News Archives: March, 2015
ICI's latest "Trends in Mutual Fund Investing" shows that total money fund assets decreased by $13.9 billion, or 0.5%, to $2.678 trillion, in February 2015. It was the second straight month of declines as assets dropped $33.4 billion in January (after increasing by $81.4 billion in December, $21.1 billion in November, $19.2B in October, and $22.7B in September). Money fund assets are roughly flat month-to-date in March, though, according to Crane Data's Money Fund Intelligence Daily, which shows assets down a mere $194 million through March 27. (Year-to-date through March 25, money market funds are down $44 billion, according to ICI's latest weekly "Money Market Fund Assets" report.) We review ICI's latest monthly "Trends," as well as its latest Portfolio Composition figures, below. ICI's latest "Month-End Portfolio Holdings of Taxable Money Funds" verified our previously reported sizable decreases in Agencies and TDs, and increases in Repo, CDs, and CP, in February. (See Crane Data's March 11 "News", "March Portfolio Holdings Show Drop in Agencies, TDs; Repo, CP Up.")
The Trends report says, "The combined assets of the nation's mutual funds increased by $501.83 billion, or 3.2 percent, to $16.24 trillion in February, according to the Investment Company Institute's official survey of the mutual fund industry.... Bond funds had an inflow of $17.41 billion in February, compared with an inflow of $10.11 billion in January.... Money market funds had an outflow of $14.21 billion in February, compared with an outflow of $33.44 billion in January. In February funds offered primarily to institutions had an outflow of $8.80 billion and funds offered primarily to individuals had an outflow of $5.41 billion." Money funds represent 16.5% of all mutual fund assets, while bond funds represent 21.7%.
ICI's latest Portfolio Holdings summary shows that Holdings of CDs (including Eurodollar) increased by $9.3B, or 1.5%, in February to $637.3B, after increasing $84.3 billion in January. CDs represent 26.3% of assets and are the largest composition segment. Repo holdings, the second largest segment, increased $12.8 billion, or 2.5%, in February (after decreasing $132.5B in January) to $534.8 billion. Repos represent 22.1% of taxable MMF holdings.
Treasury Bills & Securities moved up into third place despite decreasing by $9.5 billion, or 2.5%, in February to $383.7 billion (15.9$ of assets). Commercial Paper jumped to fourth, increasing $7.6B, or 2.1%, to $374.6 billion (15.5% of assets). U.S. Government Agency Securities fell from third to fifth after dropping $43.0 billion, or 11.2%, to $340.7 billion (14.1% of assets). Notes (including Corporate and Bank) dropped by $1.2 billion, or 1.5%, to $76.5 billion (3.2% of assets), and Other holdings (including Cash Reserves) increased by $10.5 billion to $71.8 billion.
The Number of Accounts Outstanding in ICI's series for taxable money funds decreased by 120.6 thousand to 23.237 million, while the Number of Funds remained the same at 364. Over the past 12 months, the number of accounts fell by 579.6 thousand and the number of funds declined by 17. The Average Maturity of Portfolios declined by one day to 43 days in February. Over the past 12 months, WAMs of Taxable money funds have declined by 5 days.
Note: Crane Data has updated its March MFI XLS to reflect the 2/28/15 composition data and maturity breakouts for our entire fund universe. Note too that we are now producing a "Holdings Reports Issuer Module," which allows subscribers to choose a series of Portfolio Holdings and Issuers and to see a full listing of which money funds own what paper. (Visit our Content Center and the latest Money Fund Portfolio Holdings download page to access our March Money Fund Portfolio Holdings and the latest version of this new file.)
In other news, a Working Paper was published by the European Central Bank (ECB) entitled, "Fragility in Money Market Funds: Sponsor Support and Regulation." (It was written by Cecilia Parlatore from the Wharton School, and we learned about it from an article in Chief Investment Officer magazine.) The paper's Conclusion says, "In this paper, I developed a novel model of MMFs to analyze the role of sponsor support in the industry's stability. The model incorporates several features that are characteristic of MMFs: the investors' ability to redeem their shares on demand, the stability of the NAV, the liquidation of the funds after breaking the buck, and, most importantly, the provision of voluntary sponsor support. The fluctuation in the value of the funds' assets is captured by shocks to the quality of risky assets which affect the equilibrium prices. The model shows that, even in the absence of investor runs, the MMF industry may be fragile. MMFs may subject to a source of fragility that differs from the canonical bank runs: there may be strategic complementarities in the sponsors' support decisions that may give rise to multiple equilibria and to runs of the MMFs on the asset market. Therefore, sponsor support, which is instrumental in providing stability to the MMFs after idiosyncratic shocks, may be not so effective when the shocks are systemic and it may even amplify them."
She continues, "I then use the model to analyze the trade-offs involved in the adoption of a floating NAV and of a capital buffer for MMFs. The consequences of the regulations depend on the interaction between potentially countervailing effects. Changing the institutional setup of the MMF industry would affect the risks and returns of intermediation for investors and MMF managers not only directly, but also through the change in equilibrium outcomes such as intermediation fees, the sponsors' support decision, and asset prices. The model allows me to take into account these general equilibrium effects, which seem particularly important given the relative size of the MMF industry in the market for short term financing. One of the key determinants of the overall effect of the policies is the elasticity of the supply of assets faced by MMFs. In light of this, the model suggests that a crucial piece in the policy analysis is whether other market participant would be able and willing to offer liquidity in the money market if MMFs were not there."
Federal Reserve Board Chair Janet Yellen delivered a speech Friday at the San Francisco Fed entitled, "Normalizing Monetary Policy: Prospects and Perspectives," where she confirmed market expectations "that conditions may warrant an increase in the federal funds rate target sometime this year." Her colleague, Fed Vice Chair Stanley Fischer, also spoke late last week in Germany on, among other things, the role of money market funds in the financial crisis. We review and excerpt these new comments below, and we also report on a new study by global insurer Swiss Re, which says monetary policy since the financial crisis has cost investors almost half a trillion dollars in interest income.
In her speech, Yellen discussed "why most of my colleagues and I believe the return of the federal funds rate to a more normal level is likely to be gradual," and she addressed the question, "[W]hy does the Committee judge that an increase in the federal funds rate target is likely to become appropriate later this year?" She commented, "Like most of my FOMC colleagues, I believe that the appropriate time has not yet arrived, but I expect that conditions may warrant an increase in the federal funds rate target sometime this year."
Yellen added, "The FOMC will, of course, carefully deliberate about when to begin the process of removing policy accommodation. But the significance of this decision should not be overemphasized, because what matters for financial conditions and the broader economy is the entire expected path of short-term interest rates and not the precise timing of the first rate increase.... More important than the timing of the Committee's initial policy move will be the strategy the Committee deploys in adjusting the federal funds rate over time, in response to economic developments, to achieve its dual mandate."
She concluded, "Let me first be clear that the FOMC does not intend to embark on any predetermined course of tightening following an initial decision to raise the funds rate target range -- one that, for example, would involve similarly sized rate increases at every meeting or on some other schedule. Rather, the actual path of policy will evolve as economic conditions evolve, and policy tightening could speed up, slow down, pause, or even reverse course depending on actual and expected developments in real activity and inflation. Reflecting such data dependence, as well as some historically unusual policy considerations that I will discuss shortly, the average pace of tightening observed during previous recoveries could well provide a highly misleading guide to the actual course of monetary policy over the next few years."
In other Fed news, Vice Chair Stanley Fischer spoke on, "The Importance of the Nonbank Financial Sector." (Last week, Fischer also gave a speech discussing the Fed's Reverse Repo Program -- see our March 25 "Link of the Day", "SEC's White Comments on Money Fund Reforms; Fed's Fischer on RRP.") Fischer latest speech said, "The nonbank financial system includes a diverse group of entities such as insurance companies, finance companies, government-sponsored enterprises, hedge funds, security brokers and dealers, issuers of asset-backed securities, mutual funds, and money market funds.... [B]ecause many nonbanks are connected to banks, a shock to the nonbank sector could in turn threaten the stability of the overall banking system--as happened in the unfolding of the Global Financial Crisis."
On the financial crisis, he said, "Some of the first cracks in the nonbank sector appeared in April 2007, when New Century Financial Corporation, at one point the second-biggest subprime mortgage lender, filed for bankruptcy.... A few months later, with subprime assets falling in value, money market investors refused to roll over the asset-backed commercial paper that had been funding many of these subprime assets. With this market shrinking dramatically, the banking sector was left on the hook to support entities that banks had sponsored or to which they had provided some form of credit or liquidity support.... By the dramatic month of September 2008, the chain of interconnections had helped spread the financial pain, and a broader range of firms were caught in the financial maelstrom."
Fischer continued, "Fannie Mae and Freddie Mac entered conservatorship. Lehman Brothers failed when its creditors ran from it as they had from Bear Stearns. American International Group, or AIG, had to be bailed out primarily because of its inability to post enough collateral to cover liabilities on credit protection it had sold on many entities (including Lehman) and because it lost funding in the securities lending market. The Reserve Primary fund, a money market mutual fund, "broke the buck" as a result of its holdings of Lehman securities. Banks were not immune to the financial market stress of this period, but they were far less involved in the unfolding of the crisis than were nonbanks -- a phenomenon that highlighted the importance of the nonbank sector and the vulnerability of the financial system to its distress. When nonbanks pulled back, other parts of the system suffered. When nonbanks failed, other parts of the system failed."
He added, "A crisis as deep as the Global Financial Crisis was bound to produce widespread regulatory changes.... A second nonbank reform has been the Securities and Exchange Commission's (SEC) adoption of new rules for money market mutual funds. Specifically, the SEC will require prime money market funds sold to institutional investors to publish a floating net asset value and to restrict withdrawals through a system of gates and fees. These rules, while as yet untested, are designed to reduce the likelihood of runs on prime money market funds."
Finally, a study by Swiss Re entitled, "Financial Repression: The Unintended Consequences," says that while the Fed's actions were beneficial to managing the financial crisis, they came with a substantial cost. The press release of the 34-page study says, "Seven years after the financial crisis, central banks are still keeping interest rates at historically low levels. Low interest rates help finance governments' debt and lower funding costs, as well as support growth. But such policy actions cause financial repression. This comes at a substantial cost.... [T]he impact of financial repression on markets is undisputable.... `[T]he impact of foregone interest income for households and long-term investors has become substantial: in the US alone, savers have lost about USD 470 billion in interest rate income (net) since the financial crisis (2008-2013)."
The study's "Foreward," written by Group CIO Guido Furer, says, "Central banks have done an extraordinarily good job of stabilising financial markets, restoring economic confidence and fighting the threat of deflation -- no question about that. But seven years after the financial crisis, interest rates are still being kept at historically low levels, mainly due to the ongoing low growth environment. Do low interest rates really help to overcome the global economic malaise? Doubts abound. They certainly do have one effect: That is, helping governments to direct funds to themselves to finance their debt and lower their funding costs -- a set of policies known as financial repression. Indeed, policymakers' actions to manage the financial crisis resulted in significant benefits for society at large. But today, the advantages of those ongoing actions are outweighed by their costs. As well as resulting in lower interest earnings on savings, financial repression serves as a disincentive for policymakers to tackle pressing public policy challenges."
On Tuesday, we excerpted the first half of an article from our latest Bond Fund Intelligence (see our March 24 "News" "New Bond Fund Intelligence Profiles JPMorgan's Martucci and Rehman), Crane Data's new product which tracks the bond mutual fund marketplace. Today, we reprint the second half of our interview with JPMorgan Asset Management Managing Director & Portfolio Manager Dave Martucci and Managed Reserves Investment Policy Committee Chairman and Risk Manager Saad Rehman. Martucci runs the $6 billion JPMorgan Managed Income Fund, which is the largest fund we currently track among BFI's "Conservative Ultra Short Bond Fund" category. Part II follows:
BFI: Where would Managed Income fit in the spectrum of funds in the conservative ultra short space? Martucci: I think the Managed Reserves Strategy and our Managed Income Fund, more specifically, is on the more conservative end of this segment. This is by design, and it will serve us well in the coming period of increased volatility. The real question is, do clients understand how conservative ultra short funds are positioned in terms of both rates and credit? This will drive volatility and performance.
BFI: What does the fund buy? Martucci: In line with our objective to provide current income while minimizing volatility, our strategy focuses on investment grade investments, only those with a maximum maturity of three years and in. Our interest rate duration is typically between 1/4 year and 3/4 of a year, and we have a target spread duration of one year and in. We're not going out and buying significantly longer securities that traditionally can be found in more core fixed income or intermediate-type funds and hedging the duration risk.
From an instruments standpoint, we'll do Treasuries, Agencies, money market instruments (CP, TDs, and, CDs), corporate bonds, sovereigns and supranational, triple A asset-backed securities, and some Treasury futures. We do not invest in MBS in the fund and we do not invest in below investment grade securities. From a sector standpoint, we run around a 40% exposure to banks; a prime money market fund will be significantly higher, close to double that. In the asset-backed space, we focus on consumer receivables that have limited extension risk. They are all going to be triple-A rated, mostly concentrating on the one year average life and in.
BFI: How has regulation affected your trading strategy? Martucci: One of the benefits of the regulations for this space is that it has created a much shorter roll-down strategy. On the one hand you have money funds being told that they have to hold much more liquidity, and on the other, you have banks being told that they need to fund longer. The Managed Reserves strategy has stepped into this gap and seized that opportunity. In many instances, we are trading the same names you'll find in a money market fund, buying them out to 6-12 months and rolling them down the curve. So we leverage our money market fund expertise to deliver what we think is a very efficient conservative managed reserves strategy.
BFI: How integrated are you with the money fund team? Martucci: The strategy is managed separately and we have a separate trading desk. But we're a well integrated part of the Global Liquidity platform, sharing several resources. We have the same credit analysts and we share best practices in risk management. We understand that our clients have a longer time horizon, but we also understand that these investors want preservation of principal and low volatility. Importantly, we also share the same sales force. Our salespeople have a strong expertise in cash investment solutions, which allows them to offer their clients the full spectrum of our products, including Managed Reserves.
BFI: Are you seeing interest from the longer end as well as from clients in MMFs? Martucci: We're seeing interest from clients at both ends of the yield curve. Some sophisticated clients who are looking for protection in a rising rate environment have started to move down the curve. But then you also have clients in the traditional money market space who are not only searching for incremental returns but also face the prospect of floating NAVs. Rehman: An influx of clients is now entering the conservative ultra short space. We think that this growing segment can be better understood and navigated when clients have a clear picture of these funds' risk-return profiles.
Note: Crane Data's newest product, Bond Fund Intelligence, tracks the bond mutual fund marketplace with an emphasis on the ultra-short bond fund segment. BFI's complement, Bond Fund Intelligence XLS, is a monthly spreadsheet with performance and statistics on the largest bond funds and ultra-short bond ETFs. The monthly BFI newsletter is $500 a year, or $1,000 including BFI XLS. ("Site licenses" are $2K/yr.) Let us know if you'd like to learn more about these new products (e-mail info@cranedata.com for the latest issue), and watch for our Bond Fund Intelligence website (bondfundintelligence.com) to go live in the second half of 2015.
Wells Fargo Securities released a new "Money Market Monitor" commentary late yesterday, which discusses "Tier 2 Commercial Paper." Wells Strategist Garret Sloan writes, "We have been riding on the Tier-2 commercial paper bandwagon for quite some time, thus we approach this subject with perhaps a bit more enthusiasm than the truly dispassionate observer. Tier-2 commercial paper has ebbed and flowed in terms of its basis between tier-1 CP and total issuance outstanding, but the recent spread widening and the increase in total CP outstanding has pushed the bounds of what we have historically witnessed during any given period of relative calm. It seemed to us, therefore, important to identify the current market environment for tier-2 CP as particularly unique in terms of value proposition."
He explains, "One of the primary concerns for short-term investors, in our view, is overexposure to the financial sector, and within that definition we would argue that banks represent the majority share. As banks rely on a funding model that attempts to exploit the upward slope of the yield curve (i.e. borrow short and lend long) they are invariably the largest and most consistent issuers in short-term markets. Moreover, banks provide liquidity and credit support to other short-term securities that some might not consider direct bank exposure. This includes the variable-rate demand note (VRDN) and asset-backed commercial paper sectors. Using money market fund portfolio holdings as a proxy for short-term financial exposure, current data suggests that prime funds are 78 percent exposed to the financial sector."
Sloan notes "the importance of including non-financial asset classes in short-term investment strategies," and continues, "It has been suggested that the rise in tier-2 commercial paper has largely been the result of the Federal Reserve's definition of what constitutes a Tier-2 security. Under current definitions, if a CP issuer is placed on negative credit watch its outstanding commercial paper is placed in the lower rating category.... But the data may be somewhat misleading. The growth in the tier-2 market cannot be wholly attributed to banks on negative credit watch.
He points out that tier-2 CP market growth was already on the rise in Q1 2014, writing, "Moreover, we estimate that once bank-related CP programs are on watch, outstanding balances began to run off.... If we assume that the Jan-April 2014 growth rate in non-bank-related tier-2 CP was sustained until March 2015, the true level of non-bank tier-2 CP outstanding would climb to just over $104 billion.... It suggests that the recent growth in tier-2 CP is primarily attributable to growth in non-bank tier-2 CP and only partially attributable to bank rating activity."
In other news, yesterday Chicago Fed President Charles Evans discussed why he thinks interest rates should stay put until 2016 and provided an inside look at the Fed's "dot plot." He said, "In the latest projections made just last week, 15 of the 17 FOMC participants expected that it would be appropriate to raise the federal funds rate sometime this year.... The "median participant" expects the target fed funds rate to be about 1-3/4 percent by the end of 2016. In other words, according to the median path for the target fed funds rate as projected by FOMC participants, rate increases of about 50 basis points for this year and 100 basis points next year are to be expected. The FOMC meets eight times a year. So, the projected path is consistent with a 25 basis point increase at every other FOMC meeting."
He added, "I should note that this would be a considerably slower, more gradual pace of rate increases than those implemented in 2004 through 2006 -- the last time the Fed normalized policy following an extended period of very low interest rates.... [M]arket expectations puts the target rate at the end of 2016 at about 1 percent -- 75 basis points below the median FOMC forecast."
Evans continues, "What is my personal view of the appropriate path for Fed policy? I think economic conditions are likely to evolve in a way such that it will be appropriate to hold off on raising short-term rates until 2016. Economic activity appears to be on a solid, sustainable growth path. However, inflation is low and is expected to remain low for some time -- and I have serious concerns that inflation will run even lower than I expect.... In summary, I think we should be cautious in raising interest rates."
Finally, PIMCO released its "9th Annual Defined Contribution Consulting Support and Trends Survey", which polled 58 consulting firms that represent $3.2 trillion in defined contribution/401(k) plan assets on trends in that marketplace. There were a couple of data points related to money market funds. One said that as a single, standalone strategy for capital preservation, 89% of consultants favored stable value funds, while 73% favored money market funds, over low-duration and short-term options. Also, 75% of consultants said it was important for fiduciaries to review their use of money funds in light of the SEC’s MMF reforms, while 23% said it was very important. Further, 75% of consultants said they were likely or very likely to recommend a switch from MMFs to stable value funds.
Treasury Strategies just published a white paper called, "Money Market Fund Regulatory Changes: The Impact of 2014 Regulations on Investment Policies," which examines what corporate treasurers need to know about money market fund reform. The 20-page paper was sponsored by Federated Investors, who wrote the introduction. They tell us, "Federated Investors' corporate clients are asking how these regulations impact them: What is needed to "adapt" to these new regulations? And must our investment policies be revised? We asked Treasury Strategies, the well-respected treasury management consulting firm, to help our clients address this question. This paper represents their suggested approach for corporate investors who are currently permitted to use Institutional Prime and Municipal MMFs in their short-term investment Portfolios."
Section I of the paper is an overview of the 2014 MMF reforms called "Understand the New Rules." Section II says "Examine Your Current Investment Policies" to make sure that money funds are still permitted after the implementation of new money fund rules. Section III, "Have a Conversation with Your CFO," talks about how to discuss the value proposition of MMFs.
Section III says, "Based on the policies we reviewed, we think few companies will have to formally change their investment policies to continue investing in MMFs. However, even if this is the case for your firm, it is certainly wise to brief your CFO (or head of the Investment Policy Committee or other appropriate person) about continuing to use MMFs. We suggest this discussion center around three ideas: The value proposition of using MMFs has not changed; Even with changes, MMFs still compare favorably with other permitted investments; New products are likely to be introduced and may need to be incorporated in the investment policy."
To the latter point, the paper says, "A logical consequence of the new MMF regulations is that fund companies, banks and other investment firms will devise new short-term investment products aimed at the corporate investor. We expect most new products will have features similar to money funds but with some structural differences. Some may be separately managed accounts (SMAs) with investment characteristics of money funds. Others may be commingled cash pools, again with MMF characteristics. Still others might register with the SEC as a type of ultra-short bond fund."
The paper continues, "Funds taking advantage of the conditions of the private offering exemption will be able to offer their units at $1.00 per share. In addition, funds that undertake to hold only portfolio securities with maturities of under 60 days may affect purchases and redemptions at $1.0000 per share, so long as each security's amortized cost is approximately the same as its market value, and the fund is not required to dispose of securities for more or less than their amortized cost.... To include a new product in your investment policy, it may suffice to incorporate "2a-7-like" language into the investment policy statement."
In section 4, "Develop an Action Plan," Treasury Strategy says, "Having talked with your CFO, you will hear four possible outcomes to the question of what is required to continue investing in Institutional Prime and Municipal MMFs. 1. No policy changes needed; continue investing as usual. This is straightforward. No change to the investment policy statement is required. Based on the investment policies we reviewed, we believe this may be the case for most U.S. corporations.... 2. No policy changes needed, but let's inform our Board about the regulatory changes.... 3. Let's tweak the policy to allow continued use of MMFs. If any of the new MMF attributes make them "prohibited investments" as specified in your policy, you need to update or eliminate that language."
The fourth possible outcome is "Let's tweak the policy to allow for new managers or new products." It says, "As discussed earlier, it is likely that during the two-year implementation period, several new 2a-7-like products will be developed. If your policy is not sufficiently broad, now would be a good time to modify it. What you choose to include here is a matter of your company's preference."
In summary, the paper comments, "Regulatory changes to Institutional Prime and Municipal MMFs are far less onerous than we once feared they would be. The value proposition of money funds remains intact, and the U.S. Treasury action will mitigate most, if not all, tax and recordkeeping concerns for the corporate investor. MMF changes have been regularly covered in the financial press, frequently with bits of misinformation or hyperbole. CFOs and Investment Committees are bound to wonder how their corporate treasurer views this issue and whether they will continue investing in MMFs. It makes sense to have a discussion with them about the MMF value proposition constancy, the parallels between post-change MMFs and your other permitted investments, and the continued valuable role you see for MMFs in your firm's short-term investment strategy."
It adds, "Historically, MMFs enjoyed an advantage over other money market instruments from net asset value, tax and recordkeeping perspectives. While some of those advantages are now diminished because of the fluctuating net asset value, MMFs are still on par with most other permissible short-term investments and deposits with respect to safety, liquidity, yield and convenience. Moreover, MMFs still enjoy an advantage over other instruments in terms of liquidity and transparency."
Finally, the piece adds, "The notion that fees and gates are problematic is a red herring. As we show in this report, these provisions provide a fund Board with additional investor protection tools. Further, the fees and gates provisions merely codify for money funds the actual liquidity limitations that exist for all money market instruments and bank deposits in times of market stress. After examining a large representative sample of our clients' investment policies, we conclude that most companies will not require formal policy change to continue investing in Institutional Prime or Municipal MMFs."
Today, we excerpt from the March issue of Crane Data's new publication, Bond Fund Intelligence, which tracks the bond fund marketplace with a focus on the ultra-short and most conservative segments. Our latest monthly "profile" follows.... This month, Bond Fund Intelligence interviews Managing Director & Portfolio Manager Dave Martucci and Managed Reserves Investment Policy Committee Chairman and Risk Manager Saad Rehman from JPMorgan Asset Management. Martucci runs the $6 billion JPMorgan Managed Income Fund, which is the largest fund we currently track in our Conservative Ultra Short Bond Fund category, and Rehman has been instrumental in the creation of our new "Conservative" category. We discuss risk management, the growing demand for short-term products, and conservative ultra short’s place within a cash segmentation strategy, below.
BFI: How long have you been involved in the conservative ultra short bond space? Martucci: JPMorgan Chase & Co. has been managing money for corporations, governments, endowments, foundations, and individuals worldwide for well over a century. Currently, J.P. Morgan Asset Management has $1.7 trillion in AUM, around 25% of which is in our Global Liquidity business, which we've been in for over 30 years. Within the Global Liquidity business we manage cash and money market fund portfolios, as well as our conservative ultra short bond fund offering, which we call the Managed Reserves strategy.
The strategy dates back to 2004 and currently has $43 billion in AUM. Of that, around $9B is in mutual funds and the remainder is in separately managed accounts. Within the Managed Reserves strategy is the JPMorgan Managed Income Fund (JMGIX), which was launched in 2010 and now has $6B, an all-time high. I'm the lead portfolio manager and head of our Managed Reserves trading desk. I have 15 years of experience running liquidity strategies, and I've also been a portfolio manager for short duration and intermediate portfolios.
Rehman: I am a Risk Manager and Chairman of the Managed Reserves Investment Policy Committee, which formulates and approves investment policies and procedures as they relate to credit, market, and other risks applicable to the investment management of these funds and accounts. I've worked at JPM for 10 years.
BFI: How has the fund been received? Martucci: We've seen a significant amount of interest recently, as clients continue to be challenged by the Fed's zero interest rate policy. Additionally, they now face the prospect of floating NAVs on the short end and rising rates on the long end. These clients are looking for some incremental return over money market funds, but they still want a conservative approach. Rehman: In the wake of the financial crisis, a lot of clients built up large cash positions on their balance sheets. This excess cash, combined with an effective segmentation strategy, has been driving growth in this space. A natural place to put a strategic cash position to work is in a conservative solution that offers an incremental return over money funds.
Martucci: This is where the Managed Reserves strategy comes in, as it was a natural extension of our well-established money market fund platform, leveraging the best practices and procedures that we employ in that platform. For instance, an approved credit list that you typically find in a money market fund has been built upon and expanded, serving as a key piece of our Managed Reserves strategy. Since the strategy launched, these conservative foundations have enabled Managed Reserves to provide a strong track record of consistent returns over money market funds, with very limited volatility. Since inception, the Managed Reserves composite has had no period of rolling three-month losses. Fund assets are at an all-time high.
BFI: What are the biggest challenges for funds in the conservative space? Martucci: The main issue that we see is the variability of funds in this category. The issue comes from trying to define what that conservative ultra short space is. We're happy that industry leaders such as Crane and others are starting to focus on this and trying to establish it as a category of its own. Clearly, the space is somewhere between money market funds and short duration. We believe that the conservative ultra short space is not determined solely by interest rate duration, but also by spread duration, credit selection, the type of securities these funds can and do choose to hold and, most importantly, the volatility of performance. We address all these factors through robust risk management.
Rehman: What clients are looking for in this space is not just returns, but the risk associated with those returns. We have seen a period of low volatility over the past few years, which we think is masking some of the potential downside. We expect to see more volatility, potentially due to diverging central bank actions, regulations for money market funds and banks, as well as geopolitical risk. With volatility, we expect that we'll start to see divergence in performance for these conservative ultra short funds. One of the factors driving that divergence will be credit selection in these funds. For example, some funds in the ultra short space actively participate in below investment grade credit while others, like JPMorgan Managed Income, do not.
There are many ways you can analyze the risk and returns of funds in the ultra short space. For example, when you look at the average monthly returns of these funds they are somewhat clustered tightly around a mean -- whereas there's a much wider range when you look at the volatility of those returns. Another way to get a general sense of how risky a fund's returns are is to compare the percentage of negative monthly returns over a period, such as the past 12 or 36 months. You can see that the percentage for some funds is almost double that of others in the space. (Note: Watch for more excerpts from our latest BFI "profile" in coming days, or contact us to see the full issue of our new Bond Fund Intelligence.)
There's been a lot of discussion in recent months on both negative yields and money market reform in Europe. Below, we review the latest statement from the Institutional Money Market Fund Association about the negative impact of negative interest rates in Europe. Also, in the March edition of Pricewaterhouse Coopers Ireland's Asset Management newsletter, authors Sarah Murphy and NJ Whelan recap the latest regulatory developments. We report too on a recent roadshow of the Irish Funds Industry Association in Boston where there was also some discussion of the proposed reforms. Finally, we also recap some recent statistics from our Money Fund Intelligence International and from our MFI International MF Portfolio Holdings dataset.
London-based IMMFA sent out a press release, "Negative Interest Rates and Euro-Denominated Prime Money Market Funds" in which it warns about the potential for negative MMF yields. It says, "Given the European Central Bank's policy stance on interest rates and its introduction of a minus 20 basis points deposit rate in September 2014, it is not surprising that many euro-denominated Prime MMFs are now yielding close to zero -- indeed barring some unexpected significant market change, it is highly likely that many funds will start to distribute a negative yield in the coming weeks. Euro MMFs' negative yields are a reflection of prevailing rates for short term investments generally. Indeed in moving towards negative territory, money market funds are simply following the trend in recent months of many banks and other investments in offering negative euro yields. This move in large part is due to the actions and policy stance of the European Central Bank."
It continues, "The value that investors place on MMFs is independent of the absolute level of return. IMMFA MMFs prioritise the preservation of capital, the diversification of credit risk, the provision of liquidity and they aim to generate returns in line with money market rates. In order to accommodate the possibility of unusual market conditions, many of our member firms have previously modified their fund structures to allow them to operate in a negative yield environment. Investors continue to value MMFs as a cash management tool and managers have sought to ensure that they are prepared to operate during these challenging market conditions. Informed investors appreciate that the continued focus by MMFs on the highest quality short term instruments is resulting in them returning a yield which, given the central bank's policy stance, may soon be negative."
The PwC report, "Money Market Funds -- The Ongoing Debate," examines where the proposal currently stands and where it might be headed. It recaps the initial reform proposal put forth by the European Commission in September 2013, which included the controversial 3% Capital Buffer on Constant NAV MMFs. The report says, "Since these draft proposals were issued there has been ongoing debate about the nature of the proposed reform and the impact on the industry. In early 2014 the ECON Committee failed to reach consensus on the proposals and over that summer with the European elections and a new presidency the process ground to a halt."
In October 2014, the debate resumed. "Following the formation of a new ECON committee in October 2014 progress has been made. In a first exchange of views the new Rapporteur stated that she would address the proposed MMF regulation in light of recent developments which included the SEC final rules that were issued in July 2014." In November 2014, the Rapporteur issued her draft report. "Her amendments in summary provided for the following: A carve out for EU public debt CNAV MMFs or retail CNAV MMFs; Buffer not on retail; Transition period of 3 months; Redemption gates and fees for all MMF other than EU public debt; Increased transparency and liquidity; Fees and gates."
It explains that, "In the meantime, the Italian presidency published a progress report and a further compromise text on the MMF proposed reforms before handing over to Latvia on 1 January 2015. This report set out the current position and acknowledged that while there was some "convergence" among the member states on some of the items under discussion, there were still "strong reservations" in relation to certain provisions. It also noted that "the definition of the scope and treatment of constant-NAV MMFs (was) the most disputed issue of this file" and given the difficulties of pursuing the approach based on NAV buffer, proposed -- through a non-paper -- an approach based on a mandatory transformation of CNAV funds into a new class of MMFs called Low Volatility NAV (LVNAV) MMF which would make use of the "penny-rounding method".... A further 704 amendments were submitted in addition to the 96 in November draft report and views were still divided and diverse on the main areas."
The report adds, "However on 26 February the ECON committee went ahead with the vote and adopted its position by approving a "draft law that would make MMFs safer, provide for more transparency, investor information and investor protection." In the draft report approved by the ECON committee, CNAV funds are limited to two types: I. Retail CNAV that would be available for subscription only for charities, non-profit organizations, public authorities and public foundations; and II. Public debt CNAV which would invest 99.5% of its assets in public debt instruments. In addition ECON proposed a new type of MMF -- a low volatility net asset value MMF (LVNAV) that might display a constant NAV but under strict conditions. Other matters included the following: I. Diversification of asset portfolios, strict liquidity and concentration limits and stress testing processes; II. Internal assessment procedures determining the credit quality of money fund instruments; III. Valuation of assets to be performed on a daily basis and published; IV. No external support from third parties, including sponsors; V. Application of fees and gates for public debt and retail CNAVs and LVNAVs in certain circumstances.... The plenary vote on the draft report issued by ECON is due to take place at the end of April, following which the Council must approve the Regulation before it becomes law."
The issue of European MMF reforms came up at the Irish Funds Industry Association's, recent "road show" in Boston, which updated attendees on developments in the European fund sector. Kevin Murphy, Partner at Arthur Cox, commented, "Money market funds, and CNAV in particular, make up a large portion of Ireland's funds industry. In reforming CNAV in the EU, the legislators need to be very careful that any changes they make to address their concerns are proportionate so that CNAV remains a viable product for investors who need a CNAV structure in Europe. A particular concern is the current proposal to have a five year sunset clause for certain CNAV funds which would mean those funds may not exist in five years unless the EU Commission determines otherwise. The problem with such a sunset clause is that fund promoters may decide not to launch new CNAV product in Europe if there is a risk the product cannot be sold after five years. Removing this sunset clause is a key priority for supporters of CNAV in Europe."
On another regulatory panel, one participant commented on money funds, "We're not there yet." He said of the recent amendments that "not all of them are appropriate," and told the gathering, "In Europe, we don't have [retail investors in money funds]." He added, "What we've done is informed our MEPs [and] had capital buffers [removed]." Finally, the panelist added, "We've got to address the source of the snowball and not wait for the avalanche." We must also "ensure the VNAV is understood."
William Fry's Cormac Commins said the issue is a key focus of the IFIA. The panel said the "voice of the investor" needs to be heard. "Too many times it's the last voice. We've got to make sure the investor's voice is heard." The regulations are headed to the EU Parliament in April to vote on the ECON proposal, and then they'll go to the Council for consideration. Once the Council agrees on a proposal, it will then go to "Trilogue." One panelist didn't expect the issue to be completed for at least a year, with the current Latvian presidency's time running out and Luxembourg taking over as head of the EU next. ("They won't touch it," he commented about Luxembourg.)
Note: Crane Data's Money Fund Intelligence International, which tracks European or "offshore" money market funds domiciled in Dublin and Luxembourg, currently shows Euro Money Fund 7-Day Yields Averaging -0.02%, USD Yields averaging 0.04%, and GBP (Sterling) Yields averaging 0.34%. Assets of Euro Money Funds have increased by E3.8 billion YTD through 3/19/15 to E94.5 billion, USD Money Funds have decreased by $11.1 billion to $372.7 billion, and Sterling MMFs have increased by L12.6 billion to L165.1 billion. Total assets tracked by MFI International have fallen sharply YTD in U.S. dollar terms, down $24.9 billion to $729.9 billion, due to the jump in the dollar.
Crane Data's latest MFI International Money Fund Portfolio Holdings collection, with data as of Feb. 28, 2015, shows the 5 largest Issuers to Euro Money Funds as: Republic of France (6.0% of holdings, or E5.5B), BNP Paribas (5.9%, or E5.4B), HSBC (4.2%, or E3.9B), Procter & Gamble Co (3.7%, or E3.4B), and Nordea Bank (3.7%, or E3.4B). The 10 largest Positions held by USD MMFs are: US Treasury (17.3%, or $77.5B), Credit Agricole (3.7%, or $16.8), BNP Paribas (3.3%, or $14.6B), Barclays PLC (3.1%, or $13.7B), Bank of Tokyo-Mitsubishi UFJ Ltd (2.5%, or $11.4B), Federal Reserve Bank of New York (2.5%, or $11.1B), Swedbank AB (2.1%, or $9.2B), DnB NOR Bank ASA (2.0%, or $9.0B), Sumitomo Mitsui Banking Co (2.0%, or $8.9B), and Lloyds TSB Bank PLC (2.0%, or $8.8B). And the 5 largest Issuers to GBP MMFs include: FMS Wertmanagement (4.4%, or L5.5B), Rabobank (4.0%, or L5.0B), HSBC (3.9%, or L4.9B), Sumitomo Mitsui Banking Co (3.7%, or L4.6B), Standard Chartered Bank (3.6%, or L4.4B).
Moody's Investors Service issued a statement yesterday that explains how recent bank rating actions will positively impact its money market fund ratings. The press release, entitled "Moody's Expects Outcome of New Banking Methodology to be Positive for Money Fund Ratings; No Change for Bond Fund Ratings," says "Moody's Investors Service expects recent bank rating actions, together with the intended introduction of Counterparty Risk (CR) assessments for senior bank obligations and counterparty commitments, to drive improvements in credit and stability profiles of rated money market funds (MMFs). On Tuesday 17 March, a large number of bank ratings were placed on review following the publication of Moody's new bank rating methodology. Our preliminary analysis of how potential rating changes may affect MMF portfolios indicate, on average, likely improvement in funds' credit matrix and net asset value (NAV) stress scores, two key metrics in our evaluation of MMFs. Of the 201 rated MMFs, less than 7% are potentially negatively impacted by Moody's bank rating actions based on most recent monitoring reports."
Moody's explains, "Many funds often invest in a variety of bank securities, and any changes in bank security ratings will impact certain of our analytic metrics. The analytic framework for rating MMFs focuses on two distinct factors: portfolio credit profile and portfolio stability profile. To assess the credit profile we evaluate the weighted average credit quality of a fund's portfolio, while for the stability profile we consider other factors that can affect a portfolio's stability including: weighted average maturity, asset concentration, liquidity, investor concentration and exposure to market risk under stress scenarios."
The release adds, "Rating downgrades of securities held in MMF portfolios affect two important elements of our MMF evaluation. Deterioration in portfolio credit quality will result in weaker Moody's Credit Matrix scores, which measures a MMF's maturity-adjusted credit profile, and lower NAV stress model scores, which measures the sensitivity of a portfolio to market risk, including credit spread shift due to assets' credit degradation. Our pro-forma analysis indicates that while exposure to banks that face potential ratings downgrades varies significantly from fund to fund, rated funds' aggregate exposure to the affected banks is small and tenor exposure to the affected banks is short. For MMFs that do show deterioration in key rating metrics, Moody's will gather additional information regarding exposure to the affected credit(s), as well as sponsors' plans for managing those exposures."
Further, "CR assessments were introduced in Moody's rating methodology titled, "Rating Methodology: Banks," published on Monday, 16 March. CR assessments constitute Moody's opinion of the probability of default on senior bank obligations and counterparty commitments other than debt and deposit instruments. Senior bank obligations and counterparty commitments include letters of credit, liquidity facilities, guarantees, swap agreements and other contractual obligations (e.g. repurchase agreements). The position of the CR assessment relative to rated instruments will depend on the presence and the type of operational resolution regime the bank operates in, but in all cases, the CR assessment will be no lower than the bank's Adjusted Baseline Credit Assessment."
Moody's continues, "Following the roll-out of CR assessments globally, we intend to use CR assessments as credit inputs in MMF ratings and specifically in Moody's Credit Matrix and NAV stress models for investments in repurchase agreements (excluding traditional repos), fully-supported asset backed commercial paper, VRDNs, derivatives and other securities supported by bank guaranties. Based on the expected position of CR assessments relative to our current input (rated senior debt), we believe using the CR assessment instead of the bank's senior unsecured rating as the credit input for the aforementioned security types in our credit matrix and NAV stress models will have a positive impact on funds' credit and stability profiles."
They explain, "Moody's expects to finalize its review of bank ratings, and to introduce CR assessments for the large majority of banks, in the first half of 2015. In the event that any deterioration in funds' credit and/or liquidity profile due to downgrades of bank securities is material, and is not offset by improvements due to the introduction of the use of CR assessments in our analysis, we would typically seek to initiate a rating review for any affected funds should fund managers' remediation plan fail to bring their metrics in line with our rating methodology thresholds."
The release concludes, "Moody's does not expect the recent bank rating actions to have a material impact on the weighted average credit quality of Moody's-rated bond funds. Moody's bond fund ratings speak to the credit quality of a bond fund's portfolio, also determined through the use of our Credit Matrix. After considering the possible bank rating actions, there would not be any impact on existing bond fund ratings."
As anticipated, the Federal Reserve's Federal Open Market Committee, which met March 17-18, indicates that it may no longer be "patient" in its stance toward normalizing interest rate policy, leading many to speculate that it is one step closer to raising rates. The FOMC hints that it is "unlikely" that the Federal Funds Rate will go up at the April meeting, it made no other predictions beyond April and wouldn't rule out a rate hike in June. The FOMC statement says, "To support continued progress toward maximum employment and price stability, the Committee today reaffirmed its view that the current 0 to 1/4 percent target range for the federal funds rate remains appropriate. In determining how long to maintain this target range, the Committee will assess progress -- both realized and expected -- toward its objectives of maximum employment and 2 percent inflation. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments."
It continues, "Consistent with its previous statement, the Committee judges that an increase in the target range for the federal funds rate remains unlikely at the April FOMC meeting. The Committee anticipates that it will be appropriate to raise the target range for the federal funds rate when it has seen further improvement in the labor market and is reasonably confident that inflation will move back to its 2 percent objective over the medium term. This change in the forward guidance does not indicate that the Committee has decided on the timing of the initial increase in the target range."
Further, "When the Committee decides to begin to remove policy accommodation, it will take a balanced approach consistent with its longer-run goals of maximum employment and inflation of 2 percent. The Committee currently anticipates that, even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run."
In a press conference after the FOMC meeting, Chair Janet Yellen elaborated on the committee's stance. "Today's modification of our guidance should not be interpreted to mean that we have decided on the timing of that increase," she said. "In other words, just because we removed the word patient from the statement doesn't mean we are going to be impatient." Yellen also explained what the FOMC meant by patient. "In December and January the committee judged that it could be patient in beginning to normalize the stance of monetary policy. That meant that we considered it unlikely that economic conditions would warrant an increase in the target range for the federal funds rate for at least the next couple of FOMC meetings. While it's still the case that we consider it unlikely that economic conditions will warrant an increase in the target range at the April meeting, such an increase could be warranted at any later meeting depending on how the economy evolves. This change does not mean that an increase will necessarily occur in June although we can't rule that out."
She also said that most participants had lowered their compared with the projections for the path of the Federal Funds Rate consistent with the downward revisions made to the projections for GDP growth and inflation. "The median projection for the Fed Funds Rate is just below 2% in the late 2016 and rises a bit above 3% in late 2017," Yellen said. "The median projected rate in 2017 remains below the 3.75% or so projected by most participants as the rate's longer run value." An examination of the Fed's "dot plot"" shows that the median rate is 0.77% at the end of 2015, 2.02% at the end of 2016, and 2.99% at the end of 2017.
RBC Capital Markets' Michael Cloherty writes, "The dots moved down significantly more than the market rallied since December. But after this market rally, the gap between the market and the dots remains extremely wide.... While the dots now signal a median and a mode of a 75bp IOER at the end of 2015, Fed funds suggests an IOER of about 65bps. For 2016, the median is consistent with a 2% IOER and the mode is consistent with a 1.75% IOER, while the market is suggesting roughly a 1 1/2% IOER. That is a tighter gap than we had before, but it is still a meaningful gulf. And for 2017, the median is consistent with a 3 1/4% target with the mode at a 3.25% target versus roughly 2% (or lower, depending on your term premium assumption) for the market. For the long run, the gap is wider than it was in Jan, as the market has fallen and the dots haven't moved much."
In other news, SEC Commissioner `Michael Piwowar was the keynote speaker at the ICI's "2015 Mutual Funds and Investment Management Conference" Monday, where he hit back at bank regulators and discussed hot topics in the fixed income and money market spaces. On the potential regulation of shadow banks, he said, "Notwithstanding the dire supposed need to have regulatory authority in the so-called "shadow banking" area, the track record of prudential regulators in identifying and acting upon systemic risks in the banking sector leaves much to be desired. Prior to 2008, prudential regulators allowed many large banks to become heavily reliant on very short-term borrowing, at relatively low rates, to fund lending and other operations. As the Fed has acknowledged, "[g]overnment agencies, including the Fed, failed to recognize the extent of the risks or how severely they could damage the financial system and the economy."
Also, on the temporary suspension of redemptions, he added, "In the immediate aftermath of the Reserve Primary Fund failing to maintain a $1 stable net asset value, the Commission adopted a temporary, then a permanent, rule under Section 22(e) that permits a money market fund to suspend redemptions during liquidation. In the June 2009 proposing release on money market funds, we asked whether such relief should be broadened to apply to all mutual funds. Although the Commission did not address that issue in the February 2010 adopting release, a number of commenters addressed the question."
ICI was live "tweeting" from the event and had just a few updates on money market fund related initiatives. One of their Tweets quotes from a panel featuring the SEC's Diane Blizzard: "We're planning on releasing some #MoneyMarketFund FAQs, to help with the latest round of regulatory reforms.... This should come out soon." ICI also Tweeted: "SEC realizes how much work enhanced reporting could be for funds" and "Other project is removal of credit-rating references from money market funds." (Follow @ICI and @cranedata on Twitter. Note: Crane Data normally "tweets" after updating our daily "News" and "Link of the Day" on www.cranedata.com.)
Is the liquidation of Reich & Tang's money market funds, and possible rollover to Federated, a sign of things to come? In a recent article called, "There's No Profit For You -- or Fund Companies -- in Money Funds," Marketwatch's Chuck Jaffe suspects the current money fund landscape will lead to further consolidation. He writes, "[W]hen Reich & Tang Asset Management announced last week that it's liquidating its money-market funds, it should have fired alarm bells with investors who use money funds as a safe haven for cash. While Reich & Tang is not a household name, it did have nearly $10 billion in money-fund assets, enough to rank as the 25th largest company in the money-fund game, according to Crane Data." (See our March 17 News, "Federated In Talks with Reich & Tang Over MMF Assets," and our March 13 "Link of the Day", "Reich & Tang Announces Liquidation of Money Market Mutual Funds."
Jaffe's piece continues, "And in exiting the business, Michael Lydon, Reich & Tang's president and chief executive officer, sounded a warning for the industry. "Given the ongoing regulatory changes that are being added to the already challenging landscape for money funds," he said, "the ability for mid-tier money-fund sponsor firms to thrive has become significantly diminished." Fund companies are waiving expenses mostly to make sure the funds don't break the buck, and regulatory changes hurt them by slightly hiking expenses -- since most people and firms will gravitate toward insured [sic]/Treasury funds which tend to be slightly higher in cost -- which means it will take even more time before running a money fund again becomes profitable. In short, there's no money to be made in money-market funds, except for the biggest of sponsors."
He adds, "The [Reich & Tang] news really highlights how long and painful the money market business has been for the fund industry," said Russel Kinnel, director of fund research at Morningstar Inc. "The giants have the scale and cost structures to minimize the pain, but it's hard for smaller companies to manage and they have steadily been leaving money markets for a few years now." Investors haven't left quite so fast; there's $2.7 trillion stashed in money funds."
Finally, Jaffe quotes Peter Crane of Crane Data, "Investors became desensitized to yield, they just stuck their heads in the sand and said 'Forget it' when rates went below one percent. There's a real question of when investors will become re-sensitized; they haven't seen anything good for so long, you have to wonder if they will jump at the first round numbers they see. Money funds used to be about convenience and yield, but without the yield advantage, the only reason to use them is if it's convenient." Crane added. "They'll be worth discussing more if and when they get their yield advantage back; we'll just have to see which companies are still in the business when that finally happens."
In other news, the Investment Company Institute released its latest "Money Market Fund Holdings" report, which tracks the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds (as of Feb. 28, 2015). ICI's "Prime and Government Money Market Funds' Daily and Weekly Liquid Assets" table shows Prime Money Market Funds' Daily liquid assets at 25.6% as of February 28, 2015, up from 25.4% on Jan. 31. Daily liquid assets were made up of: "All securities maturing within 1 day," which totaled 21.1% (vs. 20.8% last month) and "Other treasury securities," which added 4.5% (down from 4.6% last month). Prime funds' Weekly liquid assets totaled 37.9% (vs. 38.7% last month), which was made up of "All securities maturing within 5 days" (32.3% vs. 32.2% in January), Other treasury securities (4.9% vs. 4.4% in January), and Other agency securities (1.1% vs. 2.1% a month ago). (See also our previous Money Fund Portfolio Holdings story, Crane Data's March 11 News, "March Portfolio Holdings Show Drop in Agencies, TDs; Repo, CP Up.")
Government Money Market Funds' Daily liquid assets totaled 56.4% as of Feb. 28 vs. 58.1% in January. All securities maturing within 1 day totaled 24.6% vs. 26.3% last month. Other treasury securities added 31.8% (vs. 31.8% in January). Weekly liquid assets totaled 80.9% (vs. 78.7%), which was comprised of All securities maturing within 5 days (40.3% vs. 37.8%), Other treasury securities (29.3% vs. 29.9%), and Other agency securities (11.2% vs. 11.0%).
ICI's "Prime and Government Money Market Funds' Holdings, by Region of Issuer" table shows Prime Money Market Funds with 40.5% in the Americas (vs. 41.2% last month), 20.2% in Asia Pacific (vs. 19.5%), 39.0% in Europe (vs. 38.9%), and 0.3% in Other and Supranational (same as last month). Government Money Market Funds held 85.7% in the Americas (vs. 86.5% last month), 0.4% in Asia Pacific (vs. 0.3%), 13.9% in Europe (vs. 13.1%), and 0.1% in Supranational (vs. 0.1%).
The table, "Prime and Government Money Market Funds' WAMs and WALs" shows Prime MMFs WAMs at 44 days as of Feb. 28, same as last month. WALs were at 79 days, same as last month. Government MMFs' WAMs was at 42 days, down from 43 days last month, while WALs was at 80 days, up from 79 days. ICI's release explains, "Each month, ICI reports numbers based on the Securities and Exchange Commission's Form N-MFP data, which many fund sponsors provide directly to the Institute. ICI's data report for February covers funds holding 94 percent of taxable money market fund assets." Note: ICI publishes aggregates but doesn't publish individual fund holdings.
In their latest "Prime Money Market Fund Holdings Update," JP Morgan Securities', Alex Roever, Teresa Ho, and John Iborg comment, "During February, prime funds increased their exposures to banks by $14bn. This modest gain was driven primarily by a $15bn increase in time deposit holdings across several European banks, and a $12bn increase in CD holdings of Japanese banks. Conversely, holdings of ABCP declined by $5bn month-over-month, while repo allocations decreased by $8bn. At $136bn, money fund holdings of repo (ex RRP) are at their lowest levels since we began collecting this data."
They continue, "Our data shows that the top 25 bank issuers in the US money market are beginning to issue more in shorter maturity buckets. Year-over-year, outstandings of the top 25 bank issuers held by prime MMFs have increased by $65bn, the majority of which has been allocated in the 0-7 day maturity bucket. We suspect that concentration of issuance into the 0-7 day space may be the beginning of a broader trend in the months to come. As investors begin to migrate out of prime funds, and large fund families alter the structure of their complexes, portfolio managers are likely to focus more on ensuring ample liquidity and demand shorter maturity paper."
Finally, JPM Securities writes, "Money market funds took down $169bn or 82% of total RRP at the end of February. Prime funds took down $10bn of term RRP and $48bn of overnight RRP. Government funds took down $39bn of term RRP and $72bn of overnight RRP. Looking forward, we expect RRP usage to surge at the end of March as banks temporarily pull back on short-term funding for quarter-end. As banks engage in regulatory induced balance-sheet management, the RRP will serve as a viable source of backstop supply for money funds. This time around, $500bn in Fed RRP will be available at the end of the month ($200bn in term RRP + $300bn in overnight RRP). With the newly added counterparties and $500bn aggregate cap on the facility, using historical usage data we estimate that demand from money funds for RRP could now register around $370bn at the end of the month."
The changes in the money market fund world continue. Just last week, Reich & Tang, announced that they were liquidating their money market funds due to the "challenging landscape for money funds." A press release entitled, "Federated Investors, Inc. Announces Exclusive Arrangement with Reich & Tang Asset Management, LLC for Transition of Money Market Fund Shareholders informed us that Federated is in exclusive negotiations with Reich & Tang to allow Reich & Tang's MMF shareholders to transition into similar Federated MMFs. Reich & Tang is the 25th largest money market fund manager in the US with about $10.9 billion in assets. Federated is the fourth largest MMF manger in the US with about $258.8 billion in MMF assets. (For more, read our March 12 "Link of the Day," "Reich & Tang Announces Liquidation of Money Market Mutual Funds.")
The press release says, "Federated Investors, Inc., one of the nation's largest investment managers, today announced that it has entered into exclusive discussions with Reich & Tang Asset Management, LLC, to enable the shareholders of that firm's money market funds to transition into Federated money market funds with similar investment objectives."
Federated continues, "The exclusive arrangement, which resulted from ongoing discussions, is an initial step toward negotiating a final agreement for the transition of shareholders of Reich & Tang's money market funds into Federated's money market funds. The transition is being discussed to assist with the orderly liquidation of Reich & Tang's domestic and offshore money market funds. The final agreement remains subject to further discussions and negotiations between Federated and Reich & Tang. If a final agreement is reached, the transition of shareholders would be subject to various other contingencies, including obtaining certain shareholder, intermediary, regulatory and board consents, authorizations or approvals related to the liquidation and transition of the Reich & Tang money market funds. The announcement allows both companies to begin talking with clients and shareholders about a planned transition in advance of reaching a final agreement. Once a final agreement is executed, both companies would expect the transition to be completed in stages in late June through the end of July 2015."
The release adds, "The following Reich & Tang sponsored funds would be available to be transitioned: Daily Income Fund -- Money Market Portfolio; U.S. Government Portfolio; U.S. Treasury Portfolio; and Municipal Portfolio; California Daily Tax Free Income Fund, Inc.; and Daily Dollar International, Ltd., a Cayman Islands-domiciled money market fund open to non-U.S. investors. It is expected that the shareholders of these Reich & Tang money market funds would be transitioned into Federated money market funds with comparable investment objectives and strategies."
In other news, the Federal Reserve released the latest Z.1 "Financial Accounts of the United States" statistical release (formerly the "Flow of Funds") for the Fourth Quarter of 2014 was published last week. The four tables it includes on money market mutual funds show that the Household sector remains the largest investor segment, but Nonfinancial Corporate Businesses and Funding Corporations made the biggest jumps. Table L.206 shows the Household sector with $1.120 trillion -- or 41.7% of the $2.688 trillion held in Money Market Mutual Fund Shares as of Q4 2014. Household shares increased by $32 billion in the 4th quarter, but were down $10 billion year-to-date (after rising $21 billion in 2013). Household sector money fund assets remain well below their record level of $1.581 trillion at year-end 2008.
Nonfinancial corporate businesses were the second largest investor segment, according to the Fed's data series, with $556 billion, or 20.7% of the total. Nonfinancial corporate business assets in money funds increased $43 billion in the quarter and were up $35 billion YTD. In 2013, they increased by $40.5 billion. Funding corporations, which includes securities lenders, remained the third largest investor segment with $426 billion, or 15.8% of money fund shares. They increased by $40 billion in the latest quarter and have jumped $44 billion YTD. They dropped $58.8 billion in 2013. (Funding corporations held over $906 billion in money funds at the end of 2008.)
State and local governments held 6.2% of money fund assets ($166 billion). Private pension funds, which held $137 billion (5.1%), remained in 5th place. The Rest of the world category was the sixth largest segment in market share among investor segments with 4.4%, or $119 billion, while Nonfinancial noncorporate businesses held $84 billion (3.1%), State and local government retirement held $39 billion (1.5%), Property-casualty insurance held $22 billion (0.8%), and Life insurance companies held $21 billion (0.8%), according to the Fed's Z.1 breakout.
The Fed's "Flow of Funds" Table L.121 shows "Money Market Mutual Fund Assets" largely invested in Credit market instruments ($1.491 trillion, or 55.5%), which includes: Open market paper ($334 billion, or 12.4%; we assume this is CP), Treasury securities ($413 billion, or 15.4%), Agency and GSE backed securities ($385 billion, or 14.3%), Municipal securities ($282 billion, or 10.5%), and Corporate and foreign bonds ($78 billion, or 2.9%).
Other large holdings positions in the Fed's series include Security repurchase agreements ($645 billion, or 24.0%) and Time and savings deposits ($516 billion, or 19.2%). Money funds also hold minor positions in Foreign deposits ($24 billion, or 0.9%) and Miscellaneous assets ($17 billion, or 0.6%). Checkable deposits and currency went into negative territory with -$4 billion.
During Q4, Security Repos (up $69 billion), Agency and GSE Backed Securities (up $38 billion), Treasury securities (up $21 billion), Corporate and foreign bonds (up $7 billion), Municipal Securities (up $3 billion), Open Market Paper (up $2 billion), and Foreign Deposits (up $1 billion) showed increases. Time and Savings Deposits (down $16 billion), Misc. Assets (down $2 billion), and Checkable Deposits and Currency (down $1 billion) showed declines. (We're not aware of a detailed definition of the Fed's various categories, so aren't sure in some cases how to map some of these figures against other data sets.)
On Friday, Western Asset Management published a press release entitled, "New Regulations Set To Impact U.S. Money Market Funds According to Western Asset Management" and a white paper entitled, "The New Frontier: Managing Cash Investments," which discuss regulatory changes, cash segmentation and alternatives for investors. But the update does not give any indication on Western's plans for fund lineup changes. The paper, written by Portfolio Manager and Research Analyst Michele Mirabella, says, "For almost 40 years, money market funds have offered a comprehensive solution for cash investors by providing three main benefits -- preservation of capital, liquidity and yield -- all with a simple structure that has provided ease of use. However, in the years since the financial crisis, regulators have focused on ways in which they could avert a future financial crisis. As a result, stricter banking regulations and new money market fund rules were introduced. The new regulatory regime coupled with an environment of unprecedented low interest rates has fundamentally changed the dynamics of the short-term markets. Consequently, investors may find it increasingly challenging to capture all of the traditional benefits of money market funds. We believe these challenges have created opportunities for cash investors to take a more proactive and dynamic approach to their cash management strategies."
Western explains, "Between the regulatory overhaul and the unprecedented market conditions of today's environment, a fundamental shift has occurred in the way investors think of "cash." The historical approach of utilizing money market funds to provide a simple cash alternative by providing preservation of capital, liquidity and yield will be transformed in the near future. And while we still believe that money market funds will continue to provide investors many benefits, we think that cash investors should view this as an opportunity to take a more dynamic approach to their cash management strategies. By adopting a more efficient approach to managing risk and liquidity, cash investors can realign their cash needs to better meet their strategic objectives."
Mirabella adds, "One of the initial steps in this process is to establish or carefully review existing investment policies.... [C]ash investors may consider segmentation or cash bucketing. To clarify, cash can fall into a minimum of three distinct categories: operating cash, core cash and strategic cash. By allocating cash investments over multiple time horizons, investors may be able to achieve optimal returns by separating operational cash needs from longer horizon strategic needs. In the coming months, this simplistic approach may require additional precision as multiple strategies may need to be utilized for the deployment of operating cash."
In other news, at last week's "Conference on Financial Stability and Asset Management," hosted by ICI at Boston University, discussed whether asset management poses a threat to financial stability. Though not a focus, money market funds were mentioned several times throughout. ICI President & CEO Paul Schott Stevens commented, "In our judgment, neither regulated funds nor their managers pose threats to financial stability. The existing regulation and defining characteristics of regulated stock and bond funds, as well as their historical experience, render designation as SIFIs unnecessary and inappropriate."
He adds, "Yes, money market funds were caught up in the crisis, but the experience of long-term stock and bond funds was strikingly different. Unlike money market funds, their net asset value per share fluctuates daily. They are not designed as transactional vehicles. They did not experience redemptions of the kind that threatened prime money market vehicles in 2008. And, of course, the regulation of US money market funds has been comprehensively addressed -- not once, but twice -- since the crisis," added Stevens.
ICI Chief Economist Brian Reid, in his "Overview of the Asset Management," pointed out that the SEC has been accomplished two significant rulemakings since the financial crisis, both aimed at money market funds. The first occurred in 2010 and the second happened in July 2014. "We will see the effects of these rules over the next few months," he said. Already, the new rules are beginning to cause shifts in the market, he added, as some companies are moving from prime to government as a result of the rules.
In another panel discussion there was further discussion of regulations. "One of the narratives that has frustrated many in the industry, is that when asset managers engage in this debate, they are somehow trying to avoid tougher regulations," said Peter Stahl, Senior Vice President, Deputy General Counsel, Fidelity Investments. But the reality is that mutual funds are already "much more tightly regulated" than banks. He added that "to look at this through a SIFI lens is to take a solution and look for a problem."
In one of the last panels money market funds were also discussed. When asked if asset managers that act like banks, i.e. shadow banking, should be regulated differently, panelist Peter Wallison, of the American Enterprise Institute, said no. "If you are acting like a bank, you are engaged in maturity transformation -- that is the essence of banking. I don't understand how an asset manager can be engaged in maturity transformation," he said. But what about money market funds, he was asked. "Money market funds are short term assets. That isn't, as I see it, maturity transformation. Maturity transformation is using short-term liability toward the purpose of making long term investments and that's what is risky about banking." He reiterated, "I can't understand how asset managers could be said to be engaged in maturity transformation."
Finally, David Grim, Acting Director of the SEC's Division of Investment Management, said in a speech earlier this month, "Enhanced reporting facilitates our oversight of funds and assists staff in monitoring efforts. For example, since December 2010, money market funds have filed monthly reports on Form N-MFP with the Commission containing organized data formats relating to portfolio holdings. So far, we have received over 34,000 filings.... Data from these reports have been used extensively by staff to inform policy and rulemaking, and have assisted Commission staff in examination, monitoring and investor protection efforts."
He explained, "During the four years we have been receiving the data, the staff has been able to answer current questions [in real time] about the money market fund industry such as how much exposure did money market funds have to banks in a certain geographic region or country or what percent of money market fund assets were invested in a certain type of security. Just two weeks ago, we began publishing some summary trend data based on the information we get from Form N-MFP that we hope the public will find useful when analyzing money market funds, in addition, fund advisers and possibly their boards will find it useful to compare their funds to broad averages." (See the SEC's latest "Money Market Mutual Fund Statistics" here.)
Nancy Prior, President of Fixed Income at Fidelity Investments was the keynote speaker yesterday at iMoneyNet's Money Market Expo (MMX) which took place in Orlando this week. (Note: Crane Data produces MMX's main competitor, our Money Fund Symposium, which will be held June 24-26 in Minneapolis.) Fidelity released the transcript of the speech, titled "Money Market Funds: The New Reality." In it she explains Fidelity's move from prime to government funds, the market and supply implications of that move, and how Fidelity will still be a major player in prime funds. Here are some excerpts. (Note also our new "Link of the Day" on Reich & Tang exiting the money fund business.)
Prior began, "Last year, the title of my speech was "Let's Get It Right" -- "it" being the impending, long-anticipated, but still unfinished money market fund (MMF) regulation. This year, we're here to focus on "The New Reality".... And I am here to talk specifically about the implications of the new SEC rules, and about how we -- all of us across the industry -- are responding now; how we need to proceed over the next couple of years; and how it may impact our shareholders and the markets."
She continued, "Let me talk a little bit about how Fidelity has chosen to move forward and what went into our decisions, as I appreciate the fact it has implications for the MMF segment as a whole.... Our first priority was to make sure that our product line meets the needs of all of our customers. We started by reviewing all the investor use cases for our money market funds. Like other firms, our use cases are many and varied. On the institutional side, we have corporate treasurers who invest balance sheet cash for later capital spending, and companies who use funds regularly to meet payroll or other operating expenses. Our clients also include state and local governments, as well as nonprofits that use MMFs as an alternative to banks.... Other types of institutional clients -- which may be eligible to invest in retail funds under the new rules -- are bank trust departments, broker-dealers and other omnibus providers who invest money for individuals in large single trades. On the retail side, our MMF investors include retirement savers in 401(k) plans and IRAs, asset allocators and customers saving for a major purchase or life event. At Fidelity, the largest block of retail money market fund investors are brokerage customers who use a money market fund as a core account. That core account is where all mutual fund and security purchases settle. It is also often used to write checks, make ATM withdrawals and pay bills."
Prior explained, "During the latter part of 2014, we solicited a lot of feedback -- via surveys, investor forums, and direct client outreach -- to help us figure out what our lineup should look like in order to meet the specific needs of each customer segment. Our retail core account customers made it clear that they did not want any possible interruption in their ability to make trades, write checks or pay bills. I remember well one gentleman, who participated in one of our many client conference calls, and who demanded to know whether Fidelity was going to "break his trade" under the new rules for prime funds. And we saw similar objections in the surveys."
She said, "For example, in this slide of one of our customer polls, 53% of respondents told us that the possibility of fees or gates on their core account would cause them to make a change in their holdings. And of that 53% who were very likely or somewhat likely to make a change, 73% indicated they would pull all or most of their money out of an affected fund and move it to another investment at Fidelity."
Prior continued, "So, even with the assurance of a stable NAV for these retail funds, the very remote possibility of fees and gates is not acceptable to a certain segment of our customers. We heard the same from workplace savings plan sponsors and investors. The challenges of mandatory distributions, hardship withdrawals and regular defined contribution plan processing make prime funds less attractive to many DC plans. Given this direct feedback, we were driven by the idea of keeping things as simple as possible for our customers."
Further, she explained, "So, after careful deliberation, we determined it was in our customers' best interest that we recommend changes to the Fidelity funds' Board of Trustees for two uses of MMFs: brokerage core accounts and workplace savings plans. As a result, last month, after Board approval, we announced a proposal to convert three of our retail prime MMFs that are used primarily in core accounts or retirement plans, including our Fidelity Cash Reserves fund, to government MMFs. Assets from the three funds total about $130 billion."
Prior continued, "The Cash Reserves fund itself is about $110 billion of that total. As part of this rationalization of our lineup, we are also planning to merge several funds that have similar investment strategies. These mergers are intended to simplify and streamline Fidelity's MMF offering and make it easier for investors to choose a fund or class that best meets their needs. Importantly, though -- and I want to really emphasize this -- we will continue to offer a full suite of MMFs: Retail and Institutional Prime and Municipal funds, along with government and Treasury funds."
Prior commented, "Using iMoneyNet data as of year-end 2014, Fidelity's MMF asset mix is 62% prime, 21% government and 17% muni, with total assets of $420 billion.... If the three proposed conversions are approved, the composition of our assets would shift to be 31% prime, 17% muni and 52% government.... You can see that even when these conversions take place, we will likely remain among the top five prime MMF firms, with well over $100 billion in prime assets. So -- bottom line -- we will remain a major player in the prime market. We realize that these changes have implications for both our customers and the industry at large -- especially if other MMF advisors choose to follow a similar path, as it appears some will. We are confident, however, that our approach is sound and sustainable, and the right one for our shareholders."
Prior added, "Let's look at some of the market implications, and how they may play out. First, let's discuss the implications for the industry on available supply of government securities in the money markets. This slide, which cites data from J.P. Morgan, compares the available supply in government and prime securities with the assets of MMFs in those categories. What stands out immediately is how large the supply bar is when compared to government MMF assets. You can see that the total supply of MMF eligible government securities stood at $6.6T at the end of 2014. Obviously, there is demand for government securities from sources other than government and Treasury money market funds."
She said, "However, the government securities market is enormous, at close to $7T. So each $100B in incremental demand represents just 1.5% of the available supply. While we do not know other firms' plans, let's just use Moody's estimate of an additional $100-$200 billion of assets' converting to government from prime, which may end up being high. Taking the middle of that range -- $150 billion -- and adding that to Fidelity's proposed conversions gets Moody's total estimate to $280 billion. That additional $280 billion in demand represents only about 4% of the total supply of government securities. So, standing where we stand right now, we believe that the converted MMF assets within the industry will have no trouble finding investments in the government market.... There continues to be adequate supply for prime MMFs, but we are seeing a trend of regulatory changes causing financial institutions to issue less short-term paper."
She continued, "As we know, investors in MMFs have historically had three goals: NAV stability, ready liquidity and market yield. Like many other firms, we at Fidelity have managed our MMFs with those priorities, in that order, for decades. The new rules make it challenging to deliver on all three going forward. Government funds are able to pursue the first two goals of NAV stability and ready liquidity, but there may be a trade-off for customers in the form of slightly lower investment returns via government, as opposed to prime, MMFs. This is something that investors will need to be informed of and understand. It's an open question, however, how significant that trade-off will be, and how it will influence investors' decisions."
Prior commented, "Of course, the planned transition of assets from prime funds to government funds will have an impact on yields, and the yield spread between government securities and prime securities such as commercial paper and CDs is likely to widen. But quantifying just how much is difficult, not only because we don't know how big the shift will be, but also because there are dynamics in the supply for prime securities that will continue to put downward pressure on their supply, which will, in turn, pressure yields lower."
She told the Orlando audience, "Now, I would be remiss if I did not talk today about the many reasons for optimism in the MMF industry going forward. Because, at long last, the climate in which we will be implementing these changes appears to be an improving one. The final SEC MMF regulations are now known, and we are all in the process of adopting them. Meanwhile, the extraordinarily difficult interest-rate environment we've endured for seven years appears, finally, to be improving -- though it is fair to say I state that with "cautious optimism." At any rate, for the first time in a long time, we can see daylight for our industry and for MMF investors."
Finally, Prior concluded, "As we proceed into 2016, we will focus on some of the other changes we're required to make -- adopting the fees and gates requirement for all prime and municipal MMFs, and the floating NAV for institutional prime and muni funds. Right now, we are hard at work, setting ourselves up to comply with the new rules. As we continue to get our houses in order -- seeking approvals from fund boards and shareholders -- we will put our product lineups in the right place to begin implementing the structural changes. It will be a massive effort for all of us, and it's just ramping up. The near- and long-term future will not be without continued challenges, but I believe we have the potential to emerge stronger, and certainly more resilient, than ever. Our true north remains our mutual commitment to ensuring the safety, stability and viability of the money market product for our customers."
Fitch Ratings lifts some of the mystery surrounding Chinese money market funds in a new report, entitled, "Chinese Money Market Funds: Growth Set to Slow." The update, authored by Charlotte Quiniou, Director of Fitch's Fund and Asset Manager Rating Group, charts the explosive growth of the money market funds in China over the last two years and looks at where they are headed. Quiniou writes, "Chinese MMFs have experienced a rapid expansion since mid-2013, after 10 years of slow development since the first Chinese MMF was launched in 2003. At the beginning of 2015 there were 231 active MMFs in the market with total assets of CNY2.2trn (USD353bn), more than six times total assets of CNY360bn at end-2Q13. China was the fifth-largest MMF domicile globally according to ICI as of end-3Q14. The number of the MMFs has increased at a steady pace despite periodic industry outflows. Assets are largely concentrated in a small number of large funds; two of them -- Tian Hong Zeng Li Bao (Yu'E Bao) and ICBC Credit Suisse MMF -- have assets over CNY100bn, while 45% have less than RMB1bn of assets."
She continues, "The largest five asset managers in MMF assets represent more than half of the market (51% compared with 43% in 2Q13). They typically provide investors with MMFs of various features (credit quality, duration, distribution channels) to meet different investment objectives. The sharp and fast expansion of Tian Hong Asset Management (THAM), through its Tian Hong Zeng Li Bao fund linked to Alibaba's online investment fund (Yu'E Bao), raised the company to the top position in MMF assets managed since 4Q13. The fund was launched in June 2013 and can be bought through online payment via Alipay. The market share of THAM in MMFs peaked at 35.3% in 1Q14, from only 1.4% in 2Q13. That fund is almost exclusively retail driven and reached CNY579bn at the beginning of 2015."
Fitch writes, "As this fund and other e-commerce related funds are primarily retail focused, their asset bases may be less stable than those of institutional money funds.... Other market leaders experienced multi-fold increases in their MMF assets after the mid-2013 market downturn. Many MMFs offer shares for retail investors (share A) and institutional investors (share B). MMFs are typically distributed both online and via more traditional channels."
Further, they comment, "Fitch rates six Chinese MMFs, five of them managed by asset managers, which are joint ventures between local companies and established western firms, and one by a security firm. These MMFs target institutional investors and differentiate themselves from the retail MMFs with more conservative strategies, higher credit quality, shorter maturity and stronger diversification guidelines. Fitch believes that an international JV partner may give these funds a competitive advantage in servicing international corporates with RMB cash management needs given their typical global presence and experience in managing MMFs in other jurisdictions –notably Europe, the US and Australia. All of them are rated AAAmmf(chn) on the national scale, which reflects the funds' strong capacity to achieve the investment objective of preserving principal and providing shareholder liquidity. This is done through limiting credit, market and liquidity risk, relative to all other short-term investments in China."
Fitch adds, "The spurt in MMF growth over the past 18 months was mainly driven by retail demand. Retail investors accounted for almost three-quarters of Chinese MMF assets as of 2Q14 compared with the almost even split between retail and institutional investors in mid-2013. Retail demand has been driven by attractive MMF yields relative to bank deposit rates, ease of access and limited alternative investment opportunities. Internet technology development has made the purchase of the funds more convenient and rapid. All of the big three Chinese internet and E-commerce companies (Baidu, Alibaba and Tencent) have their own asset management partners and provide MMFs, which can be purchased and redeemed online. Institutional demand for money market funds is growing albeit at a slower pace than retail demand. The liberalisation of the Chinese domestic market and the internationalisation of the Chinese renminbi have attracted more institutional investors. Multinational companies are increasingly accepting Chinese MMFs as an effective cash management product diversifying counterparty risk. CIFM MMF, the largest Fitch-rated institutional MMF, has grown substantially during the past years to over CNY70bn (USD11.3bn)."
Quiniou explains, "The overnight SHIBOR (Shanghai Interbank Offered Rate) hit a record high of 13.44% during the tight liquidity at end-June 2013. This led to a rise in MMF yields at the time, accompanied by outflows and pressure on the mark-to-market net asset value (NAV) of many Chinese MMFs, which are by nature heavily exposed to interbank and short-term bond markets. Certain unrated funds saw material mark-to-market declines in their NAVs… Three months later the market stabilised. By the beginning of 2014 just before the Chinese spring festival, the average yield of Chinese MMFs had increased to more than 5.6% and many MMFs realized an annualised seven-day average yield of above 6%. Money fund yields have declined since the Chinese spring festival in 1Q14, when the government injected liquidity into the market to bring down finance costs for the real economy. The PBOC cut the one-year deposit rate to 2.75% from 3% and the one-year lending rate to 5.6% from 6% in November 2014. The current average yield of the MMFs was around 4.5% at the beginning of 2015. Money fund yields are still higher than bank deposit rate despite an overall declining trend. They remain attractive to some investors for yield compared with other short-dated products."
She comments, "The asset allocation of Chinese MMFs in terms of security is homogenous given the regulatory framework and market supply. Differences between funds appear primarily in liquidity and maturity management as well as the degree of issuer selectivity. Instruments held include short-term bonds, bills (when available), term deposits, mostly negotiable and repos. Retail MMFs invest heavily in negotiable term deposits and bonds. Bonds have steadily gained weight since 1Q14, after a drop in 2H13, reaching late 2012 levels. Given that most of the bonds bear fixed rates and are of longer maturity than negotiable deposits, these funds have increased their sensitivity to potential interest-rate volatility."
The Fitch paper explains, "AAAmmf(chn)-rated funds (and similar) have a greater focus on short-dated assets of high credit quality, notably short-dated exchange-traded repos. This reflects their primary objective of providing investors with liquidity and principal stability, which often means lower yields compared with most retail-oriented Chinese MMFs.... There are some signs that asset managers have turned to longer-dated assets to increase MMFs' yields and stay competitive. 38% of the funds have a WAM longer than 90 days. Liquidity management is challenging for retail MMFs. In the event of large outflows, assets would need to be sold, potentially at a discount, if the primary liquidity of the funds itself were not sufficient to meet the redemptions. Yu'E Bao has steadily increased its WAM from 44 days at end-3Q13 to 93 days at end-4Q14, effectively almost doubling its duration risk. The AAAmmf(chn)-rated funds keep liquidity well under control with WAMs under 40 days as of end-2014."
Finally, the report says, "Fitch believes there could be greater differentiation of funds and asset managers in 2015 while overall yields are lower. While some funds will strive for higher yields, others will emphasise their conservative fund management style, experience (potentially including international experience for those fund managers with an international JV partner) and sound governance."
Crane Data released its March Money Fund Portfolio Holdings late yesterday, and our latest collection of taxable money market securities, with data as of Feb. 28, 2015, shows a jump in Repo and CP, and drops in VRDNs, Agencies, Treasuries, CDs, and Other. Money market securities held by Taxable U.S. money funds overall (those tracked by Crane Data) decreased by $52.1 billion to $2.473 trillion in February, after increasing by $5.6 billion in January, $68.3 billion in December, $11.5 billion in November, and $4.7 billion in October. CDs remained in the top spot as the largest portfolio segment among taxable money market funds, ahead of Repos. CP moved into third place, jumping ahead of Treasuries. Agencies were fifth, followed by Other (Time Deposits) and VRDNs. Money funds' European-affiliated securities represented 29.1% of holdings, down from 29.3% the previous month, while the Americas' market share fell slightly to 58.5% from 58.8%. Below, we review our latest Money Fund Portfolio Holdings statistics.
Among all taxable money funds, Certificates of Deposit (CDs) were down $7.4 billion (1.3%) to $549.0 billion, or 22.2% of assets, after increasing $28.0 billion in January and dropping $34.8 billion in December. Repurchase agreements (repo) increased $10.8 billion (2.1%) to $531.7 billion, or 21.5% of assets, after dropping $141.5 billion in January and increasing $140.3 billion in December. Commercial Paper (CP) moved up to the third largest segment, jumping $8.2 billion (2.1%) to $397.4 billion, or 16.1% of assets.
Treasury holdings, the fourth largest segment, dropped $8.2 billion (2.0%) to $395.4 billion, or 16% of assets, while Government Agency Debt remained in fifth, decreasing $42.9 billion (11.1%) to $342.3 billion, or 13.8% of assets. Other holdings, which include primarily Time Deposits, dropped $2.4 billion to $236.7 billion, or 9.6% of assets. VRDNs held by taxable funds decreased by $10.3 billion to $20.0 billion (0.8% of assets).
Among Prime money funds, CDs still represent over one-third of holdings with 35.6% (up from 35.3% a month ago), followed by Commercial Paper (25.8%). The CP totals are primarily Financial Company CP (15.7% of holdings) with Asset-Backed CP making up 5.5% and Other CP (non-financial) making up 4.6%. Prime funds also hold 5.1% in Agencies (down from 6.3%), 4.4% in Treasury Debt (up from 4.2%), 4.3% in Other Instruments, and 6.2% in Other Notes. Prime money fund holdings tracked by Crane Data total $1.540 trillion (down from $1.577 trillion last month), or 62.3% of taxable money fund holdings' total of $2.525 trillion.
Government fund portfolio assets totaled $468 billion in February, down from $472 billion in January, while Treasury money fund assets totaled $465 billion in February, down from $476 billion at the end of January. Government money fund portfolios were made up of 55.8% Agency Debt, 22.4% Government Agency Repo, 2.6% Treasury debt, and 18.7% in Treasury Repo. Treasury money funds were comprised of 67.8% Treasury debt, 31.0% Treasury Repo, and 1.2% in Government agency, repo and investment company shares.
European-affiliated holdings fell $19.9 billion in February to $719.0 billion (among all taxable funds and including repos); their share of holdings fell to 29.1% from 29.3% the previous month. Eurozone-affiliated holdings fell $10.8 billion to $399.3 billion in February; they now account for 16.2% of overall taxable money fund holdings. Asia & Pacific related holdings increased by $5.8 billion to $305.8 billion (12.4% of the total). Americas related holdings plunged $38.0 billion to $1.445 trillion, and now represent 58.5% of holdings.
The overall taxable fund Repo totals were made up of: Treasury Repurchase Agreements (up $19.2 billion to $286.7 billion, or 11.6% of assets), Government Agency Repurchase Agreements (down $5.0 billion to $157.8 billion, or 6.4% of total holdings), and Other Repurchase Agreements (down $3.3 billion to $87.1 billion, or 3.5% of holdings). The Commercial Paper totals were comprised of Financial Company Commercial Paper (up $9.8 billion to $241.2 billion, or 9.8% of assets), Asset Backed Commercial Paper (down $5.7 billion to $85.4 billion, or 3.5%), and Other Commercial Paper (up $4.2 billion to $70.8 billion, or 2.9%).
The 20 largest Issuers to taxable money market funds as of Feb. 28, 2015, include: the US Treasury ($396.2 billion, or 16.0%), Federal Home Loan Bank ($203.6B, 8.2%), Federal Reserve Bank of New York ($160.9B, 6.5%), BNP Paribas ($69.3B, 2.8%), Wells Fargo ($69.1B, 2.8%), Credit Agricole ($69.0B, 2.8%), JP Morgan ($57.8B, 2.3%), Bank of Tokyo-Mitsubishi UFJ Ltd ($55.5B, 2.2%), RBC ($55.2B, 2.2%), Federal Home Loan Mortgage Co ($54.2B, 2.2%), Bank of Nova Scotia ($53.4B, 2.2%), Bank of America ($47.6B, 1.9%), Natixis ($45.6B, 1.8%), Sumitomo Mitsui Banking Co ($45.1B, 1.8%), Toronto-Dominion Bank ($43.3B, 1.7%), Federal Farm Credit Bank ($42.1B, 1.7%), Barclays PLC ($41.9B, 1.7%), Federal National Mortgage Association ($39.8B, 1.6%), Credit Suisse ($38.9B, 1.6%), and DnB NOR Bank ASA ($38.7B, 1.6%).
In the repo space, Federal Reserve Bank of New York's RPP program issuance (held by MMFs) remained the largest program with $160.9B, or 30.3% of the repo market, down fractionally from 30.6% a month ago. Of the $160.9B, $117.7 billion, or 73.2%, was in Overnight Repo, while $43.1 billion, or 26.8% was in Term Repo. The 10 largest Repo issuers (dealers) (with the amount of repo outstanding and market share among the money funds we track) include: Federal Reserve Bank of New York ($160.9B, 30.3%), Bank of America ($38.5B, 7.2%), BNP Paribas ($37.9B, 7.1%), Wells Fargo ($34.1B, 6.4%), Credit Agricole ($30.0B, 5.7%), Societe Generale ($28.1B, 5.3%), JP Morgan ($22.8B, 4.3%), Barclays PLC ($21.1B, 4.0%), Citi ($20.2B, 3.8%), and Credit Suisse ($19.3B, 3.6%).
The 10 largest issuers of CDs, CP and Other securities (including Time Deposits and Notes) combined include: Bank of Tokyo-Mitsubishi UFJ Ltd ($48.9B, 4.6%), Sumitomo Mitsui Banking Co ($45.1B, 4.3%), Credit Agricole ($39.0B, 3.7%), DnB NOR Bank ASA ($38.7B, 3.7%), RBC ($38.6B, 3.7%), Toronto-Dominion Bank ($38.3B, 3.6%), Bank of Nova Scotia ($37.9B, 3.6%), Natixis ($37.6B, 3.6%), Wells Fargo ($34.9B, 3.3%), and JP Morgan ($34.6B, 3.3%).
The 10 largest CD issuers include: Bank of Tokyo-Mitsubishi UFJ Ltd ($38.6B, 7.1%), Toronto-Dominion Bank ($37.4B, 6.9%), Sumitomo Mitsui Banking Co ($37.0B, 6.8%), Bank of Nova Scotia ($31.5B, 5.8%), Mizuho Corporate Bank Ltd ($29.5B, 5.4%), Bank of Montreal ($26.3B, 4.8%), Wells Fargo ($26.1B, 4.8%), Rabobank ($24.9B, 4.6%), Natixis ($20.7B, 3.8%), and Sumitomo Mitsui Trust Bank ($19.5B, 3.6%).
The 10 largest CP issuers (we include affiliated ABCP programs) include: JP Morgan ($23.9B, 7.1%), Commonwealth Bank of Australia ($17.5B, 5.2%), Westpac Banking Co ($16.7B, 5.0%), RBC ($15.9B, 4.8%), Lloyds TSB Bank PLC ($14.3B, 4.3%), National Australia Bank Ltd ($11.9B, 3.5%), Australia & New Zealand Banking Group Ltd ($10.6B, 3.2%), Toyota ($10.1B, 3.0%), BNP Paribas ($9.6B, 2.9%), and Barclays PLC ($9.0B, 2.7%).
The largest increases among Issuers include: Wells Fargo (up $9.6B to $69.1B), Lloyds TSB Bank PLC (up $8.5B to $27.0B), Skandinaviska Enskilden Banken AB (up $3.0B to $31.5B), Goldman Sachs (up $2.9B to $13.4B), Bank of America (up $2.5B to $47.6B), Sumitomo Mitsui Trust Bank (up $2.4B to $21.0B), Norinchukin Bank (up $2.3B to $12.6B), Canadian Imperial Bank of Commerce (up $2.3B to $18.3B), ING Bank (up $2.2B to $28.9B), and Sumitomo Mitsui Banking Co. (up $2.0B to $45.1B).
The largest decreases among Issuers of money market securities (including Repo) in February were shown by: Federal Home Loan Bank (down $24.5B to $203.6B), Federal National Mortgage Association (down $9.1B to $39.8B), Federal Home Loan Mortgage Co. (down $8.2B to $54.2B), Nordea Bank (down $7.9B to $20.6B), US Treasury (down $7.4B to $396.2B), Citi (down $7.3B to $33.8B), Svenska Handelsbanken (down $6.5B to $23.5B), Standard Chartered Bank (down $5.1B to $15.9B), KBC Group NV (down $5.0B to $9.5B), and Natixis (down $4.4B to $45.6B).
The United States remained the largest segment of country-affiliations; it represents 49.3% of holdings, or $1.219 trillion (down $44B). France (10.3%, $255.4B) stayed in second, followed by Canada (9.0%, $222.8B) in third. Japan (7.5%, $186.4B) remained in fourth, while the U.K. (4.9%, $121.5B) was fifth. Sweden (4.3%, $105.6B) was sixth, followed by Australia (3.6%, $89.9B) in seventh. The Netherlands (3.0%, $75.0B), Switzerland (2.2%, $53.8B), and Germany (2.1%, $50.6B) round out the top 10 among country affiliations. (Note: Crane Data attributes Treasury and Government repo to the dealer's parent country of origin, though money funds themselves "look-through" and consider these U.S. government securities. All money market securities must be U.S. dollar-denominated.)
As of Feb. 28, 2015, Taxable money funds held 25.5% of their assets in securities maturing Overnight, and another 15.1% maturing in 2-7 days (40.6% total matures in 1-7 days). Another 19.9% matures in 8-30 days, while 12.3% matures in 31-60 days. Note that almost three-quarters, or 72.7% of securities, mature in 60 days or less, the dividing line for use of amortized cost accounting under the new pending SEC regulations. The next bucket, 61-90 days, holds 11.6% of taxable securities, while 12.0% matures in 91-180 days and just 3.7% matures beyond 180 days.
Crane Data's Taxable MF Portfolio Holdings (and Money Fund Portfolio Laboratory) were updated Tuesday, and our MFI International "offshore" Portfolio Holdings and Tax Exempt MF Holdings will be released later this week. Visit our Content center to download files or visit our Portfolio Laboratory to access our "transparency" module. Contact us if you'd like to see a sample of our latest Portfolio Holdings Reports or our new Holdings Reports Issuer Module.
Crane Data will publish its latest Money Fund Intelligence Family & Global Rankings Tuesday, which ranks the asset totals and market share of managers of money market mutual funds in the U.S. and globally. The March edition, with data as of Feb. 28, 2015, shows asset decreases for a majority of money fund complexes in the latest month. However, most managers show gains over the past three months (due to a strong December 2014). Assets declined by $1.8 billion, or 0.1%, in February; over the last 3 months, assets are up $40.0 billion, or 1.6%. For the past 12 months through Feb. 28, total assets are up $23.1 billion, or 0.9%. Below, we review the latest market share changes and figures. (These "Family" rankings are available to our Money Fund Wisdom subscribers.)
Dreyfus, Franklin, BofA, Western, SSgA, and BlackRock were among the biggest gainers in February, rising by $4.8 billion, $3.7 billion, $2.4 billion, $2.2 billion, $1.4 billion, and $1.1B respectively. (SSgA moved back ahead of Northern into 11th place). BlackRock, JP Morgan, Dreyfus, Northern, SSgA, and Morgan Stanley led the increases over the 3 months through Feb. 28, 2015, rising by $8.5B, $5.9B, $5.6B, $4.4B, $3.9B, and $3.3B billion, respectively.
Our latest domestic U.S. money fund Family Rankings show that Fidelity Investments remained the largest money fund manager with $404.4 billion, or 15.6% of all assets (down $527 million in February, down $955M over 3 mos., and down $15.7B over 12 months), followed by JPMorgan's $254.1 billion, or 9.8% (down $1.9B, up $5.9B, and up $4.7B for the past 1-month, 3-months and 12-months, respectively). BlackRock remained in third with $217.5 billion, or 8.4% of assets (up $1.1B, up $8.5B, and up $16.0B). Federated Investors was fourth with $207.2 billion, or 8.0% of assets (down $3.4B, up $2.1B, and down $11.2B), and Vanguard ranks fifth with $173.0 billion, or 6.7% (up $893M, up $605M, and down $995M).
The sixth through tenth largest U.S. managers include: Dreyfus ($171.7B, or 6.6%), Schwab ($161.8B, 6.2%), Goldman Sachs ($145.6B, or 5.6%), Wells Fargo ($112.2B, or 4.3%), and Morgan Stanley ($110.2B, or 4.2%). The eleventh through twentieth largest U.S. money fund managers (in order) include: SSgA ($83.8B, or 3.2%), Northern ($83.2B, or 3.2%), Invesco ($61.2B, or 2.4%), BofA ($50.9B, or 2.0%), Western Asset ($47.3B, or 1.8%), First American ($41.7B, or 1.6%), UBS ($37.1B, or 1.4%), Deutsche ($33.3B, or 1.3%), Franklin ($22.5B, or 0.9%), and RBC ($16.7B, or 0.6%). Crane Data currently tracks 71 managers, down one from last month. (See our March 6 "Link of the Day," MMF Assets Down, RBB Liquidates and our March 5 "News," "Touchstone Rescinds Liquidations, Moves to Dreyfus; MFS Goes Govt" for recent consolidation news.)
Over the past year through February 28, 2015, BlackRock showed the largest asset increase (up $16.0B, or 7.9%), followed by Morgan Stanley (up $9.9B, or 9.9%), Goldman Sachs (up $9.3B, or 6.8%), Western (up $7.7B, or 19.4%), Northern (up $6.5B, or 8.5%), and SSgA (up $5.2B, or 6.6%). Other asset gainers for the year include: JP Morgan (up $4.7B, or 1.9%), First American (up $4.2B, or 11.2%), Franklin (up $3.9B, 20.9%), HSBC (up $3.3B, or 31.4%), American Funds (up $1.3B, or 9.1%), and SEI (up $1.3B, or 10.7%). The biggest decliners over 12 months include: Fidelity (down $15.7B, or -3.7%), Federated (down $11.2B, or -5.1%), UBS (down $5.2B, or -12.3%), UBS (down $3.3B, or -16.5%), Wells Fargo (down $2.3B, or 2.0%, and Schwab (down $3.0B, or -1.8%). (Note that money fund assets are very volatile month to month.)
When European and "offshore" money fund assets -- those domiciled in places like Dublin, Luxembourg, and the Cayman Islands -- are included, the top 10 managers match the U.S. list, except for Goldman moving up to No. 4, and Western Asset appearing on the list at No. 9. (displacing Wells Fargo from the Top 10). Looking at the largest Global Money Fund Manager Rankings, the combined market share assets of our MFI XLS (domestic U.S.) and our MFI International ("offshore"), the largest money market fund families are: Fidelity ($418.2 billion), JPMorgan ($381.9 billion), BlackRock ($338.6 billion), Goldman Sachs ($228.9 billion), and Federated ($215.8 billion). Dreyfus/BNY Mellon ($198.2B), Vanguard ($173.0B), Schwab ($161.8B), Western ($128.4B), and Morgan Stanley ($126.3B) round out the top 10. These totals include offshore US Dollar funds, as well as Euro and Pound Sterling (GBP) funds converted into US dollar totals.
Also, our February 2015 Money Fund Intelligence and MFI XLS show that yields remained largely unchanged in February. Our Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 836), remained at 0.02% for both the 7-Day Yield and the 30-Day Yield (annualized, net) Average. The Gross 7-Day Yield remained at 0.14%. Our Crane 100 Money Fund Index shows an average 7-Day Yield and 30-Day Yield of 0.03%, same as last month. (The Gross 7- and 30-Day Yields for the Crane 100 remained at 0.17%.) For the 12 month return through 2/28/15, our Crane MF Average returned 0.02% (up a tick) and our Crane 100 returned 0.02%.
Our Prime Institutional MF Index yielded 0.03% (7-day), while the Crane Govt Inst Index moved down to 0.01% (from 0.02%). The Crane Treasury Inst, Treasury Retail, Govt Retail and Prime Retail Indexes all yielded 0.01%. The Crane Tax Exempt MF Index also yielded 0.01%. (The Gross Yields for these indexes were: Prime Inst. 0.21%, Govt Inst. 0.11% (up from 0.10%), Treasury 0.07% (up from 0.06%), and Tax Exempt 0.10% (down from 0.11%) in February. The Crane 100 MF Index returned on average 0.00% for 1-month, 0.01% for 3-month, 0.00% for YTD, 0.02% for 1-year, 0.03% for 3-years (annualized), 0.05% for 5-year, and 1.52% for 10-years.
In other news, Reuters wrote, "U.S. Fund Demand for Reverse Repo Agreements Seen at $350 bln-JPMorgan.” It says, “U.S. money market funds are expected to bid for $350 billion worth of the Federal Reserve's reverse repurchase agreements (RRPs) for the upcoming end of the first quarter, J.P. Morgan analysts said on Monday. There is typically huge demand for the Fed's reverse repos and near-cash securities at the end of the quarter as investors pare their positions in riskier holdings. "Over the past several quarter-ends, the Fed RRP has proven to serve as a source of backstop supply when liquidity temporarily dries up in the money markets," J.P. Morgan analysts wrote in a report. In addition to its daily RRP operation that has a cap of $300 billion, the U.S. central bank has said it will offer two term RRP operations that mature past March 31. On March 19, it will offer a $75 billion term RRP operation that matures on April 2, followed by a $125 billion term operation that matures on April 6."
By now most investors are familiar with the pending SEC money fund reforms, but what about the knock-on effects of these reforms? What will they mean for investors? Northern Trust tackled some of these questions in a white paper released last week called "SEC Money Market Reform: Investor Implications." Author Jennifer Sheroian, short duration fixed income portfolio manager, writes, "While firms have approximately two years to implement these reforms, late 2015 and 2016 will prove pivotal for transition and change. Here is what we believe investors should expect heading into and after implementation. In the next 12-24 months, money market fund investors are likely to see: More liquidity, shorter maturity; More reliance on Federal Reserve's Reverse Repo Facility, U.S. Treasuries; and U.S. agencies; Steeper yield curve for credit; and, Narrowing spread for overnight investments."
Under "More liquidity and shorter maturity," the piece says, "Portfolio managers likely will increase liquidity and shorten weighted average maturity to prepare for potential outflows from institutional prime and tax-exempt MMMFs as the SEC compliance deadline approaches. Institutional prime MMMFs could accomplish this by decreasing their exposure to corporate debt -- mostly financials -- and increasing their exposure to U.S. Treasuries, U.S. agencies and repurchase agreements backed with government collateral. U.S. Treasuries and U.S. agency debt are the most liquid securities; therefore, portfolio managers would opt to hold these types of securities during a period of potential outflows."
Regarding the "Steeper yield curve," Northern says, "U.S. Treasuries and U.S. agency debt are the most liquid assets in the money market sector, defined primarily by the SEC Rule 2a-7 that governs registered MMMFs. Therefore, we expect institutional prime MMMFs will begin to increase their holdings of U.S. Treasuries and U.S. agencies to prepare for investors who wish to transition to a constant net asset value (NAV) government MMMF exempt from the SEC's mandated structural changes. We believe this may steepen the yield curve and widen spreads for eligible 2a7 investments, outside of U.S. Treasuries and U.S. agencies. Steepening could occur if prime MMMFs start reinvesting proceeds of their bank certificate of deposit (CD)/commercial paper (CP) maturities into U.S. debt instead of reinvesting it with financial institutions. Currently, three-month CDs have a spread of around 17 basis points (bps) over three-month U.S. Treasury bills. On average, three-month bank CDs yield around 19 bps compared to a three-month U.S. Treasury bill set at 2 bps. However, heightened demand for U.S. Treasuries and U.S. agencies ultimately could push yields lower and dampen demand for typical term investment instruments. These typical-term instruments, traditionally relied on by prime funds, could see yields spike in order to attract investors."
On "Narrower spreads for overnight investments, they comment, "Overnight maturity time deposits relied upon by money market funds would attract even higher demand as institutional prime 2a-7 funds build their overnight cash positions to prepare for potential outflows. In the current environment for overnight investments, most time deposits pay a premium over agency discount notes, repurchase agreements and the Federal Reserve's reverse repo facility, except on quarter-end and year-end. Even now, however, it is not unusual for financial institutions to limit the amount of overnight cash they accept. We expect this dynamic will continue, especially as banks conform to new regulations by lowering their needs for short-term funding and money funds demand a greater supply of time deposits, since they will be holding more short-term cash. The spread also could narrow among all overnight investment options as more cash is positioned at the very front end of the yield curve, chasing fewer assets."
Northern explains, "Firms also likely will manage institutional prime money market funds more conservatively to help ensure the funds are well-positioned to avoid instituting a liquidity fee or redemption gate if weekly liquid assets fall below the 30% threshold. As a result, these funds are likely to increase their allocation to instruments categorized as daily and weekly liquid assets. Daily liquid assets are comprised of cash, U.S. Treasuries and any security that matures in one business day or is subject to a demand feature that can be exercised and payable within one business day. Of course, weekly liquid assets include daily liquid assets but also include U.S. agency discount notes issued at a discount with a maturity within 60 days and any security that matures in five business days or is subject to a demand feature that can be exercised and payable within five business days."
Regarding a "Growing reliance on repo," the paper states, "Institutional prime money market funds will also rely more heavily on repurchase agreements as fund managers prepare for the possibility of potential outflows. This poses an interesting scenario, since dealer balance sheets have been declining due to recent bank regulations that somewhat handicap dealers' repo balances by making it more costly for dealers to fund." Specifically, they cite Basel III and the Liquidity Coverage Ratio as two regulations that are affecting the supply of repo. "Since the LCR requires banks to hold high quality liquidity assets against a 30-day stressed period of expected net cash outflows, this ultimately leads banks to limit their funding maturing within 30 days."
A section entitled, "Overnight RRP a lifesaver for MMFs?" tells us, "The Federal Reserve's Overnight Reverse Repo Facility is an alternative to dealer repos for 165 new eligible counterparties that currently include money market funds in excess of $5 billion assets under management, government-sponsored enterprises, banks and primary dealers. Since operational exercises for the facility began on September 23, 2013, the facility has seen the most demand when bank funding is most scarce.... One of the facility's goals is to help put a floor on short term interest rates. However, if the current process is not improved, it is unlikely this facility will become full allotment or that the number of counterparties will be expanded much beyond the current approved counterparties; therefore, the goal of setting a rate floor would become impossible. It also appears that the FOMC is perhaps rethinking the full allotment and that the program will remain capped at a certain dollar amount, especially after the steps taken to modify the program in September and December. A term reverse repo option was introduced in December to help alleviate year-end pains, like the overnight facility it was capped at the maximum $300 billion. They also have introduced additional testing of the term reverse repo facility for February and March 2015."
Finally, Northern says that "Demand may outstrip supply." They say, "We think these new MMMF reform regulations may foster strong demand that likely will outstrip supplies of high-quality, short-term assets. This could help keep yields in the short end of the curve relatively low even after the Fed starts tightening monetary policy and rates begin rising."
The March issue of Crane Data's Money Fund Intelligence was sent out to subscribers Friday morning. The latest edition of our flagship monthly newsletter features the articles: "Money on the Move? Keeping Up With Pending Changes," which estimates how much money will shift to various fund types and discusses other changes in the money fund world; "JP Morgan Sticks to Program; Announces Lineup Changes," about how JP Morgan is standing pat with its large Prime Institutional fund; and "Max 60-Day Maturity Funds: Federated Goes Its Own Way," a look at how Federated is changing its fund lineup with 60-Day maximum maturity funds. We also updated our Money Fund Wisdom database query system with Feb. 28, 2015, performance statistics, and sent out our MFI XLS spreadsheet shortly. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our March Money Fund Portfolio Holdings are scheduled to go out on Tuesday, March 10, and our March Bond Fund Intelligence is scheduled to ship next Friday, March 13.
The lead article in the latest issued of MFI is "Money on the Move? Keeping Up With Pending Changes." It says, "If the first couple of months of the year are any indication, 2015 will be filled with changes in the money fund world. As we have written about in MFI and on www.cranedata.com, money fund managers are not wasting any time getting ready for SEC reforms, which kick in October 2016. New funds are being announced, old funds are being converted, and that means money will be moving -- some in, some out, and some shuffling within. Let's take a look at the some of the recent changes and possibilities."
On the "Prime to Government Shift," the article comments, "Fidelity announced in late January that it was converting three Prime Retail MMFs to Government MMFs, including the largest money fund, the $112 billion Fidelity Cash Reserves. BlackRock, reports The Wall Street Journal, is also considering turning Prime Retail funds into Government funds. (See our table of the largest money fund managers along with their type of fund assets on p. 7.)"
In our middle column, we look at how JP Morgan Asset Management is responding to MMF reforms. It reads, "Since Fidelity Investments announced that it was revamping its money market fund lineup in response to SEC's reforms and investor demand in late January, two more major MMF managers have announced changes of their own, Federated Investors and J.P. Morgan Asset Management. The latter won't be making any changes to its largest MMF, the $64.9 billion J.P. Morgan Prime MMF, a prime institutional fund that will adopt a Floating NAV. But it did announce other changes."
The article continues, "J.P. Morgan, which is the second largest manager of money market funds globally with $384 billion, became the first money fund manager to designate which of its funds will be "Retail," "Institutional," or "Government," under the pending criteria established by the Securities & Exchange Commission in July 2014. The company also stated that it has no current intention of instituting liquidity fees or gates on any of the MMFs designated as Government MMFs."
The article on "Max 60-Day Maturity Funds: Federated says, "In a recent commentary, Garret Sloan, money market strategist with Wells Fargo Securities, said that he didn't expect a stampede of money managers to follow Fidelity's lead to move from prime to government funds. Rather, he said that money managers would choose to "go their own way." That's indeed been the case over these last few weeks. Case in point: Federated Investors, which is responding to SEC reforms by creating 60-day maximum maturity and under funds -- i.e. floating NAV funds that don't really float. However, the company also plans to have at least one longer duration Prime Institutional fund with a floating NAV."
It adds, "On Feb. 19, Federated Investors, the 4th largest money fund manager with $211 billion in assets, announced "phase one" of its post-MMF reform changes. The big change, which CEO Christopher Donahue has discussed in recent earnings calls, is to convert some of its Institutional Prime funds to 60-day maximum maturity funds, which are allowed to continue using amortized cost pricing, decreasing the likelihood that any floating NAV fund would actually float."
Crane Data's February MFI XLS, with Feb. 28, 2015, data shows total assets decreasing in February, the second month in a row, down $1.6 billion to $2.598 trillion, after falling $44.6 billion in January. Prior to January, assets had gone up each of the last 5 months of 2014. Our broad Crane Money Fund Average 7-Day Yield and 30-Day Yield remained at 0.02%, while our Crane 100 Money Fund Index (the 100 largest taxable funds) stayed at 0.03% (7-day and 30-day). On a Gross Yield Basis (before expenses were taken out), funds averaged 0.14% (Crane MFA, same as last month) and 0.17% (Crane 100, unchanged) on an annualized basis for both the 7-day and 30-day yield averages. Charged Expenses averaged 0.13% (up from 0.12%) and 0.14% (same as last month) for the two main taxable averages. The average WAMs for the Crane MFA and the Crane 100 were 41 and 44 days, respectively. The Crane MFA WAM was the same as last month while the Crane 100 WAM is down 1 day from the prior month. (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
We reported at the end of 2014 that Touchstone Investments would liquidate its money market funds (see our Dec. 26 News, "Touchstone to Liquidate Money Funds, Victim of SEC's MMF Reforms"), subject to approval by the fund's Board of Trustees. However, at its meeting on February 12, the board voted to change its plan to liquidate its money market funds. Instead, the $675 million Touchstone Institutional MMF, the $264 million Touchstone MMF S, and the $64 million Touchstone MMF will be reorganized and run by Dreyfus Corp. Touchstone's latest filing says, "At a meeting of the Board of Trustees of Touchstone Investment Trust (the "Board") held on February 12, 2015, the Board rescinded the plans to close and liquidate each of Touchstone Institutional Money Market Fund and Touchstone Money Market Fund (each, a "Fund" and together, the "Funds"). In addition, the Board approved, with respect to each Fund, an Agreement and Plan of Reorganization (the "Agreement") between the Fund and a comparable money market fund advised by The Dreyfus Corporation ("Dreyfus"), pursuant to which the Fund would be reorganized on a tax-free basis with and into the applicable Dreyfus money market fund."
It continues, "Specifically, pursuant to Touchstone Institutional Money Market Fund's Agreement, Touchstone Institutional Money Market Fund will be reorganized into Dreyfus Cash Management, advised by Dreyfus, and shareholders of Touchstone Institutional Money Market Fund will become shareholders of Institutional Class shares of Dreyfus Cash Management (a "Reorganization"). Pursuant to Touchstone Money Market Fund's Agreement, Touchstone Money Market Fund will be reorganized into General Money Market Fund, Inc., advised by Dreyfus, and Class A and Class S shareholders of Touchstone Money Market Fund will become shareholders of Class A shares of General Money Market Fund, Inc. (also, a "Reorganization")."
Touchstone's filing goes on, "A combined special meeting of shareholders of each of Touchstone Institutional Money Market Fund and Touchstone Money Market Fund is expected to be held on or about May 8, 2015 and approval of each Agreement will be voted on at that time. A joint proxy statement/prospectus containing more information regarding each reorganization will be provided in advance of the meeting to shareholders of record of Touchstone Institutional Money Market Fund and Touchstone Money Market Fund as of March 10, 2015. If an Agreement is approved at the combined special meeting and certain conditions required are satisfied, the Reorganization is expected to take place on or about June 5, 2015."
Touchstone will also reorganize its Tax-Exempt funds, the Touchstone Ohio Tax-Free MMF A and Touchstone Ohio Tax-Free MMF I, as well as the Touchstone Tax-Free MMF A and Touchstone Tax-Free MMF S. The Tax Free MMF filing says, "At a meeting of the Board of Trustees of Touchstone Tax-Free Trust (the "Board") held on February 12, 2015, the Board rescinded the plan to close and liquidate Touchstone Tax-Free Money Market Fund (the "Fund"). In addition, the Board approved an Agreement and Plan of Reorganization (the "Agreement") between the Fund and General Municipal Money Market Fund, a comparable money market fund advised by The Dreyfus Corporation ("Dreyfus") pursuant to which the Fund would be reorganized on a tax-free basis with and into General Municipal Money Market Fund. Specifically, pursuant to the Agreement, Touchstone Tax-Free Money Market Fund will be reorganized into General Municipal Money Market Fund, advised by Dreyfus, and Class A and Class S shareholders of Touchstone Tax-Free Money Market Fund will become shareholders of Class A shares of General Municipal Money Market Fund (the "Reorganization")."
It adds, "A special meeting of shareholders of Touchstone Tax-Free Money Market Fund is expected to be held on or about May 8, 2015 and approval of the Agreement will be voted on at that time. A joint proxy statement/prospectus containing more information regarding the Reorganization will be provided in advance of the meeting to shareholders of record of Touchstone Tax-Free Money Market Fund as of March 10, 2015. If the Agreement is approved at the special meeting and certain conditions required are satisfied, the Reorganization is expected to take place on or about June 5, 2015."
We also learned this month that MFS has switched both of its remaining Prime funds to Government money funds. Specifically, the MFS Money Market Fund, a Prime Retail Fund with $387 million in assets, converted into the MFS US Government Money Market Fund, according to SEC filings. Also, the $119 million MFS Cash Reserve Fund, a Prime Retail Fund with $119 million in assets, converted into the MFS Government Cash Reserve Fund. (These changes went into effect late last year, but the renaming will show up in our MFI XLS this month.)
In the respective filings, MFS says the "Principal Investment Strategies" of both of the funds were restated as follows: "MFS (Massachusetts Financial Services Company, the fund's investment adviser) normally invests at least 80% of the fund's net assets in U.S. Government money market instruments and repurchase agreements collateralized by U.S. Government securities. In buying and selling investments for the fund, MFS seeks to comply with Securities and Exchange Commission rules for money market funds regarding credit quality, diversification, liquidity, and maturity. MFS stresses maintaining a stable $1.00 share price, liquidity, and income."
MFS is not the only fund company to shift from Prime to Government in recent months. Fidelity announced in late January that it was converting three prime MMFs to Government MMFs, the $112 billion Fidelity Cash Reserves, the $12 billion Fidelity MMT Retirement Portfolio, and the $3 billion Fidelity VIP MM Portfolio. BlackRock, reported the Wall Street Journal, is also considering shifting Prime Retail assets to Government funds.
The Federal Reserve Bank of New York announced new Term repos offerings for the March quarter-end in two new statements. The NY Fed's first new "Statement Regarding Term Reverse Repurchase Agreements says, "The Federal Open Market Committee (FOMC) instructed the Open Market Trading Desk (the Desk) at the Federal Reserve Bank of New York to conduct a series of term RRP operations that span the March 2015 quarter-end." It continues, "The tests will consist of two term RRP operations: a $75 billion, 14-day operation on March 19 and a $125 billion, 7-day operation on March 30, with any unused capacity from the March 19 operation to be added to the offering size of the March 30 operation. The maturity date for the March 19th operation is April 2, while the maximum ON RRP offering rate is +5 basis points. The maturity date for the March 30th operation is April 6 and the ON RRP offering rate is also +5 basis points." The NY Fed's other Statement explains, "The tests will consist of four one-week term RRP operations to take place on successive Thursdays. The amount offered and maximum offering rate associated with each operation will be announced on or around the Monday prior to the operation."
At the Federal Reserve's Federal Open Markets Committee meeting in January, the board discussed the possibility of raising the ON RRP cap. The minutes for the January 27-28 meeting state, "The presentation discussed the possibility of establishing, on a temporary basis, an aggregate cap for ON RRP operations that was substantially above the cap the Committee had chosen for the purposes of testing such operations. In addition, the presentation discussed the possible use of term RRP operations, either before or after the commencement of policy firming, as a way to reinforce control of short-term interest rates and to manage the size of the ON RRP program."
It continues, "A couple of participants expressed continued concerns about the potential risks to financial stability associated with a large ON RRP facility and the possible effect of such a facility on patterns of financial intermediation.... While acknowledging these concerns, many participants believed that a temporarily elevated cap on the ON RRP operations at a time when the Committee saw conditions as appropriate to begin normalization would likely pose limited risks.... Some participants noted that a relatively high cap could be established and then reduced fairly soon after the initial policy firming if it was determined that it was not needed, and that such a reduction could help underscore the Committee's intent to use such a facility only to the extent necessary. A number of participants emphasized that the Committee should develop plans to ensure that such a facility is temporary and that it can be phased out once it is no longer needed to help control the federal funds rate."
Last week, the Federal Reserve released a paper, "Overnight RRP Operations as a Monetary Policy Tool: Some Design Considerations that examines the effects of the facility. It concludes, "An ON RRP facility offers a promising technical advance in the implementation of monetary policy. By making ON RRPs available to a broad set of investors, including nonbank institutions that are significant lenders in money markets, such a facility can complement the use of IOER and help control short-term interest rates. Indeed, the FOMC has stated that it intends to use an ON RRP facility for this purpose during the policy normalization process. At the same time, an ON RRP facility may have important secondary effects with both positive and negative implications."
It continues, "The FOMC has considered a range of issues associated with an ON RRP facility and has directed the Desk to test several design features of ON RRP operations, including some which might be used to address undesirable secondary effects. Results of the testing exercise in place since September 2013 have been quite encouraging and indicate that even capped offerings of ON RRPs can be effective in setting a floor for short-term interest rates. FOMC policymakers have generally agreed upon the importance of a successful commencement of the policy normalization process, and they have indicated that they will be prepared take the steps necessary to keep the federal funds rate within the target range established by the Committee."
In his most recent commentary, JP Morgan Securities' money market strategist Alex Roever says, "This begs the question of whether or not the current $300bn cap on the Fed RRP is sufficient for effectively influencing short-term rates outside of Fed Funds.... Given the regulatory-driven forces suppressing front-end yields, most notably deposit shedding by large banks and money market fund reform, we believe that increasing the aggregate cap on the RRP will become imperative for the Fed. Looking forward, it is likely that the March FOMC meeting will be the next opportunity we have to get more color from the Fed on this issue."
Roever adds, "The prospect of a growing supply-demand mismatch in short-term government securities is going to leave market participants looking to the Fed and hoping for some relief in the form of increased availability for both term and overnight reverse repos. The potential scale of regulation-based inflows into the money markets suggests the program may need to be substantially larger in order to accommodate the marginal demand. At various times, the Fed has expressed concern about upsizing the RRP program for reasons including possible financial instability that could be caused by deposits trying to access the Fed balance sheet as a safe haven during a future banking crisis. Conceivably this could happen if deposits shifted to MMFs that are RRP counterparties."
He adds, "Ironically, while prudential regulations that the Fed helped to put in place are stabilizing the banking system, deposits appear to be shifting from banks into the money markets anyway. Facing a dearth of investible product, MMFs are eyeing the Fed's balance sheet as the asset of last resort. While the Fed could choose not to increase the size of the RRP program in the face of growing demand, not accommodating the marginal demand could complicate the Fed's plans to raise short-term rates beginning later this year. Too much cash chasing too few assets does not make for higher yields."
In her March "Month in Cash" column, "Rate Hike Not the Only Issue to Play Out This Year," Federated Investors' Global CIO for Money Markets, Deborah Cunningham, writes, "You know things are getting interesting when the timing of the Federal Reserve's long-delayed hike in rates is not the most uncertain issue facing cash managers. Liftoff -- probably to another target range rather than a specific number -- is pretty much written in stone for 2015. It is just a question of the timing. At present, we think the move will take place midyear, in one of the two policymaking meetings of June or July. The consensus is around 70% for the hike to be approved at one of those two meetings, and nearly everyone agrees the latest it will come is at the September meeting."
She adds, "What's less clear is what path money funds will take to adapt to the Securities and Exchange Commission's 2014 ruling regarding them. If you recall, the SEC announced that starting in 2016, prime institutional money funds must state the value of its shares down to the fourth decimal place. This means a move from the stable $1 per share to a "floating" net asset value (NAV). There are many strategies out there for money market firms, from transitioning an institutional fund into a retail product (which are permitted to maintain the stable NAV), or changing a fund's composition, such as converting a prime fund into one that invests in government securities. While these potential moves will affect the competitive landscape, their effect on the supply of government debt could be a greater issue. There are plenty of short-term Treasuries available now. But if more players get in the game, the supply could diminish. For example, money currently invested in CDs, commercial paper, and the like could soak up Treasuries and agencies on a massive scale."
Cunningham concludes, "Even as we wait for its big decision, the Fed continues to give us plenty to handle on a weekly basis. It is constantly tweaking its reverse repurchase program (RRP) in an effort to "ensure that this tool will be ready to support the monetary policy objectives of the FOMC." In addition to the $300 billion overnight reverse repo program, the policymakers undertook four smaller weekly term operations and also announced a quarter-end term offering in March. Why all the complication? The Fed is experimenting with how the participants react to rate adjustments. Think of it as a litmus test to see what will work when the Fed raises the federal funds rate. These term reverse-repo offerings have not had a significant effect. Participants are generally not using all the overnight repo as it is, meaning that the Fed's guaranteed five-basis-point return has been often providing that crucial floor for participants."
Several large money managers have announced lineup shifts this year in response to new money market fund regulations, and it's likely that more will follow in the coming months. Mutual fund publication, Ignites, explored the new landscape in a webinar it hosted last week, entitled, "How Firms are Revamping Their Fund Lineups." The 45-minute session was moderated by ignites Managing Editor Beagan Wilcox-Volz and featured panelists Rick Holland, Head of Money Management and Fixed Income Funds Product Management at Charles Schwab, and Peter Crane, President of Crane Data.
Just a month ago, Fidelity announced that it will be converting three Prime funds to Government funds due to reforms, including the $112 billion Fidelity Cash Reserves. Also, Federated announced that it will be converting some of its Prime Institutional funds to 60-day maximum maturity floating NAV funds, funds that likely won't float because of the short duration. When asked if the SEC rules and subsequent product changes like these would lead to an increase or decrease in MMF assets, 81% of the webinar audience said it would lead to a decrease in MMF assets, with 67% of that total saying a slight decrease. About 19% said assets would increase, while 17% expected a substantial decrease.
Crane agreed with the minority "increase" camp, due primarily to forces not related to SEC MMF reforms. "I'm going to go with the under. The last several years people have been predicting large outflows from money funds and the assets have been basically flat. Within money market funds there's clearly going to be a lot of shifts and a lot of pressure to move towards government. But there are external factors that I believe are going to be pushing an awful lot of money into money funds from bank deposits and bonds." Citing a recent article in The Wall Street Journal on the subject, Crane said new banking regulations could discourage large banks from holding deposits. "I don't think it's out of the question that $1 trillion moves out of bank deposits over the next few years."
Crane also predicted that as much as $500 billion could move out of bond funds, depending on the direction of interest rates, which are expected to go up this year. "I also don't think it's crazy to say there may be big flows from bond funds -- which have doubled in assets since 2008. They are now $3.5 trillion, so there's almost $2 trillion that's flowed into bond funds seeking more yield over the last several years."
Crane showed a chart that illustrated the asset breakdown of money funds. Of the $2.7 trillion total, the largest chunk, about one-third or $900 billion, is in Prime Institutional while nearly $600 billion is in Prime Retail. "One of the big variables we're going to be dealing with going forward is the reclassification of Prime Institutional and Prime Retail and that's expected to slice off at least 5-10 percentage from Prime Institutional." He asked, `Of that $1.5 trillion in Prime Institutional and Prime Retail, how much is going to move into government? Holland believes that the volume of flows depends on the type of money fund. "To the degree that your business is heavily skewed toward retail investors, you are less likely to experience significant outflows from money market funds than you would be if your client base is exclusively or predominantly institutional."
Schwab is among the many MMF managers that have not yet announced any changes as a result of the rule changes, but Holland discussed the factors his firm is weighing. "From the initial stages of this debate about the need for additional money fund reform, the discussion has rightly focused on the fact that institutional and retail shareholders behave differently. We feel it's appropriate that the decision about product offerings and enhancements are made with the new definitions of retail and institutional investors in mind. The vast majority of our client base, 80%-90%, is comprised of what will now be defined as retail shareholders who will very likely qualify for the retail exemptions. Life doesn't change that much for them."
He adds, "However, we do have institutional shareholders and we are in the process right now of identifying which additional products we will need to create for those investors. Secondly, the vast majority of our shareholders use money market funds in a sweep capacity as opposed to a position-traded or a purchased money market fund. The complexities of offering a VNAV in a sweep versus a position-traded fund are paramount and we have to consider those complexities when we look at whether or not we would offer product in both of those fund types."
Holland continues, "Our shareholders look at money funds as the best method of preserving capital, providing liquidity, and giving them transparency. We want to be sure that our clients, both on the retail and the institutional side, have a variety of ways to accomplish those objectives. Lastly, we feel that a high degree of education is appropriate at this point in time to insure that clients understand what the rule is about, what their options are, and the timetable under which we need to comply on their behalf."
In the Q&A portion of the session, one audience member asked if there will be a shift to Ultra Short Bond Funds. Crane responded, "Ultra Shorts to date have attracted a lot of assets, in the hundreds of billions. But they haven't attracted trillions, and the reason is that they are not giving a substantial yield advantage over money market funds. The risk of losing money to the VNAV isn't worth another 25 basis points to people. But higher rates could be the best thing that happens to them."
He added, "Fund companies have been out there selling the theme of putting cash in different buckets and my impression is that investors haven't been buying it. But going forward, if you get a 50 basis point spread between government funds and prime funds, and you get another 50 basis point spread between prime funds and Ultra Short funds, I believe that enough people will start bucketing their cash and putting money into Ultra Shorts.
There was also a question about "60-day maximum maturity" funds and whether they would generate interest. Crane answered, "This is dependent on rates scenarios and supply as well. Federated has been pushing this idea, and Invesco has had a 60-day product out there, the STIC Prime Fund. The question is, is there enough yield over a government fund to make it worthwhile? If you're getting 20 or 30 basis points over a government fund, and if a ton of money moves into the government segment and really flattens those rates, then it looks like the 60-day funds are going to be viable."
Another audience member asked about supply in the government money fund sector, or lack thereof, if there is a mass movement from prime to government. Holland said, "I think that's a real concern and certainly some of the activities that we have seen by some fund sponsors would lead us to believe that it would be wise to keep our eye on that ball. But from our perspective, looking at the retail shareholder, life doesn't change that much for them if they stay in a prime money fund, and we are of the opinion that a lot of our shareholders will continue to do just that. I do think that the potential for flows from retail prime into government has possibly been overstated and I think we'll have a little bit of relief there in terms of supply."
Crane added, "The Fed says that its Reverse Repo Program will continue [for now]. But if that thing goes away, there's no room for anybody in the government space. There are major issues with supply in the current environment, let alone some future actions that could shift things so it becomes a real squeeze."
Finally, on investors' concerns about gates and fees, Crane states, "The no-brainer is to go government, but you may want to keep that prime option open. We've come through a period of 6 years where investors were looking for safety and have become "de-sensitized" to yield. But investors at some point will become "re-sensitized" to yield. All of a sudden, if there are [as expected] 50 or 100 basis point spreads, they will care, and money [will] start moving." He continues, "As people learn about the gates and fees -- and I always use the term "emergency gates and fees" because these things are only going to be used in a major event -- [they'll realize that only] a September 2008-type scenario, where 20% of your liquidity is stripped away in the course of days, will trigger these."
Money fund assets rebounded last week to end February roughly flat. This follows a sharp decline in January, which broke a 5-month winning streak for MMFs. Assets have declined in six out of 8 weeks YTD in 2015, and they should remain weak until we move past the April 15 tax filing date. Over the past 4 weeks, money fund assets have declined by $11 billion according to ICI's weekly, though Crane Data's MFI Daily shows MMF assets up $5 billion in February through 2/26. We review the Investment Company Institute's latest weekly money fund statistics, as well as their latest monthly "Trends" report and Portfolio Composition figures for January, below. We also report again on the news out of Europe (see Friday's "Link of the Day"), where controversy continues to rage over pending money fund reforms.
ICI's latest weekly "Money Market Mutual Fund Assets" report says, "Total money market fund assets increased by $10.28 billion to $2.69 trillion for the week ended Wednesday, February 25, the Investment Company Institute reported today. Among taxable money market funds, Treasury funds (including agency and repo) increased by $4.19 billion and prime funds increased by $7.74 billion. Tax-exempt money market funds decreased by $1.65 billion.... Assets of retail money market funds decreased by $4.05 billion to $896.09 billion.... Assets of institutional money market funds increased by $14.33 billion to $1.79 trillion."
ICI also released its latest monthly "Trends in Mutual Fund Investing, January 2015" late last week, which shows that total money fund assets decreased by $33.4 billion in January to $2.692 trillion. MMF assets had been on a hot streak, increasing by $81.4 billion in December, $21.1 billion in November, $19.2B in October, $22.7B in September, and $34.0 billion in August. Year-to-date through Jan 31, ICI's monthly series shows money fund assets were down by $33 billion, or 1.2%.
The Trends report says, "The combined assets of the nation's mutual funds decreased by $117.61 billion, or 0.7 percent, to $15.73 trillion in January, according to the Investment Company Institute's official survey of the mutual fund industry.... Bond funds had an inflow of $9.98 billion in January, compared with an outflow of $19.09 billion in December.... Money market funds had an outflow of $33.44 billion in January, compared with an inflow of $80.40 billion in December. In January, funds offered primarily to institutions had an outflow of $20.38 billion and funds offered primarily to individuals had an outflow of $13.07 billion." Money funds represent 17.1% of all mutual fund assets while bond funds represent 22.3%.
ICI also released its latest "Month-End Portfolio Holdings of Taxable Money Funds," which verified our previously reported sizable decrease in Repos and Treasurys, and increase in CP and CDs, in January. (See Crane Data's Feb. 12 News, "Feb. MF Portfolio Holdings Show Fed Repo Plunge, Jump in TDs, Europe.") ICI's latest Portfolio Holdings summary shows that Holdings of CDs (including Eurodollar) increased by $84.3B, or 15.5%, in January to $628.1B, after decreasing $79.6 billion in December. CDs represent 25.8% of assets and are the largest composition segment. Repo holdings, the second largest segment, decreased sharply, falling $132.5 billion, or 20.2%, in January (after increasing $124.6B in December) to $522.0 billion. Repos represent 21.5% of taxable MMF holdings.
U.S. Government Agency Securities moved up into third place despite decreasing $1.6B, or 0.4%, in January to $388.9 billion (16.0% of assets). Treasury Bills & Securities, which decreased by $31.1 billion, or 7.4%, fell to become the fourth largest segment. Treasury holdings totaled $388.9 billion (15.9% of assets). Commercial Paper remained the fifth largest segment, increasing $28.3B, or 6.4%, to $367.0 billion. They represent 15.1% of assets. Notes (including Corporate and Bank) dropped by $1.8 billion, or 2.3%, to $77.7 billion (3.2% of assets), and Other holdings (including Cash Reserves) increased by $22.4 billion to $61.3 billion.
The Number of Accounts Outstanding in ICI's series for taxable money funds decreased by 114.8 thousand to 23.359 million, while the Number of Funds decreased by 1 to 364. Over the past 12 months, the number of accounts fell by 615.0 thousand and the number of funds declined by 17. The Average Maturity of Portfolios remained the same 44 days in January. Over the past 12 months, WAMs of Taxable money funds have declined by 4 days.
Note: Crane Data has updated its February MFI XLS to reflect the 1/31/15 composition data and maturity breakouts for our entire fund universe. Note too that we are now producing a "Holdings Reports Issuer Module," which allows subscribers to choose a series of Portfolio Holdings and Issuers and to see a full listing of which money funds own what paper. (Visit our Content Center and the latest Money Fund Portfolio Holdings download page to access our February holdings and the latest version of this new file.)
Also, a new European money market fund reform proposal working its way through Parliament does not include the capital buffer, as we mentioned in yesterday's Link, "IMMFA Disappointed w/European Union ECON Committee Money Fund Regulations)." BlackRock explains in an update, "Today the European Parliament's (EP) Economic and Monetary Affairs Committee (ECON) voted on their initial position on European Money Market Fund (MMF) reform. This is very much the latest step in a broader regulatory process and does not represent the final rule of law. The regulatory process in the European Union is initiated with a proposal by the European Commission, which was released for MMF reform in September 2013. The subsequent process is for the European Parliament and European Council to separately review the text and suggest their amendments. Once the three institutions have finalized their review, they move to the trilogue process to agree a final text to be set as rule of law."
They continue, "The ECON vote today puts forth the following key suggestions: 1) Retail funds may retain a Constant Net Asset Value (CNAV); 2) Government funds that invest at least 99.5% of assets in government and government-guaranteed securities may retain a Constant Net Asset Value (CNAV), by 2020 to be EU government and government-guaranteed securities only; 3) Institutional style strategies will have the option to adopt either of the following structures: Low Volatility Net Asset Value funds that use amortised cost accounting (ACA) for securities maturing within 90 days and mark-to-market pricing for securities maturing after 90 days. The Low Volatility Net Asset Value structure is subject to a sunset clause, to expire within five years or at the Commission's review; or, Variable Net Asset Value (VNAV) funds that mark to market their full holdings."
On reform's next steps, BlackRock says, "The text approved today will be put to the European Parliament for a final vote in the April Plenary session. Secondly, the European Council is still to release its response and suggested amendments to the Commission's proposal. The Council Presidency currently lies with Latvia and there is a strong possibility that we will hear from the Council prior to the Presidency being handed over to Luxembourg at the end of June 2015. Thirdly, upon completion of the two steps outlined above the trilogue process can begin. In the trilogue process the three entities (Commission, Parliament & Council) will agree on a final text of regulation which will be passed as law." (For the Institutional Money Market Fund Association's reaction to the proposal, which we cited Friday, click here.)
