The latest monthly "Trends in Mutual Fund Investing: July 2010," released by the Investment Company Institute late yesterday, shows money fund assets basically flat in July following a modest outflow in June. ICI's separate (and non-public) "Month-End Portfolio Holdings of Taxable Money Market Funds shows money funds increasing Repurchase Agreement holdings while decreasing U.S. Government Agency Securities and U.S. Treasury Bills in July.
ICI's first release says, "The combined assets of the nation's mutual funds increased by $415.3 billion, or 4.0 percent, to $10.916 trillion in July, according to the Investment Company Institute's official survey of the mutual fund industry. In the survey, mutual fund companies report actual assets, sales, and redemptions to ICI.... Money market funds had an outflow of $6.40 billion in July, compared with an outflow of $24.08 billion in June. Funds offered primarily to institutions had an inflow of $1.56 billion. Funds offered primarily to individuals had an outflow of $7.97 billion."
The monthly survey contains an added "Analysis from ICI Chief Economist Brian Reid," which says, "Our report ... for July shows a continuation of several trends in bond and stock mutual funds -- activity that has attracted a great deal of attention and commentary in the media and online in recent weeks.... The July data continues some general trends: Outflows from money market funds: From January through July 2010, $515.6 billion flowed out of money market funds. This is primarily related to the current low yields on those funds.... [And] continued strong inflows to bond funds: Bond funds attracted net new cash flow of $185.6 billion from January through July."
Reid adds, "[L]ow short-term interest rates and the relatively steep yield curve likely are enticing some investors, both institutional and retail, to shift out of money market funds -- whose yields are hovering just above zero. Some retail investors may be moving assets into bond mutual funds." ICI also shows "Liquid Assets of Stock Mutual Funds" returned to a near-record low of 3.4%.
ICI's separate monthly Composition totals showed Repo holdings rising $73.2 billion in July to $546.0 billion (22.1%). Certificates of Deposit, the second largest holding at 21.7%, rebounded by $12.4 billion to $535.7 billion, but third-ranked Government Agency holdings plunged by $42.1 billion to $418.1 billion (17.0%). Commercial Paper increased by $5.7 billion to $400.1 billion (16.2%), but Treasury Security holdings plunged by $42.3 billion to $316.7 billion (12.8%). Notes (including Corporate and Bank) fell by $11.0 billion to $160.8 billion (6.5%), and Other investments fell by $1.4 billion to $75.9 billion.
Note: For more recent figures on money fund assets and portfolio composition, see Crane Data's subscription products, Money Fund Intelligence Daily and Money Fund Intelligence XLS.
While there wasn't much of interest, or much good news, related to money market funds, Federal Reserve Bank Chairman Ben Bernanke's speech Friday at the Kansas City Fed's Economic Symposium in Jackson Hole, Wyoming did contain some interesting tidbits on the Fed's extended period language and on lowering interest on excess reserves. Bernanke's "The Economic Outlook and Monetary Policy," says about Federal Reserve Policy, "In 2008 and 2009, the Federal Reserve, along with policymakers around the world, took extraordinary actions to arrest the financial crisis and help restore normal functioning in key financial markets, a precondition for economic stabilization. To provide further support for the economic recovery while maintaining price stability, the Fed has also taken extraordinary measures to ease monetary and financial conditions."
It continues, "Notably, since December 2008, the FOMC has held its target for the federal funds rate in a range of 0 to 25 basis points. Moreover, since March 2009, the Committee has consistently stated its expectation that economic conditions are likely to warrant exceptionally low policy rates for an extended period. Partially in response to FOMC communications, futures markets quotes suggest that investors are not anticipating significant policy tightening by the Federal Reserve for quite some time. Market expectations for continued accommodative policy have in turn helped reduce interest rates on a range of short- and medium-term financial instruments to quite low levels, indeed not far above the zero lower bound on nominal interest rates in many cases."
Regarding "Policy Options for Further Easing," Bernanke says, "Notwithstanding the fact that the policy rate is near its zero lower bound, the Federal Reserve retains a number of tools and strategies for providing additional stimulus. I will focus here on three that have been part of recent staff analyses and discussion at FOMC meetings: (1) conducting additional purchases of longer-term securities, (2) modifying the Committee's communication, and (3) reducing the interest paid on excess reserves. I will also comment on a fourth strategy, proposed by several economists -- namely, that the FOMC increase its inflation goals."
He explains, "A second policy option for the FOMC would be to ease financial conditions through its communication, for example, by modifying its post-meeting statement. As I noted, the statement currently reflects the FOMC's anticipation that exceptionally low rates will be warranted 'for an extended period,' contingent on economic conditions. A step the Committee could consider, if conditions called for it, would be to modify the language in the statement to communicate to investors that it anticipates keeping the target for the federal funds rate low for a longer period than is currently priced in markets. Such a change would presumably lower longer-term rates by an amount related to the revision in policy expectations."
Bernanke continues, "A third option for further monetary policy easing is to lower the rate of interest that the Fed pays banks on the reserves they hold with the Federal Reserve System. Inside the Fed this rate is known as the IOER rate, the 'interest on excess reserves' rate. The IOER rate, currently set at 25 basis points, could be reduced to, say, 10 basis points or even to zero. On the margin, a reduction in the IOER rate would provide banks with an incentive to increase their lending to nonfinancial borrowers or to participants in short-term money markets, reducing short-term interest rates further and possibly leading to some expansion in money and credit aggregates. However, under current circumstances, the effect of reducing the IOER rate on financial conditions in isolation would likely be relatively small."
Finally, he adds, "The federal funds rate is currently averaging between 15 and 20 basis points and would almost certainly remain positive after the reduction in the IOER rate. Cutting the IOER rate even to zero would be unlikely therefore to reduce the federal funds rate by more than 10 to 15 basis points. The effect on longer-term rates would probably be even less, although that effect would depend in part on the signal that market participants took from the action about the likely future course of policy. Moreover, such an action could disrupt some key financial markets and institutions. Importantly for the Fed's purposes, a further reduction in very short-term interest rates could lead short-term money markets such as the federal funds market to become much less liquid, as near-zero returns might induce many participants and market-makers to exit. In normal times the Fed relies heavily on a well-functioning federal funds market to implement monetary policy, so we would want to be careful not to do permanent damage to that market."
While the increases have been miniscule, money market mutual fund assets rose for the fifth week in a row in the week ended Wednesday. ICI's weekly "Money Market Mutual Fund Assets" says, "Total money market mutual fund assets increased by $3.70 billion to $2.834 trillion for the week ended Wednesday, August 25, the Investment Company Institute reported today. Taxable government funds increased by $3.76 billion, taxable non-government funds increased by $2.54 billion, and tax-exempt funds decreased by $2.59 billion."
The weekly release continues, "Assets of retail money market funds decreased by $3.40 billion to $966.47 billion. Taxable government money market fund assets in the retail category decreased by $670 million to $169.71 billion, taxable non-government money market fund assets decreased by $980 million to $589.93 billion, and tax-exempt fund assets decreased by $1.75 billion to $206.83 billion."
ICI adds, "Assets of institutional money market funds increased by $7.10 billion to $1.867 trillion. Among institutional funds, taxable government money market fund assets increased by $4.42 billion to $677.37 billion, taxable non-government money market fund assets increased by $3.52 billion to $1.058 trillion, and tax-exempt fund assets decreased by $850 million to $131.62 billion."
Over the past 5 weeks, money fund assets have increased by $35.7 billion, or 1.3%. Since April 28, which appears to be the point when outflows slowed to a trickle, money fund assets have declined a mere $39 billion, or 1.3%. Year-to-date, money fund assets remain down by $459 billion, or 14.0%. (Money fund assets declined by exactly 14.0% in 2009 too.) Institutional assets have declined by $358 billion, or 16.1% YTD, while Retail assets have declined by $101 billion, or 9.5%.
Total money fund assets have declined by $745 billion, or 20.8%, over the past 52 weeks; they've declined by $739 billion, or 20.7% over the past 104 weeks (2 years); but, assets have actually increased $226.9 billion, or 8.7% over the past 156 weeks (3 years). Since early August 2007, institutional money fund assets have increased by $307.2 billion, or 19.7%, while retail assets have decreased by $80.2 billion, or 7.7%.
Goldman Sachs Asset Management, the 8th largest manager of money market mutual funds with $142.5 billion, has announced that it will be consolidating its Institutional Liquid Assets (ILA) money fund family into its larger Financial Square series of money funds. ILA Money Market Portfolio, ILA Treasury Obligations Portfolio, ILA Treasury Instruments Portfolio, and ILA Federal Portfolio are expected to liquidate Friday, while ILA Tax Exempt Diversified Portfolio and ILA Prime Obligations Portfolio are scheduled to liquidate on Monday, August 30.
A March 1, 2010, filing announced the plan, saying, "The Board of Trustees of Goldman Sachs Trust has approved a plan to consolidate the assets of the Funds with those of other similarly managed money market funds of the Trust by allowing shareholders of the Funds the opportunity to acquire shares of substantially similar Goldman Sachs money market funds in exchange for their current ILA Fund holdings. This Consolidation may result in the movement of portfolio securities from ILA Funds to their prospective counterparts. Additional details of the Consolidation will be provided to Fund shareholders in the coming weeks."
It continued, "After the Consolidation has been fully carried out, each Fund's shareholders who have chosen to participate will hold shares of a substantially similar money market fund into which their Fund has been consolidated. The Funds will then be liquidated, and shareholders who have chosen not to participate in the Consolidation will receive a liquidating distribution in the amount of their investment. The Consolidation and subsequent liquidation described above will not include the Goldman Sachs Institutional Liquid Assets Tax-Exempt California Portfolio or the Goldman Sachs Institutional Liquid Assets Tax-Exempt New York Portfolio -- these portfolios will continue operations and are expected to be rebranded at a future date for inclusion in the Goldman Sachs Financial Square family of money market funds."
It added, "All steps of the Consolidation and subsequent liquidation of the Funds are expected to be completed sometime after June 1, 2010 and on a date no later than August 31, 2010. It is currently anticipated that, until the Consolidation is carried out, new and existing Fund shareholders will continue to be able to purchase Fund shares and/or reinvest their dividends in additional Fund shares. The rights of Fund shareholders to redeem some or all of their shares will remain unchanged."
A July 27 Prospectus supplement added, "As previously noted in the Prospectus Supplement dated March 1, 2010, the Board of Trustees of Goldman Sachs Trust has approved a plan to consolidate the assets of the Funds with those of other similarly managed money market funds of the Trust. ILA Fund shareholders have the opportunity to exchange their shares for shares of substantially similar Goldman Sachs money market funds at amortized cost (i.e., Fund shareholders receive $1.00 for each share currently held and pay $1.00 for each new share of the new Goldman Sachs money market funds). After this voluntary exchange has been fully carried out, each Fund will be liquidated, and shareholders who have chosen not to participate in the exchange will receive a liquidating distribution in the amount of their investment."
It continues, "All steps of the exchange and subsequent liquidations of the Funds are expected to be completed sometime prior to or including August 31, 2010, with such dates subject to the discretion of the officers of the Trust. The precise dates of the Funds' eventual liquidations within this period may vary. The Funds may be liquidated at different times, depending in large part on the percentage of each Fund's shares that are redeemed. If a relatively large percentage of a Fund's shares is redeemed, then continuing operations through August 2010 may not be feasible, and the Fund would be more likely to liquidate as of an earlier date."
Finally, it said, "In anticipation of the liquidation of portfolio holdings that will be necessary to satisfy exchange requests, and because it is expected that each Fund will be fully liquidated no later than August 31, 2010, a Fund may not be fully invested over the course of the next few weeks. Furthermore, to the extent that a Fund's assets are invested, they may be concentrated in relatively short-term, low-yielding securities. Therefore, during the period prior to liquidation, the Funds may not be achieving their investment objectives, and performance may be adversely affected. Finally, while each Fund will attempt to increase its liquidity in anticipation of the potential exchanges and eventual liquidation, significant redemption or market activity prior to liquidation could adversely affect a Fund’s liquidity and its ability to maintain a $1.00 net asset value per share."
For a full list of the funds and share classes involved, see our Money Fund Intelligence or Money Fund Intelligence XLS, or check our Resources, Fund Detail page. (The ILA funds are still listed in our August issue, but the mergers and changes will be reflected in our pending September issue.)
Earlier this month, the Investment Company Institute released its latest quarterly "Worldwide Mutual Fund Assets and Flows First Quarter 2010." The compilation of worldwide fund association totals shows global money fund assets declined by $431.7 billion, or 8.2%, to $4.840 trillion in Q1 2010. Declines in U.S. money funds accounted for over three-quarters of the drop, or $332.2 billion (down 10.0%), while declines in France, Luxembourg, China, and Italy accounted for most of the remainder.
ICI says, "Mutual fund assets worldwide increased 0.3 percent to $23.02 trillion at the end of the first quarter of 2010. In total, worldwide mutual funds had $104 billion in net outflows in the first quarter, compared to $77 billion in net inflows in the fourth quarter of 2009. Net flows into long-term funds were $303 billion in the first quarter of 2010, with flows into bond funds, at $169 billion, accounting for more than one-half of long-term funds flows.... Net outflows from money market funds nearly doubled in the first quarter of 2010 to $406 billion, from $206 billion in outflows in the previous quarter, more than offsetting the flows into long-term funds. Over the past year, net outflows from money market funds have averaged $277 billion per quarter."
The Worldwide Flows report shows that the U.S. accounts for 56.5% of all assets with $2.984 trillion (as of March 31, 2010). France ranks second with 11.8%, or $622.8 billion (though some don't consider France true "money market funds"); we estimate that Ireland ranks third with 8.4%, or $442.6 billion; Luxembourg ranks fourth at 8.0%, or $424.7 billion; and, Australia ranks fifth with 4.6% of assets, or $244.5 billion. (Ireland and Luxembourg are home to the vast majority of "offshore" U.S.-style money market funds marketed to multinational companies. Note too that Crane Data adjusted ICI's numbers to include Ireland, which doesn't break out money market funds. We estimate that half of Ireland's assets are money funds.)
The list of largest money fund markets also includes: Korea ($73.6 billion), Italy ($69.1 billion), Mexico ($50.7 billion), Canada ($47.1 billion), South Africa ($34.2 billion), Brazil ($30.2 billion), Taiwan ($27.8 billion), Switzerland ($26.1 billion), and Japan ($25.0 billion). The largest percentage decline was seen by China, which experienced a massive 55.1% decline in assets (down $21.0 billion). Italy (down 14.6%), Portugal (down 16.8%) and Greece (down 34.1%) also saw large percentage declines.
ICI's quarterly explains, "The Investment Company Institute compiles worldwide statistics on behalf of the International Investment Funds Association, an organization of national mutual fund associations. The collection for the first quarter of 2010 contains statistics from 43 countries." E-mail Kaio to request a copy of Crane Data's compilation of ICI's data into a "Largest Money Market Mutual Fund Markets Worldwide" spreadsheet.
SIFMA's latest "Research Quarterly" for 2Q2010, in a 2-page section on "Funding and Money Market Instruments," shows that outstanding money market instruments continued to decline in the latest quarter while repos remained flat.
The publication says, "The average daily amount of total outstanding repurchase (repo) and reverse repo agreement contracts was $4.51 trillion through the first half of this year, roughly unchanged from the average daily outstanding in the same year-ago period. Daily average outstanding repo transactions totaled $2.55 trillion year-to-date, down 4.2 percent from the $2.66 trillion recorded in the same year-ago period, while reverse repo agreements aver-aged $1.96 trillion, up 4.9 percent from the $1.87 trillion daily average outstanding during the same year-ago period."
SIFMA writes, "The Federal Reserve Bank of New York (FRBNY) began testing tri-party reverse repos in late 2009 in preparation for their potential use to drain extraordi-nary reserves from the U.S. banking system when it may be deemed necessary. These repo data represent financing activities of the 18 primary dealers reporting to the FRBNY and includes repos/reverse repos using U.S. government, federal agency, agency mortgage-backed, and corporate securities as collateral. FRBNY also published their final recommendations in the second quarter for reforming the current tri-party repo infrastructure."
The report continues, "Money market rates overall rose through the second quarter, and spreads widened. 3-month LIBOR rates rose to 53.4 basis points (bps) at the end of the second quarter from 29.2 bps at the end of 1Q'10. The overnight indexed swaps (OIS) rate, a commonly used measure of liquidity and stress, was unchanged quarter over quarter (20 bps at the end of 2Q'10), although it rose up to 25 bps intra-quarter. The 3-month Treasury bill yield also picked up slightly, rising to 18 bps as of June 30 from 16 bps at end-March."
Research Quarterly explains, "The LIBOR-OIS 3-month spread, an important indica-tor of liquidity and marketplace lending risk, jumped significantly to 33.2 bps at end-2Q'10 from 8.9 bps at the end of 1Q'10. The spread between the 3-month T-bill and LIBOR rate, or the TED spread, is another measure for liquidity and credit risk in the marketplace, and more specifically reflects how likely banks may default on loans. The spread also rose to 35.4 bps at the end of 2Q'10 from 13.2 bps at the end of the first quarter, an indicator of worsening (or assumption for worsening) credit conditions as sovereign debt concerns and a slowing recovery may have dragged on market confidence."
Finally, SIFMA says, "The outstanding volume of total money market instruments (MMI), including commercial paper (CP) and large time deposits, totaled over $2.9 trillion as of the end of 2Q'10, 5.1 percent below the $3.08 trillion as of the end of 1Q'10 and 13.5 percent below year-ago volumes. CP outstanding totaled approximately $1.04 trillion at the end of the second quarter, down 4.4 percent from end-1Q'10's $1.09 trillion recorded and an over 15 percent decline from the outstanding volume for the same year-ago period. Financial CP outstanding declined 9.2 percent to $514 billion at the end of 2Q'10 from $566.2 billion at end-1Q'10. Non-financial CP outstanding rose for the second consecutive quarter to $115.6 billion at quarter end from $108.7 billion at end-1Q'10."
At the end of last week, the U.S. Securities & Exchange Commission issued a "no-action" letter entitled "Investment Company Act of 1940 -- Section 2(a)(41) and Rules 2a-4 and 22c-1 Investment Company Institute Designated NRSROs", which allows fund board to delay implementation of the designation of NRSROs (nationally-recognized statistical ratings organization) until further notice.
In the letter, the SEC's Associate Director of the Division of Investment Management Robert Plaze writes Investment Company Institute General Counsel Karrie McMillan, "As you know, the amendments to rule 2a-7 under the Investment Company Act of 1940 that the Commission adopted last February require boards of directors of money market funds to designate at least four nationally recognized statistical rating organizations ('NRSROs') whose ratings the fund would use to determine the eligibility of portfolio securities under the rule. The rule also requires funds to disclose designated NRSROs in their statements of additional information. In order to meet the December 31, 2010 compliance date, boards of directors will likely have to designate NRSROs no later than the Fall of this year."
It continues, "We have received a number of questions from participants in the mutual fund industry about the effect on this requirement of provisions in the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act. More specifically, participants have expressed concerns regarding section 939A of the Act, which requires the Commission to review its regulations that reference credit ratings and to modify regulations the Commission has identified to remove any reference to or requirement of reliance on credit ratings and substitute a standard of creditworthiness the Commission determines appropriate. Participants have pointed out that the effect of the Act would be to render the determinations made this Fall by fund boards irrelevant several months later when the Commission is required to eliminate references to credit ratings that are central to the board designation determinations."
Plaze explains, "The Commission required money market fund boards to designate NRSROs, among other reasons, in order to shift to the board the responsibility for deciding which NRSROs the board would use in determining whether a security is an eligible security for purposes of rule 2a-7. In light of the requirements in section 939A of the Act, we agree that such a shift would not be a useful exercise pending the Commission review. Accordingly, the Division of Investment Management would not recommend that the Commission institute an enforcement action under section 2(a)(41) of the Investment Company Act and rules 2a-4 and 22c-1 thereunder if a money market fund board does not designate NRSROs and does not make related disclosures in its statement of additional information before the Commission has completed the review of rule 2a-7 required by the Act and has made any modifications to the rule."
Finally, he says, "Until the Commission determines to modify rule 2a-7 in accordance with section 939A of the Act, money market funds relying on this letter must continue to comply with the obligations for determining and monitoring eligible securities set forth in rule 2a-7 as in effect before May 5, 2010 (other than the limitation on holding unrated asset backed securities rescinded by the 2010 rulemaking)."
In their latest weekly report, ICI says, "Total money market mutual fund assets increased by $4.11 billion to $2.826 trillion for the week ended Wednesday, August 18, the Investment Company Institute reported today. Taxable government funds decreased by $3.26 billion, taxable non-government funds increased by $9.29 billion, and tax-exempt funds decreased by $1.92 billion."
ICI says, "Assets of retail money market funds decreased by $100 million to $968.77 billion. Taxable government money market fund assets in the retail category increased by $40 million to $170.14 billion, taxable non-government money market fund assets increased by $140 million to $590.34 billion, and tax-exempt fund assets decreased by $280 million to $208.30 billion."
The report continues, "Assets of institutional money market funds increased by $4.21 billion to $1.857 trillion. Among institutional funds, taxable government money market fund assets decreased by $3.30 billion to $670.62 billion, taxable non-government money market fund assets increased by $9.15 billion to $1.055 trillion, and tax-exempt fund assets decreased by $1.64 billion to $131.94 billion."
It explains, "ICI reports money market fund assets to the Federal Reserve each week. Revisions are due to data adjustments, reclassifications, and changes in the number of funds reporting. Historical weekly money market data back to January 2008 are available on the ICI website."
The New York Federal Reserve Bank just published its money fund repo counterparty list. As we mentioned in our March 9 Crane Data News "NY Fed Expands Counterparties for Reverse Repos to Money Funds", "The Federal Reserve Bank of New York today announced the beginning of a program to expand its counterparties for conducting reverse repurchase agreement transactions" including money market mutual funds.
Today's posting says, "Effective August 18, 2010, the New York Fed has accepted the following money market funds as reverse repurchase transaction counterparties: Bank of America Bank of America Cash Reserves Fund, BlackRock Institutional Management Corp BlackRock Liquidity Funds: TempFund, Charles Schwab Investment Management, Inc. Schwab Cash Reserves, Schwab Value Advantage Money Fund, Deutsche Investment Management Americas, Inc. Deutsche Cash Management Master Portfolio, The Dreyfus Corporation Dreyfus Cash Management Fund, Dreyfus Government Cash Management Fund, Dreyfus Institutional Cash Advantage Fund, Federated Investment Management Company Federated Government Obligations Fund, Federated Prime Obligations Fund, Fidelity Management & Research Company Fidelity Cash Reserves, Fidelity Institutional Prime Money Market Portfolio, Fidelity Institutional Money Market Portfolio, Fidelity Institutional Government Portfolio, FAF Advisors, Inc. First American Prime Obligations Fund, Goldman Sachs Asset Management Goldman Sachs Financial Square Prime Obligations Fund, Goldman Sachs Financial Square Money Market Fund, Goldman Sachs Financial Square Prime Obligations Fund, Invesco Advisors, Inc. AIM STIT Liquid Assets Portfolio, J.P. Morgan Investment Management Inc. JPMorgan Prime Money Market Fund, JPMorgan US Government Money Market Fund, Legg Mason Partners Fund Advisor, LLC Western Asset/Liquid Reserves Portfolio, Vanguard Group, Inc. Vanguard Market Liquidity Fund, Vanguard Prime Money Market Fund, Wells Fargo Funds Management Wells Fargo Advantage Government Money Market Fund, and Wells Fargo Advantage Heritage Money Market Fund."
The NY Fed adds, "Inclusion on this list simply means that, should the New York Fed conduct reverse repurchase agreements, those listed would be eligible to participate. It does not mean that any listed eligible reverse repurchase transaction (RRP) counterparty is eligible for any other program or transactional relationship with the New York Fed. Further, it does not in any way constitute a public endorsement of any listed eligible RRP counterparty by the New York Fed, nor should inclusion on the list be viewed as a replacement for prudent counterparty risk management and due diligence. Each listed fund applied to be an eligible RRP counterparty under the criteria and application published by the New York Fed on March 8, 2010."
These funds represent $900 billion, or almost one-third of all money fund assets. Rueters explains in its coverage (see our "Link of the Day," "Reverse repos are one of the tools that the Fed can use to remove excess reserves in a bid to avert a resurgence in inflation. In these operations, the Fed exchanges Treasury and other securities it holds for cash for a short period."
An SEC announcement late Tuesday says, "The Securities and Exchange Commission announced Tuesday that Andrew J. 'Buddy' Donohue plans to leave the SEC in November after serving more than four years as its Director of the Division of Investment Management." The Division of Investment Management overseas the regulation of mutual funds and money market mutual funds. Donohue has led the group during a period of unprecedented change. His expertise and leadership will be missed, though his speculation about the possibility of a $10.00 a share and floating rate money fund likely will not be.
The SEC's release says, "Mr. Donohue helped develop significant regulations governing the $39 trillion asset management industry, including investor-oriented rules to improve oversight of money market funds, increase investment adviser custody controls, and curtail investment adviser 'pay-to-play' abuses. Under his leadership, the SEC also implemented a new mutual fund summary prospectus and investment adviser disclosure brochure, and proposed to replace rule 12b-1 mutual fund distribution fees with a reformed regulatory framework. The agency also recently proposed rule amendments to improve information in target date fund advertisements and marketing."
SEC Chairman Mary Schapiro comments, "Buddy has been an effective leader and investor advocate during his tenure at the Commission. His vast knowledge of mutual funds and the investment advisory landscape has been invaluable in advancing several vital regulatory initiatives. We are grateful for his practical insights and innovative guidance, and thank him for his tremendous commitment to public service."
Donohue said, "It has been a privilege to work with so many dedicated and talented staff members throughout the agency who have contributed to the development of important new rules in the investment management area. I will forever value my time at the Commission and its remarkable mission that I feel fortunate to have been a part of."
The release adds, "Mr. Donohue, 59, was appointed to lead the Division of Investment Management in April 2006. He came to the SEC from Merrill Lynch Investment Managers, where he served as Global General Counsel and oversaw the firm's legal and regulatory compliance functions for more than $500 billion in assets including mutual funds, fixed income funds, hedge funds, private equities, and managed futures. He also was Chairman of the firm's Global Risk Oversight Committee."
While extremely knowledgeable and a strong supporter of money funds, Donohue dismayed many in the business with recent comments about possible structural changes to money funds. Our Crane Data April 7, 2009, News, "SEC's Donohue Floats $10, Floating NAV for Money Market Funds", quoted him, "Many assert that the stable $1.00 NAV has been important to the development and popularity of money market funds. While the popularity of the stable $1.00 NAV is understandable, it does present certain potential drawbacks to investors.... These problems could be addressed by the adoption of a $10.00 NAV or a floating NAV. I believe these important issues must be considered when approaching money market fund reform." (This was from a "Keynote Address at the Practising Law Institute's Investment Management Institute 2009".)
Our Dec. 17, 2008, News, "SEC's Donohue: Money Fund Model, Regulatory Regime Review on Tap", quoted Donohue, "It is essential that we take the experience of money market funds from the last several months and draw from it to consider important lessons. For instance, money market funds have twin goals of providing liquidity, typically on a same-day basis, and preserving capital to maintain a stable net asset value of $1.00. At times these goals can conflict." (This is from his "2008: Important Accomplishments, Meaningful Lessons and Getting Back to Basics" at the ICI 2008 Securities Law Developments Conference.)
The Federal Reserve Bank of New York posted a release entitled, "New York Fed Receives 11 Public Comments, All Supporting Tri-Party Repo Task Force Recommendations" yesterday, which says, "The Federal Reserve Bank of New York is providing the following summary of the 11 public comments it received in response to a recent white paper and to the recommendations of the Tri-party Repo Market Infrastructure Reform Task Force (the Task Force). All comments strongly supported the Task Force's recommendations that address weaknesses in the U.S. tri-party repo market and contribute to broader financial market resiliency. Comments also suggested additional improvements to the tri-party repo market infrastructure."
The statement explains, "The comments focused on the following key themes: Support for the Task Force's recommendations to improve operational effectiveness and significantly reduce the level of intraday credit provided by the clearing banks by introducing three-way, real-time trade confirmation; shifting settlement times; automating collateral substitution; and eliminating the clearing banks' daily unwind. Support for the Task Force's recommendations to improve margining practices and increase transparency, although some comments cautioned that the recommendations could result in risk management behavior that might not be consistent with a counterparty's creditworthiness. Recognition that despite these infrastructure improvements, the potential for a disorderly liquidation might still exist."
It continues, "Several comments noted continuing concerns over the implementation timetables for the Task Force's recommendations—being either too slow or too fast -- and that the identified weaknesses would likely continue until the recommendations were fully implemented. A few comments suggested that although individual recommendations seem reasonable, the cumulative effect of all the Task Force's recommendations could drive smaller cash lenders from the tri-party repo market."
The NY Fed says, "Other comments suggested requiring a one-day notification of a participant's intent to terminate a repo transaction; improving the level of detail in existing collateral schedules to support more refined risk management practices; and prohibiting collateral that could not be independently priced -- all points that the Task Force either did not consider or did not recommend. Comments also noted the critical role of the two clearing banks and associated competitive and risk concerns, and suggested exploring the benefits and drawbacks of establishing a central counterparty, a central liquidity facility and/or a central liquidation agent."
The release explains about the "Tri-Party Repo Infrastructure Reform White Paper," "On May 17, the Federal Reserve Bank of New York issued a white paper to discuss its policy concerns regarding weaknesses in the infrastructure of the tri-party repo market and on the same day requested comment on the Task Force's recommendations to address these concerns. The feedback helps Federal Reserve staff, the industry and the public assess the recommendations and identify additional or alternative measures. The Task Force is now reviewing all comments as part of its work to see that the recommendations are implemented." (See the original release, "New York Fed Releases White Paper on Tri-Party Repurchase Agreement (Repo) Reform".)
The "Tri-Party Repo Infrastructure Reform: Public Comments" include: Wells Fargo/Joe Palamara, Vanguard/Nathan Will, JPMC/Mark Trivedi, Morgan Stanley/Graeme McEvoy, Goldman Sachs Group/Matthew Leisen, RBS Securities Inc./Nelson Young, SIFMA/Elisa Nuottajarvi, Center for Financial Stability/Bruce Tuckman, Jordan & Jordan/David Buckmaster, Paul Lopez, and NYU/Viral V. Acharya.
As several news outlets reported yesterday, Federal Reserve Bank of Kansas City President Thomas Hoenig yesterday again blasted the zero interest rate policy and "extended period" language of the `Federal Reserve in a speech entitled, "Hard Choices". Hoenig says, "These are trying times for the U.S. economy. The unemployment rate is almost 10 percent, our financial system remains under stress, community bank failures have become weekly news and the central bank is printing money to such an extent that zero interest rates bring little return to those who choose to save. Not in decades has the Federal Reserve seen such challenges in how it conducts monetary policy. With this in mind, this morning I will give you my sense of the issues we face and the hard choices that must be made."
Hoenig's speech first discusses Financial Reform and "Too-Big-to-Fail," but then says, "I want to spend my remaining time on monetary policy.... [A]s much as I want short-term improvement, I am mindful of possible longer-term consequences of zero interest rates and further easing actions. Rather than improve economic outcomes, I worry that the FOMC is inadvertently adding to 'uncertainty' by taking such actions. Remember, high interest rates did not cause the financial crisis or the recession."
He explains, "[W]e are experiencing a better pace of recovery this time than at this point in our previous two economic recoveries.... While we are not where we want to be, the economy is recovering and, barring specific shocks and bad policy, it should continue to grow over the next several quarters. We are recovering from a horrific set of shocks, and it will take time to 'right the ship.' Moreover, the financial and economic shocks we have experienced did not 'just happen.' The financial collapse followed years of too-low interest rates, too-high leverage, and too-lax financial supervision as prescribed by deregulation from both Democratic and Republican administrations. In judging how we approach this recovery, it seems to me that we need to be careful not to repeat those policy patterns that followed the recessions of 1990-91 and 2001. If we again leave rates too low, too long out of our uneasiness over the strength of the recovery and our intense desire to avoid recession at all costs, we are risking a repeat of past errors and the consequences they bring."
Hoenig tells us, "The real fed funds rate averaged 1.6 percent between 1991 and 1995, 0.37 percent between 2001 and 2005 and -1.0 percent from 2008 to the present, hardly a tight policy environment.... In my view, maintaining an accommodative monetary policy is necessary at this time, but a clear policy path toward a less highly accommodative policy will encourage a more sustained recovery. Under such a policy, financial deleveraging will evolve slowly and many of the remaining economic imbalances will rebalance. Under such a policy, the economy will expand at a sustainable moderate pace with similar moderate job growth, but job growth that will be stable and resilient. There may be ways to accelerate GDP growth, but in my view, highly expansionary monetary policy is not a good option."
He says, "To be clear, I am not advocating a tight monetary policy. I am advocating a policy that remains accommodative but slowly firms as the economy itself expands and moves toward more balance. I advocate dropping the 'extended period' language from the FOMC's statement and removing its guarantee of low rates. This tells the market that it must again accept risks and lend if it wishes to earn a return. The FOMC would announce that its policy rate will move to 1 percent by a certain date, subject to current conditions. At 1 percent, the FOMC would pause to give the economy time to adjust and to gain confidence that the recovery remains on a reasonable growth path. At the appropriate time, rates would be moved further up toward 2 percent, after which the nominal fed funds rate will depend on how well the economy is doing."
Hoenig's speech continues, "I believe the economy has the wherewithal to recover. However, if, in an attempt to add further fuel to the recovery, a zero interest rate is continued, it is as likely to be a negative as a positive in that it brings its own unintended consequences and uncertainty. A zero policy rate during a crisis is understandable, but a zero rate after a year of recovery gives legitimacy to questions about the sustainability of the recovery and adds to uncertainty."
He also says, "Of course the market wants zero rates to continue indefinitely: They are earning a guaranteed return on free money from the Fed by lending it back to the government through securities purchases.... The summer of 2010 has seemed strikingly familiar to me. I recently went back and looked at news reports for the spring and summer of 2003, just prior to when the FOMC lowered the fed funds rate to 1 percent, where it remained until 2004.... With the low rates very low for a considerable period, credit began to expand significantly and set the stage for one of the worst economic crisis since the great depression. In my view, it was a very expensive insurance premium.... That's why I believe that zero rates during a period of modest growth are a dangerous gamble."
Finally, he closes, "[T]he recent financial crisis and recession was not caused by high interest rates but by low rates that contributed to excessive debt and leverage among consumers, businesses and government. We need to get off of the emergency rate of zero, move rates up slowly and deliberately. This will align more closely with the economy's slow, deliberate recovery so that policy does not lag the recovery. Monetary policy is a useful tool, but it cannot solve every problem faced by the United States today. In trying to use policy as a cure-all, we will repeat the cycle of severe recession and unemployment in a few short years by keeping rates too low for too long. I wish free money was really free and that there was a painless way to move from severe recession and high leverage to robust and sustainable economic growth, but there is no short cut."
Money market mutual funds saw asset inflows for the third week in a row, the first time this has happened since early 2009. While it's too early to declare the outflows over, it's clear that the tide has turned. Flows into bank deposits and bond funds have slowed to almost zero and in some cases have reversed. Since April 2010, money fund assets have declined by less than both bank savings and CDs as money funds plateau at $2.8 trillion and bank deposits decline from their $5.1 trillion peak.
ICI's latest weekly "Money Market Mutual Fund Assets" statistics say, "Total money market mutual fund assets increased by $3.53 billion to $2.822 trillion for the week ended Wednesday, August 11, the Investment Company Institute reported today. Taxable government funds increased by $3.34 billion, taxable non-government funds increased by $4.00 billion, and tax-exempt funds decreased by $3.81 billion."
Since the end of April 2010, money fund assets have declined by a mere $50 billion, or 1.7%, according to ICI's weekly stats. Institutional assets, which led the outflows in the first four months of 2010, have even rebounded slightly as retail outflows have slowed to a trickle. While money fund rates have climbed since bottoming out in January and February of 2010, market rates have been declining. This has pushed cash from direct instruments back into money funds.
Looking at The Federal Reserve's "H.6 Money Stock Measures", we see Savings deposits (including MMDAs, or money market deposit accounts) falling by $46.1 billion over the past 4 weeks (through Aug. 2), after rising by $589 billion the past 52 weeks. `After breaking the $5.0 trillion level in March and peaking at $5.164 in the first week of June, deposits appear to have stalled. Regulatory and market pressures continue to weigh upon institutional and retail deposit rates.
We learned from Stradley Ronan's Joan Ohlbaum Swirsky that the SEC posted a "no-action" letter in response to a recent "Request for Interpretation" on floating rate securities and WAL calculations from the ICI. The letter says, "The Investment Company Institute requests that the staff of the Division of Investment Management concur with our interpretation that money market funds may treat short-term floating rate securities as short-term variable rate securities for purposes of determining portfolio maturity under Rule 2a-7(c)(2)(iii) under the Investment Company Act of 1940."
Swirsky tells us, "The letter clears up an ambiguity regarding the calculation of maturity of a short term floating rate security, for purposes of weighted average life ('WAL').... Rule 2a-7 includes 'maturity shortening' provisions, that permit a fund to deem the maturity of a variable or floating rate security to be 'shortened' to the next interest readjustment date or the next date that principal can be recovered on demand ('demand date'), in accordance with certain rules. The maturity shortening provision relating to a short term floater states that the maturity is one day. This treatment is based on the interest rate readjustments of a floater, which can be as frequent as daily."
She continues, "The interest readjustment dates on a variable rate security, as opposed to floater, do not occur daily. So, if the security has a demand feature, the demand date may be sooner than the next interest readjustment, depending on the terms of the security. The maturity shortening provision relating to a short term variable rate security states that the maturity is the shorter of the period remaining until the next interest readjustment date or until the next demand date. This differs from the provision for a short term floater, which does not on its face permit shortening maturity to the next demand date -- but, instead, flatly deems the maturity to be one day, based on daily interest readjustments."
Swirsky explains, "When calculating WAM, reference to the next demand date would be irrelevant for a short term floater, since the maturity of a short term floater is considered to be daily. But, when calculating WAL, reliance on an interest rate readjustment date (including daily rate readjustments) is forbidden. So, if the floater has a demand feature, permission to shorten to the next demand date becomes important. In this letter, the SEC staff, in essence, confirms that the maturity of a short term floater that has a demand feature can be 'shortened' to its next demand date when calculating WAL, even though that the maturity shortening provision relating to short term floaters does not refer to the demand date. The relief states that it only permits shortening to the next demand date for an unconditional demand feature, not a conditional demand feature."
Finally, she adds, "The letter to the SEC includes a useful footnote remarking that an adjustable rate Government Security (whose maturity can be shortened under the maturity shortening provision for Government Securities) can also have its maturity shortened under the other maturity shortening provisions in Rule 2a-7. The maturity shortening provision for Government Securities, like the maturity shortening provision for short term floaters, also does not reference shortening to the next demand date. This footnote supports that the maturity of the Government Security can be determined under the other maturity shortening provisions, that do allow shortening to the next demand date."
The latest "Arrowhead Weekly" update, published by Denver-based Arrowhead Credit Research Corp., features an interesting discussion on the debate over a floating NAV money fund in "To Float Or Not To Float: Is That Really The Question?" Director of Research Barry Weiss writes, "A more relevant connection to the headline this week has to do with the public debate occurring in money market land, as to the appropriateness of a floating NAV for a money fund. This past week we saw an article from Ignites, reporting on the launching of a floating NAV money market fund from DB Advisors, and CraneData re-ran a previously published article by BlackRock which had laid out the reasons against a floating NAV money fund. Generally, the points in both articles are well made, but I'm more surprised at how emotional the topic has become."
He explains, "There are more than enough these days written about the importance of the money fund in the mechanisms of the capital markets. Certainly the case has been made repeatedly on how issuers rely on this $2.0 trillion plus industry to help fund themselves via cheaper short-term debt instruments. Putting Paul Volcker aside, I don't think anyone truly doubts that money funds are a necessary cog. But during discussions on regulatory reforms and wrist-slapping in the form of more onerous oversight and structure, there was a point where the idea of a floating NAV fund came to the forefront. Stable value ended up winning the day, but it did signify that ideas that were a few steps forward in the evolution of money funds were being considered. And that was surprising, given the industry's aversion to change."
Arrowhead says, "I don't think there has ever been a point where a change in any industry, company or even in our own personal appearances such as a hair style has been truly embraced from the get go. But here, in terms of a floating NAV fund, there is certainly a more emotionally charged refusal to embrace it than most would have guessed. In the past, one of our concerns had been that once a fund or a few funds were launched and there is some acceptance, regulators would use that small sampling to hammer home their final piece of operational requirements. The launching of the fund with some publicity for DB Advisors with a proposed initial NAV of $10.00 certainly makes that seemingly possible."
But the piece continues, "Supposedly one of the main advantages of a floating NAV is that its transparency would limit the possibility of a run on the fund. The idea is shareholders will get used to the fluctuating NAV and thus, as it rises and drops with the tide of the credit markets, they will merely shrug it off. That may be so when it comes to retail shareholders. But the systemic risk in money funds all along has not been retail, which generally are pretty sticky assets, it is institutional. Corporate treasurers, prior to the meltdown, were notorious 'click and invest' types, many of them using portals which allowed them to move larger sums of monies on a daily basis. At that time, it was mostly yield that caused them to move the money. The complexes that saw vast outflows during troubled times were mostly ones that had come to rely on that type of investing to capture the assets to begin with."
Weiss tells us, One of the points of the Ignites article was that the floating NAV fund should be able to capture a bit more yield, and if that is truly so, I would assume it would initially attract the same type of investor that previously spent their mornings searching for yield. But given the willingness to move quickly into the fund for that reason, as we have already seen, that type of investor would almost assuredly run for the exits if the fund dropped below the initial NAV. Those types of investors and the trades they initiated were not built on relationships; it was built on yield hunting. Dropping below par, no matter what form it looks like, isn't going to keep them from clicking their assets away."
Arrowhead says, "The cash management sector is notorious for being nervous and quick to exit. And if the managers of funds react in that manner, it is hard for me to understand why one would expect shareholders in those funds to act differently. Regardless of structure, floating NAV or stable value, at the end of the day, no one wants to risk their job on a being patient while their balance drops below par. Certainly a corporate treasurer is not willing to risk his or her job in the hopes the NAV will float back above initial investment. Time is not on the fund's side in this case, and my expectation would be that the treasurer would pull his monies out at the moment he thinks he won't get principal back."
Finally, the piece warns, "Stable value funds have another problem: it is becoming dominated by larger and larger companies.... That is also a sign the funds that remain are now being run by stronger, perhaps better staffed entities, and those that during darker times had sponsors that stepped up and supported funds that needed capital infusions or credit support. That is good from the standpoint of shareholders, retail or institutional, looking for a strong support history and creditworthy sponsor. However, the dominance of the stronger sponsors also creates a conundrum in that ultimately their success in capturing assets creates a dangerous lack of investor diversity. That is a problem at the sponsor level, as the size of a future bailout could prove to be too large for even the strongest sponsors, but even more so for issuers.... In essence, their size and dominance in the market and the turning the spigot off could not only threaten their own survival; but, also squeeze and threaten the issuers themselves."
Moody's Investors Service released a report late yesterday entitled, "Sponsor Support Key to Money Market Funds," which is also discussed in today's Wall Street Journal story "'Breaking the Buck' Was Close for Many Money Funds". (See today's "Link of the Day.") Moody's press release on the study, subtitled, "Manager support key to money market fund stability," says, "Data compiled by Moody's Investors Service in a new report reveals the extent of manager support for money market funds since their introduction, and especially during the height of the 2007-2009 financial crisis."
It explains, "The report sheds new light on the depth and magnitude of this support during the crisis. At least 20 managers of prime funds in the US and Europe expended in total at least $12.1 billion dollars (pre-tax) to preserve the net asset values of their constant net asset value (CNAV) funds due to credit losses, credit transitions or liquidity constraints."
Author Henry Shilling comments, "Fund managers, which are typically financial institutions, have stepped in to help their funds in times of market stress, enabling them to maintain their constant net asset value. Also referred to as sponsors, the fund managers don't have a legal or regulatory obligation to do so, but, with limited exceptions, they have stepped in to protect their franchises and reputations."
Moody's explains, "Throughout their history, both in the U.S. and in Europe, more than 200 funds, including rated and unrated funds, were the beneficiaries of some form of sponsor support, without which they would have 'broken the buck.' In all but two cases, involving three funds, between 1980 and 2009, parental support mitigated the realization of losses on the part of fund shareholders."
Shilling adds, "The sponsor's financial condition and its willingness to provide support are important factors to consider when evaluating how well a money market fund is positioned to meet its objectives. This is, of course, in addition to other key factors, such as the portfolio credit quality, its liquidity profile, its susceptibility to market risk, and the manager's risk management practices."
Finally, the report says, "Even prior to the financial crisis of 2007-2009, Moody's identified no fewer than 146 funds that, if not for sponsor intervention, they would have broken the buck, which is equivalent to suffering mark-to-market losses of more than 50 basis points. According to Moody's research, 62 funds, including at least 36 funds in the US and an estimated 26 funds in Europe, received financial and balance sheet support from their sponsor or parent company during the financial crisis between August 2007 and December 31, 2009."
This past weekend marked the third anniversary of the start of the "Subprime Liquidity Crisis," a series of panics in the short-term funding markets and money markets. We mark the beginning as August 7, 2007, when several "Secured Liquidity Notes, or "Extendible ABCP" issues delayed payment and triggered a series of market and media concerns over structured investments. We review our coverage of these events from three years ago below.
In the first sign of problems in the "cash" markets, Crane Data's August 7, 2007, News featured, "Trouble in ABCP Market as Secured Liquidity Notes (SLNs) Are Extended." Our brief said, "The meltdown in the CDO marketplace has begun impacting money market funds, though in a limited fashion. Several SLN (secured liquidity note) programs extended yesterday, including American Home Mortgage-related Broad Hollow Funding, Luminent Star Funding, and Ottimo Funding Ltd. The Broad Hollow program extended for 4 months, and Luminent extended for 110 days. Only a handful of money funds held these securities as of recent filings, and the holdings appeared to be very minor (<2%). Some money funds have avoided extendible asset-backed commercial paper because the investor provides the liquidity. The penalty step-up in yield for extension may be some solace for any companies holding these now illiquid securities. We've also heard that several auctions for ARS (auction-rate securities) have failed in recent days."
On August 8, we wrote "Extendible ABCP Troubles Trigger Rare Wall Street Journal CP Article," which said, "Today's Wall Street Journal features 'Commercial Paper Shows Some Stress,' one of only a handful of stories the Journal has ever run on the CP, or commercial paper, market. It discusses the recent extensions of ABCP, and estimates that 'Extendible asset-backed commercial paper makes up about 12% to 13%, or around $144 billion to $156 billion, of the $1.2 trillion asset-backed commercial-paper market.' Fitch's AJ Santos told Dow Jones that ABCP 'borrowings secured by bundles of home loans accounted for about 10% to 12% of the market in the first quarter'."
Crane Data also wrote another August 8 piece entitled, "'Subprime 'Tsunami' Hits Asset-Backed Commercial Paper Market' Says Bloomberg." It said, "Extendible asset-backed commercial paper yesterday carried yields of 5.75 percent to 5.95 percent, compared with 5.45 percent for asset-backed commercial paper that isn't extendible and 5.25 percent to 5.30 percent for corporate commercial paper," said the article, quoting Money Market One's Lee Epstein. Bloomberg says extendible notes 'make up about 15 percent of the asset-backed' market of $1.15 trillion, 'or about $172.5 billion, according to Moody's.'"
Finally, on August 9, Crane Data wrote "'Money Funds May Hold Subprime Too' Says Wall Street Journal." We said, "Thursday's WSJ article names names, saying that Evergreen Institutional Money Market Fund held recently-extended Broadhollow Funding LLC debt earlier this year, according to SEC filings. The Journal also incorrectly mentions Putnam Premier Income Trust, but this is a bond fund and not a money market fund. (Putnam says they've never held Broadhollow in their money funds.) The Journal says money fund managers will likely 'pay closer attention to what is backing the commercial paper they buy, demand additional compensation for investing in a particular type pf vehicle that issues some asset-backed commercial paper and call for greater transparency in the market.' The article quotes several fund managers, including Schwab's Linda Klingman, Advantus' Jon Thompson, and William Blair's Jim Kaplan. The subprime problem 'isn't likely to cause big losses at these funds or endanger them' adds the piece."
See also Dow Jones Financial News' "The credit crunch three years on: The day the world changed?". It says, "For Adam Applegarth, then chief executive of UK bank Northern Rock, it was the day 'life changed'. August 9, 2007 was the day the markets froze. For Northern Rock, it meant an end to the short-term financing on which it relied and, within six months, the bank had been privatised. For the global financial markets, it was the beginning of a period of turmoil that redrew the economic landscape."
The August issue of Crane Data's Money Fund Intelligence, our flagship monthly publication, emails to subscribers this morning along with our monthly MFI XLS and Crane Index products and July 31, 2010, performance data and indexes. The latest edition contains the articles, "Consolidation Happens: MF Mergers, Liquidations," which discusses recent mergers and liquidations; "ICI's Stevens Unveils Stable Value Coalition," which excerpts ICI President Paul Stevens' speech at our conference last week; and, "Regs, Rates, Reality Rule at Crane MF Symposium," which reviews some of the highlights of Crane Data's second annual money fund conference.
Our "Consolidation" article says, "Following what seems like years of predictions, some signs of real consolidation finally began occurring in the money fund business in July. We've seen mergers before, similar to the one that just happened between the Wells Fargo Advantage Funds and the Evergreen Funds. But pure liquidations and outsourcing deals have been surprisingly rare." The piece reviews recent liquidations and mergers, including recent moves by Raymond James' Eagle MMF to exit, RidgeWorth outsourcing to Federated, and AARP Money Funds' planned exit from the business.
We excerpted some of Paul Stevens' speech last week, but we print much more of it in our latest edition. Stevens says, "First, the industry and the Securities and Exchange Commission have already scored some impressive gains in making money market funds more secure.... Second, we're not through with this process.... A third point I'd like to make is that money market funds remain firmly opposed to proposals that would force them to abandon their stable per-share value." He proceeds to list the proponents and benefits of the stable NAV regime, and lists the myriad risks and problems with moving to an untested floating system.
Finally, our latest newsletter also briefly reviews our recent Crane's Money Fund Symposium, saying, "We were thrilled by the turnout -- it was easily the largest gathering of money fund professionals and cash investors ever held with over 330 participants -- and encouraged by the overall tone of the event. The mood was surprisingly upbeat given the monumental challenges of unprecedented regulatory uncertainly, unending near-zero interest rates, and unyielding pessimism about the money fund businesses' future." (Subscribers to MFI are welcome to request copies of the PDF conference binders; non-subscribers may purchase the binder, which includes most of the presentations and supporting materials, for $250.)
As we began collecting data for our August Money Fund Intelligence and July 31, 2010, performance statistics, we noticed several funds reporting eye-poppingly high 7-day yields. Even a 1.0% yield would jump out in this environment, but these were ridiculous. One Victory Money Market Fund is showing a yield of almost 9%, while two Cavanal Hill Money Funds are showing yields over 4.0%. After investigating, we discovered the temporary anomaly was caused by the SEC's "Fair Fund" and a distribution related to a case against BISYS Fund Services (now part of Citi). (Note: Cavanal Hill has since adjusted their yields to remove the impact of the Fair Fund settlement.)
Cavanal Hill Funds, which are Bank of Oklahoma affiliated and the former American Performance Funds, says on its website, "The Cavanal Hill Funds listed below received funds on July 30, 2010 as part of a distribution from a 'fair fund' established by the SEC in connection with a consent order against BISYS Fund Services, Inc. This distribution was not in respect of the performance of securities invested by the Fund. As a result, the yield numbers provided elsewhere on this site for such Funds are affected, in some instances materially, by such distribution. The income associated with the distribution is non-recurring and the effect is not expected to be duplicated." Cavanal Hill Cash Management Fund Inst is showing a yield of 4.51%, and Cavanal Hill U.S. Treasury Fund Inst is showing a yield of 4.33%.
Victory, which is affiliated with KeyBank, doesn't say anything about it on its website, but a customer service rep confirmed the one-time nature of the yield pop. Victory Prime Obligations is posting a 7-day (annualized) yield of 8.91% and a 1-month return of 0.24%. Victory Financial Reserves Fund is showing a yield of 3.08%, Victory Institutional Money Market Fund is showing a yield of 1.06%, and Victory Federal Money Market Fund is showing a yield of 0.99%. (We haven't seen any others benefiting from this settlement yet.)
The website www.bisysfairfund.com says, "A Fair Fund was established pursuant to a settlement between the U.S. Securities and Exchange Commission and BISYS Fund Services, Inc., now known as Citi Fund Services, Inc.... On September 26, 2006, BISYS and the Commission entered into the Settlement with respect to findings by the Commission that certain arrangements between BISYS, acting as mutual fund administrator, and certain mutual fund advisers, were improper. The Settlement requires, among other things, a distribution of settlement monies from the BISYS Fair Fund to benefit the Mutual Funds within the affected fund families..... Pursuant to the Settlement, BISYS has paid into the BISYS Fair Fund a total of approximately $21.4 million, of which $10 million represents a civil penalty and approximately $11.4 million represents disgorgement and interest. The distribution of the BISYS Fair Fund will be made pursuant to a Fair Fund Distribution Plan that has been reviewed and approved by the Commission."
While unusual and mercifully rare, it's worth noting that money fund yields and returns are occasionally impacted by one-time payments, accounting adjustments, and other factors. Note that the 7-day yield (or SEC yield), which is the main performance gauge of money market funds and which takes the previous 7 days' worth of income and annualizes it, excludes capital gains and losses. (It also should exclude any income that is "non-investment income," so these yields may have to be revised. In 1996, the SEC changed the rules to exclude any non-investment income.) Note too that Crane Data will be excluding these ridiculously high yields from its performance statistics. But investors in these funds, at least for a couple of days, can enjoy a brief respite from the endless landscape of near-zero yields.
Moody's wrote recently that, "SunTrust's Sale of Money Fund Assets to Federated Reflects Credit Negative Industry Consolidation." Author Henry Shilling says, "The definitive acquisition agreement on 16 July between Federated Investors, Inc. and SunTrust Banks, Inc. will add $17 billion to Federated's money market management business, currently $260.5 billion. The sale will effectively remove SunTrust from the business of managing constant net asset value (CNAV) money funds when the deal closes around year-end. The transaction reflects the continuing consolidation of the money market fund industry, which is credit negative. With the top 20 management firms accounting for 91% of money market assets, systemic risk is elevated."
Shilling continues, "The financial crisis and recent amendments to Rule 2a-7 governing the operation as well as investment of money market funds have increased the costs of managing money funds. On top of that, the management, legal, and operational challenges of money funds have risen. And finally, money market fee income and margins have been shrinking because of low interest rates and fee waivers. Consequently, the attractiveness of the business for management organizations lacking sufficient scale and proper infrastructure is diminished. We expect these changes to lead to further exits from the money market fund business."
The dour piece adds, "The adoption and implementation this year of various amendments to Rule 2a-7 have mitigated the risk of fund runs. But in our view, and as noted by the Securities and Exchange Commission in January 2010, they do not eliminate the susceptibility of money market mutual funds to runs.... [But] with fewer but larger players, there is a higher likelihood that management firms may respond in unison to adverse credit, market, and/or liquidity events by withholding support for their funds. In doing so, the otherwise unfavorable business or reputational consequences for individual management companies would be limited. However, this could lead to fund runs, such as in September 2008. In the absence of governmental intervention, fund runs have a destabilizing effect on financial markets."
A press release entitled, "Citibank Online Investments now offers Money Market Funds from Northern Trust says, "Citibank Online Investments is pleased to announce the addition of the Northern Institutional Funds, U.S. domestic institutional money market funds. Citi offers clients access to more than 150 institutional funds, including U.S. dollar denominated domestic (U.S. registered), offshore (non-U.S. registered), tax exempt, tax-efficient, government/Treasury and non-dollar currency (Euro, Sterling) funds through a single channel, making it easier and more efficient for companies to manage their liquidity. With the convenience of Citibank Online Investments, existing clients will automatically have access to these new funds from the 'Fund Info' page. No additional paperwork is required.... Citibank Online Investments is a global, secure, web-based investment service accessible via CitiDirect Online Banking, Citi's web-based cash management system and TreasuryVision, Citi's award-winning information and analytics service."
Finally, a statement entitled, "SWIP Euro Liquidity Subfund Assigned 'AAAm' Principal Stability Fund Rating," says, "Standard & Poor's Ratings Services said today that it assigned its principal stability fund rating of 'AAAm' to the Dublin-domiciled Euro Liquidity Fund, a subfund of SWIP Global Liquidity Fund PLC, managed by Scottish Widows Investment Partnership Ltd. (SWIP). The rating reflects our view that the subfund has an extremely strong capacity to maintain principal stability and to limit exposure to principal losses due to credit risks. In our opinion, based on our current understanding of the implementation of the investment policy and the strategy of the asset managers, the subfund will maintain strong credit quality standards by investing exclusively in securities or with counterparties rated at least 'A-1' by Standard & Poor's, or deemed by us to be of equivalent credit quality. We also understand that, consistent with our criteria, to enhance the portfolio's liquidity and diminish sensitivity to changing interest rates, it is the current intention of the asset managers to maintain a weighted average maturity of 60 days or less."
It adds, "SWIP established the subfund in 2003 to offer institutional and corporate investors a high level of current income and daily liquidity, as is consistent with the preservation of capital. In our opinion, the subfund will be managed by an experienced team of investment professionals, at Edinburgh-based SWIP, which is responsible for managing approximately L16 billion of money market assets, and is the asset management division of Lloyds Banking Group PLC."
The $31 million AARP Money Market Fund has filed for liquidation. The Prospectus Supplement for the AARP Funds says, "At a meeting on July 13, 2010, the Board of Trustees of the AARP Funds approved, in principle, the liquidation, dissolution and termination of the AARP Funds. Shareholders of the AARP Funds will receive checks for the value of the shares they hold on the date of liquidation, which is expected to be on or about October 1, 2010. Shareholders have the right to redeem shares of the AARP Funds prior to the liquidation date.... Effective at the close of business on July 20, 2010, the AARP Funds will close to new shareholders, and no longer accept orders from existing shareholders to purchase additional shares (including automatic investment programs). However, exchanges into the AARP Money Market Fund will be permitted up to the liquidation date."
Next, Federated Investors writes on "No relief for savers in its latest Commentary, saying, "With core inflation in the United States running at the lowest level since the early 1960s and large amounts of excess capacity remaining in labor and resource markets, investors have concluded that a rate hike this year is off the table. We concur with that view, and are pleased with our purchases of some longer-dated securities when yields briefly ticked higher in June. The unprecedented magnitude and duration of the Fed's easy money policies has exerted a heavy price on savers. We believe that over time, the government's efforts to revive growth will succeed and that cash yields will trend higher. Given the strong immediate headwinds to full employment as households and governments embrace some degree of austerity, however, it is virtually certain that the journey towards more generous yields on cash equivalents will not begin until next year."
The FT writes "Justin Meadows: money market fund yields," "The US fund industry is fighting tooth and nail to preserve a unique feature of money market funds -- their ability, in normal circumstances, to quote a constant, stable net asset value (NAV) of $1 a share, even if the underlying value of the holdings differs from this. The Investment Company Institute, the US trade body, says suggestions from the Securities and Exchange Commission that the $2,800bn US industry could be forced to switch to a more conventional variable NAV structure 'would destroy money market funds as they exist now, risking severe harm to investors and to issuers of short-term securities, including businesses, state and local governments, banks and the US Treasury.' It is perhaps surprising then that the European money market industry seems set for a wholesale move to variable NAV funds of its own volition, without a stick-wielding regulator in sight."
Finally, see "ASF Indicates Broad Support for SEC Reg AB Proposals" and "SIFMA Supports SEC Rules to Increase Transparency and Revitalize Securitization ". The ASF release says, "In two letters submitted to the Securities and Exchange Commission today, the American Securitization Forum offers broad support for SEC proposals aimed at increasing transparency in the securitization markets. In a comment letter focused on the Commission's proposals regarding Regulation AB, the ASF both appreciates and supports the SEC's goal of balancing investors' needs for adequate information with issuers' interest in securing timely access to the capital markets. In another letter responding to proposals affecting privately placed asset-backed commercial paper, or ABCP, the Forum concurs with the commission's aim of providing investors with increased transparency but also expresses concern over the SEC's proposed information delivery requirements."
The latest "ICI's Month-End Portfolio Holdings of Taxable Money Market Funds" report shows a jump in Government agency securities and a decline in repo holdings in June. Certificates of Deposit rebounded while Commercial Paper holdings inched lower. The Investment Company Institute's monthly surveys also show weighted average maturities continued to decline, and asset outflows continued their slow to a trickle.
CDs remain money funds largest holding at 21.2%, or $523.3 billion. They rose by $3.9 billion in June, led by a jump in Eurodollar CD holdings. CD holdings have decreased by $73.8 billion the past 3 months, by $39.4 billion YTD, and by $116.3 billion over the past 12 months.
Repurchase agreements remain the second largest holding in taxable money funds, even after their drop in June, with $472.7 billion, or $19.2%. Repo holdings have grown by $23.5 billion over the past 3 months, by $2.4 billion YTD, and have declined by $26.4 billion over the past 12 months. U.S. Government Agency Securities rank third with $460.2 billion, or 18.7% of assets. Agencies jumped $23.1 billion in June, but have declined by $14.6 billion over 3 months and $297.6 billion over one year.
Commercial Paper continues to be the fourth largest holding in money funds with $394.4 billion, representing 16.0% of assets. CP holdings in money funds declined by $4.0 billion in June, $63.1 billion over 3 months, $15.7 billion YTD, and $143.3 billion over 12 months. (Note that CP issuance has increased for 4 weeks in a row in July -- see the Federal Reserve's latest, so we expect to see these totals moving up next month.)
Treasury Bill and Securities Holdings also rose by $5.7 billion in June to $359.0 billion, or 14.6% of holdings. It seems money funds are substituting repo for Treasury and agency securities, all of which are eligible for funds' new mandated 30% weekly liquidity buckets. Taxable money funds hold an average of 52.5% of total holdings in these three asset classes, so it's unlikely that many are having trouble staying over the 30% floor.
Average Maturities of portfolios continued shortening in June, decreasing 5 days to 36 days, their lowest level in over 3 years. WAMs were 49 days on average at the start of this year and were at a high of 55 days in October 2009. The Number of Funds tracked by ICI's series increased by 2 funds to 468 in June.
Assets of money funds decreased by $22.4 billion in June according to ICI's monthly "Trends in Mutual Fund Investing." This marked the second consecutive month of less than 1.0% declines, and assets appear to have been almost flat in July too. (ICI's weekly money fund series showed an increase last week with assets re-taking the $2.8 trillion level.)