Federated Investors, the fourth largest manager of money market funds, reported its latest earnings late last week and hosted its quarterly conference call Friday. The earnings release, entitled, "Federated Investors, Inc. Reports Third Quarter 2016 Earnings," shows that lower fee waivers continue to be a bright spot in the otherwise cloudy and rapidly-changing money fund sector. It says, "Federated Investors, Inc. (NYSE: FII), one of the nation's largest investment managers, today reported earnings per diluted share (EPS) of $0.54 for Q3 2016, compared to $0.42 for the same quarter last year on net income of $54.9 million for Q3 2016, compared to $44.1 million for Q3 2015. Federated reported YTD 2016 EPS of $1.48, compared to $1.17 for the same period in 2015 on YTD 2016 net income of $153.1 million compared to $122.2 million for the same period last year."
The Pittsburgh-based company tells us, "Federated's total managed assets were $364.3 billion at Sept. 30, 2016. Total managed assets were up $13.3 billion or 4 percent from $351.0 billion at Sept. 30, 2015 and down $2.9 billion or 1 percent from $367.2 billion at June 30, 2016. Growth in equity and fixed-income assets was offset by lower money market assets at the end of Q3 2016 compared to the end of Q2 2016. Average managed assets for Q3 2016 were $365.4 billion, up $13.5 billion or 4 percent from $351.9 billion reported for Q3 2015 and up $1.2 billion from $364.2 billion reported for Q2 2016."
They explain, "Money market assets were $248.4 billion at Sept. 30, 2016, up $1.5 billion or 1 percent from $246.9 billion at Sept. 30, 2015 and down $6.6 billion or 3 percent from $255.0 billion at June 30, 2016. Money market fund assets were $209.4 billion at Sept. 30, 2016, down $6.9 billion or 3 percent from $216.3 billion at Sept. 30, 2015 and down $8.7 billion or 4 percent from $218.1 billion at June 30, 2016."
The release continues, "Revenue increased by $60.3 million or 26 percent primarily due to a decrease in voluntary fee waivers related to certain money market funds in order for those funds to maintain positive or zero net yields (voluntary yield-related fee waivers), as well as an increase in revenue from higher average equity assets. This was partially offset by a decrease in revenue due to a change in the mix of average money market assets.... During Q3 2016, Federated derived 55 percent of its revenue from equity and fixed-income assets (39 percent from equity assets and 16 percent from fixed-income assets) and 45 percent from money market assets. Operating expenses increased by $45.9 million or 29 percent primarily due to an increase in distribution expenses as a result of a decrease in voluntary yield-related fee waivers."
Comparing "YTD 2016 vs. YTD 2015," it comments, "Revenue increased by $170.5 million or 25 percent primarily due to a decrease in voluntary yield-related fee waivers. The increase in revenue was partially offset by a decrease in revenue from lower average fixed-income assets. For the first nine months of 2016, Federated derived 54 percent of its revenue from equity and fixed-income assets (38 percent from equity assets and 16 percent from fixed-income assets) and 46 percent from money market assets. Operating expenses increased $122.2 million or 25 percent primarily due to an increase in distribution expenses as a result of a decrease in voluntary yield-related fee waivers."
The press release adds, "Voluntary yield-related fee waivers and their resulting negative impact could vary significantly in the future as they are contingent on a number of variables including, but not limited to, changes in assets within the money market funds, yields on instruments available for purchase by the money market funds, actions by the Federal Reserve, the U.S. Department of the Treasury, the SEC, the Financial Stability Oversight Council and other governmental entities, changes in fees and expenses of the money market funds, changes in the mix of money market customer assets, changes in customer relationships, changes in the money market product structures and offerings, demand for competing products, changes in the distribution fee arrangements with third parties, Federated's willingness to continue the fee waivers and changes in the extent to which the impact of the waivers is shared by third parties."
On the earnings call, Federated President & CEO Christopher Donahue comments, "Now let's look at money market funds. Total assets in funds and separate accounts decreased by $7 billion from the second quarter and were up $1 billion from the 3rd quarter of '15. MMMF assets decreased by $9 billion from the 2nd quarter and $7 billion from Q3'15. Out MMMF share in October has been about 7.7%, down from about 8% at the end of 2015. About half of that decrease was due to about $4 billion shifted from a Federated Prime MMMF to a Federated managed separate account. As money moves into separate accounts and other non-'40 Act money market products, such as our new prime collective and new prime private funds, it will not be captured in the money market fund data for calculations of market share."
He continues, "In 2016, we saw approximately $11 billion move out of Federated Prime money market mutual funds into bank deposits. A significant portion of these redemptions were transitioned into a bank affiliate, in certain cases relating to M&A activity among brokers and banks…. With the 2014 money fund rules fully in place as of Oct. 14, we saw a significant shift from our Prime and muni money funds into our government money funds in Q3 and here into Q4. During Q3 and through Oct. 26, govt funds increased $48 billion, prime funds decreased by $53 billion and muni funds decreased by $10 billion."
Donahue adds, "We have launched our prime collective and prime private funds. These products have about $580 million at the end of Q3, with about $400 million shifting from Federated money market mutual fund products. With these product additions, extensive changes made to our money fund product line, [and] our separate account capabilities, we believe that our cash management business is well poised for growth."
He also tells us, "Taking a look at our most recent asset totals, as of Oct. 26, managed assets were approximately $357 billion, including $242 billion in money markets [including separate accounts], $63 billion in equity, $52 billion in fixed income. Money market mutual fund assets were $203 billion." CFO Tom Donahue adds, "An increase in yields of 25 basis points, could nearly eliminate the [remaining] effect of waivers <b:>)."
Finally, during the Q&A, MM CIO Deborah Cunningham tell us, "I think the fourth quarter will be a period of transition where people watch and make sure that all the plumbing is correct and that everything flows and works the way it is supposed to. I would expect that you will continue to see some movement in the fourth quarter. But 2017, with that calendar flip, will be the time when people start to re-address where they are and what they are using, from a money market standpoint."
Donahue comments on fee reductions by some providers, "I can't remember a time during the time when there isn't at least one player out there who are chopping at [fees] to gain market share." When asked about fee levels of Prime vs. Govt MMFs vs. SMAs, President Ray Hanley answers, "The net fee would be right around 12 bps, [and there's] not much variability between the two. Separate account rates tend to be about one-half of this (6 bps)." (See Seeking Alpha's earnings call transcript and also Federated's latest 10-Q filing.)
Prime money market fund assets, which have declined by a massive $1.066 trillion (-73.1%) over the past 52 weeks, barely moved in the latest week, falling a mere $2.6 billion. Overall money fund assets rebounded in the 7 days ended Wednesday, rising by $16.1 billion, their first gain in 4 weeks. (As we mentioned in yesterday's News, Prime assets have had 2 days of positive inflows over the past week and appear to be poised to begin a gradual rebound.) It appears that the "Big Shift" of assets from Prime and Tax-Exempt MMFs, which lost $1.183 trillion since 10/31/15, and into Govt MMFs, which have gained $1.118 trillion, is coming to a close. We review ICI's latest "Money Market Fund Assets," and also analyze their most recent monthly "Trends in Mutual Fund Investing" and "Month-End Portfolio Holdings of Taxable Money Funds," below. The latter confirms earlier reports of a surge in Repo holdings and plunge in CDs. (See our Oct. 13 News, "Oct. Portfolio Holdings: CDs, CP in Single Digits; Repo Hits Record.")
ICI's latest release says, "Total money market fund assets increased by $16.10 billion to $2.65 trillion for the week ended Wednesday, October 26, the Investment Company Institute reported today. Among taxable money market funds, government funds2 increased by $18.67 billion and prime funds decreased by $2.57 billion. Tax-exempt money market funds increased by $10 million."
It continues, "Assets of retail money market funds decreased by $370 million to $946.81 billion. Among retail funds, government money market fund assets increased by $1.04 billion to $561.70 billion, prime money market fund assets decreased by $1.22 billion to $261.63 billion, and tax-exempt fund assets decreased by $180 million to $123.49 billion."
The update adds, "Assets of institutional money market funds increased by $16.46 billion to $1.70 trillion. Among institutional funds, government money market fund assets increased by $17.62 billion to $1.57 trillion, prime money market fund assets decreased by $1.35 billion to $130.41 billion, and tax-exempt fund assets increased by $190 million to $4.46 billion." Government assets, including Institutional and Retail (and Treasury and Government) stand at $2.131 trillion, while Prime assets now stand at $392 billion.
Year-to-date through Oct. 26, total money fund assets have declined by $107.9 billion, or 3.9%. Prime MMFs have fallen by $891.8 billion, or 69.5%, while Government MMFs have risen by $910.3 billion, or 74.6%. Tax-exempt money market funds have declined by $126.5 billion, or 49.7%. Combined, Prime and Tax-exempt MMFs are down $1.018 trillion, or 66.%, YTD. Prime Institutional assets have lost $744.8 billion in 2016 (-85.1%), while Prime Retail assets have lost $147.0 billion (-36.0%).
ICI's latest "Trends in Mutual Fund Investing - September 2016" shows a $51.1 billion decrease in money market fund assets in Sept. to $2.672 trillion. The increase follows an increase of $18 billion in August and $14 billion in July. In the 12 months through Sept. 30, money fund assets have gone up by $4.6 billion, or 0.2%. (Month-to-date in Oct. through 10/26, our Money Fund Intelligence Daily shows total assets down by $19.2 billion with Prime MMFs down $129.2 billion, Tax Exempt MMFs down $1.4 billion, and Govt MMFs up $111.4 billion.)
The monthly report states, "The combined assets of the nation's mutual funds decreased by $6.65 billion to $16.35 trillion in September, according to the Investment Company Institute's official survey of the mutual fund industry. In the survey, mutual fund companies report actual assets, sales, and redemptions to ICI.... Bond funds had an inflow of $17.68 billion in September, compared with an inflow of $23.08 billion in August.... Money market funds had an outflow of $52.26 billion in September, compared with an inflow of $17.62 billion in August. In September funds offered primarily to institutions had an outflow of $41.54 billion and funds offered primarily to individuals had an outflow of $10.72 billion."
The latest "Trends" shows that while Taxable MMFs overall decreased slightly in September, Tax-Exempt MMFs had another very bad month. Tax-Exempt MMFs declined by $15.3 billion, compared to taxable, which increased by $1.1 billion. Year-to-date through Sept. 30, MMFs have had $82.8 billion in outflows, with $41.0 billion in inflows to Taxable funds and $123.0 billion in outflows from Tax-Exempt funds. Money funds now represent 16.3% (down from 16.7%) of all mutual fund assets, while bond funds represent 22.8%. The total number of money market funds dropped to 416 in Sept., down from 426 in August and down from 503 a year ago.
ICI's Portfolio Holdings confirms a jump in Repo, Agencies and Treasuries in Sept., and continued declines in CDs and CP. Repo remained the largest portfolio segment, rising by $125.4 billion, or 17.2%, to $855.7 billion or 33.6% of holdings. U.S. Government Agency Securities reclaimed second place among composition segments <b:>`_, rising $35.1 billion, or 5.8%, to $642.5 billion, or 25.3% of holdings. Treasury Bills & Securities dropped to third place, gaining $19.9 billion, or 3.2%, to $635.6 billion or 25.0% of holdings. `These increases continued to be fueled by the ongoing shift of Prime fund assets into Government funds last month.
Certificates of Deposit (CDs) stood in fourth place, but decreased $200.6 billion, or 7.7%, to $195.5 billion (7.7% of assets). Commercial Paper remained in fifth place but decreased $70.6B, or 38.4%, to $113.4 billion (4.5% of assets). Notes (including Corporate and Bank) were down by $4.9 billion, or 30.3%, to $11.3 billion (0.4% of assets), and Other holdings fell to $40.6 billion.
The Number of Accounts Outstanding in ICI's series for taxable money funds increased by 633 thousand to 24.547 million, while the Number of Funds fell by 5 to 310. Over the past 12 months, the number of accounts rose by 1.424 million and the number of funds declined by 39. The Average Maturity of Portfolios was 39 days in Sept., up 5 days from August. Over the past 12 months, WAMs of Taxable money funds have lengthened by 4 days. Note: Crane Data also revised its Oct. MFI XLS this week to reflect the latest 9/30/16 Portfolio Composition data and Maturity breakouts. (Visit our Content Center and the latest Money Fund Portfolio Holdings download page to access our Sept. Money Fund Portfolio Holdings and the latest files.)
Assets of Prime money market funds rose Tuesday, their second increase over the past week, which likely marks an end to the massive $1.1 trillion Prime to Government shift over the past year. According to our Money Fund Intelligence Daily, Prime MMFs rose by $202 million on Oct. 25 to $385.5 billion; assets are down a mere $1.1 billion over the past week. Weighted average maturities have inched out and yields have crept higher, so these funds appear to be slowly attracting back some client assets. Whether Prime will make a true comeback remains to be seen, but the early post-reform signs appear encouraging. (Note: Last Friday we made some final categorization tweaks, shifting a handful of funds from retail to inst and from prime vs. government. We'd missed these ahead of the Oct. 14 reforms.) We briefly review recent changes below, and we also cover the SEC's September "Money Market Fund Statistics."
Our MFI Daily shows Prime Institutional funds currently totaling $128.9 billion and Prime Retail funds totaling $256.5 billion. Prime Inst MMFs on average are now yielding 0.29%, 13 bps higher than Govt Inst MMFs and 17 bps higher than Treas Inst MMFs. Prime Inst funds have extended their WAMs by 2 days over the past week (to 14 days) from recent record low levels, and Prime Retail MMFs have extended WAMs by 4 days to 28 days. Weekly Liquid Assets (WLA) have risen fallen to 77.1% (from 79.7%) for Prime Inst and to 54.0% (from 60.6%) for Prime Retail.
A number of money fund providers at this week's AFP Annual Meeting, the largest gathering of corporate treasury investors, said they've seen positive Prime inflows and have heard encouraging comments from investors about returning. Our discussions and public statements from investors too indicate that Prime might make a comeback at some point, though a number of rate increases will likely be needed before assets begin growing in earnest. While it's too early to predict that Prime assets will retake the $500 billion level, it is a relief to see that they're no longer going down.
In other news, the SEC released its latest "Money Market Fund Statistics" last week, and the latest data shows that assets were down slightly in September but that almost $300 billion shifted from Prime to Government MMFs last month. Gross yields increased for Prime MMFs and jumped for Tax Exempt MMFs. The SEC's Division of Investment Management summarizes monthly Form N-MFP data and includes asset totals and averages for yields, liquidity levels, WAMs, WALs, holdings, and other money market fund trends. The Commission's latest statistics show total money market fund assets decreased by $35.2 million in September to $2.945 billion. (The SEC's series includes some private and internal funds not reported to ICI, Crane Data or other reporting agencies.) Assets fell $33.7 billion in August, $21.2 billion in July, and $20.7 billion in June. Year-to-date, total assets are down $140.6 billion, or 4.6%, through 9/30.
Of the $2.945 billion in assets, $741.0 billion was in Prime funds, which dropped by $292.1 billion in September after falling $201.3 billion in August, $44.5 billion in July, $124.5 billion in June, and $66.9B in May. Prime funds represented 25.2% of total assets at the end of Sept.; they've declined by $831.0 billion YTD, or 52.9%, and they've fallen $1.050 trillion, or 58.6% since 10/31/15. Government & Treasury funds total $2.068.2 billion, or 70.2% of assets, up $280.3 billion in September, after being up $198.7 billion in August, $77.0 billion in July and $120B in June. Govt & Treas MMFs are up $818.6 billion YTD (65.5%) and $1.027 trillion (98.7%) since 10/31/15, just prior to the start of the Prime to Govt conversion trend. Tax Exempt Funds were down again, dropping $23.5 billion to $135.6 billion, or 4.6% of all assets. The number of money funds was 443, down 10 for the month and down 78 from 9/30/15.
Yields increased in September. The Weighted Average Gross 7-Day Yield for Prime Funds on September 30 was 0.63%, up 6 basis point from the previous month, and more than double the 0.27% of November 2015 (before the Fed hike). Gross yields were 0.42% for Government/Treasury funds, up 1 basis point from the previous month but up 0.27% since 11/15. Tax Exempt Weighted Gross Yields jumped 21 basis points in September to 0.81%. The `Weighted Average Net Prime Yield was 0.40%, up by 0.05% from the previous month and up 0.29% since 11/15. For the year-to-date, 7-day gross yields for Prime are up 22 basis points and net yields are up 18 basis points. The Weighted Average Prime Expense Ratio was 0.23% in September (up one bps from August). Prime expense ratios have risen from 0.16% in November 2015. (Note: These averages are asset-weighted.)
Weighted Average Maturities rebounded but liquidity continued to inch higher in September. The average Weighted Average Life, or WAL, was 43.0 days (up 6.5 from last month) for Prime funds, 94.6 days (down 3.8 days) for Government/Treasury funds, and 27.5 days (down 1.5 days) for Tax Exempt funds. The Weighted Average Maturity, or WAM was 25.8 days (up 4.0 days from the previous month) for Prime funds, 42.2 days (up 1.0 days) for Govt/Treasury funds, and 24.9 days (down 1.7 days) for Tax-Exempt funds. Total Daily Liquidity for Prime funds was 43.0% in September (up 4.3% from previous month). Total Weekly Liquidity was 63.0% (up 0.8%) for Prime MMFs.
In the SEC's "Prime MMF Holdings of Bank Related Securities by Country" table, ` the U.S. topped the list with $77.2 billion, followed by Canada with $77.0 billion <b:>`_. Sweden was third with $57.3 billion, followed by France ($55.6B), Japan with $50.6B and Australia/New Zealand ($37.6B), the UK ($30.3B) and Germany ($28.7B). The Netherlands ($23.8B) and Switzerland ($13.2B) round up the top 10.
Once again, there were not any gainers among Prime MMF bank related securities for the month. The biggest drops came from France (down $89.9B), Sweden (down $38.4B), Japan (down $37.0B), and the U.S. (down $23.3B). For Prime MMF Holdings of Bank-Related Securities by Major Region, Europe had $218.8B (down $195.8B from last month), while the Eurozone subset had $110.6 billion (down from $117.2B). The Americas had $154.6 billion (down from $46.8B), while Asian and Pacific had $98.9 billion (down from $63.0B).
Of the $731.8 billion in Prime MMF Portfolios as of September 30, $260.2M (35.6%) was in CDs (down from $458.6B), $224.1B (30.6%) was in Government securities (including direct and repo), up from $220.1B, $129.1B (17.6%) was held in Non-Financial CP and Other Short Term Securities (down from $159.0B), $86.1B (11.8%) was in Financial Company CP (down from $141.5B), and $32.2B (4.4%) was in ABCP (down from $50.5B).
The Proportion of Non-Government Securities in All Taxable Funds was 18.4% at month-end, down from 28.5% the previous month. All MMF Repo with Federal Reserve rebounded to $387.5B in September from $149.9B the previous month. Finally, the "Trend in Longer Maturity Securities in Prime MMFs" tables shows 25.0% were in maturities of 60 days and over (up from 20.9%), while 3.7% were in maturities of 180 days and over (up from 3.0%).
Below, we reprint the lead article from our October BFI, "Fidelity Muni Conservative Income's Doug McGinley." It says: This month, BFI profiles Fidelity Conservative Income Municipal Bond Fund's Doug McGinley. He discusses the ultra-short municipal space and Fidelity's shortest tax-exempt bond fund offering, which celebrates its 3rd anniversary this month. McGinley also talks about his investment strategies and the recent jump in tax-exempt yields. Our interview follows. (Contact us if you'd like to see the latest Bond Fund Intelligence. Also, thanks to those who visited with us at the recent AFP Annual Conference. We hope you had a great show and a nice visit to Orlando!)
BFI: Tell us about your history. McGinley: We've had a short [muni] product offering for nearly 30 years now, and obviously Fidelity has been in the muni fund business for decades. The Conservative Income Municipal Bond Fund is a more recent fund launch; it will be 3 years old this month. In terms of my background, I joined Fidelity coming out of Harvard Business School and started off as a credit analyst in 1994, so I've been with the company for 22 years.... I've been on the money market side for the past 10 years, then [moved] back into the bond world with our launch.
BFI: Did you see a gap in the market? McGinley: Yes.... We've had a short muni bond fund (Fidelity Limited Term Municipal Bond Fund) for the past 30 years that would have a duration on average of between 2 to 5 years. And we've had money market product offerings for quite a while. Our question was: Is there something in between that there's demand for [which] we're not meeting? We took a look at ... the market and assessed how much money flowed into ultra-short types of muni bond products.... Also [we asked], if we did launch something and if it was growing, would there be enough security supply to meet that type of customer demand? We spent some time reviewing that, and after considerable examination came to the conclusion, 'Yes, there is customer demand for it.' This followed the launch of our taxable Conservative Income Bond Fund, which was in 2011. We had great success with that product launch.
BFI: What's your biggest challenge? McGinley: When we first launched the fund, it was in a lower rate environment.... That has been a challenge for this product category. The fund has seen consistent growth [which] has accelerated as time has gone on. Short term rates have gone up since we launched, so that has enabled the fund to provide a higher yield.... When this product is examined in [an ultra-short bond] context, the category is so broad that this really fits on one end of the spectrum, being very short [with] limited credit exposure.... I think the 'Conservative' name in the fund name is trying to indicate to people what the goal of this fund is.
BFI: What can and can't you buy? McGinley: The fund purchases securities that are designed for money market funds, in terms of the variable rate demand bonds and tender option bonds.... There are times when those securities have been issued without actually meeting the money market requirements ... or maybe they were issued and held in a money market fund at one time but then were downgraded, taking them just outside of money market eligibility. So the fund has been able to accumulate and buy a lot of these 1-day and 7-day instruments that provide great liquidity, which is wonderful to have in a short-term, ultra-short type of fund. These securities also give the fund a great anchor in terms of average maturity and interest rate risk. In the past, the fund has typically had anywhere from a quarter to half of its assets invested in these ... and the fund was able to pick up some decent yields on those types of holdings.
This fund, may normally invest in securities out to 4 years in maturity, but the average maturity for the fund is normally below 1 year. Owning a lot of these dailies and weeklies allows the fund to buy bonds out 3 or even 4 years if we think they represent good value and still keep that average maturity down below one year. The fund does have many diversification rules as well that are similar to money market funds and other bond funds in terms of sector and issuer diversification.
BFI: Is there a lot of issuance? McGinley: Municipal securities are definitely issued inside of 4 years. The fund does buy deals in the primary market when new deals are coming and participates in those. But I would say we've probably had even more success buying in the secondary market and purchasing securities that may have been longer than 4 years when they were issued but have now rolled down.... [T]here has been enough supply in both the primary and the secondary market. And another thing, there's a fair amount of issuance that comes in the one year space in the form of cash flow notes.
Again money market funds will buy a lot of that type of paper. But to the extent that the issuer does not meet [the] very high standards for money market funds, then ultra-short bond funds can step in, typically at higher yields, and purchase those. It's great that Fidelity's analysts that are looking at deals as they're coming. The analysts may conclude: 'I cannot give this the minimal credit risk designation necessary for money market funds, but now let me take my work over to the ultra-short and short bond funds and see if they have an interest in this credit.'
There are thousands of issuers out there, and they typically have many different securities with different maturities and different coupons. It is a very wide spectrum in terms of the number of offerings in the municipal space. One of the great strengths of Fidelity is our strong research staff, especially on the tax-exempt or municipal side. We have analysts looking across all these different sectors, following many different credits. It gives us the opportunity to look at more investment options that way. We have a money market trading desk and a municipal bond trading desk sitting just a few feet from one another. There's great synergy in understanding what's going on in each marketplace, how they impact one another and what we're seeing in terms of the offerings.
BFI: Who are the big issuers? McGinley: There is a lot of issuance out of the big states such as California, Texas, Illinois, and Florida. [But] that's not necessarily how the Conservative Income Municipal Bond Fund [looks]. In the past, the fund has not purchased many securities issued in California ... because its securities generally trade a lot richer and do not meet the yield hurdles that we may be looking for in the fund. That's not to say there aren't specific issuers out there that we find attractive and purchase for the fund.... Historically, the two states to which the fund has had the most exposure to in terms of everything issued within the state are Illinois and Texas. But that's across a wide variety of different issuers and different sectors.
BFI: What about the spike in SIFMA? McGinley: I think it's really a reflection of what has happened with shareholder flows as a result of pending money market regulation changes. We have seen money move out of municipal money market funds during the calendar year. And if you go back a full year ago, we really [were] in a market environment where demand by 2a-7 funds appeared to exceed eligible supply out there. So that kept rates very low.... But as the months rolled by [and as] we continued to see money leaving muni money market funds, we've almost experienced a flip of [these] technicals now where supply is exceeding the demand.... The re-marketing agents are pricing these securities at higher yields to find other buyers.
BFI: What about bank regulations? McGinley: Any regulatory impact on banks can impact the marketplace, because the banks do play a big role by providing letters or credit or liquidity facilities for a lot of the daily and weekly securities in the money market space.... Certainly, to the extent that regulations change and impact bank behavior, that can change the pricing charged by the banks and the availability of credit enhancement to the municipal issuers which can change the types of supply or the amount of supply that we see in the money market or short muni bond space.
BFI: Who are the investors in the fund? McGinley: We've seen the institutional class for this fund grow faster than the retail share class. But it does appear that the great majority of assets are coming more from individual investors than big institutional investors. That may change over time as the fund establishes a three year track record and if it crosses the $1 billion threshold.
BFI: How tough has the zero yield environment been? McGinley: It probably makes it more challenging for munis to look attractive on an after-tax basis in an extremely low rate environment. Having said that, with the rise in SIFMA and short term muni rates, as of the first week of October, the Conservative Income Municipal Bond Fund is now offering over 80% of the yield of the taxable version, Fidelity Conservative Income Bond Fund.... Our Conservative Income Municipal Bond Fund looks very attractive at this time.
BFI: Any comments on the future? McGinley: Current yields are catching investors' eyes.... Hopefully they're also looking at what's in the portfolio, and see that the fund has conservative positioning [credit-wise]. The fund is not taking much interest rate risk, because we are trying to limit the shareholder's downside exposure.... Looking back, we felt that there was investor demand between a money market fund and a short term bond fund, and I think that conclusion was correct. We've seen flows to support that conclusion. With money market funds going through transitions right now, investors may be taking a fresh look at how they want their short term money invested.... I would think that the future demand for ultra-short bond funds will continue to support having these funds offered in the marketplace, and that we'll continue to see inflows over the longer run.
A press release entitled, "ICD Releases Essential MMF Reform Solutions for Corporations, which says, "Institutional Cash Distributors (ICD) today announced the release of Transparency Plus 6.0 providing several key on-line and reporting enhancements that are necessary for corporate treasury practitioners to effectively manage portfolios that include institutional prime money market funds." Among the highlights: it "enables users to compare and contrast historical Net Asset Value Pricing, Asset Flows and Liquidity of institutional prime money market funds" and its "new Gain/Loss Report enables corporations to efficiently take advantage of the Simplified Tax Accounting Method for institutional prime money market funds." (ICD revealed the features at the AFP Annual Conference, which takes place this week in Orlando. We also briefly cover some of the conference content below.)
ICD's release explains, "The MMF Reform enhancement release is the latest iteration of Transparency Plus, which in 2010 was the first risk management exposure analytics application for institutional cash investments. New SEC 2a-7 rules, effective October 14, 2016, require institutional prime money market funds to maintain a variable, or floating net asset value to the fourth decimal place (e.g., 1.0000), where they previously were rounded to the second decimal place (e.g., $1.00); and providing institutional prime money market fund boards with the ability to impose fees of up to 2% and gates of up to ten days if weekly liquidity falls below 30% and the board feels it is in the best interest of the fund’s shareholders."
ICD Senior Vice President & Head of Global Trading, Sebastian Ramos said, "With the new SEC 2a-7 Rules in place, Institutional Prime MMF investors should look to maintain diversified portfolios and use the latest compliance, reporting and monitoring tools to ensure portfolios meet their corporation's investment objectives and risk tolerance."
The release adds, "ICD Portal's Liquidity Compliance Rules will prevent or limit trading in MMFs where liquidity is below client-established levels. Alerts are also sent to clients with positions in MMFs that fall below client-established liquidity minimums. Transparency Plus's NFL Report compares Net Asset Value Pricing, Net Asset Flow and Liquidity for MMFs in client actual and hypothetical portfolios, enabling fund comparisons on these important metrics. ICD Portal generates Gain/Loss reports that simplify corporate tax and financial reporting for institutional prime money market funds using the IRS-approved Simplified Tax Accounting Method. Gain/Loss report ranges can be customized by month, quarter, year or any specified time period."
"Institutional prime money market funds will continue to be an important part of corporate short-term portfolios, especially when the spreads widen. This release is another example of ICD's commitment to provide superior products and extraordinary client service," said ICD Chairman, Tom Newton.
In other news, the Association for Financial Professionals' Annual Conference was surprisingly short on money market fund content this year with just two sessions involving cash investing. The first, "Managing Liquidity in a Post-Reform World, was described as, "Safely managing liquidity of corporate cash portfolios is a chief challenge corporates face. Rising interest rates, money market fund reforms, and new bank regulations have radically altered the cash management landscape. With the introduction of floating-NAV money market funds in October 2016, the final shoe may have dropped following years of changes. What can practitioners except in 2017? This moderated panel examines short-term investment options from the practitioner's perspective across industries, including automobile manufacturing, biotechnology and real estate."
The session, moderated by Benjamin Campbell of Capital Advisors Group, included the speakers Klas Holmlund of Vertex Pharmaceuticals, Kimberly Kelly-Lippert, American Honda Motor Company, and David Miller of Hunt Companies, Inc. Lippert commented, "They [Prime money funds] had a terrific run [but] that era is over." Lippert says she stuck with Prime throughout the transition and continues to invest in these funds, citing education and support by portals and funds as reassuring factors in their decision.
The others, however, moved out of Prime and remain out. Miller commented that the use of any fee or gate would mean liquidation for a fund. To make it simple, he said, "Today, most of our cash sits in bank deposits or government funds."
Of particular interest was an audience survey, which asked what corporate treasurers were most likely to consider in the next 6 months. The responses indicated that approximately 31% would consider separately managed accounts, 19% would consider FDIC insured accounts, 15% would consider FNAV money funds, 14% would consider ultra-short bond funds, and 12% would consider direct investments.
The other session, entitled, "Offshore Cash: What Does the Future Hold," featured Britta Hion of BlackRock, Douglas Tropp of Priceline Group, and Geoffrey Nolan of QUALCOMM Inc. This session's description says, "US corporations' cash reserves are at historic highs, with record amounts held offshore. Given the current Euro rate environment, how are corporations investing their offshore cash? How do they deal with the diverging rate dynamics globally? Is there an increase in the use of SMAs and (long-term) repos in Europe in a quest to mitigate negative rates and boost returns? How has the issuer landscape changed in Europe since the crisis in 2011? This interactive sessions answers these and other questions to help corporates best utilize offshore cash."
The Federal Reserve Bank of New York's Liberty Street Economics blog published a brief entitled, "From the Vault: Funds, Flight, and Financial Stability." Written by Anna Snider, it says, "The money market industry is in the midst of significant change. With the implementation this month of new Securities and Exchange Commission rules designed to make money market funds (MMFs) more resilient to stress, institutional prime and tax-exempt funds must report more accurate prices reflecting the net asset value (NAV) of shares based on market prices for the funds' asset holdings, rather than promising [sic] a fixed NAV of $1 per share." We review this below and we also debunk a recent article claiming that some Prime Inst MMFs have traded below $1.0000. (This is not the case.)
The blog explains, "The rules also permit prime funds, which invest in a mixture of corporate debt, certificates of deposit, and repurchase agreements, to impose fees or set limits on investors who redeem shares when market conditions sharply deteriorate. (Funds investing in government securities, which are more stable, are not subject to the new rules.) These changes, driven by a run on MMFs at the height of the financial crisis, add to earlier risk-limiting rules on portfolio holdings."
It tells us, "In what is being described as a "big sort," institutional MMF investors are rethinking their strategies for where to place large pools of cash; many are shifting investments from prime funds to funds that invest only in government securities, while others remain in place or undecided about their next move. Meanwhile, critics continue to debate whether the new rules go far enough, or perhaps too far. For readers interested in learning more, numerous posts in the Liberty Street Economics archive help illuminate the issues underlying the reforms." [Note: For the record, the article references a Seeking Alpha piece entitled, "The Big Sort", but Crane Data was the first to coin the term. See our Jan. 15 News, "The Big Sort: Who's Going Retail or Floating Inst Among Prime MMFs?."]
The NY Fed blog continues, "In "Money Market Funds and Systemic Risk," our bloggers examine the vulnerability of MMFs, and show why, in theory, a floating NAV could stanch runs. As they explain, the end of "NAV rounding" (MMFs traditionally rounded their shares to $1 per unit even if the market NAV was only within a half penny of $1) would temper investors' rush to redeem shares before others do when a fund suffers a loss, since there would be no more opportunity for arbitrage between the stable share price and the true value of the MMF share."
It adds, "Elsewhere on the blog, our authors looked at the extent to which sponsor support has been vital to maintaining MMFs' price stability. Their analysis, using information collected by regulators, showed that while the catalyst for the September 2008 run on MMFs -- the Reserve Primary Fund -- was the only fund to officially "break the buck" during the crisis, at least twenty-eight other funds would have also done so had their sponsors not provided crucial support in the form of cash infusions and purchases of the funds' securities at above-market prices. The bloggers called for reforms "that would provide a form of stability to the MMF industry not predicated on voluntary and uncertain support from sponsors.""
Liberty Street writes, "Our bloggers also explored MMFs' significance as a potential source of systemic risk, particularly through MMFs' increasing importance as a funding source for banks in recent decades. A check of the data at the end of 2012 revealed that MMFs held 43 percent of financial commercial paper, 29 percent of certificates of deposit, and 33 percent of repo agreements, prompting consideration of possible spillovers if MMFs reacted to run-like redemptions by fire-selling the bank assets in their portfolios."
Finally, the piece says, "Other blog analysis paid close attention to MMF investor movements during unsettling periods, such as the large outflows from prime funds that were exposed to the U.S. debt-ceiling and European debt crises in 2011, and weighed the pros and cons of fees and gates to reduce the run risk posed by investor redemptions."
In other news, an article in Institutional Investor, "New Money Market Rules Roil Investors," incorrectly claims that a Prime fund has dropped below $1.0000. While there are 2 Prime Inst funds showing NAVs at $0.9999, these currently have no investor assets. Every Prime Inst fund with investor money has traded at $1.0000 or higher every day since the conversion on October 14.
ICI's latest "Money Market Fund Assets" report shows that MMFs decreased $13.5 billion in the latest week. Prime funds fell by $17.8 billion, less than a third of the size of the drop the previous week (when they fell $56 billion) and far smaller than the $110 billion 2 weeks ago. Prime assets have declined in 20 out of the past 21 weeks (-$768B), but the outflows appear to be subsiding. (They rose yesterday by $1.4 billion, according to our MFI Daily, their first increase in many weeks.) Since Oct. 29, 2015, when the "Great Prime-to-Govie Migration" started, Prime assets have fallen by a massive $1.064 trillion, or 72.9%. Tax Exempt funds have declined by another $117.0 billion, or 47.8%. Combined these two non-Government sectors (which are now subject to the possibility of emergency gates and fees) have fallen by $1,181 billion (-68%) over the past year. We review the latest ICI update below, and also excerpt from a new Fidelity paper and press release from Capital Advisors.
Government money funds (including Treasury funds) gained $3.9 billion in the past week (after gaining $51 billion last week, $88 billion the week before, and $102 billion the week before that). They've increased by $1,099 billion since last October (more than doubling, up 108.4%) and by $891.6 billion, or 73.0%, YTD. (YTD in 2016, Prime MMFs are down by $889.2 billion, or 69.3%.) Tax Exempt MMFs were up fractionally.
ICI's latest release says, "Total money market fund assets decreased by $13.46 billion to $2.63 trillion for the week ended Wednesday, October 19, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $3.92 billion and prime funds decreased by $17.78 billion. Tax-exempt money market funds increased by $400 million." Prime MMFs now total just $394.6 billion, or just under 15.0% of total assets; Govt MMFs total $2.112 trillion, or 80.0% of all assets.
It continues, "Assets of retail money market funds increased by $9.15 billion to $947.18 billion. Among retail funds, government money market fund assets increased by $4.23 billion to $560.66 billion, prime money market fund assets increased by $1.52 billion to $262.85 billion, and tax-exempt fund assets increased by $3.39 billion to $123.67 billion.... Assets of institutional money market funds decreased by $22.61 billion to $1.69 trillion. Among institutional funds, government money market fund assets decreased by $320 million to $1.55 trillion, prime money market fund assets decreased by $19.30 billion to $131.76 billion, and tax-exempt fund assets decreased by $2.99 billion to $4.27 billion."
In other news, Fidelity released a new update, entitled, "Money Market Mutual Funds: Regulatory Change Review." Written by Money Market CIO Tim Huyck and Senior VP & Deputy General Counsel Kevin Meagher, it says, "The rules establish new definitions for government MMFs and retail MMFs, and require institutional prime MMFs ... and institutional municipal MMFs to price and transact at a "floating" (or variable) net asset value (NAV). Also under the new rules, during periods of extraordinary market stress, retail and institutional prime and municipal MMFs may charge shareholders liquidity fees, payable to the fund upon redemption, and may impose redemption gates that would temporarily halt all withdrawals."
It continues, "Retail MMFs are funds that have policies and procedures reasonably designed to limit all beneficial owners to "natural persons" (i.e., individual investors). These funds may continue to seek to maintain a stable NAV, but are subject to potential liquidity fees and redemption gates. Institutional MMFs are funds that don't qualify as retail funds (i.e., may be held by institutional investors). These funds are subject to potential liquidity fees and redemption gates. They will price and transact at a floating NAV priced out to four decimal places (i.e., $1.0000) and may experience fluctuations from time to time. Government and U.S. Treasury MMFs are not subject to any of the new structural changes."
Fidelity explains, "The daily prices per share of all institutional prime and institutional municipal MMFs are required to "float." This means that instead of fund shares being priced at $1.00, as they were before the new rules, these funds are now required to price and transact at an NAV that uses four decimal-place precision (e.g., $1.0000), a process known as "basis-point rounding." When a fund uses basis-point rounding to calculate its NAV, shareholders may experience a gain or loss if the per share value of the fund changes by 1/100th of a penny. For example, if a shareholder owned 10,000 shares priced at $1.0000, a one basis-point change in a floating-NAV fund would result in a gain or loss of $1.00."
The piece adds, "Shareholders in institutional MMFs may experience gains or losses as the NAV moves up or down. Under ... guidance issued by the U.S. Department of the Treasury (Treasury) and the Internal Revenue Service (IRS), floating-NAV shareholders will be able to report a single net total for the gains and/or losses experienced during the course of a year, rather than reporting individual transactions.... With respect to accounting, the SEC stated its position that floating-NAV MMFs will be considered a "cash equivalent.""
The paper tells us, "The SEC rules permit both retail and institutional prime and municipal MMFs to limit redemptions under certain rare circumstances, by imposing liquidity fees or redemption gates. Subject to the discretion of a MMF's board of trustees, these funds can impose a fee of up to 2% on shareholder redemptions if weekly liquid assets were to fall below 30%. Additionally, a MMF's board may impose a temporary suspension of redemptions if weekly liquid assets were to fall below 30%. This redemption gate can only be in effect for up to 10 business days during any 90-day period."
It concludes, "At Fidelity, we remain committed to offering a variety of investment options, and a comprehensive MMF product lineup that includes retail and institutional funds, prime and municipal funds, and government and U.S. Treasury funds. As market conditions and investor preferences evolve, we will continue to review our MMF lineup to ensure that we are meeting investors' needs."
Finally, Goldman Sachs Asset Management unveiled a new "Investing in a Floating NAV World" Calculator" on its website, which allows investors to compare the returns on stable NAV vs. floating NAV investments in a variety of scenarios.
GSAM explains, "Effective October 2016, institutional prime and municipal money market funds in the US will have a floating net asset value (NAV). While this does not impact most retail investors, US institutional investors may need to diversify to achieve stability, liquidity of their investment, or total return. This tool may help institutional investors understand how to invest for their immediate and short-term liquidity needs. It allows the investor to assess if risking stability is worth the reward of a potentially higher yield."
State Street Global Advisors published a new paper entitled, "Critical IPS Changes for the New Cash World," which reviews Investment Policies and recent money market changes and options. It says, "Cash investing has undergone major changes over the past several years. The new SEC rules with a phase-in deadline of October 14, 2016 have dramatically altered how money market funds (MMFs) operate, seeking to make them safer in aggregate but introducing new measures that can impact access and net asset value (NAV). Other market developments -- including a shortage of appropriate securities and widespread ratings downgrades on MMF counterparties -- have also reshaped cash investing."
The paper tells us, "The result: cash has been transformed from a straight-forward, seemingly risk-free asset class to one requiring more flexibility and closer attention to risk-return tradeoffs. In the new cash world, investors are being called upon to apportion their cash among funds that tilt subtly among the attributes that they have long taken for granted: capital preservation, liquidity, convenience and return. To adapt, many investors are finding that their existing cash policies need to be revisited or even overhauled."
It explains, "An expanded universe of cash investment options are now available, tailored to the unique requirements of three cash segment types: (1) operational, (2) core and (3) strategic cash. State Street Global Advisors (SSGA) believes that investing a portion of a company's cash portfolio in higher yielding vehicles -- such as prime funds or ultra-conservative bond funds -- could result in improved performance, within an acceptable risk profile."
SSGA continues, "As the new cash world becomes a durable reality, a company may find that its legacy Investment Policy Statement (IPS) either lacks the flexibility needed in the new cash landscape, or is obsolete, posing potential operational or compliance risks. SSGA is urging clients to review their cash management practices, to ensure both that their IPS is appropriate for current market and regulatory realities, and that risk and liquidity goals are effectively being managed in accordance with the changes. SSGA sees the potential for excess return for investors willing to evolve their portfolios to capitalize on new opportunities. This paper is intended to facilitate an IPS review."
They comment, "The cash IPS is a "living document" carefully conceived and reviewed to govern a company's cash investment profile. It is a key component of risk management, through which executive management delineates the goals and constraints for managing one of the most vital assets of a company: its liquidity. In the new cash world, the IPS must be detailed enough to guide the various individuals and firms involved in managing the cash portfolio, yet it must also be dynamic and flexible enough to let corporate staff anticipate market conditions. It is critical that the IPS is developed in accordance to the company's specific goals, constraints and market environment."
Under a section entitled, "Rethinking Principal Preservation," the piece says, "Revisions to SEC rule 2a-7 stipulate that after October 14, 2016, only U.S. Treasury, U.S. government-sponsored entity (GSE) and retail prime MMFs will continue to price their shares at a constant net asset value. All institutional prime MMFs will operate with a floating NAV, calculated to four decimal places.... For investors sensitive to balance fluctuations, the emergence of floating-NAV MMFs post-October 2016 compounds the importance of ensuring that the IPS directs corporate staff to segment cash and invest according to a tiered risk tolerance criteria. Investors wary of the new rules governing prime funds have shifted balances to government funds. Yet for investors willing to adapt to the new rules and opt to remain invested in prime funds the yield could be significantly more than a government fund."
SSGA writes, "To account for the emergence of floating NAV MMFs, we believe that companies should consider updating their IPSs to use total return (rather than yield) as a performance criteria. The total return metric -- which accounts for yield, price fluctuations and capital gains and losses -- more accurately enables comparison among MMF options that offer a constant versus a fixed NAV. As Figure 2 demonstrates, the excess interest earned on a prime fund has the potential to offset a price decline."
Under "Accounting and Tax Relief," the piece explains, "When the reforms were first proposed, investors raised questions over record-keeping hurdles. In particular, there were concerns that constant buying and selling of a floating NAV MMF would demand complex accounting and tax reporting for capital gains on the underlying MMF securities. Investors also posed questions over the applicability of the IRS "wash sales rule" on the sale and repurchase of assets in fewer than 30 days. These concerns have been mitigated, however, by the Treasury Department which recently published final Regulations and Revenue Procedures allowing for a simplified floating NAV accounting method and eliminating the "wash sales rule" complexity. Under the simplified NAV accounting method, MMF investments can be taxed based on the net fiscal-year (or other period chosen) gain or loss, with adjustments; a figure that should be available on reports prepared by the fund administrator."
Finally, it concludes, "Vast changes are influencing how a company manages cash. These include SEC reforms impacting MMF liquidity and principal preservation; credit rating revisions; and a reduction in the supply of short-dated securities. The reforms appear poised to make cash investing safer and more transparent, but investors need to adapt to the changes in order to achieve liquidity and performance goals. In contrast to pre-crisis cash management, investors have more options for how to balance liquidity, capital preservation and return. Of course, more options mean more review and more decisions; but continuing to operate according to the old rules is no longer possible. State Street Global Advisors is urging clients to review their cash strategies and IPSs to ensure they support your organization's goals. We are available to help assess your needs, revise your IPS and prepare for management and board approvals."
In other news, we're still catching up with the flurry of fund changes surrounding the October 14 Money Fund Reform deadline. One of the "Prime-to-Government" conversions we hadn't caught beforehand was TIAA-CREF Money Market Fund, which filed on its "Conversion to government money market fund" previously. A Prospectus Supplement explains, "As a result of amendments to Rule 2a-7 under the Investment Company Act of 1940, as amended, the Board of Trustees (the "Board") of the TIAA-CREF Funds has approved a proposal for the TIAA-CREF Money Market Fund (the "Fund") to convert to a "government money market fund," as defined in the amendments, on or before October 14, 2016."
It explains, "As a government money market fund, the Fund will be required to invest at least 99.5% of its total assets in cash, government securities and/or repurchase agreements that are collateralized fully by cash or government securities. The Fund's portfolio securities will continue to be valued at their amortized cost and the Fund will continue to seek to maintain a share value of $1.00 per share. A government money market fund is not required to impose liquidity fees or redemption gates, and the Fund does not currently intend to impose such fees and/or gates."
Following on the heels of our European Money Fund Symposium last month in London (and our Money Fund Symposium this past summer in Philadelphia), Crane Data is now preparing for its next event, our "basic training" Money Fund University. Our seventh annual MFU will be held at the Westin Jersey City Newport, Jersey City, NJ, January 19-20, 2017. Crane's Money Fund University is designed for those new to the money market fund industry or those in need of a concentrated refresher on the basics. The event also focuses on hot topics like money market regulations, money fund alternatives, offshore markets, and other recent industry trends. The affordable ($500) educational conference (see the preliminary agenda here or e-mail us to request our brochure) features a faculty of the money fund industry's top lawyers, strategists, and portfolio managers. (Note: Crane Data would like invite those attending next week's Association for Financial Professionals annual conference in Orlando to stop by Booth #208 to say "Hello.")
Money Fund University offers attendees a 2-day course on money market mutual funds, educating attendees on the history of money funds, the Fed, interest rates, ratings, rankings, money market instruments such as commercial paper, CDs and repo, plus portfolio construction and credit analysis. At our Jersey City event, we will also take a look at some remaining issues involving regulations, and we'll have a mini "Bond Fund University" double segment on ultra-short bond funds.
The morning of Day One of the 2016 MFU agenda includes: History & Current State of Money Market Mutual Funds with Peter Crane, President & Publisher, Crane Data; The Federal Reserve & Money Markets with Joseph Abate, Director, Fixed Income Strategy, Barclays and Mark Cabana, MD, Bank of America Merrill Lynch; Interest Rate Basics & Money Fund Math with Cabana and Phil Giles, Adjunct Professor at Columbia University and, Ratings, Monitoring & Performance with Greg Fayvilevich, Director, Fitch Ratings, Michael Masih, Associate Director, Standard & Poor's Global Ratings Services, and Rochelle Genetti, Managing Director, First American Funds.
Day One's afternoon agenda includes: Instruments of the Money Markets Intro with Teresa Ho, Vice President, J.P. Morgan Securities; Repurchase Agreements with Teresa Ho and Tyler Williams, Associate, J.P. Morgan Securities; Treasuries & Govt Agencies with Sue Hill, Senior Portfolio Manager; Federated Investors and, and Mike Watt, Senior MD, INTL FCStone Partners; Tax-Exempt Securities & VRDNs with Shaloo Savla, Research Analyst, Fidelity Investments; Commercial Paper & ABCP with Rob Crowe, Director, Citi Global Markets, Director, Money Markets, Citi Global Markets; CDs, TDs & Bank Debt with Vanessa Hubbard, Vice President, Wells Fargo Securities and Marian Trano, Senior Vice President and Treasurer, Bank Hapoalim; and, Credit Analysis & Portfolio Management with Adam Ackermann, VP and Portfolio Manager, J.P. Morgan A.M..
Day Two's agenda includes: Money Fund Regulations: 2a-7 Basics & History with Joan Swirsky, Of Counsel, Stradley Ronon, Jack Murphy, Partner, Dechert LLP and Stephen King, Senior Counsel, Perkins Coie LLP; Outstanding Issues with MMF Reforms with Stephen Keen, Senior Counsel, Perkins Coie, Jack Murphy, Partner, Dechert LLP and John Hunt, Partner, Sullivan & Worcester LLP; and, Bond Fund University: Ultra-Shorts with Peter Crane (and a speaker TBD). The conference ends with its annual MFU "Graduation" ceremony (where diplomas are given to attendees).
New portfolio managers, analysts, investors, issuers, service providers, and anyone interested in expanding their knowledge of "cash" investing should benefit from our comprehensive program. Even experienced professionals may enjoy a refresher course and the opportunity to interact with peers in an informal setting. Attendee registration for Crane's Money Fund University is just $500, exhibit space is $2,000, and sponsorship opportunities are $3K, $4K, and $5K. A block of rooms has been reserved at the Westin Jersey City.
We'd like to thank our past and pending MFU sponsors –- BlackRock, Fitch Ratings, Dreyfus/BNY Mellon CIS, Federated, J.P. Morgan Asset Management, Invesco, S&P Global Ratings, Dechert LLP, Fidelity, Morgan Stanley, SSGA, First American Funds/US Bank, INTL FCStone, and Wells Fargo Funds -- for their support, and we look forward to seeing you in Jersey City in January. E-mail Pete Crane (firstname.lastname@example.org) for the latest brochure or visit www.moneyfunduniversity.com to register or for more details. Crane Data is also preparing the preliminary agendas for its new Bond Fund Symposium (March 23-24, 2017, at the Boston Hyatt Regency), and our "big show," Money Fund Symposium, which will be held June 21-23, 2017, at the Atlanta Hyatt Regency.
In other news, Bloomberg writes on the "Conservative Ultra-Short Bond Fund" sector in the article, "Specter of New Threat Emerges in $1 Trillion Money-Fund Exit." Author Liz McCormick writes, "Regulations designed to safeguard the $2.7 trillion U.S. money-market industry threaten to steer cash toward higher-risk alternatives. Investors may respond to the market overhaul that took effect last week by seeking the higher yields of short-term bond funds, say Crane Data LLC, Fitch Ratings and Goldman Sachs Asset Management. In a sign of the segment's appeal, a category that Crane dubs conservative ultra-short bond funds, with a maturity mostly less than one year, has swelled to a 19-month high of almost $31 billion." (See also our latest Bond Fund Intelligence and our Oct. 17 News, "Sept. Bond Fund Intelligence Features Fitch, Fidelity's Doug McGinley.")
The Bloomberg piece continues, "But these funds aren't subject to the same standardization as their money-market counterparts, raising the prospect that investors will be surprised by the degree of potential losses and even run for the exits if values slide. That may undermine some of the benefits from the money-fund revamp, which most firms agree has gone a long way to reducing systemic risks in an industry that helped fuel the financial crisis."
It tells us, "Yet the uninspiring returns on government-only funds may lead investors to seek another destination. The 30-day yield for those offerings, an annualized measure of the period's earnings, was about 0.17 percent as of Oct. 17, compared with a yield of 0.81 percent for Crane's conservative ultra-short bond-fund index. Prime institutional funds yield 0.29 percent on average."
Finally, Bloomberg adds, "For Peter Crane, president of Westborough, Massachusetts-based Crane Data, the risk is that investors lured to short-term bond funds for their relatively higher yield may flee if they see share values slump, as holders of prime funds did in 2008, spurring a broader market disruption. "Investors still haven't been taught the lesson that higher yield or higher return means higher risk," he said. "We've seen this movie before, and every other time in history it ended badly."
An article published in American Banker, entitled, "Enough Already. Money-Market Funds Aren't Shadow Banks," argues against further regulation of money market funds following the latest set of reforms. Written by Paul Schott Stevens, President & CEO of the Investment Company Institute, it says, "In July 2014, the U.S. Securities and Exchange Commission enacted sweeping new rules for money-market funds, setting an aggressive implementation deadline: Oct. 14, 2016. Though the rules required significant operational changes, money-market funds have met the new requirements on time. As a result, today's money-market funds are very different products than their precrisis predecessors."
He explains, "The reforms, which are meant to prevent a repeat of the heavy redemptions from money-funds brought on by the banking crisis of 2008, have added layers of transparency and redundant safeguards that more than adequately address any risks that may have existed. Moreover, the reforms have prompted a large shift in assets from prime to government money market funds. Yet with all of these new rules, some still clamor for further regulation, using disparaging terms like "shadow banking" to spark fear in the minds of regulators and investors alike. Enough already. Money-market funds are not shadow banks. They are fully transparent, regulated investment vehicles that have been a reliable cash management tool for millions of individuals and institutions for decades. Calls for additional layers of burdensome regulation over this industry are not only premature, but unwarranted."
Stevens writes, "Though sweeping in scope, the new rules are actually just the latest in a series of SEC regulations that have been designed to reduce risk in money-market funds following the financial downturn of 2008. The latest rules add to an earlier, comprehensive rulemaking in 2010, which set a number of new standards -- including liquidity requirements and stress tests -- to enhance the resiliency of money-market funds. These reforms were tested and proven in 2011, when Europe's sovereign debt crisis and the federal debt-ceiling crisis rattled markets, and showed their value again after the Brexit vote in the United Kingdom."
He continues, "Now, the latest rulemaking has added even more protection against market shocks, in a number of ways. First, the SEC's reforms require institutional money market funds (both prime and tax-exempt) to price and transact their shares using a floating net asset value, rather than a constant NAV of $1.00, based on the market value of portfolio holdings at the time they calculate their NAVs. The new rules also require funds to calculate their NAVs to four decimal places (for instance, for funds with a $1.00 NAV, to one-hundredth of a penny, or $1.0000). Though this change required fund sponsors and pricing vendors to spend significant time and money reprogramming and testing system algorithms that calculate NAVs, this highly technical work has succeeded -- firms are prepared to meet the demand for unprecedented levels of precision on the valuation of floating NAV money-market funds."
The article tells us, "Many investors, meanwhile, will be able to continue to use floating NAV funds as cash management vehicles because fund sponsors have created systems to strike the funds' NAV multiple times a day, ensuring that investors have intraday access to their balances. Fund prospectuses and other investor education materials will inform investors about how the floating NAV requirement is implemented for each fund. Secondly, the SEC reform permits money-market funds' boards of directors to impose certain conditions on redemptions (so-called liquidity fees and gates) during extraordinary circumstances. This is also a significant change.... In addition to making the operational changes required to implement this requirement, funds have subsequently spent a considerable amount of time communicating to shareholders about fees and gates, including explaining why the likelihood of fees and gates actually being imposed is so small."
It adds, "Funds have worked overtime to prepare for the new regulatory landscape, with remarkable success. While the new rules went into force on Oct. 14, large shifts of assets have already been occurring in the money-market fund sector -- a process that funds and their advisers have smoothly managed. Since November 2015, nearly $1.1 trillion in assets have moved out of prime and tax-exempt money market funds, with a nearly equivalent inflow of cash into government money-market funds. On its face, this is a staggering sum of money -- but the industry foresaw this migration, and shortened the maturities of portfolio holdings to increase liquidity and meet investor demands."
Finally, Stevens says, "Markets and products evolve. While today's money-market funds are very different products than their precrisis predecessors, the $2.6 trillion in assets they hold today prove investors are confident in the industry's ability to continue meeting their needs for years to come."
In other news, the recently released "Minutes of the Federal Open Market Committee" reveal that the Federal Reserve discussed the shifts driven by money market fund reforms at its Sept. 20-21 meeting. Under, "Developments in Financial Markets and Open Market Operations," they say, "The manager reported on developments in financial markets during the period since the Committee met on July 26–27, 2016. Over much of the period, financial market volatility was relatively low, but volatility increased somewhat in the last couple of weeks.... The deputy manager followed with a briefing on open market operations and developments in money markets, including investment flows and changes in market interest rates in anticipation of the upcoming implementation of reforms to the money market fund (MMF) industry. Usage of the System's overnight reverse repurchase agreement facility increased modestly in the most recent intermeeting period. Federal funds generally continued to trade close to the middle of the FOMC's target range of 0.25 to 0.50 percent."
In a "Staff Review of Financial Situation," the minutes explain, "Domestic financial conditions remained accommodative since the July FOMC meeting. Asset prices moved within a fairly narrow range for much of the intermeeting period.... Market expectations for a policy rate increase by the end of this year rose a bit since the July FOMC meeting, reportedly reflecting comments of Federal Reserve officials that were viewed, on balance, as suggesting that the case for policy firming had strengthened over recent months. Nominal Treasury yields across the curve edged up. Anticipation of the impending deadline for compliance with MMF reform measures continued to prompt net outflows from prime MMFs and put upward pressure on some term money market rates."
Finally, they add, "MMF reform continued to affect several short-term funding markets in advance of the October 14, 2016, compliance date. While total assets under the management of MMFs changed little over the intermeeting period, investors continued to shift from prime funds to government funds. As a result, MMF holdings of commercial paper (CP) and certificates of deposit continued to decline, and prime institutional funds further reduced their weighted-average maturities to historically low levels. Reflecting MMFs' reduced appetite for term lending, spreads of three-month money market rates over rates on comparable-maturity overnight index swap contracts rose during the intermeeting period. Rates on short-term municipal securities and net yields on tax exempt MMFs also increased sharply, primarily because of outflows from these funds."
The October issue of Crane Data's Bond Fund Intelligence, which was sent out to subscribers Monday morning, features the lead story, "Fitch: Short-Term Bond Funds as MMF Subs Need Scrutiny," which reviews Fitch Ratings' recent "Short Term Bond Fund" release, and a profile of Doug McGinley, co-Portfolio Manager of Fidelity Municipal Conservative Income Fund. Also, we recap the latest Bond Fund News, including continued inflows in September and October, and the latest Worldwide Bond Fund statistics. BFI also includes our Crane BFI Indexes, which showed continued gains in September. In other news, ignites wrote Friday on Winners and Losers from Money Fund Changes. We also quote from this below.
Our lead Bond Fund Intelligence story says, "The ultra-, ultra-short or conservative ultra short bond fund sector continues to attract interest from fund managers and seemingly everyone except perhaps investors in big numbers. Fitch Ratings is the latest company to take a close look at the sector, as ratings agency, fund rankers like Crane Data, and servicers move to track and define this growing new space. We cover Fitch's recent update below."
It says, "A release entitled, "Fitch: Short-Term Bond Funds Need Scrutiny as Money Fund Alternatives," explains, "Short-term bond funds have garnered attention as potential alternatives to prime money market funds in light of reforms, but closer scrutiny is warranted by investors due to a lack of standardization and widely varying risks, according to a new report from Fitch Ratings."
It tells us, "Most of the cash leaving prime funds has gone into government money funds ahead of money fund reform taking effect Oct. 14, but investors have shown an interest in short-term bond funds as a higher yielding alternative, and fund managers have responded by launching numerous new offerings. One of the draws for investors is the absence of the liquidity fees and redemptions gates feature that money funds will have with reform."
Fitch's Greg Fayvilevich comments, "Short term bond-funds may attract investors, however there is less transparency in these funds than money funds." The update explains, "The higher yields on short-term bond funds reflect the additional interest rate, credit, and liquidity risks. The newest type of short-term bond funds launched by fund managers in response to the reforms tends to assume slightly higher duration and credit risk than allowed under Rule 2a7, up to one year of duration and a small allowance for 'BBB' rated credits. In the broader universe of short-term bond funds, duration risk is higher, and many funds buy non-investment-grade securities."
It continues, "Liquidity risk is another differentiating factor, since money funds are used as cash management vehicles, but short-term bond funds are generally viewed as appropriate for longer time horizon reserve or strategic investments. This is reflected in the funds' portfolio compositions, with money funds allocating more to liquid government securities while short-term bond funds invest more in less liquid and higher yielding ABS. The difference in risk is reflected in the funds' expected volatility."
Finally, it adds, "Fitch has rated a number of short-term bond funds marketed to investors as MMF alternatives and, in light of the focus on the sector, recently updated its Global Bond Fund Rating Criteria.... The changes are meant to provide investors with additional transparency, which is often lacking in short-term bond funds compared to the information available on money funds."
The BFI "Profile" on Fidelity's Doug McGinley says, "This month, BFI profiles Fidelity Conservative Income Municipal Bond Fund's Doug McGinley. He discusses the ultra-short municipal space and Fidelity's shortest tax-exempt bond fund offering, which celebrates its 3rd anniversary this month. McGinley also talks about his investment strategies and the recent jump in tax-exempt yields. Our interview follows."
A sidebar entitled, "SEC Adopts Fund Portfolio Reporting, Liquidity Rules," explains, "A release entitled, "SEC Adopts Rules to Modernize Information Reported by Funds, Require Liquidity Risk Management Programs, and Permit Swing Pricing," explains, "The Securities and Exchange Commission today voted to adopt changes to modernize and enhance the reporting and disclosure of information by registered investment companies and to enhance liquidity risk management by open-end funds, including mutual funds and exchange-traded funds (ETFs).... The new rules are part of the Commission's initiative to enhance its monitoring and regulation of the asset management industry."
Our sidebar on Worldwide Bond Funds, says, "ICI released its latest "Worldwide Regulated Open-End Fund Assets and Flows Second Quarter 2016" report, which shows that bond fund assets globally increased by $980 (12.5%) billion in Q2. It says, "Worldwide regulated open-end fund assets increased 1.2% to $39.29 trillion at the end of the second quarter of 2016.... Bond fund assets increased by 3.8% to $8.81 trillion in the second quarter.... The asset share of bond funds was 22% [unchanged from Q1]." (Contact us if you'd like to see a copy of our latest Bond Fund Intelligence.)
In other news, ignites article, "Winners, Losers (So Far) Amid Massive Money Fund Changes," comments, "Friday marks the SEC's deadline for all institutional prime and municipal money market funds to adopt a floating net asset value -- a move that firms have been working on steadily since the agency finalized its new rules for the products in July 2014. The reforms have sparked massive changes to firms' product offerings and systems and incited a $1 trillion exodus from prime funds. And numerous managers have approached this period of flux as an opportunity to gain market share."
It continues, "In fact, at least one close observer of the industry says the gains and decreases in firms' money fund assets since the SEC passed its rule do not have much significance. "This time may be different, but when we've seen what looked like somebody gaining market share in the past, it almost always turns out to be a temporary, transactional phenomenon," says Peter Crane, CEO of Crane Data."
Finally, ignites adds, "Questions for the industry post-Oct. 14 are what factors will induce investors to return to prime institutional products, and how much they might bring back. Investors will likely want to see that prime funds’ NAVs fluctuate very little, for example, and ensure that firms impose liquidity fees and redemption gates on the funds sparingly. Investors also will want to see a bigger yield advantage with prime funds, as compared to government funds."
October 14 marks the implementation date for the final phase of the SEC's 2014 Money Fund Reforms, which most notably include a floating (4-digit) NAV for Prime Institutional funds and emergency gates and fees provisions for all Prime and Municipal money market funds. (See our July 24, 2014 News, "SEC Adopts MMF Reforms; Chair White on Rule's Fundamental Changes.) ICI released a "Statement on SEC Money Market Fund Rules," which is subtitled, "Reforms from 2010 and 2014 Have Fundamentally Changed Product to Address Any Pre-Crisis Risks." We excerpt their statement, as well as comments from Fitch Ratings and S&P Global Ratings, below.
The ICI writes, "In 2014 the US Securities and Exchange Commission (SEC) finalized new regulations governing money market funds, which will take effect on October 14, 2016. Investment Company Institute (ICI) President and CEO Paul Schott Stevens issued the following statement on the eve of implementation of the new SEC rules: "This SEC rulemaking required funds to make a number of significant operational changes on a very aggressive timeframe. Thanks to substantial effort, planning, and execution within the industry, funds are prepared to meet the new requirements on time."
He comments, "After all of this work, three things are clear: today's money market funds are very different products than their pre-crisis predecessors; investors value the vital role that money market funds play in helping meet their cash management needs; and money market funds do not need further reform. Indeed, when coupled with SEC reforms from 2010, these new rules add layers of transparency and redundant safeguards that more than adequately address any risks that may have existed in 2008."
Stevens adds, "Funds have worked overtime to prepare for the new regulatory landscape. By entrusting $2.6 trillion in assets to these funds, investors continue to register their confidence in money market funds' ability to meet their needs for years to come."
A statement entitled, "Fitch: Money Funds Not Taking Chances on Liquidity as Reform Looms," tells us, "Uncertainty surrounding investor behavior is pushing prime institutional money funds to err on the side of caution when it comes to liquidity as money fund reform comes into effect on Oct. 14, 2016.... Average weekly liquidity across 33 prime institutional funds Fitch reviewed was 84.0%, and a quarter of the funds maintain at least 99% weekly liquidity. Five funds have 100% of their portfolios invested in weekly liquid assets, eliminating any chance that outflows will trigger the liquidity fees or redemption gates features."
Fitch's Greg Fayvilevich states, "With new liquidity requirements on prime money funds, managers are maintaining liquidity levels well above the 30% threshold on prime funds as over a trillion dollars has flowed out of prime funds ahead of reform. In response, fund managers have been hoarding government securities and other debt that matures within one week to successfully meet the large outflows."
The release continues, "As much as $1.1 trillion has shifted away from prime money funds since October 2015, including $838 billion from institutional prime funds, mainly into government funds. The moves are driven to a large degree by investor discomfort with prime money funds' new features, particularly liquidity fees and redemption gates that may be imposed on these funds if their weekly liquidity falls below certain thresholds."
It adds, "The funds' focus on short maturities is causing dislocations in the short-term markets, with commercial paper (CP) rates spiking in recent months. Rates on CP maturing in 90 days rose from 0.60% at end-April to 0.81% as of Oct. 7, 2016. Not all short-term debt issuers have been willing to pay the higher rates to access the CP market, as evidenced by a decline in CP outstandings of $175 billion between end-April and Oct. 5, 2016. The higher yields on short-term debt are being reflected in money fund portfolios, with the spread between net yields on prime institutional funds and government institutional funds now up to 0.16% as of Oct. 11, 2016, up from 0.12% as of Sept. 21, 2016."
"The yield spreads between government money funds and prime funds, as well as alternative liquidity products such as private liquidity funds and short-term bond funds, will be a significant factor in investors' decisions to move back into prime funds post reform," adds Fayvilevich.
S&P Global Ratings, in an update entitled, "Ratings On Money Market Funds Are Likely To Remain Stable After The SEC's New Amendments Take Effect," writes, "On Oct. 14, the SEC's amendments to rules governing money market funds (MMFs) will take effect. The commission adopted these reforms on July 23, 2014, in part because of the 2007-2008 financial crisis. These updates to rule 2a-7 of the Investment Company Act of 1940 are subsequent additions to the prior amendments the SEC implemented in 2010. The new guidelines represent significant changes to the way MMFs--particularly institutional prime funds--currently operate. S&P Global Ratings' assessment at the time these amendments were adopted in July 2014 was that they were unlikely to affect our principal stability fund ratings (PSFR)."
It explains, "The amendments going into effect on Oct. 14 primarily combine two approaches for restructuring MMF operations, which include floating net asset values (NAV) as well as liquidity fees and redemption gates. The floating NAV per share requirement is targeted to all MMFs, except government and retail MMFs. A floating NAV prime institutional MMF must price and transact in its shares based on the market value of underlying fund holdings at an NAV rounded to the fourth decimal place (e.g., $1.0000).... Retail MMFs were excluded because they are less likely to redeem in time of market stress, as they showed during the 2007-2008 financial crisis."
Authors Guyna Johnson, Michael Masih, and Peter Rizzo comment, "The floating NAV aspect of the regulations has not affected our PSFRs because we rate MMFs based on our opinion of their ability to maintain a principal stability--that is, maintain a marked-to-market NAV per share within a specific range (i.e., up to -0.25% or 0.9975 for a 'AAAm' rating). A floating NAV that remains within this threshold is consistent with one component of our criteria for 'AAAm' rated funds. As the regulations take effect, we believe fund managers will continue to minimize share price fluctuations, as they did after the 2010 SEC amendments to rule 2a-7 that improved credit quality, reduced maturity, and established minimum daily and weekly liquidity requirements."
Finally, they add, "During the two-year MMF reform implementation period ending Oct. 13, investment managers have taken steps to ensure their money funds meet the new regulations while also taking into consideration institutional investors' short-term cash management needs. In addition to dedicating enormous amounts of time and resources to make the necessary operational changes to offer floating NAV MMFs, many investment managers have converted existing prime MMFs to U.S. government MMFs and created new investment alternatives within the stable MMFs and ultra-short bond fund categories. Additionally, we have seen institutional investors move large amounts of money from prime MMFs to U.S. government MMFs. Also, the regulatory changes sparked another wave of industry consolidation as investment managers determined the costs associated with the rules outweighed the benefits of remaining in the business. As a result, we have also seen several players completely exit this market and many others exit the prime MMF business and focus their offerings on government MMFs."
Crane Data released its October Money Fund Portfolio Holdings yesterday, and our latest collection of taxable money market securities, with data as of Sept. 30, 2016, again shows big increases in Repo and Treasuries, and big decreases in CDs, CP and Other (Time Deposits). Money market securities held by Taxable U.S. money funds overall (tracked by Crane Data) decreased by $114 billion to $2.554 trillion last month, after increasing by $75.9 billion in August and $47.9 billion in July, and decreasing by $59.7 billion in June. Repos remained the largest portfolio segment, growing to record levels and breaking over $800 billion for the first time ever, followed by Treasuries and Agencies. Holdings of "credit" instruments continued to plummet as the shift from Prime to Government money funds reached a crescendo in September. CDs were in fourth place, followed by Commercial Paper, Other/Time Deposits and VRDNs. Money funds' European-affiliated securities plunged to 15% of holdings, down from the previous month's 25%. Below, we review our latest Money Fund Portfolio Holdings statistics.
Among all taxable money funds, Repurchase Agreements (repo) leapt by $127 billion (28%) to $863 billion, or 34% of holdings, after rising $102 billion in August. Funds continued shortening their WAMs (weighted average maturities) in September. Treasury securities rose $28 billion (24%) to $668 billion, or 26% of holdings, after rising $79 billion in August and $39 billion in July. Government Agency Debt increased $12 billion (22%) to $608 billion, or 24% of all holdings, after increasing $24 billion in August, $27.0B in July and $37.4B in June. The rise in Repo, Treasuries and Agencies is being driven by the shift of almost $1 trillion of Prime MMF assets and another $100 billion in Tax Exempt MMF assets (since late 2015) into Government MMFs.
CDs and CP plunged again, falling to their lowest levels since Crane Data began tracking these in early 2011. Certificates of Deposit (CDs) were down $100 billion (-10%) to $163 billion, or 6% of taxable assets, after declining $55 billion in August and $37.6 billion in July. Commercial Paper (CP) was down $76 billion (-8%) to $126 billion, or 5% of holdings (after declining $72B last month), while Other holdings, primarily Time Deposits, fell $101 billion (-7%) to $90 billion, or 4% of holdings. VRDNs held by taxable funds decreased by $4 billion (2%) to $37 billion (1% of assets).
Prime money fund assets tracked by Crane Data (in our holdings collection) fell to $605 billion (down from $913 trillion last month), or 24% (down from 34%) of taxable money fund holdings' total of $2.554 trillion. Among Prime money funds, CDs represent under one-third of holdings at 27% (down from 29% a month ago), followed by Commercial Paper at 21% (down from 22%). The CP totals are comprised of: Financial Company CP, which makes up 13% of total holdings, Asset-Backed CP, which accounts for 5%, and Non-Financial Company CP, which makes up 3%. Prime funds also hold 2% in US Govt Agency Debt (same as last month), 9% in US Treasury Debt (up from 7%), 10% in US Treasury Repo (up from 4%), 4% in Other Instruments, 12% in Non-Negotiable Time Deposits, 7% in Other Repo, 4% in US Government Agency Repo, and 5% in VRDNs.
Government money fund portfolios totaled $1.337 trillion, up from $1.143 trillion in August, while Treasury money fund assets totaled another $611 billion, about the same as the $612 billion from the prior month. Government money fund portfolios were made up of 44% US Govt Agency Debt, 14% US Government Agency Repo, 14% US Treasury debt, and 28% in US Treasury Repo. Treasury money funds were comprised of 71% US Treasury debt, 29% in US Treasury Repo, and 0% in Government agency repo, Other Instrument, and Investment Company shares. Government and Treasury funds combined now total $1.948 trillion, or over 3/4 (76%) of all taxable money fund assets, up from 66%.
European-affiliated holdings decreased $275 billion in September to $388 billion among all taxable funds (and including repos); their share of holdings decreased to 15% from 25% the previous month. Eurozone-affiliated holdings decreased $188 billion to $235 billion in Sept.; they now account for just 9% of overall taxable money fund holdings. Asia & Pacific related holdings decreased by $45 billion to $151 billion (6% of the total). Americas related holdings increased $207 billion to $2.014 trillion and now represent 79% of holdings.
The overall taxable fund Repo totals were made up of: US Treasury Repurchase Agreements, which increased $169 billion, or 16%, to $607 billion, or 24% of assets; US Government Agency Repurchase Agreements (down $30 billion to $215 billion, or 8% of total holdings), and Other Repurchase Agreements ($41 billion, or 2% of holdings, down $12 billion from last month). The Commercial Paper totals were comprised of Financial Company Commercial Paper (down $49 billion to $78 billion, or 3% of assets), Asset Backed Commercial Paper (down $18 billion to $31 billion, or 1%), and Non-Financial Company Commercial Paper (down $9 billion to $17 billion, or 1%).
The 20 largest Issuers to taxable money market funds as of Sept. 30, 2016, include: the US Treasury ($668 billion, or 26%), Federal Home Loan Bank ($443B, 17%), Federal Reserve Bank of New York ($367B, 14%), BNP Paribas ($78B, 3%), Wells Fargo ($70B, 3%), Federal Home Loan Mortgage Co. ($63B, 3%), Federal Farm Credit Bank ($57B, 2%), RBC ($44B, 2%), Federal National Mortgage Association ($42B, 2%), HSBC ($40B, 2%), Bank of America ($33B, 1%), Bank of Nova Scotia ($31B, 1%), Nomura ($29B, 1%), Mitsubishi UFJ Financial Group Inc. ($29B, 1%), Citi ($28B, 1%), Societe Generale ($27B, 1%), Credit Agricole ($23B, 1%), Barclays PLC ($23B, 1%), JP Morgan ($22B, 1%), and Canadian Imperial Bank of Commerce ($22B, 1%).
In the repo space, the 10 largest Repo counterparties (dealers) with the amount of repo outstanding and market share (among the money funds we track) include: Federal Reserve Bank of New York ($367B, 43%), BNP Paribas ($63B, 7%), Wells Fargo ($59B, 7%), HSBC ($34B, 4%), RBC ($32B, 4%), Nomura ($29B, 3%), Bank of America ($28B, 3%), Societe Generale ($24B, 3%), Citi ($23B, 3%), and Bank of Nova Scotia ($21B, 2%). The `10 largest Fed Repo positions among MMFs on 9/30 include: JP Morgan US Govt ($30B), Wells Fargo Gvt MMkt ($20B), Goldman Sachs FS Gvt ($19B), BlackRock Lq FedFund ($17B), BlackRock Lq T-Fund ($16B), Federated Gvt Oblg ($16B), Fidelity Inst MMkt Gvt ($16B), Federated Trs Oblg ($14B), Northern Trust Trs MMkt ($12B), and Morgan Stanley Inst Lq Gvt ($11B).
The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: Svenska Handelsbanken ($16B, 5%), Nordea Bank ($16B, 5%), Mitsubishi UFJ Financial Group Inc. ($15B, 5%), Canadian Imperial Bank of Commerce ($15B, 4%), BNP Paribas ($15B, 4%), Swedbank AB ($13B, 4%), Credit Agricole ($12B, 4%), Sumitomo Mitsui Banking Co ($12B, 3%), RBC ($12B, 3%), and Bank of Montreal ($11B, 3%).
The 10 largest CD issuers include: Mitsubishi UFJ Financial Group Inc. ($11B, 7%), Canadian Imperial Bank of Commerce ($10B, 6%), Sumitomo Mitsui Banking Co ($10B, 6%), Wells Fargo ($9B, 6%), Bank of Montreal ($8B, 5%), RBC ($7B, 4%), Toronto-Dominion Bank ($7B, 4%), Bank of Nova Scotia ($7B, 4%), Svenska Handelsbanken ($6B, 4%) and Swedbank ($6B, 4%). The 10 largest CP issuers (we include affiliated ABCP programs) include: BNP Paribas ($8B, 7%), Commonwealth Bank of Australia ($7B, 6%), Australia and New Zealand Banking Group Ltd ($5B, 4%) National Australia Bank Ltd ($4B, 4%), FMS Wertmanagement ($4B, 4%), JP Morgan ($4B, 4%), Bank Nederlandse Gemeenten ($4B, 4%), Nordea ($4B, 3%), ADP LLC ($3B, 3%), and Westpac Banking Co ($3B, 3%).
The largest increases among Issuers include: Federal Reserve Bank of New York (up $220B to $367B), US Treasury (up $28B to $668), Nomura (up $11B to $29B), Federal Home Loan Bank (up $9B to $443B), HSBC (up $8B to $40B), Wells Fargo (up $3B to $70B), Federal National Mortgage Association (up $3B to $42B), Federal Home Loan Mortgage Co (up $1B to $63B), and Federal Farm Credit Bank (up $1B to $57B).
The largest decreases among Issuers of money market securities (including Repo) in Sept. were shown by: Credit Agricole (-$55B to $23B), Societe Generale (-$40B to $27B), Credit Suisse (-$27B to $10B), BNP Paribas (-$23B to $78B), Natixis (-$19B to $17B), DnB NOR Bank ASA (-$16B to $6B), Skandinaviska Enskilda Banken AB (-$13B to $8B), Mitsubishi UFJ Financial Group Inc (-$12B to $29B), Svenska Handelsbanken (-$12B to $16B), and Swedbank AB (-$10B to $13B).
The United States remained the largest segment of country-affiliations; it represents 73% of holdings, or $1.871 trillion. France (6%, $152B) remained in second and Canada (6%, $143B) remained in 3rd. Japan (4%, $105B) stayed in fourth, while the United Kingdom (3%, $79B) moved up to fifth. Sweden (2%, $53B) fell to sixth, while Germany (2%, $40B) ranked seventh. The Netherlands (2%, $40B) moved up to eighth while Australia (1%, $35B) dipped to ninth. Lastly, Switzerland (1%, $14B) held tenth place 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 Sept. 30, 2016, Taxable money funds held 36% (up from 34%) of their assets in securities maturing Overnight, and another 13% maturing in 2-7 days (down from 15%). Thus, 49% in total matures in 1-7 days. Another 14% matures in 8-30 days, while 12% matures in 31-60 days. Note that three-quarters, or 75% of securities, mature in 60 days or less (same as last month), the dividing line for use of amortized cost accounting under the new pending SEC regulations. The next bucket, 61-90 days, holds 11% (up from 10%) of taxable securities, while 11% matures in 91-180 days (up from 10%), and just 4% matures beyond 180 days (up from 3%).
Crane Data's Taxable MF Portfolio Holdings (and Money Fund Portfolio Laboratory) were updated Wednesday, and our Tax Exempt MF Holdings and MFI International "offshore" Portfolio Holdings will be released late 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.
Recently, the results of the "2016 Citigroup Money Market Industry Survey," which polled a number of money market professionals about their post-reform expectations, were released. Citi's Steve Kang writes, "This week, we present the results of our recently conducted money market reform survey. The survey was conducted to gauge investor expectations after the reform date. We sent it to a diverse set of market participants who follow short-end markets regularly ... from Sept 30 to Oct 6. 102 participated in the survey." We review Citi's results below, and we excerpt from a paper from S&P on "Banks Feel the Pinch from MMF Reform".
Citi explains, "Here is our summary of the aggregated results. 1. Most survey respondents expect that major outflows are behind us and expect a slow move back to equilibrium, which is expected to be reached around 2H2017. 2. The equilibrium for Prime institutional size (currently 200bn) is expected to be either around the current levels (100-400bn) or slightly larger (400-700bn). These are still smaller than what they used to be before 2016 (around 900bn). 3. Over the course of next year, Prime institutional WAM is expected to increase modestly to 20-30 days. This is higher than the current 9 days but lower than the historical average of around 40-50 days."
The summary continues, "4. There was no clear consensus on the required length of stable floating NAV for substantial inflows to Prime institutional funds to materialize. Most respondents expect either 1y or longer (28%) or 3-6 months (26%). 5. Assuming stable floating NAV, the right yield spread of Prime to Government is expected to be 20-30bp, higher than the historical average of around 12bp. 6. There was no clear consensus on the direction of 3M LIBOR-OIS in the near term (by the end of this year). However, most respondents expected it to tick down over the course of next year."
Kang tells us, "In terms of the nature of outflows, about half of the respondents believed that the decline in non-government assets is mainly due to both FNAV and gates and fees. Some respondents (22%) answered that gates and fees singularly was the primary determinant of outflows, followed by floating NAV (14%) and policy changes on conversions and closures (8%). Overall, the survey respondents are expecting outflows to slow after the reform date.... The modal expectation is for flat flows going into this year-end (between 50bn inflows to 50bn outflows to Prime) with some bias for further outflows (skewed to the right). As for the flows next year, the investor base is also expecting flat flows with some bias for inflows to prime (skewed to the left)."
He adds, "The flows so far have been more dramatic for institutional Prime funds due to uncertainty around FNAV -- currently Prime funds hold only about $200bn, a $700bn decline from a year ago. The respondents had a consensus for the timing of the equilibrium to be around 2H 2017.... In terms of the resulting size of the Prime funds, most participants expected the size of institutional Prime to stay around where we are (100-400bn) or rise slightly (400-700bn). By the end of 2017 (when most respondents expect the market to reach the equilibrium point), the modal expectation for Prime institutional WAM was 20-30 days, lower than historical averages around 40-50 days (Figure 7)."
Finally, Citi says, "Assuming stable FNAV is established, the respondents expect 20-30bp as a stable yield differential where investors feel indifferent between institutional Prime to Gov funds. This is substantially higher than historical averages of 12bp, but not out of reach as CD/CP has cheapened. The spread between 30-day CP and 1M T-bills remained around 15-25bp this year. The spread rises to 30-40bp for 3M tenors. The potential rate hike from the Fed would also help Prime funds attain higher yield spreads."
In other news, S&P Global Ratings published, "Banks Feel The Pinch From U.S. Money Market Reform, But It Won't Be Too Painful." The update explains, "U.S. Securities and Exchange Commission (SEC) reform of money market funds (MMFs) intended to boost their resiliency will take full effect on Oct. 14, 2016. One change will require institutional prime MMFs, which primarily invest in corporate debt securities, to maintain a "floating" net asset value (NAV) instead of a "stable" one. The measure aims to increase transparency in the funds' underlying assets. And in times of extreme volatility, institutional prime MMFs will be able to charge liquidity fees and restrict uncontrolled redemptions."
It continues, "Banks have traditionally used prime MMFs to raise U.S. dollar funding. In the past several months, however, investors have pulled billions of dollars from these funds ahead of the new SEC regulations. At the end of August 2016, prime MMFs outstanding had lost US$723 billion year to date after years of very stable investment volumes. Many U.S. institutional investors have moved into government MMFs, which are typically invested in debt issued by the government and government agencies, since these funds are not subject to the new rule."
The piece explains, "Despite the exodus, S&P Global Ratings does not foresee a funding shortage for banks in the U.S., Europe, Japan, and Australia. Anticipation of the MMF reform has already driven up certain short-term funding rates, such as the three-month U.S. dollar LIBOR rate, but we believe the overall impact will be limited. For banks in some countries, however, rising dollar funding costs will further strain net interest margins as they struggle amid low or even negative interest rates in their domestic markets."
It continues, "In the U.S., banks' reliance on MMFs for funding has fallen significantly from pre-crisis levels and, as a result, we think the outflow from prime to government MMFs will not significantly affect the ability of banks to fund ongoing business initiatives. The sustained low-rate environment, which has resulted in a large inflow of bank deposits, has partly helped U.S. banks to reduce their reliance on MMFs for funding. Indeed, we estimate that deposits have grown cumulatively since 2006 through the second quarter of 2016, increasing approximately 60% while loan growth rose only approximately 28%.... Given the large amount of deposits parked in U.S. banks, these institutions are not currently reliant on MMFs to fund their businesses."
S&P writes, "U.S. MMFs have historically invested in banks' short-term debt. As investors flee prime MMFs, banks need to find alternative funding to permanently or temporarily replace funding sources that have shriveled due to the new SEC regulations. However, we think banks in Europe, Japan, and Australia are unlikely to face a shortage of U.S. dollar funding. For instance, when U.S. MMFs abruptly withdrew their exposures to French banks in 2012, the banks, while they did face a squeeze in dollar funding, subsequently decided to deleverage materially from banking activities that need in U.S. dollar funding (for example, trade or commodities financings)."
They add, "Banks in Europe, Japan, and Australia rely on U.S. MMFs to fund only part of their dollar obligations, and dependency has generally declined in recent years.... Stakeholders have anticipated the full MMF reform since the SEC adopted the first amendments to its regulations in 2010.... Banks have alternative funding sources. These include borrowings in the repurchase (repo) market leveraging their high-quality liquid assets, issuing dollar-denominated securities with longer maturities, or raising dollar deposits. More generally, we think U.S. funding market sources are deep enough, and banks are able to tap other funds and buy-side counterparts. Should there be a dollar funding crisis, the Federal Reserve has established dollar swap lines with other central banks across the globe; ultimately, these central banks would in turn lend dollars to their domestic banks as a backstop."
Finally, the article tells us, "While the SEC's reforms are set to change the landscape of the U.S. MMF market, and anticipation of the changes have pushed up short-term funding costs, we believe the overall impact on banks in and outside the U.S.--in particular, Europe, Australia, and Japan--will likely be limited. They have boosted other funding sources over the past few years and a limited portion of their funds is made up of U.S. dollars sourced from the prime MMF market. For banks in some countries, however, rising dollar funding costs will further stress their net interest margins, which are already hurting from low or even negative domestic interest rates."
Crane Data's latest Money Fund Market Share rankings show asset declines for most U.S. money fund complexes in September as money market fund assets fell by $54.6 billion, or 2.1%. Overall assets inched lower, falling $17.6 billion, or 0.7%, over the past 3 months. But over the past 12 months through Sept. 30, they rose by $13.8 billion, or 0.5%. The biggest gainer in September was Vanguard, whose MMFs rose by $2.6 billion, or 1.3%. Dreyfus, First American, BlackRock, and Wells Fargo also saw assets increase, rising by $1.4 billion, $1.0 billion, $905 million, and $297 million, respectively. The biggest declines were seen by SSGA, Fidelity, JPMorgan and Western. (Our domestic U.S. "Family" rankings are available in our MFI XLS product, our global rankings are available in our MFI International product, and the combined "Family & Global Rankings" are available to Money Fund Wisdom subscribers.) We review these below, and we also look at money fund yields the past month, which were up across the board (especially in the Tax Exempt sector).
Vanguard, JP Morgan, Wells Fargo, and First American had the largest money fund asset increases over the past 3 months, rising by $9.6B, $7.5B, $7.3B and $2.9B, respectively. Over the past year through Sept. 30, 2016, Goldman Sachs was the largest gainer (up $48.9B, or 35.6%), followed by BlackRock (up $28.2B, or 13.0%), Fidelity (up $26.6B, or 6.4%), Vanguard (up $19.5B, or 11.1%), Northern (up $11.3B, or 14.1%), and PNC (up $7.0B, or 146%). (Note: BlackRock was buoyed by its acquisition of BofA's money funds -- a deal which closed in April.)
Other asset gainers for the past year include: Invesco (up $4.2B, or 8.1%), Wells Fargo (up $4.1B, 3.7%), First American (up $2.4B, 5.6%), Morgan Stanley (up $1.9B, 1.5%), and UBS (up $1.7B, 4.5%). (AB, or Alliance Bernstein, was also up by $5.1B, but we added a large fund to this complexes' listings.) The biggest decliners over 12 months include: JP Morgan (down $22.5B, or -8.9%), Deutsche (down $10.7B, or -34.7%), Western (down $9.0B, or -19.6%), SSGA (down $8.1B, or 9.6%), Dreyfus (down $8.0B, or -4.9%), and Federated (down $7.2B, or -3.5%).
Our latest domestic U.S. Money Fund Family Rankings show that Fidelity Investments remains the largest money fund manager with $444.2 billion, or 17.1% of all assets (down $12.2 billion in Sept., down $3.8 billion over 3 mos., and up $26.6B over 12 months). BlackRock is second with $245.3 billion, or 9.5% of assets (up $905M, up $1.0B, and up $28.2B for the past 1-month, 3-mos. and 12-mos., respectively). JPMorgan is third with $232.1 billion, or 8.9% market share (down $11.7B, up $7.5B, and down $22.5B for the past 1-month, 3-mos. and 12-mos., respectively). Federated Investors remained fourth with $199.0 billion, or 7.7% of assets (down $4.0B, down $9.3B, and down $7.2B).
Vanguard ranked 5th with $195.3 billion, or 7.5% of assets (up $2.5B, up $9.6B, and up $19.5B). Goldman Sachs held onto sixth place with $186.1 billion, or 7.2%, (down $579M, down $3.9B, and up $48.9B). Schwab ($157.6B, 6.1%) was in seventh place, followed by Dreyfus in eighth place with $156.0B (6.0%), Morgan Stanley was in ninth place with $129.2B (5.0%), and Wells Fargo was in tenth place with $115.2B (4.4%).
The eleventh through twentieth largest U.S. money fund managers (in order) include: Northern ($91.0B, or 3.5%), SSGA ($76.3B, or 2.9%), Invesco ($55.8B, or 2.1%), First American ($44.4B, or 1.7%), UBS ($38.3B, or 1.5%), Western Asset ($36.9B, or 1.4%), Deutsche ($20.2B, or 0.8%), Franklin ($19.5B, or 0.8%), American Funds ($16.3B, or 0.6%), and T. Rowe Price ($15.1B, or 0.6%). The 11th through 20th ranked managers are the same as last month, except: Northern moved ahead of SSGA and Deutsche moved ahead of Franklin. Crane Data currently tracks 64 U.S. MMF managers, the same number as last month.
When European and "offshore" money fund assets -- those domiciled in places like Ireland, Luxembourg, and the Cayman Islands -- are included, the top 10 managers match the U.S. list, except for JPMorgan moving ahead of BlackRock to No. 2, and Goldman Sachs moving up to #4 ahead of Federated and Vanguard, and Dreyfus/BNY Mellon moving ahead of Schwab.
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 ($453.2 billion), JPMorgan ($369.3B), BlackRock ($368.3B), Goldman Sachs ($273.7B), and Federated ($207.7B). Vanguard ($195.3B) was sixth, followed by Dreyfus/BNY Mellon ($179.0B), Schwab ($157.6B), Morgan Stanley ($156.2B), and Wells Fargo ($116.3B), which round out the top 10. These totals include "offshore" US Dollar money funds, as well as Euro and Pound Sterling (GBP) funds converted into US dollar totals.
Finally, our October Money Fund Intelligence and MFI XLS show that yields were up slightly in September across most of our Crane Money Fund Indexes. The Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 730), was up 2 bps to 0.14% for the 7-Day Yield (annualized, net) Average, while the 30-Day Yield was up one bp to 0.13%. The MFA's Gross 7-Day Yield inched higher to 0.46% (up one bps), while the Gross 30-Day Yield was also up one bps to 0.45% (unchanged).
Our Crane 100 Money Fund Index shows an average 7-Day (Net) Yield of 0.24% (up 2 bps) and an average 30-Day Yield of 0.23% (up one bps). The Crane 100 shows a Gross 7-Day Yield of 0.49% (up one bp), and a Gross 30-Day Yield of 0.48% (flat). For the 12 month return through 9/30/16, our Crane MF Average returned 0.10% (up 1 bp) and our Crane 100 returned 0.18% (up 2 bps). The total number of funds, including taxable and tax-exempt, fell to 976, down 22 from last month. There are currently 730 taxable and 246 tax-exempt money funds.
Our Prime Institutional MF Index (7-day) yielded 0.29% (up4 bps) as of Sept. 30, while the Crane Govt Inst Index was 0.17% (up 2 bps) and the Treasury Inst Index was 0.11% (unchanged). Thus, the spread between Prime funds and Treasury funds is 18 basis points, up from 13 bps last month. The Crane Prime Retail Index yielded 0.15% (up 4 bps), while the Govt Retail Index yielded 0.04% (up one bp) and the Treasury Retail Index was 0.03% (unchanged). The Crane Tax Exempt MF Index yield jumped to 0.29% (up 14 bps).
The Gross 7-Day Yields for these indexes in September were: Prime Inst 0.57% (up 3 bps), Govt Inst 0.42% (up 1 bps), Treasury Inst 0.37% (up 1 bps), Prime Retail 0.60% (up 4 bps), Govt Retail 0.41% (up 2 bps), and Treasury Retail 0.35% (unchanged). Also, the Crane Tax Exempt Index jumped 22 basis points to 0.73%. The Crane 100 MF Index returned on average 0.02% for 1-month, 0.06% for 3-month, 0.16% for YTD, 0.18% for 1-year, 0.08% for 3-years (annualized), 0.06% for 5-years, and 0.93% for 10-years. (Contact us if you'd like to see our latest MFI XLS, Crane Indexes or Market Share report.)
The October issue of our flagship Money Fund Intelligence newsletter, which was sent to subscribers Friday morning, features the articles: "MMFs Give Up Prime Ghost; $1.1 Trillion Now 'Gone Govie'," which reviews the massive shift away from Prime and into Govt MMFs; "Federated Reveals Prime Private Liquidity Fund," which profiles Bud Person on Federated's new "3c-7" fund; and "Regulations, Brexit Focus of European MF Symposium," which excerpts highlights from our recent European Money Fund Symposium. We have updated our Money Fund Wisdom database query system with Sept. 30, 2016, performance statistics, and we also sent out our MFI XLS spreadsheet Friday a.m. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our October Money Fund Portfolio Holdings are scheduled to ship Wednesday, Oct. 12, and our Oct. Bond Fund Intelligence is scheduled to go out Monday, Oct. 17.
MFI's lead "MMFs Give Up Prime Ghost" article says, "The total amount that's moved out of Prime and Tax Exempt money funds combined reached $1.1 trillion this week, as the "Big Shift" of assets into Government money funds approached a crescendo ahead of the October 14 money fund reform deadline."
It adds, "ICI's latest weekly "Money Market Fund Assets" report shows that Prime funds fell by over $110 billion in the past week, again the largest drop of the year, and Crane Data's MFI XLS shows Prime totals falling by a shocking $295 billion, or 37%, in September alone. Since Oct. 29, 2015, Prime assets have fallen by a massive $985 billion, or 68%, and Tax Exempt funds have declined by another $116 billion, or 47% (according to ICI's broader weekly series). Combined these two non-Government sectors (which will be subject to emergency gates and fees come October 14) have fallen by $1.101 trillion (down 65%) since this giant migration started."
Our latest fund interview reads, "Federated Investors recently launched a "private" money market fund, Federated Prime Private Liquidity Fund, a "3c-7" fund which intends to maintain a $1.00 NAV and adhere to money funds' liquidity, quality, maturity, diversity, and disclosure guidelines. The fund went live on Sept. 22 and has attracted approximately $220 million in assets to date. We review the launch with Federated's Bud Person and excerpt from Fitch and S&P's ratings statements on the new fund."
The article says, "Federated plans to offer share classes charging 10 bps and 15 bps with $25 and $5 million minimums, but the lower priced "Founders" shares will only accept new accounts until January 2017 or the fund reaches $5 billion in assets, whichever comes first. In a FAQ, Federated says it is disclosing yield, liquidity, shadow NAV and other information on its website. The Private Placement Memorandum is only available upon request. (Crane Data plans on tracking this and other private funds to the extent possible. See our Sept. 26 News.)"
The "European MF Symposium" article explains, "Last month, Crane Data hosted its 4th European Money Fund Symposium, which brought together about 120 money fund and money market professionals in London. We briefly review some of the highlights of the discussions and sessions below. The keynote, entitled, "IMMFA Update: The State of MMFs in Europe," was presented by Reyer Kooy, Chairman of IMMFA. He commented, "With the combination of Brexit, ultra-low Sterling rates and money market fund reforms, we're keeping ourselves pretty busy at the moment.... It's exciting times for everyone in the money fund industry."
In a sidebar, we discuss, "Fed Z1: Household MMFs Fall," saying, "The Federal Reserve released its latest quarterly "Z.1 Financial Accounts of the United States" statistical survey (formerly the "Flow of Funds"). Among the 4 tables it includes on money market mutual funds, the Second Quarter, 2016 edition shows that the Household Sector remains the largest investor segment, though assets here declined again and fell back below the $1.0 trillion level. Funding Corporations, Nonfinancial Corporate Businesses and Private Pension Funds showed gains in the latest quarter, while Funding Corporations, Nonfinancial Corporate Businesses, State & Local Governments, and Private Pension Funds showed increases over the past 12 months."
We also do a sidebar on "Worldwide MF Assets Q2," which comments, "The Investment Company Institute released its latest "Worldwide Mutual Fund Assets and Flows" data collection late last month. The latest report shows that total global money fund assets declined by $67.1 billion, or 1.3%, to $4.996 trillion in Q2 2016. The U.S., China and Luxembourg suffered the biggest declines, while France, Korea and Brazil saw gains. Worldwide MMF assets have increased by $136.0 billion, or 2.8%, over the previous 12 months through 6/30/16."
Our October MFI XLS, with Sept. 30, 2016, data, shows total assets decreased $48.5 billion in September to $2.595 trillion after increasing $19.3 billion in August, $11.6 billion in July, and decreasing $13.8 billion in June. Our broad Crane Money Fund Average 7-Day Yield was up 2 bps to 0.14% for the month, while our Crane 100 Money Fund Index (the 100 largest taxable funds) also rose 2 bps to 0.24% (7-day).
On a Gross Yield Basis (before expenses were taken out), the Crane MFA inched up to 0.46% and the Crane 100 rose one bps to 0.49%. Charged Expenses averaged 0.32% and 0.25% for the Crane MFA and Crane 100, respectively (unchanged). The average WAM (weighted average maturity) for the Crane MFA was 31 days (up 1 day from last month) and for the Crane 100 was 30 days (up 1 day). (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
As the unprecedented trillion-dollar shift of assets from Prime to Government money market funds approaches its final crescendo, we review the latest and perhaps final batch of Prime to Government funds conversions. Nationwide, Northern, Oppenheimer, PFM, PIMCO, and Columbia have all converted funds in recent days, bringing the total Prime-to-Govie conversion tally to almost 350 billion, over one-third of the 1.0 trillion that has shifted out of Prime overall. We review some of these latest moves below, and we also excerpt from Federal Reserve Vice Chairman Stanley Fischer's speech yesterday on "Low Interest Rates."
Columbia's filing explains, "In connection with amendments to the rules that govern money market funds, the Board of Trustees of the Fund approved changes to the Fund’s name and investment policies to allow the Fund to qualify and operate as a government money market fund effective on or about October 1, 2016 (the Effective Date). Accordingly, on the Effective Date the Fund's name will change to Columbia Government Money Market Fund and all references in the prospectus to Columbia Money Market Fund are deleted and replaced with Columbia Government Money Market Fund."
Nationwide Money Market Fund's filing says, "Effective September 30, 2016: The Nationwide Money Market Fund (the "Fund") is renamed the "Nationwide Government Money Market Fund." All references in the Prospectus to the Fund are updated accordingly.... The information under the heading "Principal Investment Strategies" on page 39 of the Prospectus is deleted in its entirety and replaced with the following: The Fund seeks to maintain a stable price of $1.00 per share by using the amortized cost method of valuation to value portfolio securities. The Fund invests primarily in a portfolio of U.S. government securities and repurchase agreements that are collateralized fully by cash or U.S. government securities, and which mature in 397 calendar days or less."
Northern Diversified Assets' (now Northern Govt Assets Portfolio's) filing explains, "At a meeting held on May 26, 2016, the Board of Trustees of the Northern Institutional Funds approved the conversion of the Diversified Assets Portfolio (the "Portfolio") to a "government money market fund" as defined under Rule 2a-7 of the Investment Company Act of 1940, as amended. The conversion, and the changes described below, will become effective on or about September 30, 2016." (Northern is also liquidating its Tax Exempt Portfolio and its California Municipal Money Market Fund this week.)
The PFM Prospectus Supplement adds, "Effective October 3, 2016, Prime Series will operate as a government money market fund and will have a policy of investing at least 99.5% of its assets in cash, U.S. government securities (including securities issued or guaranteed by the U.S. government or its agencies or instrumentalities) and/or repurchase agreements that are collateralized fully. This change in the investment program of Prime Series will allow Prime Series to continue to seek to maintain a stable net asset value of $1.00 per share after certain new requirements applicable to money market funds and adopted by the Securities and Exchange Commission become effective. In view of this new investment policy, the name of Prime Series will be changed to "Government Select Series" effective October 3, 2016."
The Federal Reserve Bank of New York has also made some revisions to its "Reverse Repo Counterparties List." It explains, "To prepare for the potential need to conduct large-scale reverse repurchase agreement transactions, the Federal Reserve Bank of New York is developing arrangements with an expanded set of counterparties with whom it can conduct these transactions. These counterparties are in addition to the existing set of Primary Dealer counterparties with whom the Federal Reserve can already conduct reverse repurchase agreements."
Among the latest "Name Changes," they say, "PFM Funds - Prime Series changed its name to PFM Funds Government Select Series, effective October 3," and among "Additions and Removals," they add, "Dreyfus Institutional Cash Advantage Fund merged into Dreyfus Institutional Preferred Money Market Fund, effective October 5."
Fed Vice Chair Fischer says in his recent speech, "I will talk today about an issue that currently confronts almost all central banks: historically low interest rates. Indeed--as shown in figure 1--in an increasing number of countries, they have even dipped below zero. Ultralow interest rates have not been limited to the short end of the yield curve, which is most directly affected by monetary policy. Figure 2 shows that longer-term interest rates--which embed market participants' expectations of where real short-term rates and inflation are likely to be in the future--have also been exceptionally low."
He continues, "In John Maynard Keynes's General Theory, this contrast between equilibrium and actual interest rates was at the heart of the so-called liquidity trap, a situation where the equilibrium interest rate is so low that even a zero (or slightly negative) nominal interest rate is not low enough to stimulate economic activity. Keynes's bottom line was that, when the economy falls into the liquidity trap, traditional monetary policy loses its effectiveness and fiscal policy has to be used for countercyclical stabilization. And here lies the first reason why we should be concerned about chronically low interest rates: When the equilibrium interest rate is very low, the economy is more likely to fall into the liquidity trap; it becomes more vulnerable to adverse shocks that might render conventional monetary policy ineffective."
Fischer continues, "Let me briefly mention a second reason for worrying about ultralow interest rates: The transition to a world with a very low natural rate of interest may hurt financial stability by causing investors to reach for yield, and some financial institutions will find it harder to be profitable. On the whole, however, the evidence to date does not point to notable risks to financial stability stemming from ultralow interest rates. For instance, the financial sector has appeared resilient to recent episodes of market stress, supported by strong capital and liquidity positions."
Finally, he adds, "Thus, both increased saving and reduced investment have potentially driven the sizable decline in the natural rate of interest. If some of the forces behind these shifts prove to be quite persistent, then we could be stuck in a new longer-run equilibrium characterized by sluggish growth and recurrent reliance on unconventional monetary policy. Nonetheless, there is a silver lining. Monetary and fiscal policies could ameliorate some, though not all, of the potential causes of ultralow rates--such as excessive precautionary saving and weak demand for physical capital. In other words, ultralow interest rates are not necessarily here to stay, especially if the right policies are put in place to address at least some of their root causes."
Yesterday, ignites featured the article, "Day of Reckoning: Money Funds Move to Floating NAVs," which discussed `whether MMFs are ready to transact at 4-digit floating NAVs. It says, "It's finally game day for institutional prime and municipal money market funds -- the two categories of the product that the SEC has mandated to scrap their stable $1.00-per-share price and adopt fluctuating net asset values. The deadline for the change is Oct. 14, but several large fund groups, including Fidelity and J.P. Morgan, this week made the move and more will do so in the coming days before the compliance date." We cover their piece, and we also review the latest batch of liquidations below.
The ignites update explains, "In the more than two years since the July 2014 passage of the final rule, shops sponsoring these two types of money funds have been at work on a raft of operational changes to float their NAVs. In more recent months, firms have been testing their systems to ensure the transition goes smoothly."
J.P. Morgan's Andrew Linton tells the publication, "I think when you really get down to it, it's a confidence game.... It not just our conversion that needs to go well; it's everybody's." If something goes wrong, investor confidence in institutional prime and municipal money funds as an overall category could be shaken, he says.
"Even before the SEC's reform required it, most money funds calculated their "shadow NAV," or market-based value, in addition to the published, $1.00 stable per-share price, says Tracy Hopkins, COO of BNY Mellon cash investment strategies. But being able to provide market prices multiple times a day and implement potential liquidity fees -- another new requirement for these funds under the SEC's rules -- has been "a huge endeavor," she says.
The article continues, "Among other major changes, firms have had to set up systems so that fund accountants for affected products can receive price data from third-party vendors several times throughout the day, instead of just once at the end of the day. Fund providers also have had to make sure that the funds' transfer agents could accept the transmission of multiple NAVs during the day and in turn redeem shareholders accurately."
It adds, "State Street has been testing its internal processes since spring. In July, it began dry runs with its fund manager clients. The Boston-based firm serves as the fund accountant for almost 600 money funds representing $1.7 trillion in assets. About 24 of those funds are adopting a floating NAV, Lyons says. The service provider can strike up to four NAVs during the day, but most clients have chosen two or three strike times, she says, adding that customers have selected different dates to make the switch."
Finally, the piece says, "An Ignites analysis found that 18 of the floating NAV funds managed by 13 of the largest sponsors of money funds will strike NAVs three times during the day. Another 15 funds will strike only once. "[I]t's probably going to wind up being like the Y2K issue in that it won't be as big a deal or as tough a transition as some predicted," says Peter Crane, CEO of Crane Data. A "pretty calm credit environment" will likely aid in the changeover, he says, noting that there have been few credit downgrades or major company defaults. Such events could create volatile prices, making it more difficult for money funds to strike their NAVs."
With another month-end and the approach of the October 14 Money Fund Reform deadline, yet another batch of fund liquidations and changes appeared. Our October Money Fund Intelligence XLS, which will ship Friday morning, has removed the following funds: BlackRock US Treas MMP, Cavanal Hill Tax-Free, Federated Tax-Free MMF, Goldman Sachs FS Prm Ob Class C, JPMorgan's E*Trade share classes, Morgan Stanley Act As Govt Sec, Morgan Stanley Act As Money Tr, Morgan Stanley Active As CA T-F, Morgan Stanley Active As Tax-Free, and Wells Fargo MMF Daily.
BlackRock US Treasury MMP's liquidation filing explains, "On June 13, 2016, the Board of Trustees of BlackRock Funds approved a proposal to close the Fund to new investors and thereafter to liquidate the Fund. Accordingly, effective 4:00 P.M. (Eastern time) on September 15, 2016, the Fund will no longer accept purchase orders from new investors. On or about September 29, 2016, all of the assets of the Fund will be liquidated completely, the shares of any shareholders holding shares on the Liquidation Date will be redeemed at the net asset value per share and the Fund will then be terminated as a series of the Trust."
The Cavanal Hill Tax-Free Prospectus Supplement tells us, "On August 5, 2016, the Board of Trustees of Cavanal Hill Funds approved a plan to liquidate and terminate the Cavanal Hill Tax-Free Money Market Fund, upon the recommendation of Cavanal Hill Investment Management. Inc., the Fund's investment adviser.... In connection with the termination of the Fund and in order to facilitate the exchange of Fund shares for Cavanal Hill Funds Government Securities Money Market Fund shares, Cavanal Hill will make Government Securities Money Market Fund Select shares available for sale beginning September 15, 2016. The Government Securities Money Market Fund Select trades using the ticker symbol APSXX and CUSIP 14956P810."
The Federated filing comments, "On August 12, 2016, the Board of Trustees (the “Board”) of Money Market Obligations Trust approved a Plan of Liquidation for Tax-Free Money Market Fund pursuant to which the Fund will be liquidated on or about September 23, 2016. In approving the Liquidation, the Board determined that the liquidation of the Fund is in the best interests of the Fund and its shareholders.... Investments by existing shareholders may continue until September 22, 2016."
Finally, Morgan Stanley's filing, for its, "Active Assets California Tax-Free Trust, Active Assets Government Securities Trust, Active Assets Money Trust, and Active Assets Tax-Free Trust," says, "`The Board of Directors of each Fund approved the termination (the "Termination") of each Fund. The Termination is expected to occur on or about September 21, 2016. Each Fund will suspend the offering of its shares to all investors at the close of business on September 20, 2016."
Federated Investors' latest "Month in Cash, entitled, "Time for prime," looks ahead to the end of the Prime to Government money fund exodus. It says, "The lion's share of investor and media focus this month is on the SEC money fund reforms. But for cash managers and institutional investors, October's also the month in which institutional prime and municipal funds can finally get back to acting like themselves as the industry serves notice it is just as robust as before the reforms." We excerpt from this latest commentary and also quote from a Fitch release on European Money Market Funds.
Federated's Deborah Cunningham writes, "After weeks of shortening the maturity dates of securities we buy to ensure ample liquidity for the prime clients moving assets to government funds due to the floating net asset value (NAV) requirement, portfolio managers can now reacquaint themselves with attractive spreads and the good ol' London interbank offered rate (Libor). We can go back to making purchasing decisions based on relative value and not just liquidity. At Federated, this means that instead of having weighted average maturities (WAM) of, say, nine days, we will go back to targeting 40-50 days. Yields should follow, potentially jumping from the single digits to a 40-50 basis-point spread. This is all possible because the Libor curve is far above the Treasury curve."
She explains, "During the run up to the reforms, institutional prime investors and managers have watched in envy as all sorts of non-2a-7 investors—local government investment pools (LGIPs), private accounts, collective accounts, offshore accounts, separately managed accounts and more -- capture these spreads. But now they will finally get to take advantage of what is an extremely attractive prime money market yield curve. It is not going to happen overnight, of course, because of the need to be diversified. But over some short period of time, the expectation is that prime 2a-7 funds will start to emulate prime non-2a-7 funds."
The piece continues, "Looking at the money market industry as a whole, it is important to point out that far from demolishing money funds as many experts thought, at the end of the day the industry and Federated's total assets under management in this class of securities is basically identical to what it was before the reforms. What has changed is the components. Government funds grew; municipal and prime funds shrunk."
It adds, "Assets will shift back between these sectors, but not to the sizes they once totaled. But all told, the industry is healthy and continues to provide a diverse set of desired offerings to investors. We at Federated are certainly thrilled to go back to tending our own complete offering of money market products and to continue being a leader in cash management."
In other news, a release entitled, "Fitch: EU Standard MMFs Gain Ground; Credit Risk Varies Widely," explains, "European standard money market funds are gaining momentum, but the range of investment strategies is leading to wide disparity in credit risk, Fitch Ratings says in a new presentation. This poses challenges for investors."
It explains, "Highlights from Fitch's presentation on European MMFs from Crane's 2016 European Money Fund Symposium include: We estimate standard MMFs represented about 35% of European MMF assets at end-August 2016, up from only 30% two years ago; We expect this shift to continue; Low investment-grade assets frequently held in European variable net asset value MMFs; Materially different credit risk profiles in standard MMFs, with substantial variations in BBB/BBB- fund allocation, from 0% to well above 50%; and, Most standard MMFs would have to raise their portfolio liquidity under the latest proposed European MMF regulation."
Fitch writes, "Standard MMFs are variable net asset value (VNAV) funds, which are classified in the longer MMF category (up to 12 months' weighted average life) under European regulation. Investor demand for this product has been growing over the past couple of years. We estimate they represented about 35% of European MMF assets at end-August 2016, up from only 30% two years ago, as Continental European investors shifted from short-term MMFs (less than 120 days' weighted average life) to standard. We expect this shift to continue as standard MMFs may appeal to investors as a complement to more conservative, lower-yielding money funds, especially in the current ultra-low euro yield environment."
They say, "Low investment-grade assets are frequently held in European VNAV funds and most notably in standard MMFs, where two-thirds of funds invest in 'BBB' or 'BBB-' securities. But there are substantial variations in the actual fund allocation to such securities, resulting in funds having materially different credit risk profiles. For example, funds had on average 2% exposures to 'BBB' securities at end-June 2016 according to Fitch's latest study, with allocation ranging from 0% to well above 50%. Supply opportunities in non-financial corporates and yield pick-up opportunities are key drivers of funds' allocation to low investment grades."
Finally, Fitch comments, "Portfolio liquidity management practices vary greatly among standard VNAV MMFs, with average allocation to assets maturing within a week at 9%. Most of them would have to raise their portfolio liquidity under the latest proposed European MMF regulation revisions from the Council of the European Union, which would require 15% in weekly liquid assets. The proposed regulation is now in its trilogue phase, where European institutions need to agree on a final text."
On Monday, the first batch of Prime Institutional money funds will begin trading at 4 decimal places ahead of the October 14 due date for the SEC's latest round of Money Market Fund Reforms. Fidelity and JPMorgan are expected be the first complexes to "float" NAVs for some funds starting today (October 3), though we expect these to remain "stable" at levels over $1.0000 initially. (See our March 3 News, "JPM Details Fund Updates, Cutoffs, Gates in Filing; Linton Comments," and our August 11 News, "Fidelity Reveals Final Lineup Changes: Prime Inst MMFs, Two Strikes.") The continued shift of assets out of Prime Inst funds (those about to "float") -- over $80 billion shifted over the past week and $244 billion shifted out in Sept. -- and into Govt MMFs, along with quarter-end on Friday, caused a surge in Fed RRP usage and repo rates Friday. We review these issues, as well as a recent "Operational Guide" from BlackRock, which features an FAQ on the imminent MMF changes, below.
J.P. Morgan Securities' explains in their latest "Short-Term Fixed Income" weekly, "While the dynamics of quarter-end remained the same, this one was definitely more intense than usual. This time around, we began to feel pressure almost two weeks ahead of time. Additionally, Friday proved to be grim. Overnight Treasury GCF rates averaged 1.27%, 77bp above Tri-party rates, the highest spread YTD.... This severe spread widening was driven by the combination of reduction in dealer balance sheets and poor liquidity in the GCF repo market. As we have mentioned in previous research, we also believe that a fair amount of the additional pressure is due in large part to MMF reform."
They tell readers, "Away from quarter-end, the 2a-7 money market mutual fund industry now has only two weeks left to fully comply with the SEC's MMF reform rules that come into effect on October 14. To get ahead of the regulation, several large prime fund complexes have announced that they plan to adopt a floating NAV for institutional share classes earlier than required. This early move to a floating NAV is intended to allow a brief period of time for fund complexes and their respective shareholders to get operationally comfortable with the new NAV structure."
JPM's piece shows a table listing all the pre-Oct. 14 deadline conversions. These include: Wells Fargo Prime MMFs converting Oct. 5, Morgan Stanley Oct. 7, Dreyfus Oct. 10, BlackRock, Western, Goldman and UBS Oct. 12, and State Street and Invesco Oct. 12." They state, "[O]ur data indicates that [about] $250bn or about 80% of aggregate institutional prime AuM will convert to a floating NAV prior to October 14."
Discussing Friday's quarter-end repo spike, the FT writes, in "Investors stash more cash at Fed as money market reforms loom, "Investors' cash parked at the Federal Reserve in exchange for US Treasuries hit a new 2016 high on Friday, showing heightened demand for short dated assets as typical quarter-end pressures are exacerbated by incoming rules for money market funds.... This typical quarter-end funding pressure has become exacerbated in recent weeks as prime money market funds seek to shorten the duration of their assets ahead of incoming rules in October that are likely to continue to spur outflows from investors."
The Wall Street Journal writes, "Cash Floods Into Fed Repo Facility." It tell us, "The cost of short-term loans in the repurchase agreement or "repo" market surged earlier than usual into quarter's end as money-market funds and others, anticipating new regulations, piled into a Federal Reserve facility that typically drains excess cash from Wall Street. Money-market funds and other eligible investors poured $412.5 billion into the Fed's overnight repo program Friday, its second-highest balance since the record was set Dec. 31 last year with $474.6 billion, Fed data show."
The Journal adds, "Fidelity Investments will convert two prime funds overseeing more than $50 billion combined to floating NAVs on Monday and J.P. Morgan Asset Management will convert an institutional prime fund that oversees $30 billion the same day. Some prime funds are holding only the most liquid, cash-like investments to manage through the transition because they are so close to the deadline for funds to comply with the new rules in mid-October. That is sending them into the Fed's repo program for maximum safety at the same time as government-only ones are going there, traders said."
Last week, BlackRock released an "Operational Guide to Cash Investing." It explains, "For decades, money market funds have been a cornerstone solution for cash investors. In October 2016, several structural changes become effective for certain of these funds and these changes may create questions. This guide is intended to help you navigate the new operational landscape for BlackRock's U.S. money market fund (MMF) solutions, and to understand the potential impacts to your engagement with these important products."
Under "The Fine Print: Frequently Asked Questions," they ask, "What BlackRock MMFs available for purchase are subject to FNAV?" The piece lists: BlackRock Liquidity Funds TempFund and BlackRock Cash Funds: Prime as "Intraday NAV," and BlackRock Liquidity Funds TempCash and BlackRock Liquidity Funds MuniCash as "Single Strike NAV."
BlackRock's FAQ continues, "Which NAV will I receive for my subscription/redemption? The price you receive when you trade a FNAV MMF's shares will be the next NAV determined after the fund's TA has accepted and confirmed your order. If your subscription or redemption order is received prior to the next NAV strike time, you will receive that NAV price for your order.... Will there be any change to my monthly statement if I invest in a FNAV MMF? Monthly statements will continue to be mailed by the fifth business day of each month. `Statements now contain a four decimal place NAV and a period ending asset value."
On Tax and Accounting issues, BlackRock writes, "The NAV Method provides investors the ability to report, for tax purposes, their aggregated net gains and losses over the investor’s tax year, or a shorter period, as determined by the investor.
Finally, they say, "BlackRock offers a variety of MMF solutions, as well as short-term bond funds, separate accounts, and collective trust funds for your cash investment needs. We recommend a flexible approach to the management of your cash, with the use of segmentation where possible. As you adjust to the new operational landscape, we believe it is important to evaluate your providers as well as the construction of their portfolios."