News Archives: February, 2009
Money market mutual fund assets broke a 2-week decline and rebounded by $9.42 billion to $3.888 trillion in the week ended Wednesday, February 25, reports the Investment Company Institute in its weekly asset series . ICI also reported its January 2009 "Trends in Mutual Fund Investing" totals, showing money fund assets grew by $62.5 billion in January following 2008's $746.5 billion, or 24%, increase. (The weekly series shows total money fund assets declining by about $16 billion February month-to-date.)
Government fund assets increased by $4.52 billion to $1.417 trillion, Non-government (prime) assets increased by $7.13 billion to $1.992 trillion, but tax-exempt assets decreased by $2.23 billion to $478.27 billion. Tax-exempt money funds have fallen for six weeks in a row from over $501 billion in the first week of the year. Since reaching a year-and-a-half low of $962 billion on Oct. 8, 2008, Prime Institional money funds have risen in 17 of the past 19 weeks, increasing $224 billion, or 23.3%.
Yesterday, ICI also released "Month-End Portfolio Holdings of Taxable Money Market Funds," which shows money funds increased their holdings of U.S. government agency securities, repurchase agreements, and certificates of deposits, but decreased their holdings in U.S. Treasury bills and commercial paper. Repo holdings grew by $65.7 billion in January, agency securities grew by $57 billion and CDs grew by $50.2 billion. T-bill holdings declined by $66.1 billion and CP declined by $25.0 billion.
Taxable money funds now hold $830.6 billion in Government agencies (24.4%), $617.4 billion in Repo (18.1%), $604.2 billion in Commercial Paper (17.7%), $524.9 billion in Treasury bills and securities (15.4%), $522.2 billion in CDs and Eurodollar CDs (15.3%), and $227.3 billion in Corporate and Bank Notes (6.7%). Crane Data's Money Fund Intelligence showed Treasury funds declining by $46.9 billion in January, Government funds increasing $50.5 billion, and Prime funds increasing by $92.9 billion on the month.
While concerns still remain, higher Treasury bill yields over the past two months are beginning to ease the pressure on Treasury money market mutual funds to partially waive fees in order to avoid negative yields. Yields on Treasury funds have bottomed out over the past three weeks and should soon begin inching higher. Crane Data's Money Fund Intelligence Daily currently shows 1-day yields higher than 7-day yields across all categories of taxable money funds indicating an imminent uptick in yields.
According to the U.S. Treasury's "Daily Treasury Bill Rates" web page, yields on 4-week T-bills have risen from a record low of negative 0.01 on Dec. 11 and Dec. 19 to 0.21% as of yesterday. Thirteen-week yields have risen from near zero to 0.30% over the past two months, and 26-week T-bill yields have risen from a record low of 0.14% on Dec. 19 to 0.52% currently. Fifty-two week T-bill yields have jumped to 0.73% from 0.32% at the end of December.
Though higher yields on T-bills help, fund expenses remain under pressure as older, higher-yielding Treasuries continue to roll off. But Treasury Institutional money market funds showed a 1-day yield (net) of 0.16% as of Tuesday and a 7-day yield of 0.15%, up from 0.14% Feb. 12. Treasury Individual funds showed a 1-day yield average of 0.07% and a 7-day yield of 0.03% as of Feb. 24. Currently, thirty-one funds out of 504 tracked daily by Crane currently are yielding zero, a likely indication that significant portions of fees are being waived.
Treasury Institutional money funds, which account for 72% of all Treasury money fund assets, average expense ratios of 0.29%, while Treasury Individual money funds average 0.64% in expenses. Note that money fund yields are always reported already net of expenses. Note too that overall expense ratios have likely been declining due to partial fee waivers implemented over the past two months.
Since peaking on Dec. 8, 2009, Treasury Institutional money fund assets tracked by MFI Daily have declined by $100.2 billion to $383.1 billion, while Prime Institutional money fund assets have increased by $105.8 billion to $845.0 billion. Assets of Government Institutional funds have increased by $57.3 billion to $401.6 billion.
The most recent issue of treasury and finance publication GTNews.com features an "Update on the Largest Money Fund Markets Worldwide" written by Crane Data President Peter G. Crane. Crane writes, "This article looks at the largest worldwide markets for money market mutual funds in the wake of last year's unprecedented market turmoil. It examines asset growth, recent market developments, and potential regulatory changes. While US money market mutual fund assets continue to reach record levels, a number of countries have seen substantial declines in assets."
The article features a table of the largest money fund markets worldwide, as well as a chart of the growth of worldwide money fund assets over the past five years. It explains, "Mutual fund trade groups, the Investment Company Institute and the International Investment Funds Association, recently released their latest quarterly 'Worldwide Mutual Fund Assets and Flows' survey. Although the numbers are slightly dated, they give the first glimpse of how money fund assets have been impacted by the Reserve Primary Fund's 'breaking the buck' last September. Crane Data LLC has analysed these third quarter 2008 statistics and produced a ranking of countries based on total money market mutual fund (MMF) assets."
The GTNews piece says, "Although worldwide assets dipped US$146bn, or 2.6%, in the latest quarter, global money fund totals remain dramatically higher than they were a year ago. Assets of all money market mutual funds rose by US$780bn, or 16.7%, to US$5.45 trillion over the past year. Worldwide totals have increased by US$1.58 trillion since the end of 2006 and by US$2.12 trillion since the end of 2004. So although money fund assets have experienced setbacks recently, it appears that their long-term growth trend remains intact.
Crane writes, "While asset growth has been robust in the US, MMFs have been confronted by an unprecedented series of challenges, from ultra-low yields to possible widespread regulatory changes.... Some are proposing dramatic changes to the MMF model. But the strict quality, maturity, and diversity guidelines of the US Securities and Exchange Commission's Rule 2a-7 have proven themselves to be popular, flexible and robust. The losses shouldered by US MMF advisors, which could end up in the billions, are still dwarfed by the losses taken by almost any single large bank over the past year. So we expect modest change in regulations, and even believe market events will hasten the adoption of the US model in Europe and elsewhere."
He continues, "Dublin-domiciled funds suffered due several factors. First, many fund families lacked more conservative government and treasury fund offerings.... Government funds caught much of the institutional money temporarily fleeing 'prime' or general purpose money funds. Irish funds don't have a diversified retail customer base either. Also, unlike US money funds, Irish funds lacked the extensive safety net of US government support programmes."
Visit http://www.gtnews.com for the full article and e-mail info@cranedata.us for a trial subscription to our new Money Fund Intelligence International product.
The Federal Reserve Board of Governors has launched a new website area entitled, "Credit and Liquidity Programs and the Balance Sheet." The announcement says, "The Federal Reserve Board on Monday launched a new section of its website expanding the information provided about the policy tools the Federal Reserve has employed to address the financial crisis and simplifying access to that information."
It continues, "The website section -- Credit and Liquidity Programs and the Balance Sheet -- presents a wide range of material, including a detailed explanation of the Federal Reserve's balance sheet; descriptions of all of the Federal Reserve's liquidity and credit facilities; discussion of the Federal Reserve's risk-management practices; information on the types and amounts of collateral being pledged at the various lending facilities; and an extensive set of links to congressional reports and other resources."
"This new section of our website is one of a series of significant steps we have taken to improve the public's understanding of our actions during this extraordinary period," said Federal Reserve Chairman Ben S. Bernanke. "We are continuing to review our disclosure policies relating to our balance sheet and lending policies. Our goal is to be as transparent as possible, both to ensure that the Federal Reserve is accountable to the Congress and the public, and because many of the Board's policies are likely to be more effective if they are well understood by the markets and the public."
The new section of the Board's website can be accessed at: http://www.federalreserve.gov/monetarypolicy/bst.htm.
Investment News, a Crain Communications publication, writes "Prime money funds see recent inflows" in this week's issue. The "leading news source for financial advisors" writes that "Time -- and the government's guarantee -- have buoyed confidence" in money funds and that, "`The tide has finally turned for prime money market mutual funds."
Investment News says, "Once considered among the safest and most uninteresting investments, prime money funds were thrust into the spotlight in mid-September when the prime fund managed by The Reserve Management Co. Inc. of New York 'broke the buck' and redemptions were frozen." It quotes our Peter Crane, "The Reserve [Primary Fund] is being seen more as an isolated incident because no one else broke the buck."
The article quotes Robert Deutsch of JPMorgan Asset Management, "Investors took a step back and realized that their managers were running the funds conservatively. Also during that time, Treasury fund yields had dropped to very low levels. We've seen money that had gone into Treasuries move back to prime money funds."
Crane Data wrote on Friday that Prime Institutional money fund assets have regained their status as the largest sector of money fund assets, surpassing the combined Government and Treasury Institutional sector. According to ICI's latest statistics, Prime Institutional funds now total $1.183 trillion vs. Govt Inst's $1.165 trillion.
After losing $395 billion, or 28.7%, from Sept. 3 through Oct. 1, 2008, Prime Institutional money fund assets have increased by $193 billion, or 19.7%. Year-to-date, Prime Institutional assets have increased by $78 billion, or 7%, vs. Government assets, which have declined by $28 billion, or 2.3%. (Government Institutional funds, including Treasury funds, increased by $291 billion, or 41.7%, during the 4-weeks that included Reserve Primary Fund "breaking the buck" and have increased another $203 billion, or 20.5%, since Oct. 1.)
The latest issue of AFP Exchange, the Association of Financial Professional's bimonthly magazine, features an article by Frederick Berretta, Bank of America's head of Global Liquidity Solutions, entitled "Rough Seas: Navigating the Liquidity Maelstrom." The piece says, "Volatility has put liquidity at risk, but thanks to several initiatives, commercial paper and money markets are pulling out of their nosedives."
Berretta reviews the credit crisis and tells readers, "The days of yield chasing are over, at least for the moment. The flight to quality continues, with bank deposits from strong financial providers, treasury securities, and money market funds reaping the benefits. The Fed has launched several tools, such as Money Market Fund Insurance, Commercial Paper Funding Facility (CPFF), Asset Backed Commercial Paper Money Market Fund Liquidity Facility (AMLF) and Money Market Investors Funding Facility (MMIFF) ... to help this particular aspect of the global credit crisis, as the money market is fundamental to the health of the overall economy."
"The good news is that the tools seem to be working: Commercial paper issuance has risen dramatically since the CPFF was launched, and institutional prime money market fund assets are climbing again. The bad news is that we are not sure how these markets will function when these programs expire, and a long-term dosage of them may lead to side effects that we cannot predict. Withdrawal effects may be inevitable," he says.
Berretta gives a number of tips to consider, including, "Avoid overreacting to falling rates." He says, "The embedded and hidden risks of esoteric and highly complex securities have been made manifest.... Understandably, it appears that some investors may even have overreacted by overly conservative, impulsive investing. Complex investments will probably return again in popularity, but when they do, investors will demand greater transparency. It seems that liquidity investing has gone back to an era of simplicity that would seem refreshing, were it not the product of a financial 'perfect storm'."
Finally, Berretta writes in the AFP Exchange article says, "Now is the time to chart a course for your liquidity that will endure when the appetite for capturing those basis points returns. Yield optimization is a worthy cause, but it is probably best pursued in tandem with principal protection."
Last week in our story "Lehman Bros Terminating Offshore Money Fund; Q3 Worldwide Flows," we mentioned that the Investment Company Institute and the International Investment Funds Association recently released their latest survey of "Worldwide Mutual Fund Assets and Flows Third Quarter 2008." Today, we take a closer look at the largest markets for money market mutual funds worldwide. Crane Data took the raw ICI statistics and produced a ranking of countries based on money fund assets, which we summarize below.
The U.S. remained the largest market for money funds by far, with over 63% of the worldwide total of $5.446 trillion as of Sept. 30, 2008. The U.S. was also one of the few countries to asset assets increase in the third quarter of 2008, the quarter which included Reserve Primary Fund "breaking the buck". Assets increased by $39 billion, or 1.2%, to $3.44 trillion in Q3, and increased by $589 billion, or 20.6% over one year.
Ireland ranks second in assets with its huge concentration of "offshore" money market funds domiciled in Dublin. (Unlike other countries, Ireland doesn't break out its money fund assets from its total mutual fund assets, but almost the entirety of their total is money funds.) Ireland saw assets decrease sharply in Q3'08, falling $157.9 billion, or 16.0%, to $827.9 billion. These funds, many of which have U.S. counterparts and managers, suffered due to the lack of government and Treasury options to catch the institutional money temporarily fleeing prime money funds. Also, unlike U.S. money funds, they lacked the extensive safety net of U.S. Government support programs.
France ranks as the third largest money fund market with $668 billion (down $62 billion, or 8.5% in Q3), and Luxembourg, which includes many of JPMorgan's offshore funds, ranks fourth with $477 billion (down 7 billion, or 1.5%). These are followed by Australia ($199 billion, down 42 billion, or 17.3%), Italy ($90 billion, down 12 billion, or 11.4%), Canada ($68 billion), Korea ($54 billion), Spain ($52 billion), and Mexico ($45 billion).
To request the full XLS table, e-mail our statistics team at stork@cranedata.us and include "Worldwide XLS" in the Subject Line.
Northern Trust becomes the latest complex to add government options to its lineup of sterling and euro offshore money market funds. The company said in a London press release Monday, "Northern Trust announced today that its asset management arm, Northern Trust Global Investments ('NTGI'), has become the first investment manager to launch triple-A rated offshore government liquidity funds in three currencies. The funds, which launched in U.S. Dollar, Sterling and Euro currencies, are designed to complement NTGI's suite of existing cash management products, and have been launched in response to an increasing investor appetite for funds invested in government securities."
David Rothon, senior investment strategist, says, "As a result of these unprecedented times in global financial markets, we have seen an increased demand for cash products and increasingly risk averse investments. Our cash products have all been designed to give investors the choice to invest in a range of funds with differing risk/return profiles, and all emphasising capital preservation."
The release continues, "The Government Liquidity funds aim to provide investors with returns consistent with short-term government interest rates, while maintaining a high degree of liquidity. They invest exclusively in government securities, explicitly guaranteed government agencies and repurchase agreements backed by government debts. In addition to the Northern Trust Government Liquidity funds, NTGI offer Global Cash Funds in U.S. Dollar, Sterling and Euro currencies, which are particularly appropriate for investors with a short term horizon, coupled with high or uncertain liquidity requirements."
In other news, last week Crane Data began publishing a "beta" or test version of a new product, Money Fund Intelligence International. MFII tracks USD, Euro and Sterling "offshore" money market mutual funds offered by the following firms: AIM, Barclays, BlackRock, BNY Mellon, BoA, Citi (Western), Federated, Fidelity, Fortis, Goldman, HSBC, JPMorgan, Morgan Stanley, Northern, RBS, SSgA, Standard Life, SWIP and UBS. Contact Pete to participate or for more information.
American Funds, one of the country's largest managers of stock mutual funds but just the 22nd largest manager of money funds with $25.5 billion, has filed to launch a new money market mutual fund. The Capital Research & Management-advised company's current lineup includes the $19.4 billion American Funds Cash Mgmt MFoA (CTAXX, 0.49% expense), the $5.1 billion American Funds US Treas MFoA (UTAXX, 0.48% exp.), and the $955 million American Funds Tax-Ex MFoA (TEAXX, 0.47% exp.). The new fund, American Funds Money Market will include an institution share class (A) charing just 0.15%, as well as 15 other higher-priced classes.
The fund appears to be a rare hybrid of a Treasury and a Prime fund offering. According to the filing (on Strategic Insight's SimFundFiling, under "Principal investment strategies," it says, "The fund invests substantially in U.S. Treasury securities, which are guaranteed by the United States government, federal agency discount notes and high-quality money market instruments, such as commercial paper, commercial bank obligations, savings association obligations and short-term corporate bonds and notes."
In other SEC EDGAR filing news, Strategic Insight reports that, "Columbia, JPMorgan, Morgan Stanley, PFM Asset Management, Reich & Tang, SunAmerica, and Wells Fargo funds add investment in securities guaranteed under the FDIC's Temporary Liquidity Guarantee Program." The PFM filing says under "FDIC Temporary Liquidity Guarantee Program," "Under the TLGP Program, the FDIC guarantees the payment of principal of and interest on securities issued by private entities participating in the TLGP Program through the earlier of the maturity date of the debt or June 30, 2012. The FDIC has concluded that the FDIC Guarantee is subject to the full faith and credit of the United States."
The PFM filing also adds under "Termination of Cash Management Class of Prime Series," "On January 29, 2009, the Board of Trustees of the Trust approved the termination of the Cash Management Class of Prime Series, effective February 27, 2009, in light of the significant cost associated with banking services provided by the Fund's custodian in the current low-interest rate environment."
Federated Investors recently petitioned the Securities & Exchange Commission to "amend Rule 15c3-3 under the Securities Exchange Act of 1934, to treat U.S. government money market mutual fund shares ... as 'qualified securities' to meet a broker-dealer's deposit requirements under the Special Reserve Bank Account for the Exclusive Benefit of Customers." The SEC previously proposed to expand the use of money funds as brokerage reserves in its March 2007 "Amendments to Financial Responsibility Rules for Broker-Dealers," but these have yet to be adopted.
Law firm Pickard & Djinis explains in the "Petition for Rulemaking" letter, "This proposed amendment, we believe, will improve broker-dealers' operational flexibility in meeting their obligation under Rule 15c3-3 and will allow broker-dealers to obtain more competitive yields on such assets while, at the same time, not compromise the Rule 15c3-3's Congressional purpose of safeguarding customers' deposits or credit balances. Further, this proposed amendment would inure to the benefit of qualifying money market funds and provide the Commission with an opportunity to clearly express its confidence in money market mutual funds."
The letter wants to amend Rule 15c3-3 to define "qualified securities" to allow U.S. government money market funds as investments in the "Special Reserve Bank Account for the Exclusive Benefit of Customers." It says, "By using a U.S. government money market fund, the broker-dealer avoids the operational risk of purchasing and selling U.S. Treasury securities and can reduce the confusion, complexity and opportunity for error that can result. Broker-dealers would have much greater efficiency in their ability to maintain the appropriate level of deposit in the reserve account, and would be able to purchase and sell U.S. government money market funds in precise dollar amounts. Further, broker-dealers will also be able to reduce the human and other costs associated with managing a reserve account with U.S. Treasuries. In sum, the use of U.S. government money market funds will facilitate a broker-dealer's ability to meet its cash management and liquidity in a highly cost efficient manner."
"With aggregate reserve deposits being made by broker-dealers under Rule 15c3-3 reaching an estimated $150-$180 billion, a substantial portion of reserve deposits are backed by the balance sheets of these banks rather than FDIC insured.... This petitions asks that the Commission recognize that investments in U.S. government money market funds, with all the protections of the 1940 Act for registered investment companies; the strict requirements of Rule 2a-7 under the 1940 Act; and the stability of portfolio assets limited to investments in securities issued or guaranteed by the United States government or its agencies or instrumentalities (including repurchase transactions), would allow broker-dealers greater flexibility in meeting their Rule 15c3-3 reserve account requirements without denigrating customer protection," says the petition.
The letter continues, "Petitioner seeks this change to Rule 15c3-3 because it wishes to respond to the needs of its customers. Broker-dealers have a strong desire to avoid the operational risks of managing portfolios of U.S. Treasury securities and to limit the balance sheet risk of bank deposits. Money market funds, specifically money market funds that are limited to investments in securities issued or guaranteed by the United States Government or its agencies or instrumentalities (including repurchase transactions), are safe. FCMs enjoy the same conveniences for purposes analogous to the Rule 15c3-3 special reserve account requirement. We believe that it is long overdue for the SEC to allow broker-dealers and investors to enjoy this same advantage."
Yesterday, Treasury Strategies released a "case study on one of the most important transformations in Cash Management -- the adoption of electronic trading systems by banks and financial institutions for their corporate clients. The study examined the features and benefits that online trading platforms have provided to two of the nation's largest financial institutions." See the full study, "Web-based Trading Platforms: Improving Efficiency and Control for Users and Providers," here.
The two cases in the study -- PNC and SVB -- both feature software from provider Cachematrix. The press release says, "Under increased audit, compliance, and regulatory concerns, corporate treasurers are seeking greater control, transparency, and efficiency in managing their core and operating cash through the use of buying institutional money funds and ultra safe short term fixed income securities via online trading systems," said Chrystal Pozin of Treasury Strategies. "Web-based trading, research and reporting tools are rapidly being adopted by banks to address the needs of their corporate clients. This case study shows a path to success in two scenarios."
In other news, The Bank of New York Mellon recently "announced the launch of MarginDIRECT, an innovative new liquidity tool that helps hedge funds manage margin positions and reduce counterparty risk in an uncertain credit environment. (See the press release on PR Newswire.)
The release says, "MarginDIRECT provides safekeeping for posted margin balances away from a hedge fund's over-the-counter (OTC) derivative trading counterparties, and thereby reduces the hedge fund's risk exposure. Margin assets received on behalf of clients are targeted for investment through MoneyFunds DIRECT, the bank's on-line liquidity portal that provides direct access to over 100 money market funds in multiple currencies, as well as individual money market securities, on a single, centralized investment and reporting platform."
Jonathan Spirgel, managing director and global head of liquidity services at The Bank of New York Mellon says, "MarginDIRECT reflects our commitment to helping our clients succeed in the current credit environment. `Hedge funds need access to resources that measure up to today's challenging market conditions, and MarginDIRECT can serve as a single and complete solution for managing margin positions, account data and money market investments."
In the February issue of our flagship publication, Money Fund Intelligence, we interviewed Erik Preus, president of RBC's U.S. mutual fund family, and Scott Cabalka, senior portfolio manager. We discussed the fund family's recent money fund reorganization, its move into the institutional marketplace, and issues impacting today's money market mutual fund industry. Below are excerpts. (See also our News story last week, "RBC Renames Tamarack Funds, Moves Into Inst MF Space w/AAA Ratings.")
We asked, "Why expand your money market funds now? Preus answers, "I think we are well-positioned to grow in the money market fund space. We've gained some nice traction from large RBC affiliate clients, and in our introductory discussions with portals and exchanges, we're hearing there's a need for good, strong cash management from healthy financial institutions. The recent market turmoil has validated our long-standing approach to managing cash."
He continues, "We have a good organizational structure for it, a healthy parent, and for those reasons I think we will be successful.... In addition, we also believe there are private-labeling opportunities with other financial institutions that don't have the necessary scale.... Given our recent restructuring, we can accommodate those requests very efficiently, which has the potential to be attractive to certain firms."
What has been the key to success and the key to staying out of the headlines this year? Preus responds, "We have always taken seriously the investment objectives of the fund -- preservation of principal first, liquidity second, and yield third. With that philosophy we've maintained a competitive yield over time. I think that's at the heart of why we've been able to avoid so many landmines. And now we're seeing the markets and investors truly recognize the value of that philosophy."
We also asked, "Do you have to be a giant to manage money funds?" Cabalka says, "In the realm of the money fund area, one year or shorter, Voyageur manages over $20 billion, not only in money market mutual fund assets, but also local government investment pools, public funds with very short investment mandates and separately managed portfolios that fall within the general guidelines of where you might see a 2a-7 fund reside. We see scale as being economically important. But being a giant is not necessary, and perhaps may have its own set of challenges."
Preus continues, "I don't know that you'll have to be a giant to have a future in the money fund business. I do think that scale helps a money fund complex offer its funds at a competitive price and it gives the portfolio managers the flexibility to have the proper diversification in the portfolio, which may in fact, be even more important than ever going forward. From our standpoint, building out our institutional shareholder base is important to help build scale. Our objective is to have our institutional business ultimately equal our retail business. There is an important balance there, as a diversified client base with inherently different flows helps strengthen the fund overall."
J.P. Morgan Asset Management, the second largest manager of U.S. money market mutual funds, yesterday announced the results of its "10th Annual Global Cash Management Survey." The survey, which polled "314 treasurers from around the world" and was conducted July through October 2008, "remains a benchmark for corporate treasurers and other cash investors to evaluate their liquidity management processes and understand their market position in relation to their peers," says the introduction from JPMAM's Head of Global Liquidity Robert Deutsch.
The report says, "Bank deposits remain the most commonly used investment type, although the allocation has come down from 61% in 2007 to 55%. There is, however, a high degree of regional disparity. US treasurers are the most likely to use pooled investments, with a 51% allocation to this investment type, compared to an all-region average of 32%. This is unsurprising given that US cash investors have traditionally used money market funds for their excess cash requirements rather than bank deposits."
It continues, "AAA rated money market funds continue to be the most widely used pooled vehicle, with 91% of respondents who invest in pooled funds having some allocation to them. This reflects the wide acceptance of money market funds as the most efficient vehicle for providing security, liquidity and competitive yield for risk averse investors. The use of all other pooled vehicles has declined. Enhanced yield fund usage, which fell in 2007, continued to decline, reflecting the flight to quality witnessed since the beginning of the credit crunch."
JPM explains, "By region, Western European treasurers are the least likely to use AAA rated money market funds, with 68% using them compared to the overall average of 91%. This may be due to the fact that in the large French and German liquidity markets, domestic funds have been preferred to international AAA rated funds. Money market funds are popular across all market capitalisations, although there is a size correlation: mega cap companies are slightly more likely than average to use money market funds (94%) while usage by smaller cap companies is slightly below average (86%).
The 2008 Survey continues, "The majority of treasurers who are considering using pooled instruments are looking at money market funds, with 61% weighing up this option. While only 12% of respondents currently use yield enhanced funds, another 37% of respondents are considering using them. However, last year, 39% of respondents said they were considering using yield enhanced funds, but actual use has decreased rather than increased. This perhaps suggests that treasurers would like to use yield enhanced funds to target higher yields, but that in the current market conditions they are more focused on the security offered by AAA rated funds."
Finally, J.P.Morgan Asset Management's "Global Cash Management Survey 2008" says, "Treasurers rated yield as most important when selecting either a money market fund or an enhanced yield fund. Notably, reputation/brand has moved into second place by mean score, from third place in 2007. This reflects the increased search for security, with treasurers perhaps looking for additional comfort beyond that offered by the AAA fund rating. Fees have become less significant, suggesting that treasurers may in some cases be willing to pay higher fees to invest with a more trusted provider."
Standard & Poor's Ratings Services announced late last week, "[I]t has lowered its principal stability fund rating on the Lehman Brothers Liquidity Funds PLC: Lehman Sterling Liquidity Fund to 'Am' from 'AAAm'." S&P explains, "This rating action follows notification to Standard & Poor's on Feb. 2, 2009, of the termination of the fund and that a cash payment representing 97% of the fund was distributed to shareholders on Jan. 29, 2009. The fund's board of directors had also elected to terminate the fund as of Jan. 29, 2009, on the recommendation of Lehman Brothers Asset Management (Europe) Ltd., which acts as investment manager to the fund. The residual 3% (equivalent to L700,000) is expected to be paid to shareholders soon after May 29, 2009, as a structured investment vehicle (SIV) issued by Dorada Corp., still held in the name of the fund, reaches maturity."
S&P adds, "The Lehman Sterling Liquidity Fund up until its termination date had maintained a stable principal value and remained within the criteria guidelines set down for a 'AAAm' principal stability fund rating. However, following actions taken last week, we have today lowered the rating on the fund and placed the rating on CreditWatch with developing implications." No investors are expected to see any losses, and it appears that Lehman is exiting the "offshore" institutional money fund business entirely. S&P also withdrew its AAA rating from the Dublin-registered American Beacon Global USD Liquidity Fund, as the company is closing the fund.
In other news, the Investment Company Institute and the International Investment Funds Association published "Worldwide Mutual Fund Assets and Flows for the Third Quarter of 2008. ICI writes, "Mutual fund assets worldwide decreased 12.1 percent to $21.66 trillion at the end of the third quarter of 2008. Money market funds experienced net inflows of $28 billion in the third quarter, compared with outflows of $70 billion in the second quarter of 2008. Year-to-date money market funds have had $444 billion of net inflows."
On the money fund totals, ICI explains, "Both the Americas and Europe experienced inflows into money market funds, with a combined net flow of $44 billion in the third quarter compared to a combined outflow of $83 billion in the second quarter. Asia/Pacific money market funds registered net outflows of $18 billion in the third quarter after reporting net inflows of $12 billion in the second quarter."
Finally, for more on "offshore" money market funds, see Monday's Financial Times' story "Investors voice concern over transparency" and the International Capital Market Association's (ICMA) "Draft Report on Money Market Funds".
The February issue of Crane Data's monthly Money Fund Intelligence newsletter ($500/yr) features the articles "Yields Hit Record Lows; Assets Aim at $4 Trillion," "Regulatory Landscape Changing Dramatically," and our monthly fund profile, "RBC's Voyageur Enters Institutional MM Space." Along with our regular money fund performance, statistics, indexes, rankings and news, MFI also contains discussion on the Group of 30 and the $1.00 a share NAV, plus our top-performing money fund tables.
In our "Regulatory Landscape" piece, we interview PriceWaterhouse Coopers Partner Tony Evangelista, who says of the Group of 30 report and the possibility of regulating money funds as banks, "Remember that Volcker has gone down that path before. This isn't the first time he's said these things should be bank products and more regulated.... Some people at least see that and recognize it for what it is."
On regulatory changes, Evangelista tells MFI, "You wonder how much traction reshaping the regulatory landscape will get. Products like money funds and other types of securities are likely by default to be scoped into the whole shifting of the landscape. Who has what oversight? What regulators are responsible for what products? There is a huge shakeout to come. Where it ends and what it means for money funds, who knows. You can be sure that they are going to be part of this sort of realignment and shifting that is happening."
Evangelista downplays the liklihood of radical change in the February issue. He says, "'Where does money fund regulation fall in the broader scheme of priorities?' You've got the economy that is crashing and burning; you've got bailout plans that are in transition, you've got the TARP program that people think is just sort of hemorrhaging.... But I don't know that money fund overhaul is a big priority, to be honest."
MFI asked, "Do you think the money fund is broken?" He responds, "I don't think so. You had special factors contributing to the Reserve Fund failure. But I think conceptually and intuitively the model makes sense." Evangelista adds, "In the end I am not sure that a complete overhaul of money market funds; their structure and Rule 2a-7 in particular is a priority or even warranted."
To request a copy of the February issue, write info@cranedata.us or call 1-508-439-4419.
Mutual fund news source ignites.com features Crane Data's Peter Crane in its "Money Voices" column today in an editorial entitled, "Don't Mess With The Buck." Crane argues that the $1.00 NAV and the structure of money funds should not be changed."
He writes in ignites, "Over the past two years, money market mutual funds have experienced at least 25 cases of support actions by fund advisors and a single case of a fund 'breaking the buck.' Given this unprecedented period of money market turmoil, a number of people have suggested changes to the regulation and structure of money market mutual funds. Some have gone so far as to propose that money funds abandon their $1 share price target and discontinue their use of amortized cost accounting."
Crane says, "I believe investors almost unanimously oppose these suggestions, and that these ideas would severely diminish the attraction of money market funds. Some of the changes could even cause severe economic repercussions, including a return to the credit market freeze we experienced in the second half of last year. Money funds purchase almost half of all the debt in the short-term Treasury, government agency, commercial paper, bank certificate of deposit and municipal security markets, so any change to their structure should not be taken lightly."
The ignites editorial continues, "While yield has played a role in the tremendous success of money funds, it's clear that convenience and simplicity have been big drivers of the category. If yield were the main consideration for savers, Internet banks, ultra-short bond funds or auction rate securities would be the ones holding almost $4 trillion in assets. The safety, stability and, particularly, the simplicity of a stable share price have been the key drivers of money funds' growth. Many an investor has learned that conducting daily check-writing and debit-card transactions with a fluctuating NAV product, like an ultra-short bond fund, quickly becomes a recordkeeping nightmare."
Finally, Crane says, "Money market mutual funds now have approximately 40 million shareholders with assets totaling over $3.9 trillion. Crane Data estimates that money funds have produced over $1 trillion in interest income over their 38-year history -- over $300 billion in interest income above and beyond what investors would have earned in bank savings accounts. Savers and investors do not forget this kind of performance and generosity.... My advice to regulators, commentators and industry participants is, 'Don't mess with the buck.'."
The Fed has issued a statement on its liquidity support programs, saying, "The Federal Reserve on Tuesday announced the extension through October 30, 2009, of its existing liquidity programs that were scheduled to expire on April 30, 2009. The Board of Governors and the Federal Open Market Committee (FOMC) took these actions in light of continuing substantial strains in many financial markets."
It continues, "The Board of Governors approved the extension through October 30 of the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF), the Commercial Paper Funding Facility (CPFF), the Money Market Investor Funding Facility (MMIFF), the Primary Dealer Credit Facility (PDCF), and the Term Securities Lending Facility (TSLF). The FOMC also took action to extend the TSLF, which is established under the joint authority of the Board and the FOMC."
"In addition, to address continued pressures in global U.S. dollar funding markets, the temporary reciprocal currency arrangements (swap lines) between the Federal Reserve and other central banks have been extended to October 30. This extension currently applies to the swap lines between the Federal Reserve and each of the following central banks: the Reserve Bank of Australia, the Banco Central do Brasil, the Bank of Canada, Danmarks Nationalbank, the Bank of England, the European Central Bank, the Bank of Korea, the Banco de Mexico, the Reserve Bank of New Zealand, the Norges Bank, the Monetary Authority of Singapore, the Sveriges Riksbank, and the Swiss National Bank. The Bank of Japan will consider the extension at its next Monetary Policy Meeting. The Federal Reserve action to extend the swap lines was taken by the Federal Open Market Committee.
The Fed adds, "The current expiration date for the Term Asset-Backed Securities Loan Facility (TALF) remains December 31, 2009. Other Federal Reserve liquidity facilities, such as the Term Auction Facility (TAF), do not have a fixed expiration date."
The Fed explains the programs, "The AMLF provides loans to depository institutions to purchase asset-backed commercial paper from money market mutual funds. The CPFF provides a liquidity backstop to U.S. issuers of commercial paper. The MMIFF supports a private-sector initiative to provide liquidity to U.S. money market investors. The PDCF provides discount window loans to primary dealers. Under the TSLF, the Federal Reserve Bank of New York auctions term loans of Treasury securities to primary dealers. The TALF will support the issuance of asset-backed securities collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration. Under the TAF, Reserve Banks auction term discount window loans to depository institutions."
Weighted average maturities, or WAMs, of money market funds continued inching higher in the latest week, led by a lengthening among Treasury funds. While overall fund maturities have remained relatively stable since September -- our Crane Money Fund Average increased from 43 days to 45 days after bottoming at 39 days in October -- Treasury WAMs have almost doubled.
The Crane Treasury Institutional Money Fund Index, tracked in our Money Fund Intelligence Daily, has climbed steadily from an average of 27 days as of Sept. 12, 2008, to 36 days at the end of October, 42 days at the end of November, 45 days at yearend, and 48 days as of Jan. 30, 2008. Our Crane Treasury Individual MF Index rose from 28 days on Sept. 26, 2008, to 41 days on Oct. 31, 46 days on Nov. 28, 48 days on Dec. 26, and 51 days on Jan. 30, 2009.
The Crane Money Fund Average, our broadest measure of taxable money market funds, averaged 43 days prior to `Reserve Primary Fund "breaking-the-buck". It then decreased to 39 days in the first week of October and remained there for the month. During November, December, and January, maturities edged out to 42, 44, and 45 days, respectively.
While Treasury funds have exended maturities, Prime money market funds have remained cautious overall. Prime Institutional funds moved from 46 days to 40 days from Sept. 12, 2008, through Oct. 10, while Prime Individual funds shortened from 49 days to 42 days during this peak month of the money fund crisis. Prime Institutional funds average a WAM of just one day higher, 41 days, currently, while Prime Individual funds have moved out to 45 days.
Money fund average maturities tend to stick to a relatively tight range overall, rarely falling below 40 days and almost never moving beyond 60 days (the upper boundary for most AAA-rated money funds). The effectiveness of the WAM indicator has been diluted in recent years, however, by the use of floating-rate and variable-rate securities. Rule 2a-7 allows money funds to look to the reset date for these securities in calculating WAMs.
Late last week, the Tamarack Money Market funds were renamed the RBC Money Market funds, and the fund family's Prime and U.S. Government Money Market Funds just received 'AAAm' ratings from Standard & Poor's. The newly-branded RBC funds continue to be advised by Minneapolis-based Voyageur Asset Management, a subsidiary of Royal Bank of Canada. The fund group has also recently begun a push into the institutional money fund space with the launch of a number of new share classes. RBC will be profiled in the upcoming February issue of our Money Fund Intelligence.
S&P's release says, "[I]t assigned its 'AAAm' principal stability fund rating to the Prime Money Market Fund and U.S. Government Money Market Fund of the Tamarack Funds Trust. Each of the funds has five share classes, which are: RBC Institutional Class 1, RBC Institutional Class 2, RBC Select Class 3, RBC Reserve Class 4, and RBC Investor Class 5. The funds commenced operations in 1991 and their investment objective is to achieve as high a level of current income obtainable from investments in short-term securities as is consistent with prudent investment management, the preservation of capital, and the maintenance of liquidity."
The ratings agency continues, "The funds' investment advisor is Voyager Asset Management Inc. (VAM), which was founded in 1983 and is a wholly owned subsidiary of RBC Capital Markets Holdings (USA) Inc. RBC Capital Markets Holdings (USA) Inc. is a subsidiary of Royal Bank of Canada.... The transfer agent for the funds is Boston Financial Data Services, the Administrator is VAM, the distributor is Tamarack Distributors Inc., and the custodian is Wells Fargo Institutional Trust Services.
Finally, S&P says, "Before Jan. 28, 2009, these two funds were called the Tamarack Prime Money Market Fund and the Tamarack U.S. Government Money Market Fund. VAM is also the investment manager on these eight 'AAAm' rated local government investment pools: Illinois School District Liquid Asset Fund Plus - Liquid Class; Illinois School District Liquid Asset Fund Plus - Max Class; New York Liquid Asset Fund - Liquid Class; New York Liquid Asset Fund - Max Class; Pennsylvania School District Liquid Asset Fund - Liquid Series; Pennsylvania School District Liquid Asset Fund - Max Series; Wisconsin Investment Cooperative - Investment Series; and Wisconsin Investment Cooperative - Cash Management Series."
As we wrote in Friday's "Link of the Day" (Bloomberg's "JPMorgan's Staley Calls Money Funds 'Systemic Risk'"), James Staley, head of JPMorgan Asset Management, reportedly asserted in Davos, Switzerland, that "the $4 trillion money-market fund industry is the 'greatest systemic risk' to the financial system that hasn't been adequately addressed." The Bloomberg article has since been updated to include the outraged reactions of the money market fund industry, which calls the accusations "preposterous". We expect there to be even stronger responses to Staley's comments in the coming week.
Bloomberg quoted Staley, "The people who brought down Lehman and almost Bear Stearns weren't the banks, they were the money funds." The article wrote, "JPMorgan's Staley blamed money funds for Lehman's collapse and the near bankruptcy of Bear Stearns Cos. last year. The funds, which typically hold highly rated, short-term debt instruments, were forced to pull their money from the firms when they saw signs of trouble, he said."
The updated piece adds, "Paul Schott Stevens, president of the Investment Company Institute, the fund-industry trade group based in Washington, called the idea that money funds crippled Bear Stearns or Lehman 'preposterous' and criticized the Group of Thirty's proposals." He says, "Most of the people who say these things know virtually nothing about how money-market funds are regulated. These are extraordinarily far-reaching recommendations that were made without any thought. If we get rid of the current model, what would substitute for it?"
Bloomberg also quotes Joan Swirsky of Stradley Ronon Stevens & Young, that the "recommendations could have the unintended effect of drawing money out of the commercial-paper market". She says, "The two new products [proposed in the recent Group of 30 report] put together could have less appeal than current money-market funds, causing the assets they invest in to lose value."
We expect much more discussion and debate on possible changes to the regulation and structure of money market mutual funds. But we do not expect suggestions of radical change, such as those proposed by The Group of 30, to be adopted. The likely disruption to a still fragile money market would be far too dangerous, and investors will almost certainly strongly oppose any change which substantially reduces the attractiveness of their money market investment options. Look for more news and analysis next week, and in the pending February issue of `Money Fund Intelligence.
