federated Prime Cash Oblig IS ($10,464, 2.54%).
While many investors and analysts are responding to the past year's market turmoil by demanding more frequent portfolio holdings and more metrics on money funds, ratings agencies have been conducting weekly and monthly analysis of fund holdings for years. Money market mutual fund triple-A ratings have retained their unblemished record during the crisis. No investor has ever lost money in a AAA-rated money fund, so some might consider leaving the analysis of complicated money fund portfolio securities to the professionals.
To request the most recent Crane Corporate monthly ranking, which also includes the top-ranked Treasury funds, or to request a customized performance ranking, e-mail pete@cranedata.us.
While headlines trumpet the "resolution" of the auction-rate securities deep- freeze, a closer read of the agreements indicates that investors still have many moons before they can depart the ill-fated sector for good. State attorneys generals and large brokerages got their positive headlines and will move on, while markets and investors will be left to deal with the moral hazard created, the assignment of blame to participants, and the details of dividing up the losses, if any.
Today's Wall Street Journal delivers an excellent summation of events in "UBS to Pay $19 Billion As Auction Mess Hits Wall Street". It says, "Auction-rate securities are a kind of debt that soared in popularity in recent years. They let issuers such as municipalities and student-loan organizations borrow for the long term, but at lower, short-term interest rates. The rates reset at periodic auctions, hence the name. Wall Street sold more than $330 billion of these securities to more than 100,000 individuals and other investors."
It names a number of figures expected to bear the brunt of the fiasco's blame. It cites David Shulman, "who ran UBS's auction-rate desk, saying he "questioned whether the firm should continue to submit bids to support auctions.... In the email, Mr. Shulman acknowledged that investors expected UBS to make sure the auctions ran smoothly, even as he and others behind the scenes contemplated halting their bids entirely." Shulman said, "Retail clients have -- I am confident been told that these are 'demand' notes ... and will be redeemed at par on demand.... While there is no formal obligation to cash out clients at par, he added, the moral obligation runs very deep."
The issue of commissions and conflict-of-interest is also thoroughly addressed. WSJ adds, "The brokers and firms typically shared commissions of 0.25% of the securities sold - compared with 0.05% for Treasury securities and zero for plain-vanilla money-market funds. Merrill sometimes offered extra commissions, at times up to a total of 1%. Merrill says commissions 'didn't change' brokers' approach to auction-rate securities."
After four months of flatness, money fund assets clawed their way back into record territory, rising $32.09 billion to $3.560 trillion in the latest week. ICI's statistics show tax-free assets leading the advance. Retail funds increased by $3.35 billion to $1.244 trillion, with tax-exempt retail assets rising $4.26 billion to $306.9 billion, and institutional funds increased by $28.74 billion to a record $2.317 trillion, with tax-exempt institutional assets rising $12.69 billion to $209.32 billion.
Tax-exempt funds attracted heavy inflows as yields spiked following concerns about further downgrades in the municipal "monoline" insurance sector. Moody's placed FSA and Assured Guaranty, two of the only remaining triple-A monoline credits, on watch recently. Tax-free yields should fall back to earth as they reinvest the heavy inflows.
Money fund assets overall had been setting records almost weekly since the Subprime Liquidity Crisis began a year ago. Assets have risen by $903 billion, or 34.0%, over the past 52 weeks. Year-to-date, money fund assets have increased by $416.0 billion, or 13.2%, according to ICI's weekly series and Crane Data's archiving and calculations. But since hitting a record $3.558 trillion the week ended April 9, however, assets have stagnated the past 4 months.
The August issue of Crane Data's flagship Money Fund Intelligence was e-mailed to subscribers this morning. The latest newsletter features the articles "Looking at Money Fund Portfolio Composition," "Federated's Ochson Debunks Muni Myths," and "Clearwater, DB Launch M-Fund Transparency." MFI also includes the latest money fund news (in more detail than the website), indexes, performance, and statistics.
The monthly "Fund Profile" and manager interview features a discussion with Mary Jo Ochson, Senior portfolio manager and CIO of Federated Investors' Tax-Exempt Money Market Group. Ochson tells MFI readers about the new money fund eligible variable-rate demand preferreds (VRDPs) being issued by closed-end funds to retire auction-rate preferred securities (ARPS). She also addresses concerns over monoline insurers and discusses asset growth and other issues in the tax-free money fund marketplace.
As of July 31, the Crane Money Fund Average, our broadest measure of taxable money fund performance including 885 funds, remained unchanged yielding (7-day simple) 1.96%. The Crane 100 Index declined by 0.03% to 2.24% during July. The Crane Institutional MF Index fell 1 basis point to 2.23%, the Crane Individual MF Index was unchanged at 1.80%, and the Crane Tax-Exempt MF Index jumped 0.54% to 1.82%.
Through July 31, 2008, the Crane 100 Index returned 0.19% for one-month, 0.55% for 3 months, 1.68% YTD, 3.75% over 1-year, 4.31% over 3 years (annualized), 3.14% over 5 years, and 3.50% over 10 years. Its average maturity rose by one day to 45 days. To request the latest issue of Money Fund Intelligence or Crane Index, e-mail Pete Crane (pete@cranedata.us).
Nuveen Investments announced the pricing and placement of over $500 million of its new Variable Rate Demand Preferred (VRDP) shares issued by closed-end funds in a series of four private placement offerings. Proceeds from the offerings "are expected to be used ... to redeem all of the fund's outstanding auction-rate preferred shares (ARPS)." The closed-end funds placing VRDP shares include: Nuveen Dividend Advantage Municipal Fund 2 ($196 million); Insured Premium Income Municipal Fund 2 ($219 million); Insured California Tax-Free Advantage Municipal Fund ($35.5); and, Nuveen Insured New York Dividend Advantage Municipal Fund ($50 million), says a series of press releases by Nuveen.
Nuveen says, "The VRDP was offered only to qualified institutional buyers, as defined pursuant to Rule 144A under the Securities Act of 1933" and that the offering is expected to close on August 7, 2008. "The VRDP shares will include a liquidity feature that allows holders of VRDP to have their shares purchased by a liquidity provider in the event that sell orders have not been matched with purchase orders in a remarketing. The liquidity feature is provided by Deutsche Bank AG.... VRDP dividends will be set weekly at a rate established by a remarketing agent."
At least one money market fund family has begun buying these new securities, which are intended to take the place of, and ease the pressure on, the beleaguered auction-rate preferred securities (ARPS) sector. Federated Investors CEO Chris Donahue said on the company's recent earnings call, "We have been working with many of those providers in order to make sure that the structures are compatible with 2a-7, and ... we would be enthusiastic to purchase those on our side. Our lawyers, PMs, and analysts have been working with the various people." He added, "Don't forget that the whole existence of the auction rate securities market was a way to get away from money funds."
Look for more about this topic in the imminent August issue of Money Fund Intelligence where we interview Federated's tax-free money fund CIO Mary Jo Ochson. See also MarketWatch's "Federated Municipal Closed-End Funds Announce Tender-Option Bond Refinancing for Preferred Shares".
Economists John Taylor and John Williams recently wrote the research article, "A Black Swan In The Money Market," which discusses the jump in LIBOR rates and the effectiveness of the Federal Reserve's Term Auction Facility (TAF), we learned from website mediaforfreedom.com.
The National Bureau of Economic Research (NBER) abstract (Working Paper No. 13943) says, "At the center of the financial market crisis of 2007-2008 was a highly unusual jump in spreads between the overnight inter-bank lending rate and term London inter-bank offer rates (Libor). Because many private loans are linked to Libor rates, the sharp increase in these spreads raised the cost of borrowing and interfered with monetary policy. The widening spreads became a major focus of the Federal Reserve, which took several actions -- including the introduction of a new term auction facility (TAF) -- to reduce them. This paper documents these developments and, using a no-arbitrage model of the term structure, tests various explanations, including increased risk and greater liquidity demands, while controlling for expectations of future interest rates. We show that increased counterparty risk between banks contributed to the rise in spreads and find no empirical evidence that the TAF has reduced spreads. The results have implications for monetary policy and financial economics."
The paper's introduction says, "On Thursday, August 9, 2007 traders in New York, London, and other financial centers around the world suddenly faced a dramatic change in conditions in the money markets where they buy and sell short-term securities. The interest rate on overnight loans between banks -- the effective federal funds rate -- jumped to unusually high levels compared with the Fed's target for the federal funds rate. Rates on inter-bank term loans with maturities of a few weeks or more surged as well, even though no near-term change in the Fed's target interest rate was expected. Many traders, bankers, and central bankers found these developments surprising and puzzling after many years of comparative calm."
"Rates on term lending, such as the Libor one- and three-month rates, seemed to have become disconnected from the overnight rate and thereby from the Fed's target for interest rates. It was as if banks suddenly demanded more liquidity or had grown reluctant to lend to each other, perhaps because of fears about the location of newly disclosed losses on subprime mortgages.... As we now know, that Thursday and Friday of August 2007 turned out to be just the start of a remarkably unusual period of tumult in the money markets, perhaps even qualifying as one of those highly unusual "black swan" events."
Taylor and Williams say, "The purpose of this paper is to document these unusual developments in money markets, assess various theories underlying them, and evaluate the impact of policy actions like the Term Auction Facility.... The renewed stress in the markets also gave rise to a host of new Federal Reserve actions and lending facilities. Though the financial turmoil persists, we view the introduction of these new facilities and actions as marking the beginning of a new phase of the crisis, where new policy responses will be evaluated and tested."
Silicon Valley Bank subsidiary SVB Asset Management writes in its most recent Observation Deck newsletter "The Trouble with CDs." President Adam Dean, says, "Faced with zero client appetite for their high-payout products such as mortgage backed and auction rate securities, the broker business suddenly isn't what it used to be. Their clients now demand ultra-safe investments such as money funds and treasuries, and frankly, those don't pay much. Enter the Certificate of Deposit and CD placement programs."
He continues, "For corporations looking for safety and return, CDs may sound like the best of both worlds. But there is, of course, more to the story. Aside from the FDIC coverage, very little else about the higher yield CDs offered meets the liquidity, transparency and safety standards of a conservative cash investment policy. In other words, there's a reason for the higher yield, and with a considerable payout to the broker selling that yield, there is at least one reason you are hearing about this CD."
Dean warns, "Typically these higher-yield offerings are non negotiable, meaning they cannot be liquidated prior to maturity without penalty and subject the investor to magnified interest rate risk.... Every security type permitted in your corporate investment policy should include the ability to easily sell back into an open market on demand and without incurring an early withdrawal penalty prior to maturity. Non negotiable CDs don't meet this standard. We recommend allowing only negotiable CDs."
He also advises due dilligence and caution with CD placement programs, like CDARS. "[A]n ability to accurately assess their [banks] health requires a considerable investment in time that the selling broker has almost certainly not done for you. In the event of bank failure, the failure and the FDIC takeover process can often remain invisible to the client. The selling broker has no obligation to notify the client. We recommend allowing only direct investment in CDs where your corporation is the beneficial owner and the issuing bank is approved by the credit team of your asset manager."
Finally, Dean says of CDs, "If they are offering a rate well above market, ignore the FDIC insurance and look at the bank's actual credit rating.... If not convinced, envision the conversation with your board when explaining that the regional bank that you bought the CD from has collapsed." He adds, "Lastly a note about CDARS.... If one of the underlying banks, or the home bank, is taken over by the FDIC, it is unclear as to when your investment is returned to you."
In August 2007, Matrix Settlement & Clearance Services LLC (MSCS) announced the upcoming launch of its money market portal service, targeted at bank trust departments and public sector programs. In January 2008, they began adding institutional users to its platform. President John Moody explains, "This new service expands the existing MSCS mutual fund platform to include execution and same-day settlement for T+0 executed money market funds, and our customers have reacted favorably to this service. Mid-year 2008, we have over 25 bank trust departments on our customer list that represent approximately $3 billion in sweep assets."
Designed to support daily sweep activity in bank trust departments, the portal employs a series of front-end interfaces with trust accounting systems and back-end interfaces with money market fund complexes. "We've been in the mutual fund processing and settlement business since 1999," said Cliff D'Amato, CEO. "We felt it was a natural progression for us to enter the same-day money market processing business. By using our existing technology relationships with systems providers we were able to build 'straight through' execution and settlement."
The Matrix Money Market Portal gives bank trust departments the same automation, information management and reporting tools they currently utilize with the mutual fund trading service, but with the added benefit of same-day settlement. "Matrix negotiates the trading agreements, opens new fund accounts, and handles trade execution and wire settlement," said Moody. "We follow the hallmark approach of 'long title' account registration, allowing the bank to retain full ownership of fund positions. This creates a very easy start-up process because we don't re-register fund accounts, and it allows the bank to keep these positions long on their books."
"Everyone knows it's been a challenging year for money funds," says Michael Rice, Program Manager for the Matrix portal. "The need for information is greater than ever before. Investment policies are tighter, and it's important for institutions to have some type of due-diligence in place. Just a year ago nobody thought much about the quality of a money fund portfolio. But now, liquidity, average maturity, structure and diversity of the underlying investments is extremely important."
