News Archives: January, 2010
The Investment Company Institute released its latest monthly "Trends in Mutual Fund Investing: December 2009 and its latest weekly "ICI Reports Money Market Mutual Fund Assets" last night. Both series continue to show significant money fund asset declines. The December numbers show money fund assets declined by $512.7 billion, or 13.4%, in 2009, falling to $3.3196 trillion as of Dec. 31. Money funds percentage of all mutual fund assets fell from 39.9% of the $9.6011 trillion in assets on Dec. 31, 2008, to 29.8% of the $11.1264 trillion as of 12/31/09.
ICI's weekly release says, "Total money market mutual fund assets decreased by $21.93 billion to $3.218 trillion for the week ended Wednesday, January 27.... Taxable government funds decreased by $6.14 billion, taxable non-government funds decreased by $12.58 billion, and tax-exempt funds decreased by $3.21 billion." Year-to-date in 2010, money fund assets have decline by about $75 billion, or 2.3%.
ICI's monthly stats show money fund assets rising slightly in December, up $3.5 billion. Taxable funds rose $10.7 billion to $2.9221 trillion while Tax-Free money funds fell $7.2 billion to $397.5 billion. ICI's "Trends" says, "Money market funds had an outflow of $161 million in December, compared with an outflow of $48.55 billion in November. Funds offered primarily to institutions had an inflow of $17.50 billion. Funds offered primarily to individuals had an outflow of $17.66 billion." Net new cash flow to money funds totalled negative $536.65 billion in 2009 vs. a positive net new cash flow of $637.11 billion in 2008. Liquid assets of stock mutual fund remain near record lows at 3.6%.
ICI also released its "Month-End Portfolio Holdings of Taxable Money Market Funds." It shows that CD holdings surged in December, rising $32.8 billion to $671.7 billion. CDs remain the largest holding in money funds at 23.0%. Second is U.S. Government Agency Securities at 19.1% ($557.6 billion), while Commercial Paper is third at 17.9% ($522.7 billion). Repos fell to fourth place with $490.7 billion, or 16.8% (down $92.6 billion in Dec.). Treasury securities account for 14.0% of holdings ($410.3 billion), Notes (Corp and Bank) account for 5.9% (173.2 billion), and Other securities account for 3.2%.
For more on asset flows during 2009, see Crane Data's latest Money Fund Intelligence Distribution Survey. Click here for the release on the SEC's Money Market Fund Reforms, or see our previous stories below. The full Final Rules should be posted here later today or early next week.
As we reported yesterday, the Securities & Exchange Commission approved its long-awaited Money Market Fund Reforms, the latest changes to Rule 2a-7, the regulations governing money market mutual funds. The SEC voted 4-1 in favor of the new rules, which tighten maturity and quality rules, and add new liquidity mandates. (See our story from yesterday for the full summary, "SEC Approves Money Market Fund Reform Proposals, Hosts Webcast," and click here for the full Open Meeting Webcast.) The new regulations will be "effective 60 days after their publication in the Federal Register." The SEC says, "Mandatory compliance with some of the rules will be phased in during the year." The final rules, including compliance dates, will be posted on the SEC Web site as soon as possible." (Watch the SEC's Final Rules page.)
In her prepared remarks (see them here), SEC Chairman Mary Shapiro said, "The Commission [adopted] significant revisions to our oversight of money market funds -- revisions that include increasing credit quality, improving liquidity, shortening maturity limits, and requiring the disclosure of a fund's actual 'mark-to-market' net asset value, known as a 'shadow NAV,' on a delayed basis. Today's action grows out of the financial crisis of 2008 and the weaknesses revealed by the 'breaking of the buck' of the Reserve Primary Fund in September 2008. Those events precipitated a full-scale review of the money market fund regulatory regime by the SEC. And the adoption of today's rules is an important step -- but just a first step -- in our efforts to strengthen that regime."
She says, "The rules will tighten the maturity and credit quality standards for money market funds, and impose new liquidity requirements.... [Our] new rules will impose a 60-day [WAM] standard, rather than the current 90-day standard.... [and] will impose a weighted average life restriction [of] 120 days. With respect to 'second tier' securities ... we are limiting such securities to 3 percent of a money market fund's total portfolio.... Under the new liquidity standards, money market funds would have to meet both daily liquidity requirements of 10 percent of assets in cash and cash equivalents, and weekly liquidity requirements of 30 percent.... [T]he rules will create a substantial new disclosure regime so that everyone from investors to the SEC itself can better monitor a money market fund's investments and risk characteristics."
ICI President and CEO Paul Schott Stevens commented, "The mutual fund industry supports the SEC's action today to make money market funds more resilient in the face of extraordinary market conditions, such as we saw in the fall of 2008.... ICI will remain in close dialogue with the SEC and other regulators while they consider further changes to money market fund regulation. We will urge them, however, not to take steps that would undermine money market funds' value to investors or the significant role that these funds play in the U.S. economy.... In particular, we will continue to oppose strongly any move that would directly or indirectly require money market funds to abandon the $1.00 fixed net asset value that has been a defining feature of these funds. Investors and issuers in the money market have filed extensive comments with the Commission, and they have been almost unanimous in pointing out the serious damage that floating these funds' NAV could inflict on investors, markets, and the economy."
Debbie Cunningham said in "Market Memo" entitled "Federated welcomes SEC money market changes", "We at Federated welcome the changes to money market fund industry oversight approved today by the Securities & Exchange Commission, not so much for what was done but for what wasn't done. Most significantly, we were pleased that the SEC opted to retain the stable $1 Net Asset Value (NAV) pricing for funds instead of replacing it with a floating rate as had been considered. As a more than $3.2 trillion business, the money market industry is a critical source of short-term funding for U.S. businesses and industry that is built around the concept of $1 NAV, which is easy to use for record-keeping, accounting and valuation purposes. The SEC will require money funds to regularly disclose the underlying value of their assets per share on a delayed basis -- so-called shadow pricing -- but we don't believe that will undermine the way funds currently operate using NAV."
Look for additional responses to be posted later today and tomorrow. Watch for more coverage as the full final rules are posted, and look for in-depth analysis in the February issue of Money Fund Intelligence. Finally, please let us know your thoughts and opinions!
This morning, the SEC voted to approve its Money Market Reform Proposals. (See the recorded webcast here.) A released summary statement says, "The Securities and Exchange Commission today will consider adopting new rules designed to significantly strengthen the regulatory requirements governing money market funds. The rules will, if adopted, increase the resilience of these funds to economic stresses and reduce the risks of runs on the funds." No word yet on the implementation timetable, but the full final rules should be released within days.
The SEC continues, "The rules would improve liquidity, increase credit quality and shorten maturity limits. They also would enhance disclosures by, among other things, requiring the posting on a delayed basis of a fund's 'shadow' net asset value or NAV, rather than the stable $1.00 NAV at which shareholder transactions occur. This information would enable the SEC and fund investors to better assess the risk profile of a money market fund and acclimate investors to the idea that money market funds may not always maintain a stable $1.00 share value."
The rules would "Further Restrict Risks by Money Market Funds via "Improved Liquidity: The rules would require that money market funds have a minimum percentage of their assets in highly liquid securities so that those assets can be readily converted to cash to pay redeeming shareholders (currently there are no minimum liquidity mandates): Daily Requirement: For all taxable money market funds, at least 10% of assets must be in cash, U.S. Treasury securities, or securities that convert into cash (e.g., mature) within one day. Weekly Requirement: For all money market funds, at least 30% of assets must be in cash, U.S. Treasury securities, certain other government securities with remaining maturities of 60 days or less, or securities that convert into cash within one week."
It also says, "The rules would further restrict the ability of money market funds to purchase illiquid securities by: Restricting money market funds from purchasing illiquid securities if, after the purchase, more than 5% of the fund's portfolio will be illiquid securities (rather than the current limit of 10%). Redefining as 'illiquid' any security that cannot be sold or disposed of within 7 days at carrying value."
The new rules also address: "Higher Credit Quality: The rules would place new limits on a money market fund's ability to acquire lower quality ('Second Tier') securities. They would do this by: Restricting a fund from investing more than 3% of its assets in Second Tier securities (rather than the current limit of 5%). Restricting a fund from investing more than 1/2 of 1% of its assets in Second Tier securities issued by any single issuer (rather than the current limit of the greater of 1% or $1 million). Restricting a fund from buying Second Tier securities that mature in more than 45 days (rather than the current limit of 397 days)."
There will be: "Shorter Maturity Limits: The rules would shorten the average maturity limits for money market funds, which would help to limit the exposure of funds to certain risks such as sudden interest rate movements. They would do this by: Restricting the maximum 'weighted average life' maturity of a fund's portfolio to 120 days (currently there is no such limit). The effect of the restriction is to limit the ability of the fund to invest in long-term floating rate securities. Restricting the maximum weighted average maturity of a fund's portfolio to 60 days (currently the limit is 90 days)."
It also requires: "'Know Your Investor' Procedures: The rules would require funds to hold sufficiently liquid securities to meet foreseeable redemptions (currently there are no such requirements). In order to meet this requirement, funds would need to develop procedures to identify investors whose redemption requests may pose risks for funds. As part of these procedures, funds would need to anticipate the likelihood of large redemptions. Periodic Stress Tests: The rules would require fund managers to examine the fund's ability to maintain a stable net asset value per share in the event of shocks -- such as interest rate changes, higher redemptions, and changes in credit quality of the portfolio (currently there are no stress test requirements).
Regarding, "Nationally Recognized Statistical Rating Organizations (NRSROs): The rules would continue to limit a money market fund's investment in rated securities to those securities rated in the top two rating categories (or unrated securities of comparable quality). At the same time, the rules also would continue to require money market funds to perform an independent credit analysis of every security purchased. As such, the credit rating serves as a screen on credit quality, but can never be the sole factor in determining whether a security is appropriate for a money market fund. In addition, the rules would improve the way that funds evaluate securities ratings provided by NRSROs. They would do this by: Requiring funds to designate each year at least four NRSROs whose ratings the fund's board considers to be reliable. This will permit a fund to disregard ratings by NRSROs that the fund has not designated, for purposes of satisfying the minimum rating requirements, while promoting competition among NRSROs. Eliminating the current requirement that funds invest only in those asset backed securities that have been rated by an NRSRO."
The SEC says on, "Repurchase Agreements: The rules would strengthen the requirements for allowing a money market fund to 'look through' the repurchase issuer to the underlying collateral securities for diversification purposes: Collateral must be cash items or government securities (as opposed to the current requirement of highly rated securities). The fund must evaluate the creditworthiness of the repurchase counterparty."
Under "Enhance Disclosure of Portfolio Securities," the new rule says, "Monthly Web Site Posting: The rules would require money market funds each month to post on their Web sites their portfolio holdings (currently there is no website posting requirement). Portfolio information must be maintained on the fund's website for no less than six months after posting. Monthly Reporting: The rules would also require money market funds each month to report to the Commission detailed portfolio schedules in a format that can be used to create an interactive database through which the Commission can better oversee the activities of money market funds (currently the Commission has no such database of money market fund information). Information reported to the Commission would be available to the public on a 60 day delay. This information would include a money market fund's 'shadow' NAV, or the mark-to-market value of the fund's net assets, rather than the stable $1.00 NAV at which shareholder transactions occur (currently a money market fund's 'shadow' NAV is reported twice a year, with a 60-day delay)."
Finally, the SEC says to "Improve Money Market Fund Operations," under, "Processing of Transactions: The rules would require that all money market funds and their administrators be able to process purchases and redemptions electronically at a price other than $1.00 per share (currently there is no such explicit requirement). This requirement would facilitate share redemptions if a fund were to 'break the buck.' A money market fund 'breaks the buck' when its net asset value falls below $1.00 per share, meaning investors in that fund will lose money. Suspension of Redemptions: The rules would permit a money market fund's board of directors to suspend redemptions if the fund is about to break the buck and decides to liquidate the fund (currently the board must request an order from the SEC to suspend redemptions). In the event of a threatened run on the fund, this would allow for an orderly liquidation of the portfolio. The fund would be required to notify the Commission prior to relying on this rule. Purchases by Affiliates: The rules would expand the ability of affiliates of money market funds to purchase distressed assets from funds in order to protect a fund from losses. Currently, an affiliate cannot purchase securities from the fund before a ratings downgrade or a default of the securities -- unless it receives individual approval. The change would permit such purchases without the need for approval under conditions that protect the fund from transactions that disadvantage the fund. The fund would have to notify the Commission when it relies on this rule."
The Securities & Exchange Commission will discuss and likely adopt its final Money Market Fund Reform proposals Wednesday morning starting at 10:00 a.m. (To view the live webcast, click here.) The Open Meeting Agenda including "Money Market Fund Reform" features Division of Investment Management staff Robert E. Plaze, C. Hunter Jones, Penelope Saltzman, Sarah ten Siethoff, Thu B. Ta, Adam Glazer, and Daniele Marchesani.
The agenda says, "The Commission will consider a recommendation to adopt new rules, rule amendments, and a new form under the Investment Company Act of 1940 governing money market funds, to increase the protection of investors, improve fund operations, and enhance fund disclosures. Look for details from a press release and summary around 9:30 a.m. Wednesday, and watch for the full Final Money Market Fund Reform amendments to be posted over the next couple of days. (Check here to see where the final rules should appear around Friday.)
Some of the final rules appear to have leaked already with some stories appearing Tuesday night. The Wall Street Journal says in "SEC To Vote Wed On Rules For Money-Market Funds", "The U.S. Securities and Exchange Commission on Wednesday will vote on rules requiring money-market mutual funds to disclose slight fluctuations around their $1-a-share price, but regulators will leave in place the current $1 standard, according to people familiar with the rule's content. The SEC is scheduled to vote on final rules designed to reduce the risk and volatility of money-market mutual funds. The rule, which is still being finalized, will require funds to disclose fluctuations around $1, called a 'shadow price,' on a monthly basis with a 60-day lag, these people said.... The final rule won't make any changes to the current net asset value framework. But regulators are likely to state that future rules could include a floating standard."
The Journal article continues, "The rule also will include uniform mandatory liquidity requirements for money-market funds at an institutional-investor level, requiring a minimum of 10% of assets to be in liquid securities on a daily basis and 30% on a weekly basis. The SEC had proposed a lower standard for retail investors, but regulators decided after receiving public comment that dual-liquidity standards were too complex to implement and monitor.... In a change to the proposed rule, the SEC decided that it wouldn't ban outright investments in so-called second-tier securities, or those that don't have the highest rating. Instead, the final rule will include limits on money-market funds' use of second-tier securities, limiting their exposure to 3% overall and 0.5%% of any individual second-tier security. The maturity window for second-tier securities also will be reduced from 397 days to 45 days."
Reuters says in "US SEC mull tough rules for money market funds", "The agency is considering requiring money market funds to hold a minimum of 10 percent of their assets in liquid securities and may shorten the average maturity of debt the funds can hold to 60 days from 90 days, the sources said. At a meeting Wednesday, the SEC will also consider requiring funds to publicly disclose the net asset value, or value of each share of a money fund, on a 60-day lag basis.... The agency may consider at a later date other changes that could include a fluctuating net asset value."
Finally, Bloomberg quotes Peter Crane in its "SEC Said to Drop Plan to Bar Money Funds From Lower-Rated Debt," "They are really fighting and clawing over inches.... The vast majority of the changes that the SEC proposed and likely will adopt, most of the industry has been adhering to already." Crane adds, "The SEC rules 'are seen as a necessary evil because you have to do something'.... People are more concerned about the President's Working Group and the re-emergence of Paul Volcker. There's still a slim chance of radical change."
Invesco Aim is the latest money market mutual fund complex to begin producing a regular quarterly communication for clients. The company writes in its most recent "Investment Perspective, Cash Management," an article entitled, "Regulatory reform and low yields face money markets in 2010". The piece says, "Invesco is managing their money market funds through a historically low interest rate environment and pending regulatory reform while continuing to focus on safety and liquidity into 2010."
The Perspective, written by a group led by Tony Wong, Head of Short-Term Investment Grade & Municipal Credit Research at Invesco Aim, describes the "Credit crisis impact on [the] money fund industry," and says, "As you may recall, subsequent to the bankruptcy of Lehman Brothers in September 2008, the Reserve Primary Fund, a U.S. registered 2a-7 money market fund 'broke the buck'.... On September 19, 2008, U.S. government authorities responded by providing support to the broader short term credit markets and to restore the confidence of money market investors. These government policy responses in our opinion were enormously effective and arguably have been the most successful policy actions taken during the crisis to stabilize the marketplace.
Describing the "Dawn of a new regulatory environment, they write, "Along with this unprecedented support, policymakers entered 2009 calling for material changes in the regulatory framework for money funds. However, some of these suggestions called for money funds to be organized and supervised like banks, including access to central bank lending windows and regulatory capital requirements. Other proposals called for money funds to abandon the use of stable NAVs and instead require funds to switch to floating NAVs. Neither of these were attractive for investment advisors who manage money funds or for issuers that rely on the short-term credit markets as a source of capital. But most importantly, some of these policymaker suggestions would be harmful to the millions of investors, both retail and institutional, that rely on money funds as an investment option for their liquidity needs."
Finally, they say, "While Invesco originally had anticipated that the SEC would announce its final rules by the end of 2009, the timetable of the expected release has been pushed into the first quarter of 2010. Additionally, we increasingly believe the Rule 2a-7 reform process will be a multi-step process and that a broader re-examination of the floating NAV concept will occur later in 2010. Alongside the Rule 2a-7 reform process in the U.S., a similar process is occuring in Europe.... Invesco is part of a small group of investment managers invited to engage with the U.S. Treasury, Federal Reserve, and other foreign central banks in developing private sector solutions to ensure the long-term safety and resiliency of money funds."
Money market mutual funds and cash investors will be paying close attention to the slew of news scheduled for this week. The major events include Wednesday's SEC Open Meeting (10am in Washington) to "consider a recommendation to adopt new rules, rule amendments, and a new form under the Investment Company Act of 1940 governing money market funds," as well as earnings calls from BlackRock (Wednesday at 9am) and Federated (Friday 9am). (Federated will also host its quarterly money market update call Thursday at 4pm, entitled, "The Fed's Low-Rate Stance: Prospects for Relief," and Barclays Capital will host a "Short-Term Market Update" call on Tuesday.) Finally, the Federal Reserve meets on Tuesday and Wednesday (and may weaken its "extended period" language), and the Fed's commercial paper support programs, the AMLF and CPFF, expire at the end of this week.
J.P. Morgan Securities' Alex Roever and Cie-Jae Brown write in their latest "Short-Term Fixed Income, "For most of the past year and a half the US government and the Fed (along with many foreign governments and central banks) have gone to heroic lengths to counteract the economically devastating consequences of the financial crisis. These efforts have proven remarkably successful in stabilizing the markets, so the anxiety investors have about changes is understandable, as is their sensitivity to the tone of the proposed changes. This is particularly true in short-term fixed income, where so much of the product is sourced from banks and financials."
They continue, "[R]egulators are pushing investors (including banks) to hold more of their portfolios in liquid assets while simultaneously pressuring issuers to shift more of their funding in long-term liabilities.... [T]he proposed Financial Crisis Responsibility Fee (a.k.a. 'the bank tax'), as currently envisioned, taxes most types of bank liabilities, including repo and commercial paper.... That said, we think there is a pretty good chance that the formula gets amended to exclude Treasury and probably Agency repo."
JPM says of this week's meeting, "The SEC will meet on Wednesday to consider its recommended changes to Rule 2a-7, which governs the money market mutual fund industry. Ahead of this meeting, SEC chairman Mary L. Schapiro discussed pending reforms in her January 14 testimony before the Financial Crisis Inquiry Commission. Coupled with her January 20 speech appropriately titled 'Embracing the Change,' we can glean some insights into next week's meeting. We expect the proposals to tighten the credit quality and maturity requirements for money market funds will be approved as well as proposed liquidity standards for money market funds that would mandate that these funds meet both daily and weekly liquidity requirements."
Finally, Roever and Brown say, "However, we do not expect the SEC to adopt a ruling regarding the establishment of a floating NAV for money funds. As outlined in the recent speeches mentioned above, the SEC is working with the Federal Reserve Board and President's Working Group on Financial Markets (PWG) on structural changes to further reduce the possibility of a run on money market funds. They may provide more insight into these structural changes during Wednesday's meeting, including floating NAV and private sources of liquidity. But, the SEC will likely provide some implementation period for its 2a-7 amendments before seeking to make larger, structural changes."
This month, Crane Data's flagship newsletter, Money Fund Intelligence, interviewed Sean P. Simko, Managing Director and Head of SEI Global Fixed Income Management (SGFIM) and Daisy Lac, Senior Portfolio Manager. SEI is the 24th largest manager of money funds with over $10.9 billion, but the company also manages a number of other "cash" accounts. Excerpts from our Q&A follow:
MFI: Tell us about SEI's cash products. Simko says, "SEI's cash management and money fund offerings include a subadvisory program in which we hire outside money managers and delegate the responsibility for security selection to them, and SGFIM's in-house capabilities. The subadvisory program, known as the SEI Daily Income Trust, offers a full range of solutions including prime money funds, municipal bonds, and a complete spectrum of duration products."
MFI: What's the biggest challenge managing cash today? Simko says, "Money market and short-term portfolio managers are not only balancing the changing investment landscape, they are doing so in an unprecedented low interest rate environment. The goal is to build a portfolio that is well diversified, very liquid, upholding to the highest credit standards while achieving a return on investment. Now add into the mix concerns around all the regulatory issues that are on the horizon, and the result is a very challenging environment."
He continues, "Events over the past few years clearly illustrated that there was a false sense of liquidity within the marketplace. Adapting the management process to adhere to this reality is a challenge. Market participants witnessed first-hand that even as market conditions showed signs of improving, the overall system remains weakened.... Striking a good working balance between liquidity, stalwart creditworthiness and an appropriate yield return on the cash is a formidable challenge that many managers tirelessly take on day in and day out."
MFI: What are you buying now? What aren't you buying? Simko answers, "Our goal is consistent results over the long term. In order to achieve consistent positive long term results, you need to be flexible and adapt to the current environment without compromising your disciplined approach. I feel we have stayed true to our process. The direct beneficiaries of this structure are our clients. Outside of government paper, we are focused primarily on industrials and credits with a strong and stable cash position. This approach is very challenging in the current environment. Global banks and financial institutions have historically been a primary component of money market and short term strategies. With all the disruptions in the financial sector, that universe is constantly shrinking."
"With that in mind, we turned our focus over the past year to Australian and Canadian names. We never held large positions within structured debt, whether it was in Asset Backed Commercial Paper (ABCP) or Asset Backed Securities (ABS). We stopped buying structured debt back in the spring of 2007. At this point in time we have no intention to traffic in this sector any time soon. We have also removed many European financial institutions from our portfolios. There are a few select names that we are buying, holding very small positions," he says.
MFI: How badly are ultra-low rates hurting managers and cash investors? Simko says, "The ultra low rate environment creates a very challenging market for investment managers. The battle between risk and reward becomes that much greater every day rates remain low. With yields near zero, investment managers need to find yield without compromising their investment philosophy. This is a challenge that does not seem likely to go away in the near term. Unfortunately, investors are the ones that are truly feeling the pain. Regardless of the investment vehicle used for saving, the near-zero rates are hindering the path to accumulating wealth."
Late yesterday, the SEC posted a "Sunshine Act Meeting" notice on its website, which indicates that changes to Rule 2a-7 are imminent. It says, "Notice is hereby given, pursuant to the provisions of the Government in the Sunshine Act, Pub. L. 94-409, that the Securities and Exchange Commission will hold an Open Meeting on January 27, 2010 at 10:00 a.m., in the Auditorium, Room L-002."
It explains, "The subject matter of the Open Meeting will be: Item 1: The Commission will consider a recommendation to adopt new rules, rule amendments, and a new form under the Investment Company Act of 1940 governing money market funds, to increase the protection of investors, improve fund operations, and enhance fund disclosures. Item 2: The Commission will consider a recommendation to publish an interpretive release to provide guidance to public companies regarding the Commission's current disclosure requirements concerning matters relating to climate change."
The notice says, "At times, changes in Commission priorities require alterations in the scheduling of meeting items. For further information and to ascertain what, if any, matters have been added, deleted or postponed, please contact: The Office of the Secretary at (202) 551-5400. Elizabeth M. Murphy, Secretary, January 20, 2010."
On July 1, 2009 (following a previous "Sunshine Act" meeting June 30), the SEC released the full text of its proposed "Money Market Fund Reforms". The 197-page document's summary said, "The Securities and Exchange Commission is proposing amendments to certain rules that govern money market funds under the Investment Company Act. The amendments would: (i) tighten the risk-limiting conditions of rule 2a-7 by, among other things, requiring funds to maintain a portion of their portfolios in instruments that can be readily converted to cash, reducing the weighted average maturity of portfolio holdings, and limiting funds to investing in the highest quality portfolio securities; (ii) require money market funds to report their portfolio holdings monthly to the Commission; and (iii) permit a money market fund that has 'broken the buck' ... to suspend redemptions to allow for the orderly liquidation of fund assets."
They continued, "In addition, the Commission is seeking comment on other potential changes in our regulation of money market funds, including whether money market funds should, like other types of mutual funds, effect shareholder transactions at the market-based net asset value, i.e., whether they should have 'floating' rather than stabilized net asset values. The proposed amendments are designed to make money market funds more resilient to certain short-term market risks, and to provide greater protections for investors in a money market fund that is unable to maintain a stable net asset value per share." The Commission received over 100 comment letters in response, and appears ready to issue their final changes.
A press release issued late Tuesday says, "Fitch Ratings has revised its ratings on money market funds globally following the implementation of its new global money market funds rating criteria and rating scale." (See Crane Data's Oct. 6, 2009, previous News on the new criteria, "Fitch Replaces AAA/VR1+ with AAAmmf in Revised MMF Rating Criteria".) The release explains, "Collectively, the 69 U.S. and European money market funds included in the review held more than US$1 trillion of assets under management as of December 2009."
Fitch says, "In all cases, money market funds that were previously rated 'AAA/V1+' and one 'AAA/V1' rated fund, have had their ratings revised to 'AAAmmf'. This represents Fitch's highest rating under its new rating criteria and scale for money market funds. The 'AAAmmf' ratings reflect the funds' conservative investment profiles, which are in line with Fitch's revised rating criteria, and take into consideration the proactive steps taken by fund managers to reduce their funds' risk profiles during a period of heightened market uncertainty."
They continue, "Fitch defines a 'AAAmmf' money market fund rating as having an 'extremely strong capacity to achieve its investment objective of preserving principal and providing shareholder liquidity through limiting credit, market, and liquidity risk.' The new criteria revised important elements of how Fitch assesses credit, market and liquidity risk and introduced a stand-alone ratings scale for money market funds to differentiate their ratings from other ratings assigned under Fitch's traditional rating scale. Reflecting on the stresses the industry faced during late 2008, the updated criteria seek to strengthen the safety and stability of rated money market funds and coincide with recent regulatory and industry proposals."
The ratings agency explains, "Among the key changes are new measures of portfolio liquidity to address shareholder redemption risk in times of stress and the introduction of a Portfolio Credit Factor (PCF) matrix that measures credit risk on two dimensions -- credit quality and maturity. Fitch has also introduced enhanced diversification criteria for direct, indirect (i.e. asset-backed commercial paper sponsors, variable rate demand obligation liquidity providers) and repurchase agreement counterparty exposures and guidelines to limit risk from yield-enhancing leverage strategies such as reverse repurchase agreements and securities lending. In addition, the criteria contain a new 'spread risk' metric (weighted average final maturity or WAMf) to complement the existing interest-rate sensitivity metric (weighted average maturity to reset date or WAMr) and more in-depth consideration of the sponsor's multi-faceted role, including operational set-up and financial standing."
Finally, Fitch says, "In instances where there is an absence of large operations or of a financially-sound sponsor, Fitch acknowledges that sufficiently conservative investment management practices with respect to the portfolio credit quality, market risk and liquidity may be considered as satisfactory mitigants for funds to be assigned a 'AAAmmf' rating." For a full listing of AAA-rated money market mutual funds, see Crane Data' Money Fund Intelligence XLS.
Over the weekend, several articles warned of the dangers of following the herd into bond funds. The most prominent was Sunday's New York Times, which wrote "For 'Safe' Investors, This May Be a Challenging Year. It said, "Money market funds are paying investors next to nothing. More precisely, the 100 biggest funds are now paying 0.05 percent annually, on average, a yield as low as it has ever been, according to Peter G. Crane, the president of Crane Data of Westborough, Mass."
The Times quoted Crane, "It's so low it's a joke. At that yield, it would take more than 1,000 years to double your money." The article continued, "This microscopic rate of return is part of the continuing fallout of the financial crisis -- a consequence of the very loose monetary policy of the Federal Reserve and other central banks."
The NYT piece wrote, "There are many indications that this herculean intervention has been working. In the bond market, though short-term interest rates are still hovering near zero, longer-term rates have been on an upward trajectory since late November. In part, this may be a healthy sign, suggesting that the economy is recovering. But it has also created a very unusual situation for financial markets, and it poses some tricky problems for savers, investors and home buyers."
The article continued, "William H. Gross, the co-chief investment officer of the Pacific Investment Management Company, or Pimco, the world's biggest bond manager, says the gap between short- and long-term rates has rarely been greater. Translated into the parlance of the bond market, the 'yield curve' has seldom been steeper."
But it said, "For investors, this can create some hard-to-resist temptations. People who have been holding cash in money market funds or in bank certificates of deposit, for example, may be yearning to buy longer-term bonds instead. Watch out, though. Liquidating investments that pay almost nothing in order to shift to long-term bonds that pay substantially more may not make sense right now, said Robert F. Auwaerter, the head of fixed-income investing at the Vanguard Group."
Finally, the Times wrote, "Still, many analysts project that the Fed will raise its benchmark Fed funds rate, bringing it to perhaps 1 percent by year-end.... For individuals focused on keeping their investments very safe, it's likely to be a challenging year." The piece quotes Crane, "Basically, savers are going to have to suck it up. Yields are so low that they're getting almost nothing in return, but this is not a time to play offense. Remember, if you're holding a money market fund or a C.D., you're there because you don't want to lose money. This is not the time to take a lot of risks."
See also, FT's "Fund chairman warns against following the herd on bonds" and SmartMoney's "The New Bond Bubble".
Thursday, U.S. Securities and Exchange Commission Chairman Mary L. Schapiro presented, "Testimony Concerning the State of the Financial Crisis Before the Financial Crisis Inquiry Commission." She discusses money funds at a couple different points in her comments, and provides an update on the status of the President's Working Group Report and the SEC's Money Market Fund Reforms.
Under "Enforcements," Shapiro's comments discuss "Reserve Primary Fund." She says, "On May 5, 2009 the SEC charged the managers of the Reserve Primary Fund for allegedly failing to properly disclose to investors and trustees material facts relating to the value of the fund's investments in Lehman-backed paper. The Reserve Primary Fund, a $62 billion money market fund, became illiquid when it was unable to meet investor requests for substantial redemptions following the Lehman bankruptcy. Shortly thereafter, the Reserve Primary Fund declared that it had 'broken the buck' because its net asset value had fallen below a $1.00. In bringing the enforcement action, the SEC sought to expedite the distribution of the fund's remaining assets to investors by proposing a pro-rata distribution plan. On November 25, a federal judge in New York endorsed the SEC's approach, which should result in an estimated return of at least 99 cents on the dollar for all shareholders who have not had their redemption requests fulfilled, regardless of when they submitted those redemption requests."
Shapiro comments in section "IV. Regulation of Financial Products" under "Money Market Funds," "Money Market Funds Are Not Risk-Free and Can Be Subject to Runs. As discussed above, in the wake of the Lehman Brothers bankruptcy in September 2008, the net asset value of the Reserve Primary Fund, a money market fund, fell below $1.00 a share, or "broke the buck." At the time of the announcement of the Lehman Brothers bankruptcy, the Reserve Primary Fund held 1.2 percent of its assets in commercial paper issued by Lehman Brothers. This event, combined with the general paralysis of the short-term credit markets and a concern that other financial institutions might fail, revealed the potential of money market funds to be subject to runs, i.e., broad-based and large-scale requests for redemptions that challenge money market funds' ability to return proceeds at the anticipated $1.00 value."
She continues, "This event also revealed the general lack of appreciation by many investors that money market funds could return less than the $1.00 per share originally invested. In addition, the demise of the Reserve Primary Fund and the money market fund run that followed highlighted the benefit of halting redemptions once a money market fund has broken the buck. It also revealed the importance of providing an orderly wind-down of the fund's operations in order to preserve shareholder value and avoid a larger contagion in the short term credit markets."
Shapiro says, "The run on money market funds during the week of September 15, 2008 was stemmed in part by the announcement of the Treasury Temporary Guarantee Program for Money Market Funds, which provided a guarantee to money market fund investors up to the amount of assets they held in any money market fund as of September 19, 2008. On the same date, the Federal Reserve Board announced the creation of the Asset-backed Commercial Paper Money Market Mutual Fund Liquidity Facility (AMLF). This program also helped to create liquidity and stem the run on money market funds by extending credit to U.S. banks and bank holding companies to finance their purchases of high-quality asset backed commercial paper from money market funds. The Treasury Temporary Guarantee Program expired on September 18, 2009, and the AMLF is set to expire on February 1, 2010."
She explains, "The SEC has taken a number of steps to reduce the risks posed by another money market fund run.... In June 2009, the SEC proposed rule amendments to significantly strengthen the risk-limiting conditions of our money market fund rules. In particular, the SEC proposed rules to tighten the credit quality and maturity requirements for money market funds. In addition, the SEC for the first time proposed liquidity standards for money market funds that would mandate that these funds meet both daily and weekly liquidity requirements."
Shapiro says, "The rules also would: require periodic stress testing of money market fund portfolios to identify potential problems; require monthly disclosure of portfolio information and periodic disclosure of more specific net asset value information; and permit funds to halt redemptions if a money market fund 'breaks the buck' in order to stem the motivation for runs. Our proposal also requested comment on a number of other areas relating to the fundamental structure and disclosure requirements of money market funds, including whether funds should disclose their daily mark-to-market net asset value (NAV) (in addition to their $1.00 price); whether to mandate redemptions-in-kind in times of financial crisis to reduce run risk; and whether money market funds should have floating NAVs instead of the current stable $1.00 NAV."
Finally, she says, "Going forward, we expect to consider adoption of our first set of money market fund reforms in early 2010, with consideration of more fundamental changes to the structure of money market funds to follow. In addition, the SEC has been working closely with the Federal Reserve Board and President's Working Group on Financial Markets (PWG) on a report assessing possible changes to further reduce the money market fund industry's susceptibility to runs. The SEC will continue to work with the PWG to chart a course toward further reducing the vulnerabilities of money market funds to runs while preserving the benefits they provide participants in the short-term markets."
A press release entitled, "Wells Fargo Funds Management and Evergreen Investments Announce Mutual Fund Product Offering Changes," says, "Wells Fargo Funds Management, LLC, the advisor to the Wells Fargo Advantage Funds, and its affiliate Evergreen Investment Management Company, LLC, the advisor to the Evergreen Funds, have announced plans to streamline and strengthen their mutual fund product offerings. The plans include a series of fund mergers, reorganizations, and liquidations which, following approval by fund shareholders, will result in a Wells Fargo Advantage Funds family offering 128 mutual funds ... representing what we believe to be the best investment management talent from both firms."
Karla Rabusch, president of Wells Fargo Advantage Funds, says, "Uniting these two mutual fund families gives us a tremendous opportunity to better serve our clients by offering a powerful array of products that takes advantage of the strengths of both organizations. We are thrilled with the quality, breadth and depth of the investment options that will be available to investors." Wells release explains, "The proposals are designed to both eliminate product overlap and reduce costs to shareholders, while making the resulting product lineup compelling, comprehensive, and easy to navigate.
Rabusch writes in a piece entitled, "The Integration of Our Fund Families Has Begun," under "What to expect in the coming months," "Proxies for the reorganization of our fund families are expected to be mailed to shareholders during the early part of the second quarter of 2010, with shareholder meetings held in early summer. Upon shareholder approval, the reorganizations (and other related changes) will likely be completed in mid-summer."
Spokeswoman Laura Fay tells us that the fund lineup will be reduced to 128 from 177 over the next six months. Crane Data shows the combined Wells Fargo and Evergreen money fund complex as the 9th largest with $160.5 billion (including $25.8 billion in Evergreen Funds). The document, "Our Proposed Fund Lineup," maps out the merger strategy and shows that most of Evergreen Money Market Funds will merge into existing Wells Fargo Advantage Funds in the coming months.
The $4.4 billion Evergreen Prime Cash Management and $7.6 billion Evergreen Instiutional Money Market will merge into the $31.5 Wells Fargo Advantage Heritage MM; the $3.2 billion Evergreen Money Market will merge into the $1.6 billion Overland Express Sweep Money Market; the $1.1 billion Evergreen US Govt MM and the $2.4 billion Evergreen Inst US Govt will merge into the $29.5 billion Wells Fargo Govt MM; the $896 million Evergreen Treasury MM and $5.5 billion Evergreen Inst Treasury MM will merge into the $8.4 billion Wells Treasury Plus MM; and the Evergreen Inst 100% Treasury MM will merge into the $8.5 billion Wells 100% Treasury MM. The taxable funds will all be managed by Wells' David Sylvester.
On the Tax Exempt side, the $438 million Evergreen California Municipal Money Market will merge into the $2.6 billion Wells CA Muni MM; the $6.8 billion Evergreen Municipal Money Market will remain and be renamed Municipal Cash Management Money Market; the $442 million Wells Fargo Advantage Municipal MM will be merged into the $3.9 billion Evergreen Muni MM (and renamed Wells Fargo Advantage); and Evergreen's NJ, NY and PA Municipal funds will remain, but will take on the Wells Fargo Advantage moniker. The municipal money funds will all be managed by Matt Kiselak.
Comments have recently been posted on the Committee of European Securities Regulators' Consultation Paper, "A common definition of European money market funds." (See our Oct. 22, 2009, Crane Data News, "European Regulators Consult on Definition(s) of Money Market Fund".) The European regulator's original document "propose[d] a two-tiered approach for a definition of European money market funds: Short-term money market funds [and] Longer-term money market funds." Though we were surprised that the CESR's "two-tiered" approach didn't generate more strenuous objections from U.S. money fund providers and multinational investors, it did take some hits.
CESR said, "This paper sets out CESR's proposals for a common definition of European money market funds. The key purpose behind a harmonised definition of 'money market fund' is improved investor protection. This reflects the fact that investors in money market funds expect the capital value of their investment to be maintained while retaining the ability to withdraw their capital on a daily basis. A common definition will also help provide a more detailed understanding of the distinction between funds which operate in a very restricted fashion and those which follow a more 'enhanced' approach."
The CESR received 18 comment letters, including responses from the ICI, the Irish Funds Industry Association, EFAMA and Institutional Money Market Funds Association, JPMorgan Asset Management, and Crane Data, among others. The vast majority supported the overall goals of "the need to implement a regulatory definition of European money market funds."
The world's largest money fund manager, JPMorgan, protested strongly, "Whilst we support many of CESR's proposals, we have serious concerns about certain of them. We believe it is critical to strengthen the European money market industry with greater clarity around definitions and at the same time ensure global consistency.... JPMorgan feels strongly that money market funds should pertain to the most conservative definition and as such would not support a two-tiered approach that allows for 'longer term' money market funds. We would argue that the long term nature of such products would be more safely and appropriately classified as short term bond funds or should use some other naming convention that does not include the words money market, liquidity or cash.... Money market funds should only encompass funds that have short duration, daily liquidity, stable NAV and invest in high quality money market instruments."
ICI says in its comment, "Our views on these issues are informed by the experiences of our members in organizing, advising, and distributing U.S. registered money market funds as well as non-U.S. money market funds. The potential for regulatory convergence or divergence strongly affects the conduct of our members' businesses as changes in one jurisdiction can, and often do, affect the conduct of asset managers in other jurisdictions. As a result, robust dialogue among international regulators and market participants is vital to the evaluation of new regulatory approaches."
Finally, Crane Data's Peter Crane writes, "I urge the Committee to reconsider the 'two-tiered' approach to defining 'money market funds,' which I believe would result in worldwide confusion over the term, and to allow only 'short-term money market funds' to use this naming.... [T]he vast majority of worldwide 'money market mutual fund' assets are based in the U.S., which has a tremendously successful 40-year history of usage. Having regulators in Europe disregards this history and define money market funds differently than in the U.S. and differently than in a number of other countries worldwide would create needless risk, cost, and confusion in the marketplace. 'Money market' in common usage means less than a year to maturity and implies stable value. It would make far more sense for Europe to conform."
In addition to its normal 1-year return and 7-day yield performance ranking tables, the January issue of our monthly newsletter recognizes some of the top-performing money funds of 2009 and of the past decade with the newly created Money Fund Intelligence Awards. The winners include the No. 1-ranked money market funds based on 1-year, 5-year and 10-year returns, through Dec. 31, 2009, in a number of categories.
The top-performing fund overall (again) in 2009 and among Prime Institutional funds was Touchstone Institutional Money Market Fund (TINXX) with a return of 1.07%. Among Prime Retail funds, USAA Money Market Fund (USAXX) had the best return in 2009 (0.84%). RBC US Govt MMF Inst 1 (TUGXX) was the top Government Institutional fund over 1-year with a return of 0.51%, while Vanguard Federal MMF (VMFXX) won the MFI Award for Government Retail Money Funds over 1-year. Vanguard's Admiral Treasury MM (VUSXX) ranked No. 1 in the Treasury Institutional class while Goldman Sachs FS Treasury Oblig Select (GSOXX) ranked first among Treasury Retail funds.
For the 5-year period through December 2009, Touchstone Inst MMF again took top honors for the best-performing money fund over the past 5 years with a return of 3.53%. Fidelity Select MM Portfolio ranks No. 1 among Prime Retail funds with an annualized return of 3.30%. Goldman's FGTXX and GSOXX ranked No. 1 among Govt Inst and Treasury Retail funds, and Vanguard Federal again ranked No. 1 among Govt Retail funds. BlackRock Cash Treasury MMF Inst (the former Barclays fund) ranked No. 1 over 5-years among Treasury Inst money funds.
The highest-performers of the past decade include: DWS Daily Assets Fund Inst (DAFXX), which returned 3.24% (No. 1 overall and first among Prime Inst); TIAA CREF MM Fund Retail (TIRXX), which returned 3.09% (the highest among Prime Retail); and, AIM STIT Govt & Agency Inst (AIM04), American Beacon US Govt Select (AAOXX), and JPMorgan US Govt Capital (OGVXX) all returned 3.03%, (so tied for No. 1 among Govt Inst funds). AIM STIT Treasury Inst (AIM03) returned the most among Treasury Institutional funds over the past 10 years; and, Wells Fargo Advantage Treasury Plus Admin (WTPXX) ranked No. 1 among Treasury Retail funds.
For the period ended Dec. 31, 2009, our Crane 100 Money Fund Index returned 0.31% over 1-year, 2.57% 3.08% over 5 years and 2.90% over 10 years. See our latest Money Fund Intelligence XLS for more detailed listings, percentiles, and rankings, and look for more Money Fund Intelligence Awards in coming days.
The January 2010 issue of Crane Data's flagship Money Fund Intelligence newsletter, which went out to subscribers on Friday, features the stories: "MF Year in Review: Money Funds' Annus Horribilus," which reviews assets, yields, and the most important stories of 2009; "SEI's Simko Speaks on Cash Management," a Q&A with Sean Simko and Daisy Lac, and "Top Money Funds of '09 Win New MFI Awards," which reviews the top-performing funds for 2009 and for the past decade. We excerpt a few highlights below.
MFI's "Annus Horibilis review of 2009 says, "Though relatively quiet compared to the explosive growth of 2007 and the near-death experience of late 2008, this past year was a terrible year for the 40-year old money fund business. The dominant themes were low and lower, for both yields and for assets. Rates ground down towards zero and assets experienced their largest drop in history. In addition, regulatory changes and the threat of a major remake of the industry dominated headlines.... Assets, which hit a record high of $3.920 trillion in mid-January [2009], proceeded to shrink by $545 billion, or 14.0%, to $3.294 trillion on the year, by far the largest annual decline."
SEI's Sean Simko tells MFI in our latest fund manager interview, "Money market and short-term portfolio managers are not only balancing the changing investment landscape, they are doing so in an unprecedented low interest rate environment. The goal is to build a portfolio that is well diversified, very liquid, upholding to the highest credit standards while achieving a return on investment. Now add into the mix concerns around all the regulatory issues that are on the horizon, and the result are a very challenging environment."
Finally, MFI writes, "In addition to our normal 1-year return and 7-day yield performance ranking tables, we recognize some of the top-performing money funds of 2009 and of the past decade with the newly created Money Fund Intelligence Awards.... [T]he winners [are] the No. 1-ranked funds based on 1-year, 5-year and 10-year returns, through Dec. 31, 2009, in a number of categories -- Prime Institutional, Government Institutional, Treasury Institutional, Prime Individual, Government Individual, and Treasury Individual."
Each issue of Money Fund Intelligence features news, info, and performance on over 1,300 money market mutual funds. Statistics include: assets, WAM, expense ratio, 7-day yield, 30-day yield, 1-month return, 3-mo, YTD, 1-year, 3-yr, 5-yr, 10-yr, and since inception returns, and gross yields. MFI also contains tables of the top-yielding and largest money funds and our benchmark Crane Money Fund Indexes. Look for more from the new MFI, more on our Top-Performing Fund Awards, and more from SEI's Sean Simko in coming days. To request a sample of the latest issue of Money Fund Intelligence, e-mail stork@cranedata.us.
The Federal Deposit Insurance Corporation issued an "Advisory on Interest Rate Risk Management to "remind institutions of ... sound practices for managing interest rate risk (IRR)." The publication says, "In the current environment of historically low short-term interest rates, it is important for institutions to have robust processes for measuring and, where necessary, mitigating their exposure to potential increases in interest rates."
The Advisory explains, "Current financial market and economic conditions present significant risk management challenges to institutions of all sizes. For a number of institutions, increased loan losses and sharp declines in the values of some securities portfolios are placing downward pressure on capital and earnings. In this challenging environment, funding longer-term assets with shorter-term liabilities can generate earnings, but also poses risks to an institution's capital and earnings."
It continues, "The regulators recognize that some degree of IRR is inherent in the business of banking. At the same time, however, institutions are expected to have sound risk management practices in place to measure, monitor, and control IRR exposures. Accordingly, each of the financial regulators have established guidance on the topic of IRR management.... The regulators expect all institutions to manage their IRR exposures using processes and systems commensurate with their earnings and capital levels, complexity, business model, risk profile, and scope of operations."
The FDIC says, "When conducting scenario analyses, institutions should assess a range of alternative future interest rate scenarios in evaluating IRR exposure. This range should be sufficiently meaningful to fully identify basis risk, yield curve risk and the risks of embedded options. In many cases, static interest rate shocks consisting of parallel shifts in the yield curve of plus and minus 200 basis points may not be sufficient to adequately assess an institution's IRR exposure. As a result, institutions should regularly assess IRR exposures beyond typical industry conventions, including changes in rates of greater magnitude (e.g., up and down 300 and 400 basis points) across different tenors to reflect changing slopes and twists of the yield curve."
Finally, the Advisory says, "Assumptions about non-maturity deposits are critical, particularly in market environments in which customer behaviors may not reflect long-term economic fundamentals, or in which institutions are subject to heightened competition for such deposits. Generally, rate-sensitive and higher-cost deposits, such as brokered and Internet deposits, would reflect higher decay rates than other types of deposits. Also, institutions experiencing or projecting capital levels that trigger brokered and high interest rate deposit restrictions should adjust deposit assumptions accordingly."
In the most recent "Month in Cash" publication, Federated Investors' CIO for Taxable Money Markets Deborah Cunningham writes that the "New Year should, eventually, bring better yields." She gives an update on the recent brief negative Treasury yield reprise, and holds out hope that while the Federal funds target rate should remain flat for some time, rates may begin inching upward due towards the higher end of its zero to 25 bps range.
Cunningham says, "With monetary policy in a prolonged holding pattern, the cash market in December was impacted mostly by seasonal forces that exerted downward pressure on yields at the extreme short end of the cash-yield curve. Though this phenomenon also is observed at quarter end, it is usually more pronounced as the New Year approaches. In the context of a rock-bottom interest rate environment, those seasonal factors -- caused by institutional window dressing and year-end corporate financing needs -- pushed overnight yields on commercial paper and Treasury securities to zero or below."
She continues, "If investors thought they saw the first light of higher benchmark interest rates over the horizon, it was not because of any Federal Reserve pronouncement. The official statement accompanying the mid-December Federal Open Market Committee (FOMC) meeting repeated -- at considerable length -- what the market already knew about the pending withdrawal of various liquidity programs. The Fed did conduct a pair of successful tests of reverse repo transactions in a tri-party arrangement with its traditional counterparts in the primary dealer market."
The Month in Cash also says, "On Christmas Eve, the Treasury Department announced that the government would remove the $200 billion limit on capital support that had been in place for Fannie Mae and Freddie Mac. Implicit in the move was the expectation that those agencies will have additional losses and that Uncle Sam remains ready to finance the mounting red ink. The timing of the Treasury announcement was designed to eliminate the need for Congressional authority to raise the $200 billion credit line for both Fannie and Freddie."
Finally, Cunningham says, "Looking ahead, we continue to believe that the Fed will not raise interest rates until at least this summer. However, there are steps that the Fed can take in the meantime -- such as a broader application of the reverse repo process -- that will at least move the actual fed funds rate closer to the upper end of its zero to 25 basis point target range. On balance, we are guardedly optimistic that the unfriendly environment for savers that has prevailed for over a year will gradually become more hospitable as the New Year unfolds."
Standard & Poor's Ratings Services announced Tuesday that it is "requesting comments on proposed revisions to its Principal Stability Fund Ratings Criteria. The company's press release, entitled, "Comments Requested On Principal Stability Fund Criteria Revisions; Fund Ratings Definitions Updated," says, "Our proposal and the specific requests we are making are outlined in the article 'Request for Comment: Principal Stability Fund Rating Criteria,' published today on RatingsDirect. It is also available on Standard & Poor's Web site at www.standardandpoors.com." The publication summarizes S&P's proposed money fund ratings changes, seeks feedback on a series of questions , discusses the impact on ratings, and discusses methodology.
The S&P release says, "We encourage all market participants to submit comments in writing on the proposed criteria by March 26, 2010. Please e-mail your written comments to CriteriaComments@standardandpoors.com. Once the comment period is over, we will evaluate the comments and finalize the principal stability fund rating criteria. Also effective today, we have updated our principal stability fund ratings definitions on www.standardandpoors.com.... The changes have not resulted in any ratings changes to our currently rated funds. The amendments are intended to provide more transparency regarding the opinion reflected in our principal stability fund ratings definitions."
The Request for Comment says, "The past two years have made up one of the most turbulent periods in the more than 35-year history of money-market funds. In all corners of the globe, unprecedented credit and liquidity events have led to a deeper understanding of the challenges facing fixed-income funds that strive to maintain a stable or accumulating net asset value (NAV) per share. The revisions proposed in this request for comment (RFC) are intended to better account for these risks (primarily involving asset credit-quality and liquidity risks) in Standard & Poor's Ratings Services' criteria for principal stability fund ratings (PSFRs), and identify characteristics that are inconsistent with highly rated funds."
It continues, "This RFC explains the proposed criteria changes for PSFRs and, if implemented, would complement or replace our PSFR criteria published in February 2007. During the past couple of years, we have observed within our rated funds universe a wide range of approaches to managing investment risks. We are proposing the criteria changes detailed herein to better account for fund investment risks that are inconsistent with high ratings. We are requesting comments on several proposed changes to our criteria and methodologies to gather information about market perspectives that may aid in further developing the criteria. The proposed criteria revisions apply to rated funds that are domiciled in the U.S., Bermuda, Cayman Islands, Channel Islands, France, Ireland, Isle of Man, Luxembourg, the U.K., and possibly other countries."
The proposed changes include: adopting WAM to final maturity criteria (with no change in regular WAMs for AAAm funds); allowing 95% correlations to 3-month LIBOR (in addition to Fed funds) for variable/floating rate indexes; restricting maturities of illiquid securities; tweaking maximum issuer concentrations; adding weekly stress tests; and, eliminating the 'G' designation for government money funds. S&P says, "[W]e expect very little, if any, changes to outstanding ratings."
S&P says it will host a teleconference on Thursday, Jan. 14, 2010, at 11:00 a.m. EST. (The dial-in number is 1-210-795-1098; for the U.K. it is 44-20-7108-6248. The conference ID is 2850908, and the passcode is "SANDP."
Late yesterday, Reuters posted an article, "SunTrust shops RidgeWorth asset management unit: sources", which says, "U.S. regional bank SunTrust Banks Inc is trying to sell RidgeWorth Investments, its multi-boutique asset management business, amid losses due to the financial crisis, people familiar with the matter said on Monday." (See also, MutualFundWire's "Sales Buzz Surrounds a Bank's Mutual Fund Unit".)
RidgeWorth, the former STI Classic Funds complex, manages over $60 billion, according to its website (as of Sept. 30, 2009). Its short-term fixed-income unit, known as StableRiver Capital Management, manages 15 U.S. money funds with $18.2 billion according to the Crane Data's Money Fund Intelligence XLS (Nov. 30, 2009). The family ranks 21st out of the 83 money fund complexes tracked by Crane Data and its money fund assets have declined by $5.9 billion, or 24.6% in the 12 months through Nov. 30.
Reuters says, "SunTrust is being advised by investment bank Sandler O'Neill on a potential sale of RidgeWorth, which owns interests in eight investment boutiques, these people said, requesting anonymity because the process is private. SunTrust and Sandler O'Neill declined to comment."
The article adds, "RidgeWorth's money market business could be of interest to firms like Federated Investors Inc, Fidelity Investments and State Street Corp, the other banker said." It quotes the unnamed source, "They have built a nice practice for a bank. It is highly regarded."
The company's money fund unit and its "enhanced cash" funds experienced their share of troubles back during the subprime liquidity crisis. See some of our previous Crane Data News articles, such as, "SunTrust's STI Classic Funds Obtains No-Action Letter on Cheyne SIVs" (Nov. 13, 2007), "SunTrust Discloses Backing of STI Classic Funds, 'Not a Precedent'" (Dec. 20, 2007), and "STI Classic Funds To Be RidgeWorth, Preparing for Money Fund Exit?" (March 13, 2008).
As we wrote in our Dec. 31 "Link of the Day", ICI's most recent monthly "Trends in Mutual Fund Investing: November 2009," show that money fund assets declined by $43.4 billion to $3.318 trillion in November. ICI also released its monthly "Month-End Portfolio Holdings of Taxable Money Market Funds" report, which shows continued declines in Government Agency Securities and Treasury Bills and another large increases in Repurchase Agreements.
ICI's monthly "Holdings" (available to subscribers only) shows that CDs, including Eurodollar CDs, remain taxable money funds' largest holding, but that they're now at 21.9% of taxable holdings, down $21.6 billion to $639.26 billion. Repurchase Agreements, or Repos, surged by $49.08 billion to $583.44 billion, and they now inch out Governments for the 2nd largest spot at 20.0%. Government agencies declined by $35.5 billion in November to $564.43 billion, or 19.4%.
Commercial Paper continues to represents the fourth-largest holding of taxable money funds (as of 11/30) at 17.7% ($514.84 billion). CP decreased by $7.30 billion in November. Treasury Bills and Securities dropped by $10.30 billion to $380.38 billion (13.1% of holdings), while Notes (both Corporate and Bank) ranked 6th with with 5.6% of the total ($163.18 billion). The final 2.3% of holdings were labelled "Other."
Year-to-date through November in 2009, CDs showed the largest increases (up $154.25 billion), followed by Repos (up $31.69 billion). The biggest declines in holdings were experienced by Treasuries (down $210.58 billion), U.S. Government Agency Securities (down $209.10 billion), Commercial Paper (down $114.38 billion) and Notes (down $70.09 billion). Much of these moves reflect the overall decline in taxable money fund assets (down $427.63 billion, or 12.8%, to $2.913 trillion, as well as a shift away from zero-yielding Treasury and Government money funds and into higher-paying Prime funds in 2009.
The ICI's monthly report also showed Average Maturities decreasing 3 days to 52, the number of funds falling by 4 to 484, and the number of taxable money fund accounts outstanding declining by over half a million to 30.56 million. See last week's "Link of the Day" below right and our pending January issue of Money Fund Intelligence for more on asset flows in 2009.
