Below, we reprint the fund "profile" from the March issue of our Bond Fund Intelligence, Crane Data's new publication which tracks the bond fund marketplace. BFI interviews Michael Reinartz, Fixed Income Portfolio Manager at T. Rowe Price, who co‐manages the $5.4 billion T. Rowe Price Short Term Bond Fund. This fund, along with the $327 million T. Rowe Price Ultra Short Term Bond Fund, provides investors with some additional options outside of 2a‐7 money funds. Reinartz tells us about the investment strategy, impact of regulations, and his outlook for interest rates. (Contact us if you'd like to see our latest Bond Fund Intelligence or the BFI XLS performance spreadsheet "complement".)
BFI: Can you tell us about T. Rowe Price's history in the short‐term bond fund space? Reinartz: Our Short‐Term Bond Fund was launched in 1984. At that time, we were coming out of the Volcker era, when rates had really been pushed to extremely high levels to tamp out inflation. When that began to unwind, money market investors were looking for alternatives and, of course, the yield they were earning started to drop rather precipitously. At that time, believe it or not, more than half of T. Rowe Price's assets were in our Prime Reserve Money Market Fund. The Short‐Term Bond Fund offered investors a slightly less liquid alternative where they would be able to benefit from that falling rate environment.
BFI: Tell us about your background. Reinartz: I currently manage the Short‐Term Bond Fund with Ted Wiese, who has been managing the portfolio since 1995. I have been involved with the strategy since 2000 and have been progressively increasing my level of responsibility over the years. I was named Associate Portfolio Manager in 2012 and ultimately joined Ted as a Co-Portfolio Manager in 2015. It's also important to note that we do offer an Ultra Short‐Term Bond Fund, managed by Joe Lynagh. That strategy was launched just over three years ago and is positioned between the money market and short‐term bond funds. We launched the Ultra Short fund in anticipation of that crossover money market interest.
BFI: What does the fund invest in? Reinartz: T. Rowe Price offers a broad range of fixed income bond strategies that span the risk spectrum from money market funds all the way out to Global Unconstrained. So, we have a lot of resources that we're able to draw upon. We view our Short-Term Bond Fund as an alternative for the money market investors who are looking for a little better return, but not a lot of additional risk. We're positioned as a pure investment grade fund versus many competitors in our category that have meaningful exposure to below investment grade bonds. As such, our style leans a little conservative where we look to build yield into the portfolio, but in a risk‐aware way.
Our goal is to provide consistent competitive long term returns, maintaining a disciplined approach through the cycle and being careful not to get over our skis in terms of risk. We do have capacity to go up to ten percent in non-USD assets, but we have never taken that allocation above five percent since I've been working with Ted. More typically, it's around two percent or less, but currently we don't have any non‐dollar exposure. We don't want to introduce a lot of out-of-benchmark volatility into the short‐term bond portfolio, so we only utilize that bucket when we have a very strong conviction in the direction of that currency.
BFI: Where have you found yield? Reinartz: T. Rowe Price is a fundamental, credit‐oriented shop. So, our approach is to build yield into the portfolio by overweighting credit sectors. We typically find the most value is in corporate bonds -- that's where we can leverage our deep bench of in-house credit analysts. When risk/reward is attractive, we'll carry a higher allocation to corporates. When we want to move more defensively, we'll dial back our corporate exposure in favor of bonds in the securitized space such as asset-backed, commercial mortgage-backed, and mortgage-backed securities. In these securitized sectors, the majority of our positions will be short AAA-rated tranches. So, the idea is to give up some yield versus corporates in exchange for lower volatility.
BFI: What are your duration and maturity guidelines? Reinartz: On an aggregate level, we're limited to a Weighted Average Life of 3 years. We buy bonds out to 5 years, but our preference is for 2-3 year bonds. Our benchmark is the Barclays 1-3 year Government Credit, and that's generally around 1.80 to 1.95 years in duration. Ted and I don't make large aggregate duration bets in the portfolio, but we will be more active in our positioning along the curve. Presently, we are underweight the 2-year part of the curve relative to the benchmark and overweight the 5-year part of the curve as we have been positioning for a curve flattening for the better part of two years now.
BFI: What types of investors do you have in the fund? Reinartz: Conservative investors. Earlier, I characterized the investors as those looking for a little more risk/return than money markets. Many use Short-Term Bond as a source of stability within their asset allocation mix. The retail Short‐Term Bond Fund has an Investor class and an Advisor class. In total, we manage $17 billion in the strategy, which includes Institutional separate accounts and a Short-Term Trust. The trust is a building block within our larger stable value trust. For the most part, the Institutional portfolios are mirror images of our retail fund. We do accommodate flexibility within specific guidelines, allowing clients to tweak them based upon their individual risk tolerances. But for the most part they look a lot alike. The stable value trusts are managed in a more conservative fashion, but you'll see the same themes running through those portfolios.
BFI: What impact are regulations having on the space? Reinartz: I haven't seen any impact from money market fund reform as of yet. However, we believe that money market reform has forever changed the cash management landscape for institutional investors and as a result corporate treasurers are also looking beyond money market funds into strategies like Short-Term Bond and Ultra Short-Term Bond. Going forward, we believe these strategies will become more essential tools as alternatives to traditional cash management strategies.
BFI: What is your outlook for the Fed? Reinartz: As far as the Fed is concerned, their dot plots [had] suggested four hikes in 2016. I don't think the market really ever bought into those projections, nor have I. With deflationary impacts from China and the already strong dollar, I have a difficult time seeing how the Fed gets to four hikes. In general, it's a very difficult environment for the Fed to be tightening. Given that backdrop, I think rates will be fairly well behaved this year, but that's not to say we won't experience episodes where the front end comes under pressure. We have this cycle where the market feels good about itself and then the Fed starts to turn up the rhetoric on rate hikes. The market responds by selling off, the Fed gets dovish, and the market comes back again. If the economy was overheating and the Fed was required to go on an aggressive tightening cycle, we would probably see some investors shake out of Short-Term Bond Funds. But that's not what we anticipate. We expect that the pace of tightening will be gradual and measured and in that environment, short-term bond investors can do quite well.
BFI: Have you seen any flows from either money funds or longer-term bond funds? Reinartz: I'd say some investors have come to us from money funds. But overall, I've been surprised at how static the level of money fund assets has been over the last five years. We saw a spike during the financial crisis as investors were understandably seeking safety. But while we're no longer at those levels, money fund assets have held steady at a fairly elevated level despite returns that have been anchored around zero. So, we're watching to see what effect money market reform has on investor behavior. Will we see more crossover interest in short‐term bond funds? I think so. Anecdotally, our stable value group has mentioned that they have seen quite a bit of interest in their product by plan sponsors who are looking to potentially replace the money market fund option within defined contribution retirement plans.
Fund companies continue to produce papers and briefs designed to educate their investors on the approaching changes to money market funds. Below, we excerpt and link to new pieces from Fidelity and BlackRock, and we also cite some recent comments on money funds from former Fed Chair Ben Bernanke. Fidelity Investments' latest commentary, entitled, "Data-Dependent Fed Holds Rates Steady," analyzes how much, or how little, money market fund NAVs will actually float (in addition to discussing rates). BlackRock's new white paper, "Insights to Act On: Adapting Cash Investment Policies for Money Market Reform," features a case study on how expanding the use of liquidity products can increase returns. Finally, Bernanke blogs, "What tools does the Fed have left? Part 1: Negative interest rates."
Fidelity's Michael Morin and Kerry Pope take a look at how much a floating NAV might float. They write, "By October 2016, institutional prime and institutional municipal MMFs will begin trading with variable net asset values. In line with SEC requirements, these MMFs will no longer use amortized cost accounting and will be priced and transacted with NAVs out to four decimal places -- commonly referred to as basis point rounding. As a step toward this change, institutional prime and institutional municipal MMFs are required to publish market-value NAVs beginning in April."
Fidelity's paper explains, "The same factors that can have the most impact on money market fund NAVs today -- interest rates, credit spreads, idiosyncratic issuer risk, realized gains and losses, and investor flows -- will continue to have the most influence on NAVs going forward. Today, however, small changes in the NAV -- less than $0.0050 -- do not impact the price at which investors buy and sell shares. Once institutional prime and institutional municipal MMFs begin to float their NAVs, a move of $.0001 (1 basis point) as a result of one or all of these factors, will result in an increase or decrease in the variable NAV -- an investor's transaction price."
It continues, "The timely example of the Federal Reserve's December 2015 interest-rate increase demonstrates how one of these factors could influence money market NAVs.... Looking at the universe of prime institutional MMFs as of September 30, 2015 -- prior to the Fed's rate move -- 85% of the funds had NAVs greater than $1.0000 per share. By December 31 -- after the 25 basis point increase in the fed funds rate -- only 25% of the funds had NAVs greater than $1.0000. One could theorize that the rate increase contributed to lower prices of fund holdings and thereby reduced NAVs."
Morin and Pope tell us, "This example demonstrates that as a result of variations in any of the factors listed earlier, a variable NAV can fluctuate and contribute to the dispersion of NAVs across the industry. Income is another important factor to consider. After the rate increase in this example, the income earned by the fund would likely have risen. This highlights the significance of total-return calculations in cash management."
Finally, they conclude, "Increasingly, institutional investors are weighing the implications of the money market fund modifications coming later in 2016. This summary attempts to clarify one facet of the coming changes that investors are wondering about -- the implications of variable net asset values. While the concept seems straightforward on the surface, it has technical investment implications that require thorough consideration by investors. The key takeaways for investors in institutional prime and institutional municipal MMFs after October 14 are that 1) market-based NAVs will fluctuate, and 2) investors will have to change their analysis when considering an MMF transaction, by transitioning from a money-market-equivalent-yield perspective to a total-rate-of-return evaluation."
BlackRock's paper includes a case study that highlights the need to have an investment policy that includes a range of liquidity investments. It says, "If cash investors maintain restrictive investment policy language requiring money market funds to hold a constant net asset value (CNAV), we anticipate a sizeable shift by investors from Prime to Government MMFs in the U.S. If this shift in assets occurs, we expect the difference in yields between these strategies to widen, creating a greater opportunity cost to carrying liquidity in Government MMFs. This cost of liquidity underscores the importance of flexible, post-MMF reform investment policies. When combined with effective cash forecasting, tremendous value can be added to a cash portfolio."
BlackRock explains, "We present three scenarios, and assume the investor has a $100 million portfolio that requires 40% liquidity on a monthly basis, 30% liquidity semi-annually with the remaining 30% of the cash not needed for a period of greater than 12 months. Scenario 1: 100% Government Strategy: A 100% Government Strategy could generate an approximate yield of 0.03% based on the weighted average of the 30-Day SEC Yield for the period January 2015 to January 2016. Scenario 2: Government and Prime Strategies: If the portfolio is invested into this combination of products, the yield could increase to approximately 0.08%. In terms of real dollars, the income earned could increase from `$30,000 in Scenario 1 to $84,000 in Scenario 2. Scenario 3: With an Ultra-Short Duration Allocation: If the portfolio is invested into this combination of products, the yield could increase to approximately 0.14%. In terms of real dollars, the income earned could increase from $84,000 in Scenario 2 to $135,000 in Scenario 3.
It concludes, "Given the opportunity cost of complacency outlined in our case study, we expect that the changes to Securities and Exchange Commission registered MMFs will also expand the types of liquidity products investors will use going forward <b:>`_. These investments include direct securities, money market mutual funds, short duration mutual funds, Exchange Traded Funds (ETFs) and separate accounts. A powerful investment policy will allow for investments in those solutions that each company deems appropriate based on their risk profile and the investment objectives of each pool of cash. Specificity is critical and in the new world, distinction regarding money market fund vehicle requirements (CNAV vs. FNAV) is essential."
Bernanke writes in his piece, "There has been much discussion recently about negative rates' effects on bank profitability, but the 2010 Fed memo was more concerned about money market funds (MMFs), which play a larger role in the U.S. than in Europe or Japan. Like banks, U.S. MMFs have traditionally promised [sic] their investors the ability to withdraw at least the full amount that they've invested. Not making good on this promise is known as "breaking the buck." (When a fund did this in 2008 due to losses on its Lehman Brothers commercial paper, it started a highly destructive run on the fund industry.)"
He explains, "The Fed staff memo expressed concern that, facing zero or negative short-term interest rates, MMFs could break the buck or shut down as their management fees dried up. MMFs are important providers of short-term funding for both banks and nonfinancial firms; and, although in the long run the cash that flows through MMFs would find some other channel, in the short run a squeeze on MMFs could be disruptive."
Bernanke continues, "Events since the staff memo was written have reduced, but not eliminated, these concerns. MMFs used to be able to maintain the appearance of stability by displaying a constant net asset value of at least $1.00 per share, but Securities and Exchange Commission (SEC) reforms announced in 2014 (set to be fully implemented this October) have changed that. Starting in October, MMFs will have to display floating net asset values with four decimal places, except for government MMFs (funds with 99.5% or more of their holdings in cash or government securities) and prime funds focused on retail depositors (as opposed to institutional investors)."
He adds, "With floating net asset values, MMFs will no longer effectively be promising to pay investors back dollar for dollar, that is, "breaking the buck" is no longer an issue. However, as mentioned, not all funds must adopt the new approach; those that do not could still be potentially rendered unstable by consistently negative returns on the assets they hold.... The anxiety about negative interest rates seen recently in the media and in markets seems to me to be overdone."
SEI Investments and Wilmington Trust are the latest firms to make a major retreat from the money fund space and "go government". SEI, the 24th largest manager of MMFs with $14.6 billion, has filed to liquidate its 3 Prime funds -- the $6.3 billion SEI Daily Income Trust Prime Obligations, the $1.6 billion SEI Liquid Asset Trust Prime Obligation Fund, and the $271 million SEI Daily Income Trust Money Market Fund. Wilmington, the 27th largest money fund family with $8.7 billion, is merging its $3.9 billion Wilmington Prime Money Market Fund and its $546 million Wilmington Tax-Exempt MMF, into the $3.4 billion Wilmington US Government MMF. We've also uncovered two more Prime variable annuity money funds -- Lincoln LVIP MMF and Ivy Funds VIP MMF -- that are converting from Prime to Government. We review these latest changes below and recap the total Prime to "Govie" conversions to date. As of this Friday, April 1 (when 5 more funds totaling $20.1 billion will switch), $211.9 billion will have converted from Prime to Government, or 77% of the now $288 billion declared to date.
SEI Prospectus Supplement filing explains on the "Liquidation of the Money Market and Prime Obligation Funds," "At a meeting of the Board of Trustees of SEI Daily Income Trust held on January 27, 2016, the Board approved the closing and liquidation of the Funds, each a portfolio of the Trust. The U.S. Securities and Exchange Commission recently adopted amendments to the rules that govern money market funds, several key provisions of which are scheduled to go into effect later in 2016. These amendments will substantially change the way in which many money market funds operate and accordingly have resulted (and likely will continue to result) in significant changes to the money market fund industry as a whole. In general, any money market fund that does not limit its investors to natural persons and does not limit its investment portfolio to government securities (and equivalent instruments) will be required to incur significant compliance and operational costs. This changing regulatory environment was one of several factors that led SEI Investments Management Corporation (SMIC), the Funds' adviser, to recommend to the Board of the Trust that the Funds be closed and their portfolios be liquidated."
SEI continues, "Accordingly, each Fund is commencing the orderly liquidation and distribution of its portfolio pursuant to a plan of liquidation approved by the Board. Each shareholder will receive its pro rata portion of the applicable Fund's liquidation proceeds. It is currently expected that the liquidation proceeds of the Money Market Fund will be distributed to shareholders on or about June 24, 2016 and that the liquidation proceeds of the Prime Obligation Fund will be distributed to shareholders on or about July 22, 2016. In anticipation of the Funds closing, each Fund will convert all or substantially all of its assets to cash or cash equivalents. Therefore, each Fund may not be managed in accordance with its stated investment strategy going forward, pending the distribution of the liquidation proceeds. SIMC will be available to consult with the current shareholders of the Funds regarding alternative investments."
In February, SEI also filed to liquidate the Liquid Asset Trust Prime Obligation Fund. It says, "Liquidation of the Prime Obligation Fund. At a meeting of the Board of Trustees of SEI Liquid Asset Trust held on January 27, 2016, the Board approved the closing and liquidation of the Fund, a portfolio of the Trust." This filing cites the same reasons as above. It adds, "Accordingly, the Fund is commencing the orderly liquidation and distribution of its portfolio pursuant to a plan of liquidation approved by the Board. Each shareholder will receive its pro rata portion of the Fund's liquidation proceeds. It is currently expected that the liquidation proceeds of the Fund will be distributed to shareholders on or about July 22, 2016."
With these liquidations, SEI will no longer offer any Prime funds. It does still have the SEI Daily Income Trust Government and Government II, and SEI Daily Income Trust Treasury and Treasury II funds as options. SEI also has a Short Duration and an Ultra Short Bond fund in its lineup.
The Wilmington move involves merging both a Prime and a Tax-Exempt fund into a Government fund. Their Prospectus update says, "At a meeting of the Board of Trustees of the Wilmington Funds on March 15, 2016, the Board determined that each of the Wilmington Prime Money Market Fund and the Wilmington Tax-Exempt Money Market Fund, each a series of the Trust, should be merged into the Wilmington U.S. Government Money Market Fund.... Shareholder approval of the proposed merger of the Prime Fund into the Acquiring Fund is NOT required."
It adds, "The proposed merger of the Tax Exempt Fund into the Acquiring Fund requires the approval of the shareholders of the Tax Exempt Fund, and a shareholder meeting is being called for that purpose. Acquiring Fund shareholders will NOT be solicited for approval of the proposed mergers. The closing for the Prime Fund merger is expected to occur on or about August 15, 2016. The closing for the Tax Exempt Fund merger is expected to occur on or about August 22, 2016."
We've also found out that two more variable annuity money funds are converting from Prime to Government, continuing a wholesale exodus from Prime in the VA segment. The Lincoln Financial Group's Money Market Fund, which has about $757 million in assets, says in its LVIP MMF filing," "Effective May 1, 2016, the name of the LVIP Money Market Fund will be changed to the LVIP Government Money Market Fund.... Effective April 14, 2016, the investment objective of the fund will be changed as follows: LVIP Government Money Market Fund: To seek current income while (i) maintaining a stable value of your shares (providing stability of net asset value) and (ii) preserving the value of your initial investment."
Also, Waddell and Reed's $543 million Ivy Funds VIP Money Market Fund will be converted to a Government fund. The Ivy VIP filing states, "At a meeting held on November 17-18, 2015, the Board of Trustees of Ivy Funds Variable Insurance Portfolios considered the effects of these rules on Ivy Funds VIP Money Market and approved a recommendation made by Waddell & Reed Investment Management Company, the Portfolio's investment manager, to convert the Portfolio to a government money market fund on or about October 1, 2016.... By converting to a government money market fund, the Portfolio will continue to seek to maintain a stable NAV per share. In addition, a government money market fund is not required to be subject to liquidity fees or redemption gates. While the Board may elect in the future to subject the Portfolio to liquidity fees or redemption gates, the Board has not elected to do so at this time and has no current intention to do so."
Among the 72 funds from 42 fund families "going Government" to date, almost 20 are variable annuity or insurance company related MMFs. These include: Columbia Variable Cash Mgmt Fund, Deutsche MM VIP, Fidelity VIP Money Market, Goldman Sachs VIT MMF, Great West MMF, Invesco VI MMF, John Hancock MMF, Lincoln LVIP MMF, MassMutual Premier MMF, Nationwide MMF, Nationwide VIT MMF, Oppenheimer Money Fund/VA, ProFund VP MMF, Prudential Money Mart Assets Fund, Putnam VT MMF, SunAmerica MMF, Transamerica MMF, and Voya Liquid Assets Portfolio.
As mentioned, when we include these latest changes, the total amount converting from Prime funds is $288.0 billion (and counting). The vast majority of this total is direct Prime to Govie fund conversions. But we've also included liquidating prime funds, since we believe most of these liquidated assets will find their way into these complexes' Government money funds. Among those funds officially converting from Prime to Govt later this week, or liquidating, are American Beacon Select MMF (liquidating), Prudential Money Mart Assets, BBH Money Market Fund, Cavanal Hill Cash Management Fund, and American Funds MMF.
For previous "Prime to Govt" stories, see our March 16 News, "Even More Prime to Govie: Great West; Columbia, ProFund, Rydex File," our March 15 News, "Harbor, Payden Convert from Prime to Govt; JPM on Flows; iTreasurer," our March 1 News, "More Exits: PNC Liquidates, PIMCO Goes Govt; First American Update," our Feb. 25 News, "Hits Keep Coming to Prime, Tax-Ex: UBS Sweeps Filings, Putnam T-E Exit," our Feb. 16 News, "BBH MMF Latest to Go Govt; Feb Bond Fund Intel; Schneider Gives Cash," our Jan. 25 News, "American Beacon Goes Govt; Crane's Money Fund University Sets Record," and our Jan. 6 News, "Rolling w/Reform Changes II: Recap of '15 Announcements, '16 Plans."
This month, Crane Data's flagship newsletter, Money Fund Intelligence, profiles the leaders of the money fund team at UBS Asset Management, Joe Abed, Global Head of Distribution for Liquidity Management, and Rob Sabatino, Global Head of Liquidity Portfolio Management. They discuss how UBS is tackling the changing money fund environment, expanding its fund offerings and increasing its resources. Says Abed, "We're not just committed to the liquidity business, we're growing both our fund family and our distribution and investment team globally." (Note: The following article is reprinted from our March MFI. Contact us to request the latest issue or more info.)
MFI: How long has UBS been involved in the money market fund business? Abed: UBS Asset Management has been managing cash and liquidity assets for almost forty years. We launched our first money market fund in 1978 in the U.S. and 1988 in Europe. Over the years we have significantly expanded the money market fund platform. Our fund menu was initially created to serve clients of our wealth management business and then expanded further to serve institutional investors.
MFI: What is your top priority right now? Abed: [It is] assuring that our menu of offerings continues to meet the needs of our clients -- both in the U.S., with the changes in money market fund regulations, and globally, to serve the liquidity needs of our clients around the world.... And we're adjusting other funds to ensure we continue to serve all of our clients. Outside the U.S. we have an equally long history in the money fund business.... Last year we expanded our fund range, launching additional CNAV, short term money market funds in Euro and Sterling to sit alongside our existing short term US Dollar money market fund. We see a significant opportunity to grow our business outside the U.S., and under the leadership of James Finch, we will continue to expand our liquidity distribution team in Europe.
MFI: Can you tell us about recent lineup changes as a result of new US regulations? Abed: We announced a series of changes at the end of January, and we're going to have further changes ahead. Like many others in the industry, we are having to segregate the two types of clients, natural and non-natural.... We recently launched a family of prime retail money market funds with a CNAV structure, which are now available to natural persons. Likewise on the tax-exempt side, we'll be moving non-natural persons out of our Select Tax Free Funds to allow the funds to qualify as 'retail money market funds' [and] to use CNAV. Our Treasury and Government funds will continue to be CNAV without contingent gates or fees, and we're launching a new government master fund, with feeder funds, which will be available to all investors later this year. Our goal is to ensure that a complete product offering is available for investors once the reform-related changes are complete.
MFI: What's your biggest challenge in managing cash today? Sabatino: Low interest rates continue to be a challenge. Despite some relief in the U.S. with the rate hike at the December FOMC meeting, clients are still faced with near zero to negative rates across the globe. At the same time, regulation has created a difficult environment for liquidity. Dealers have limited balance sheets and banks are reluctant to print the very short dated securities we desire. This will become increasingly difficult as we get closer to final implementation of 2a-7 reforms in October. Uncertainty surrounding investor demand for prime vs. government funds will ultimately require prime funds to maintain higher levels of liquidity, resulting in an even more significant supply/demand imbalance. In Europe, the level of uncertainty is even greater due to the fact that regulatory change to money market funds has not yet been determined.
MFI: How are you positioning your portfolios for this market? Sabatino: We continue to focus heavily on maintaining large levels of liquidity given market uncertainty and general risk-off sentiment globally. This, coupled with reduced ability for counterparties to provide bids, requires us to have a more conservative maturity profile. In the U.S., much of our attention is on the evolving product lineup and positioning of our funds for these changes. The majority of the purchases in our prime fund remain inside of six months due to the potential for outflows later this year. We continue to be buyers of bank-sponsored ABCP, especially given the conduits' willingness to print short-dated maturities. We also like some of the floating rate put/call structures due to the yield pickup [and] the ability to limit the maturity exposure. We have avoided Chinese credits and are becoming more cautious on Japanese banks due to the potential impact of negative rates on profitability and their large reliance on wholesale funding. Also, we are large users of the Fed's Reverse Repo facility.
MFI: What about customer concerns? Abed: Certainly the low yields in the U.S., and in Europe the negative yields, are a major concern. The search for yield without taking undue risk is definitely a challenge that most clients are wrestling with. On top of that, regulatory uncertainty in the money market fund space is also causing some concern. Institutional clients are assessing whether they can get comfortable with the floating NAV and contingent fees and gates, and whether the spread differentials on prime vs. treasury and government funds are worth it. Some are assessing whether, if they are going to be in a floating NAV anyway, they should go out the curve to an ultra-short bond strategy, or even further.
MFI: Have you seen fee waiver relief? Abed: Fee waivers have certainly had a big impact on our business. The December Fed move absolutely helped and was very much welcomed, but the benefit of that hasn't been uniform. There are areas where we still have waivers in place. If you look at the tax exempt money market space, those rates really haven't moved much from near zero levels. In Europe where we see negative yields, waivers continue to be an issue.
MFI: Are you planning more changes? How do you think flows will react? Sabatino: Yes there are still more changes to the product lineup on the horizon, some of which will be based on client demand. While most of the focus has been on institutional investor sentiment, it's important to keep in mind that the "Insti-vidual" investor, who might remain eligible for CNAV prime funds, will also contribute to potential outflows from the institutional prime money market space. Investors potentially will face concentration issues as the size of some prime funds decline. There's quite a bit of uncertainty around asset flows ... we'll continue to see that evolve.
Abed: As the spread between government and prime funds widens, and as investors see the negligible volatility that to date that has existed on prime funds, I think they will get comfortable and start to come back to prime funds. But that's more likely to happen in 2017 and beyond, so I think it'll be somewhat of a "U" shape in terms of prime balances.
MFI: Do you offer alternatives to MMFs? Abed: We have a menu of short duration strategies -- both taxable and tax exempt. In the SMA space we have composites across the full menu and have seen recent growth in this space. We don't currently have an ultra-short fund, but we are evaluating and may launch one later in the year.
MFI: Will you be offering 7- or 60-day "maximum WAM" MMFs? Sabatino: We are currently evaluating them. Depending on the interest rate environment, these alternatives might look more attractive, or they may not offer enough yield to make it worth investors' time. For the most conservative investor, who likely has a large allocation to government funds, I'm not sure how much additional yield will be needed to take on the added risk.
MFI: How bad are the negative yields in Europe? What are your plans there? Abed: Negative yields in Europe are a significant challenge, and it's clear the situation won't change, and may worsen, in the near term. While we can't impact the level, we can assist clients mitigating the impact. So we're working closely with our UBS banking colleagues across Europe to help clients separate cash into distinct tranches and provide a blend of solutions. From an opportunity perspective, this is the time when clients are looking for help from experienced managers who they can partner with to access a range of solutions across domiciles, currencies and risk/return profiles. So we're building out not just the fund menu but also our distribution and investment teams in Europe to ensure we can support this demand.
MFI: What is your outlook for MMFs? Abed: We're positive on the liquidity management business. I personally expect it's going to continue to grow long term.... [C]lients will continue to want secure and liquid ways to manage their cash.... If you look at the other big area of regulatory change, banking regulations and particularly Basel III, this will actually provide a tailwind to the money market fund industry as banks push cash off balance sheet. The basic value proposition that money funds provide investors -- diversification, convenience, safety, and liquidity -- is still valid; I think all those things will serve it well.
Sabatino: We've seen a significant amount of consolidation of fund providers in the U.S. as well as abroad. In order to be fully committed to the business and to do it successfully, you need resources. We have a large global research team and we have portfolio management teams located around the world. The pace of consolidation has clearly slowed down, and we are now left with a core group of providers who understand the need for liquidity management will persist regardless of low or negative interest rates.
The Investment Company Institute released its latest "Worldwide Mutual Fund Assets and Flows" data collection earlier this week. It shows that global money market mutual fund assets increased sharply in the Fourth Quarter of 2015, topping $5 trillion for the first time since 2009. The latest report says total worldwide money fund assets rose $229 billion, or 4.7%, to $5.072 trillion as of year-end 2015. Once again, most of the gains came from the second largest MMF country, China, which saw another huge jump in Q4 as investors fled the volatile stock market for the safety of money funds. The US, Ireland, Brazil and Belgium also gained significant assets in Q4. Globally, MMF assets increased by $192.2 billion, or 3.9%, in calendar year 2015. We review the ICI's Worldwide MMF totals, as well as Crane Data's latest MFI International asset totals and yields below.
ICI's latest quarterly release says, "Worldwide regulated open-end fund assets increased 2.9 percent to $37.19 trillion at the end of the fourth quarter of 2015, excluding funds of funds. The rise in worldwide fund assets predominately reflected positive equity performance, with equity fund assets rising by over $800 billion in the fourth quarter. Worldwide net cash flow to all funds was $576 billion in the fourth quarter, compared with $223 billion of net inflows in the third quarter of 2015. The Investment Company Institute compiles worldwide open-end fund statistics on behalf of the International Investment Funds Association, the organization of national fund associations. The collection for the fourth quarter of 2015 contains statistics from 45 countries."
It continues, "Bond fund assets decreased 0.9 percent to $7.83 trillion in the fourth quarter. Balanced/mixed fund assets rose 2.2 percent to $5.15 trillion in the fourth quarter. Money market fund assets rose 4.7 percent globally to $5.07 trillion, accounting for 22 percent of the quarterly increase in global mutual fund assets.... Money market funds worldwide experienced an inflow of $236 billion in the fourth quarter of 2015 after registering an inflow of $201 billion in the third quarter of 2015. The global inflow to money market funds in the fourth quarter was driven by inflows of $111 billion in the Asia-Pacific region, $86 billion in the Americas, and $38 billion in Europe.... Money market fund assets represented 14 percent of the worldwide total."
According to Crane Data's analysis of ICI's "Worldwide" fund data, the U.S. maintained its position as the largest money fund market in Q4'15 with $2.755 trillion (or 51.8% of all global MMF assets). U.S. MMF assets increased by $86.5 billion in Q4'15 and by $29.5B in the 12 months through Dec. 31, 2015. China continues to gain market share, holding on to second place among countries overall. China saw assets grow a massive $107.1 billion (up 18.5%) in Q4 to $684.4 billion (12.7% of worldwide assets). Over the last 12 months through Dec. 31, 2015, Chinese MMF assets have doubled, up $348.2 billion, or 103.6%.
A Reuters article from January, entitled, "China stock investors seek haven in bond, money market funds," elaborates on the Q4 gains in MMF assets in China. It says, "China's recent stock market rout has further damped risk appetite of mainland investors, who have been seeking safe haven in bond and money market funds, and stepping up overseas investment amid yuan depreciation fears, latest data shows.... Latest monthly fund data shows investors are shifting money out of stocks into money market and bond funds. In December, assets in money market funds jumped 27.6 percent from a month earlier to 4.4 trillion yuan, while bond funds expanded 21.6 percent in size. That compares with a merely 1 percent rise in stock fund assets, despite a 4.6 percent monthly gain in the benchmark CSI300 index that month."
China is also in the process of adopting new money fund regulations. As Fitch Ratings detailed in a recent report, "New rules on money market funds published by the China Securities Regulatory Commission (CSRC) show some convergence with international standards, notably the introduction of liquidity requirements.... Nonetheless, the regulations still permit Chinese money funds more latitude in taking investment risk than European or US money funds."
Ireland remained third in the ICI rankings, ending Q4 with $508.9 billion (9.2% of worldwide assets), up $33.5B for the quarter, or 7.0%, and up $129.9B, or 34.3%, over the last 12 months <b:>`_. France remained in fourth place with $338.5 billion (6.3% of worldwide assets), down $11.2 billion, or 3.2%, in Q4, and down $10.7 billion, or 3.1%, over 1 year. Luxembourg moved up to fifth place with $322.3B, or 6.0% of the total (down $1.6 billion in Q4 and up $18.0B for 1 year). ICI's data no longer includes money fund figures for Australia, but they would rank as the sixth largest market at $322 billion, their level of two years ago. (Australia's MMF assets were shifted into the "Other" category several quarters ago, but we continue to list them in our version of the tables.)
Without Australia, Korea is the 6th ranked country. Its MMF assets fell $6.1 billion, or 7.1%, to $80.1 billion (1.5% of total) in Q4, but assets rose $3.8 billion (4.9%) for the year. Mexico was in 7th place, dropping $2.7 billion, or 4.8%, to $53.7 billion (1.0% of total assets) in Q4 and increasing $4.6 billion (9.5%) over the previous 12 months. ICI's latest Worldwide statistics show Brazil in 8th place with $51.3B, or 1.0% of total, up $17.8B (52.9%) in Q4 and up $6.5B (14.5%) for the year. India was in 9th place, jumping $8.0 billion, or 29.4%, to $35.2 billion (0.7% of total assets) in Q4 and increasing $6.9 billion (24.4%) over the previous 12 months. Finally, Taiwan was in 10th place with $30.7 billion in assets (0.6% of total), up $3.2B, or 11.5%, in Q4 and up $6.7 billion (28.1%) for the year.
Sweden ($21.1B, down $1.0B for the quarter and up $820M for the year), Switzerland ($19.3B, up $61M and down $377M), Belgium ($18.3B, up $12.5B and up $17.0 billion for the year), Canada ($18.2B, down $690M and down $3.1B), and Chile ($17.5B, up $3.7B and down $2.3B) ranked 11th through 15th, respectively. South Africa, Japan, United Kingdom, Germany, and Spain round out the 20 largest countries with money market mutual funds.
Note that Ireland and Luxembourg's totals are primarily "offshore" money funds marketed to global multinationals, while most of the other countries in the survey have primarily domestic money fund offerings. Contact us if you'd like our latest "Largest Money Market Funds Markets Worldwide" spreadsheet, based on ICI's data, or if you'd like to see our MFI International product.
Crane Data's Money Fund Intelligence International shows assets in "offshore" money market mutual funds, U.S.-style funds domiciled in Dublin or Luxemburg and denominated in USD, Euro and GBP (sterling), down $4.5 billion to $694.6 billion year-to-date through 3/22/16. U.S. Dollar (USD) funds (156) tracked by Crane Data's MFII account for over half ($352.0 billion, or 50.7%) of the total, while Euro (EUR) money funds (98) total E77.8 billion and Pound Sterling (GBP) funds (108) total L172.5. USD funds are down $40.1 billion, or 10.2%, YTD, while Euro funds are up E2.3 billion, or 3.0%, and GBP funds are up L22.0 billion, or 14.6%.
Offshore USD MMFs have an average 7-Day Net Yield of 0.28% as of March 22, up 12 basis points YTD, and they average Charged Expenses of 0.18%. The average 7-Day Net Yield of EUR MMFs is -0.28%, down 10 basis points YTD, while the GBP MMF yields are averaging 0.41%, up 7 basis points on the year. Euro MMFs average expenses of 0.10% while Sterling MMFs average expenses of 0.17%. Crane Data tracks 156 USD MMFs, 98 Euro MMFs and 108 Sterling MMFs.
Yields for taxable money market funds started moving up even before the Fed raised interest rates in December, but since then they have increased more rapidly. The average yield on the largest taxable money fund has risen from 0.05% to 0.22% over the past 3 months. Tax-Exempt MMF yields, on the other hand, remained anchored near zero ... until this week. But with a noticeable increase in the SIFMA Index rate, municipal money fund yields have begun to move. We examine the upward trajectory of MMF yields in recent months, reviewing a column in yesterday's Washington Post, entitled, "Comatose money market funds have finally begun to wake up." We also look at the Tax-Exempt sector, including commentary from Wells Fargo Securities Garret Sloan on rising SIFMA rates, and we recap recent T-E fund liquidations, including a new one from Deutsche.
According to our latest Money Fund Intelligence Daily, the Crane 100 MF Index, which tracks the largest 100 taxable money funds, averaged 0.22% (7-Day Yield) as of March 21, while the broader Crane Money Fund Average, which includes all taxable funds, averaged 0.11%. Before the Dec. 15 rate hike, on November 30, 2015, the MFA was at 0.03% while the Crane 100 was 0.07%. At the start of 2016, the 7-Day Yield for the MFA was 0.06% on Dec. 31, 2015, while the Crane 100 was 0.15%. (See our latest MFI Daily fore more.) Our Tax Exempt Index remains at 0.01%, but we expect this to rise very soon. The highest-yielding Tax Exempt MMFs have already started to move higher.
The Washington Post's "rising yields" story, written by Allan Sloan, says, "The recent rise in the stock market has attracted a lot of attention -- and it's easy to see why. From the market bottom on Feb. 11 through Monday, U.S. stocks, as measured by the definitive Wilshire 5000 index, rose a bit more than 13 percent, or about $2.8 trillion.... But there's another investment that has also turned positive -- but has attracted far less attention. I'm talking about taxable money market mutual funds. Yes, money funds. Sure, these funds aren't paying a whole lot, compared with what they paid before the Federal Reserve cut short-term U.S. interest rates to zero to fight the financial crisis. But they are paying a lot more than the 0.01 of 1 percent that "prime" money funds had paid for years, and the zero that Treasury and federal funds had paid."
It continues, "These days, largely unnoticed, many (but not all) prime funds, whose assets consist primarily of short-term obligations of banks and corporations, have begun to yield about 0.4 percent. [Crane Note: "many" is an overstatement; only the very highest-yielding funds are at 0.4% currently.] Many [a handful of] Treasury money funds are in the 0.25 to 0.3 percent range, as are federal money funds, which own Treasury securities and other obligations guaranteed by the federal government."
Sloan explains, "A few months ago, when pretty much every money fund was paying around 0.01 of one percent, there was nothing much for us average retail investors to pay attention to. Now, the difference between 0.4 percent on many big taxable funds and less than 0.1 percent on some other big taxable funds is worth looking at. And so is the difference between taxable funds and tax-exempt funds, most of which are still yielding 0.01 or 0.02 percent, a tiny proportion of what prime funds are earning. Usually, you would expect tax-exempt funds to be earning more than half of what prime funds earn."
Finally, he adds, "I asked Chris Allwine, head of Vanguard's municipal bond group, why Vanguard's prime money fund was yielding about 20 times as much as its tax-exempt funds, and its Treasury and federal funds were yielding about 15 times as much. Allwine attributed much of the disparity to technical factors, such as a shortage of appropriate securities for tax-exempt money funds to buy. He says things are beginning to change, and he expects to see tax-free yields rise."
Indeed, in yesterday's "Daily Short Stuff," Wells Fargo Securities' Garret Sloan discusses the long-overdue rebound in Tax-Exempt yields. He writes, "In the VRDN market, SIFMA has been climbing, and the seasonal move higher in the index has been early this year, with the current 7-day index touching 13 basis points. If seasonal effects were the only thing at play, we would not have expected SIFMA to climb until late March or early April. The fact that the index has reset so early and so much may be partially the result of recent transitions/outflows from tax-exempt funds."
Sloan tells us, "Since the beginning of January, tax-exempt funds have seen net outflows of more than $22 billion, which is approximately 9 percent of tax-exempt assets. The majority of these redemptions/conversions would be at the expense of the weekly VRDN market, which may be contributing, along with tax season, to the rising tide of the weekly VRDN market this year. The current weekly SIFMA rate of 13 basis points is the highest the index has been since May 2013, and while we still see the sector pricing well below most sectors, including the shortest-maturity T-bills, it is still the highest that weekly tax-exempt levels have been in almost three years."
We have seen Tax-Exempt assets drop sharply this year, no doubt in part due to pending liquidations. Currently, we show Tax-Exempt MMF assets at $230.9 billion (as of March 21), down 8.3% year-to-date, from $251.7 billion. Tax-Exempt MMF assets are down a huge 52.3% since Dec. 2008 when they totaled $483.8 billion. Furthermore, there's been a rash of Tax-Exempt fund liquidations since MMF reform was announced in July 2014. Our Crane Tax Exempt Money Fund Index currently tracks 331 funds vs. 397 on 7/31/14 (when reforms were announced) -- a drop of 66 funds or 16.6%, and dozens more are already in the pipeline.
As we mentioned, we suspect that part of the reason that SIFMA rates are rising is due to the large number of Muni MMFs liquidations. We covered this in our Feb. 24 News, "Clean Sweep: Tax Free MMFs Liquidating En Masse; BofA, RBC, Deutsche." Since then, there have been several more Muni fund liquidations. Putnam liquidated its $39 million Putnam Tax Exempt MMF (see our Feb. 25 News, "Hits Keep Coming to Prime, Tax-Ex: UBS Sweeps Filings, Putnam T-E Exit.") Also, PNC liquidated its $589 million PNC Tax-Exempt MMF. (See our March 1 News, "More Exits: PNC Liquidates, PIMCO Goes Govt; First American Update.")
We also learned from an SEC filing that Deutsche is liquidating its Tax-Exempt California Money Market Fund. This filing says, "Upon the recommendation of Deutsche Investment Management Americas Inc., the Board of Tax-Exempt California Money Market Fund has approved the liquidation and termination of the Fund, effective on or about April 8, 2016. The Fund will redeem all of its shares outstanding on the Liquidation Date."
Finally, in addition to funds shortening WAMs dramatically in preparation for liquidations, some Tax-Exempt MMFs are making their portfolios 100% weekly liquid assets (WLA). Morgan Stanley preceded JP Morgan's recent announcement (see our March 3 News "JPM Details Fund Updates, Cutoffs, Gates in Filing; Linton Comments"), changing the investment strategy on several of its Tax-Exempt funds.
Filings for the Morgan Stanley California Tax Free Daily Income Trust, Tax Free Daily Income Trust, Active Assets Tax-Free Trust, and New York Municipal Money Market Trust, all say, "As of September 11, 2015, the Board of Trustees of the Fund has approved an `amendment to the principal strategy stipulating that the Fund will invest all assets in high-quality, short-term securities that meet the definition of "weekly liquid assets" as defined by Rule 2a-7 under the Investment Company Act of 1940, as amended. We believe this change will likely serve the Fund well given market expectation for higher short-term interest rates in the coming months. The shorter duration and higher liquidity can help insulate the Fund from declining market values in a rising rate environment. We will proceed cautiously as we watch Fed monetary policy unfold and as we prepare for the implementation of the new rules governing money market funds later in 2016."
The U.S. Securities & Exchange Commission released its latest "Money Market Fund Statistics," which confirmed that assets jumped, led by Government MMFs, and yields continued to rise in February. The report, produced by 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. We also review a new revision to the SEC's "Money Market Reform Frequently Asked Questions" document, which includes several new questions, including one on repo collateral disclosure. Finally, we also mention the latest commentary from Perkins Coie Senior Counsel Stephen Keen, "Phase Two of Money Market Fund Reform: Important Changes to Diversification, Stress Testing, Disclosure and Reporting," which recaps the path to money fund reform and reminds us not to overlook the approaching April 14 changes.
The SEC's latest statistics show total money market fund assets rose $58.5 billion in February to $3.123 trillion. Assets fell $21.4 billion in January, rose $6.0 billion in December, fell $6.6 billion in November, and rose $62.3 billion in October, according to the SEC's broad total. (This series includes some private and internal funds not reported to ICI, Crane Data or other reporting agencies.) Year-to-date, total assets are up $37.1 billion through 2/29. Of the $3.122 trillion in assets, $1.587 trillion was in Prime funds, up $21.0 billion in February. Prime funds now represent 50.8% of total assets. Government & Treasury funds total $1.287 trillion, or 41.2% of assets, up $45.0 billion in February. Tax Exempt Funds were down $7.5 billion to $248.4 billion, or 9.1% of all assets. The number of money funds was 496, down 1 for the month.
Yields continued to rise in February. The Weighted Average Gross 7-Day Yield for Prime Funds on Feb. 29 was 0.53% (up 0.04% from the previous month), 0.37% for Government/Treasury funds (up 0.03% from last month), and 0.08% for Tax-Exempt funds (up 1 basis point). The Weighted Average Net Prime Yield was 0.32% (up 3 basis points from the month before). For the year-to-date, 7-day gross yields are up 12 basis points and net yields are up 10 basis points. The Weighted Average Prime Expense Ratio was 0.21% (up 2 basis points from the previous month).
The average Weighted Average Life, or WAL, was 55.6 days (down 1.5 days from last month) for Prime funds, 92.6 days (up 3.7 days) for Government/Treasury funds, and 26.4 days (down 1.7 days) for Tax Exempt funds. The Weighted Average Maturity, or WAM, was 35.2 days (up 0.7 days from the previous month) for Prime funds, 41.5 days (up 2.1 days) for Govt/Treasury funds, and 23.8 days (down 2.3 days) for Tax-Exempt funds. Total Daily Liquidity for Prime funds was 30.7% in February (up 2.9% from last month). Total Weekly Liquidity was 43.0% (up 0.5%).
In the SEC's "Prime MMF Holdings of Bank Related Securities by Country" table, the United States topped the list with $190.9 billion, followed by France with $190.2 billion and Canada at $181.9 billion. Japan was fourth with $156.2 billion, followed by Sweden ($112.5B), Australia/New Zealand ($81.9B), UK ($75.0B), and The Netherlands ($50.2B). Switzerland ($47.7B) and Germany ($46.7B) round out the top 10. The biggest gainers for the month were US (up $8.8B), France (up $8.4B), Norway (up $5.9B), Switzerland (up $5.8B), and Germany (up 3.2B). The biggest drops came from Japan (down $5.4B), Sweden (down $3.5B), Singapore (down $3.2B), Australia/New Zealand (down $2.3B), and UK (down $2.21). For Prime MMF Holdings of Bank-Related Securities by Major Region, Europe had $584.9 billion (up from $564.9B from last month), while its subset, the Eurozone, had $304.9 billion (up from $291.9B). The Americas had $374.9 billion (up from $361.7B), while Asia and Pacific had $262.1 billion (down from $272.2B).
Of the $1.591 trillion in Prime MMF Portfolios as of Feb, 29, $509.3B (31.6%) was in CDs (up from $502.5B), $338.5B (21.3%) was in Government (including direct and repo) (down from $338.2B), $413.8B (26.0%) was held in Non-Financial CP and Other Short Term Securities (up from $393.3B), $229.7B (14.4%) was in Financial Company CP (down from $233.4B), and $99.4B (6.2%) was in ABCP (up from $97.2B). Also, the Proportion of Non-Government Securities in All Taxable Funds was 43.5% at month-end, down from 44.0% the previous month. All MMF Repo with Federal Reserve was $79.4 billion on Feb. 29, down from $104.0B. Finally, the "Trend in Longer Maturity Securities in Prime MMFs" tables shows 37.6% were in maturities of 60 days and over (up from 37.3%), while 4.7% were in maturities of 180 days and over (down from 5.2%).
In other news, the SEC also recently updated its "2014 Money Market Reform Frequently Asked Questions." The "Changes" version of the FAQs highlights the new questions in blue. One of the new FAQs related to Form N-MPF reads, "Q. Items C.8b-h require that a money market fund describe the securities subject to the repurchase agreement (i.e., collateral). Although a fund may aggregate some of the information required by Items C.8b-h for multiple securities of the same issuer, providing the information required by Items C.8b-h for securities of each of more than 50 issuers would result in extremely lengthy filings. May the fund continue to provide the information required by Items C.8b-h in a modified form consistent with prior guidance published in the Staff Responses to Questions about Rule 30b1-7 and Form N-MFP revised July 29, 2011 with respect to Item 32a-f of the 2010 Form N-MFP?"
The SEC answers, "Yes. Consistent with the prior guidance provided by the Division staff, if a fund board (or its delegate) is not relying on the collateral to make its determination that a repurchase agreement presents minimal credit risks to the fund and there are more than 50 issuers of the collateral securities, the fund may provide the following information in lieu of the information required by Items C.8 b-h: Item C.8b: The fund should select the appropriate range of the number of collateral issuers of the underlying securities from one of the following: 51-100; 101-500; 501-1000; or more than 1000.... The fund should provide a break-down of the various categories of collateral securities held (in dollars as well as percentage of total collateral securities)."
Another new FAQ is, "What is the difference between a fund that is "Exempt Government" and "Government" The SEC responds, "In the staff's view, "Government/Agency" means a government money market fund that has chosen to rely on the ability to impose a liquidity fee or gate pursuant to rule 2a-7(c)(2)(iii), whereas "Exempt Government" means a government money market fund that has not chosen to do so." The rest of the update is mostly minor, very technical changes.
Finally, Stephen Keen's article on "Phase Two of Money Market Fund Reform", tells us, "It has been mistakenly asserted that money market funds are canaries in the financial coalmines -- in that distress in money market funds signals problems in the capital markets at large. The history of money market funds generally belies this claim, insofar as idiosyncratic defaults represent the most frequent threat to money market funds. Money market funds are regulatory canaries, however, insofar as significant reforms to money market fund regulations often presage reforms for investment companies generally. For example, the SEC proposed and adopted money market fund reforms in response to the financial crisis months before the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "DFA"). Thus, it may not be a coincidence that three massive reform proposals, regarding derivatives, liquidity and reporting, followed the most significant amendments to Rule 2a-7 since 1991."
He explains, "While these broader reform proposals are pending, money market fund managers continue to work on compliance with the amendments to Rule 2a-7 and related regulations and forms adopted in 2014. These changes were so significant that the SEC allowed the funds two years after the effective date of the amendments (October 14, 2014) before they must fully comply with the amendments. The SEC established two intervening compliance dates, however, for certain aspects of the reforms. The first compliance date (for Form N-CR) passed this summer; the next compliance date is April 14, 2016. This article explains the reforms with which money market funds must comply on this second compliance date (the "Phase Two Reforms"). Many of the Phase Two Reforms will require substantial changes to existing procedures and operations, so they should not be overlooked in anticipation of the more far-reaching reforms that will take effect on the final compliance date of October 14, 2016."
Keen concludes, "With all of the concerns about the conversion of institutional money market funds to a floating NAV and the potential implementation of fees and gates, there is a risk that some managers may overlook the important changes included in the Phase Two Reforms. It is critical that managers and their compliance staffs complete their work on these reforms in the near term to allow Fund Boards to review and adopt revised procedures in advance of the April 14, 2016 deadline. Fund Boards commonly meet only once a quarter, so they will need to act on these procedures in the first quarter of 2016 in order to meet the compliance deadline."
HSBC Global Asset Management released a white paper entitled, "Impacts of Money Market Reform: Understanding how change to prime money market funds may affect your cash investment strategies," which reviews the upcoming money market fund reforms and analyzes its key impacts. (Note the paper isn't available on HSBC's website yet, but should be soon.) Author Barry Harbison, North American Head of Liquidity Product, explains in the Executive Summary, "With less than a year to go until the more structural changes are implemented, it is time to address in some detail how these changes will impact institutional investors in prime money market funds. HSBC Global Asset Management (HSBC) believes that the value proposition of prime money market funds persists despite these changes, and that prime funds will continue to be an important cash management option for large corporate and institutional investors. We believe that investors should use the remaining time to fully understand the new regulations and how they will impact their cash investment strategies from October 2016 onwards."
Harbison gives an overview of the rules, writing, "Changes to Rule 2a-7 that will come into effect in April 2016 are largely focused on ensuring money market fund investors have access to relevant information for evaluating a fund's risk levels.... In April, the following data will be disclosed on a daily basis on a money market fund's public website: Daily & weekly liquid assets – The portion of a fund's assets that mature overnight and within the next 5 business days. This is a key metric of a fund's liquidity and ability to meet redemptions. The SEC requires money market funds to maintain daily liquid assets of at least 10% and weekly liquid assets of at least 30%. Daily market-based NAVs – Daily disclosure of the mark to market net asset value (NAV) will now become standard across the money market fund industry.... Net shareholder flows [and] Sponsor support – Money market funds must disclose all instances where the sponsor has provided financial support to the fund over a preceding six month period. Enhanced stress testing of money market funds will also be introduced in April 2016."
He continues, "The amended rules -- with an implementation deadline of October 2016 -- will result in structural changes to how money market funds operate. Prime institutional money market funds will be required to publish and trade on a market-based NAV rounded to the fourth decimal point, otherwise known as a floating NAV." Further, "In stressed market scenarios, money market funds will be able to impose liquidity fees and/or redemption gates to protect existing investors. This will be compulsory for prime money market funds and other money market funds may opt in."
Harbison adds, "A liquidity fee is a fee which can be charged to investors redeeming from a money market fund during a period where that fund is under stress to ensure that the costs of obtaining that liquidity are paid for by the redeeming investor and not by investors who remain within the fund. As remaining investors are protected from the impact of redemptions, they have less incentive to redeem and may choose to remain invested until liquidity fees are no longer imposed by the fund. This reduces the likelihood of a run on a fund and as such reduces the need for a money market fund's board to implement a redemption gate. A redemption gate describes an emergency power where a fund's board may restrict redemptions from a money market fund with the aim of stopping a run on that fund during a period where the fund is under stress."
Furthermore, he says, "The power to impose liquidity fees or redemption gates lies with a fund's independent board of trustees and relies on their determination that imposing such fees or gates is in the best interests of the fund and its shareholders. The fund's board may set a liquidity fee of up to 2% should a fund's weekly liquid assets drop below 30%. If the fund's weekly liquid assets fall below 10%, the board must impose a liquidity fee of 1% unless it determines that the liquidity fee is not in the best interests of the fund's shareholders. The fund's board may set a redemption gate should the fund's weekly liquid assets drop below 30%, if the board believes the gate is in the best interests of a fund and its shareholders."
Harbison comments, "Gates can stay in place for a maximum of 10 consecutive business days, and a maximum of 10 business days in any 90-day period..... With a fund's weekly liquid asset levels becoming the trigger for the fund board to consider imposing liquidity fees and redemption gates, we will likely see increased investor focus on this metric. All money market funds will be required to publicly report overnight and weekly liquid asset levels for the prior 6 months from April 2016 onwards."
He also explains, "A market-based NAV is simply an alternative way to reflect the underlying value of a money market fund's portfolio of securities. It represents the value of each share in a money market fund should the fund sell its underlying assets at that point in time. As the NAV is calculated using a market based price for each underlying asset, any price movement in these assets changes the NAV per share of the fund, which creates the floating NAV.... Given the high credit quality and short average maturity in the underlying investments of money market funds market-based NAVs are generally not expected to fluctuate significantly. However, it is important for investors to understand that selling shares at a different NAV will result in a gain or a loss."
The paper also reviews potential NAV movements, saying, "HSBC has analyzed market data from January 2001 through January 2016 to better understand how often the NAV of four hypothetical prime money market portfolios could potentially decline.... [A] portfolio's recovery time from a decline in the NAV is longer in periods of low interest rates than in periods of higher rates.... [T]here were some movements in the market-based NAVs of a hypothetical prime institutional money market portfolio over the 15 year period.... [But] the magnitude of these movements and the time it took to recover these NAV declines were both reduced, in some cases significantly, by reducing the maximum maturity of the portfolio. The frequency of the NAV declines was also reduced by the length of time an investor held shares in the portfolio."
Harbison concludes, "Money market funds have proven popular with corporate and institutional investors because they aim to provide safety, liquidity and a competitive money market return. While the current changes in regulation may cause investors to think carefully before including money market funds as one of their cash investment solutions, it is important to consider the changes in context. Transacting at a market-based NAV does not make a prime institutional money market fund an outlier in the world of cash investment options. All other short-term securities that investors may consider for their cash management needs, (including commercial paper or Treasuries), have a market-based price that fluctuates over time, assuming the instrument is not held to maturity. After October 2016, bank deposit products, such as time deposits, will be the only cash investment option to have a fixed value. However, in many instances, even here there are costs to 'breaking' a deposit before maturity in the same way that there is a cost to sell a security."
Finally, he adds, "Despite the evolving regulatory landscape, money market funds will continue to play an important role for cash investors seeking a diversified investment product aimed at providing safety, liquidity and a competitive money market return.... We believe that money market fund investors should use the time between now and October 2016 to: Understand the regulatory changes; Consider how the changes impact your current and future cash investment strategy; Update your investment guidelines, where necessary; Communicate the changes within your organization and determine your cash investment strategy from October 2016 onwards. HSBC firmly believes that prime money market funds will continue to be an important cash investment solution despite the changes we have highlighted."
The Investment Company Institute released its latest "Money Market Fund Holdings" summary (with data as of Feb. 29, 2016), which reviews the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds. (See our Feb. 10 News, "March Portfolio Holdings: Treasuries Jump; TDs, CDs, Agencies Gain," for our earlier report on holdings.) We review the latest Holdings data from ICI and from JP Morgan Securities' "Prime money market fund holdings update February 2016" below, and we also discuss a new ICI release on fund expenses and Wall Street Journal blog on MMF revenues.
ICI's "Prime and Government Money Market Funds' Daily and Weekly Liquid Assets" table shows Prime Money Market Funds' Daily liquid assets at 30.5% as of Feb. 29, up from 27.8% on Jan. 31. Daily liquid assets were made up of: "All securities maturing within 1 day," which totaled 25.4% (vs. 23.4% last month) and "Other treasury securities," which totaled 5.1% (down from 4.4% last month). Prime funds' Weekly liquid assets totaled 41.1% (vs. 41.5% last month), which was made up of "All securities maturing within 5 days" (34.9% vs. 34.6% in January), Other treasury securities (5.1% vs. 4.3% in January), and Other agency securities (1.2% vs. 2.6% a month ago).
The report shows that Government Money Market Funds' Daily liquid assets totaled 57.7% as of Feb. 29 vs. 56.3% the previous month. All securities maturing within 1 day totaled 23.2% vs. 24.0% last month. Other treasury securities added 34.5% (vs. 32.3% in January). Weekly liquid assets for Govt MMFs totaled 77.5% (vs. 76.3%), which was comprised of All securities maturing within 5 days (33.5% vs. 34.1%), Other treasury securities (32.7% vs. 30.5%), and Other agency securities (11.3% vs. 11.8%).
ICI's "Prime and Government Money Market Funds' Holdings, by Region of Issuer" table shows Prime Money Market Funds with 39.3% in the Americas (vs. 39.5% last month), 18.9% in Asia Pacific (vs. 19.7%), 41.5% in Europe (vs. 40.5%), and 0.3% in Other and Supranational (vs. 0.4% last month). Government Money Market Funds held 84.2% in the Americas (vs. 85.2% last month), 1.4% in Asia Pacific (vs. 1.4%), 14.5% in Europe (vs. 13.4%), and 0.0% in Supranational (vs. 0.0%). The table, "Prime and Government Money Market Funds' WAMs and WALs" shows Prime MMFs WAMs at 36 days as of Feb. 29, up from 35 days last month. WALs were at 57 days, down from 59 days last month. Government MMFs' WAMs was at 41 days, up from 39 days last month, while Government fund WALs was at 93 days, up from 90 days.
The release explains, "Each month, ICI reports numbers based on the Securities and Exchange Commission's Form N-MFP data, which many fund sponsors provide directly to the Institute. ICI's data report for June covers funds holding 94 percent of taxable money market fund assets." (Note: ICI publishes aggregates but doesn't publish individual fund holdings.)
JP Morgan Securities also released its "Prime money market fund holdings update, February 2016" earlier this week. Short Duration Strategists Alex Roever, Teresa Ho, and John Iborg write, "As of the end of February, total prime fund AuM was down by $13bn YTD, driven entirely by prime to government fund conversions.... Still, while we have yet to see any visible reform-related investor outflows, anecdotally, we have heard of some smaller scale shifts beginning to take place. We continue to expect most major movement to occur during Q2/Q3."
They add, "Prime fund holdings of banks increased by $39bn month-over-month. Time deposit holdings increased by $40bn. Most other bank holdings across asset classes went unchanged. Away from banks, sector allocations also remained stable during February. Money market fund usage of the Fed RRP remained low throughout the course of February.... We view the Fed RRP's usage YTD as indicative of relatively healthy supply conditions in the money markets. The availability of higher yielding product in both the short-term credit and government markets has reduced reliance on the facility for the time being."
In other news, ICI also sent out a press release entitled, "Average Expense Ratios for Equity, Hybrid, and Bond Mutual Funds Hit 20-Year Lows," which shows that asset-weighted expense ratios for money market funds remained stable in 2015. It says, "Expense ratios for equity, hybrid, and bond mutual funds dropped in 2015 to the lowest level in at least 20 years, while money market fund expense ratios remained at their 2014 low, according to data released by the Investment Company Institute (ICI) today. A fund's expense ratio is the fund's total annual expenses expressed as a percentage of its net assets."
On MMFs specifically, it states, "Money market fund expense ratios averaged 13 basis points in 2015, unchanged from 2014. The current low interest rate environment has limited the expense ratios of money market funds over the last few years, as these funds have waived portions of their fees to prevent their net yields falling below zero. In 2015, 98 percent of money market fund share classes waived at least some portion of their fees. Fund advisers and their distributors pay for these waivers, which totaled an estimated $5.5 billion in 2015."
ICI's data only goes through the end of 2015, but Crane Data's expense ratio numbers show charged expenses rising. Our Crane Money Fund Average showed the average taxable MMF charged 0.16% at the end of November, and rose to 0.20% at the end of December. As of the February 29, 2016, according to our MFI XLS, the average expense ratio jumped to 0.27%. (Our Crane 100 Money Fund Index, the average of the 100 largest taxable MMFs, has risen from 0.17% in Nov. 2015 to 0.23% at the end of February.) This reflects the fact that money fund managers have reduced fee waivers following the Fed's December rate hike.
A WSJ blog, "Fed Actions Will Leave Money Market Funds "Rolling in Revenue"," says, "The recalibration by Federal Reserve officials of their interest rate outlook for 2016 should be perceived as good news by beleaguered money market fund managers, according to Peter Crane, president of Crane Data LLC, which tracks the industry. "Money funds are going to be rolling in revenue," he said [referring to the impact of future hikes]. The Fed is keeping its benchmark lending rate at between 0.25% and 0.50% for now. New estimates put the Fed Reserve's median projection for the benchmark federal-funds rate at 0.875% at the end of 2016, down from the 1.375% that was projected in December."
It continues, "If the central bank moves in quarter-percentage point increments, that would mean two moves this year rather than the four projected in December. "The money markets are looking at this as a hawkish move," said Mr. Crane. "[Given that the market was talking about rate cuts just a month ago] ... Two hikes in 2016 is fantastic news." Even a single rate hike would be "like manna from heaven" for money market funds after years of near zero interest rates, he said."
The blog adds, "Following December's rate increase, Mr. Crane estimates that money market funds used 0.05 to 0.1 of a percentage point of the increased income they garnered to reimburse themselves for fee waivers they granted to help keep yields in positive territory. A larger amount, between 0.1 and 0.15 of a percentage point went to investors in the form of higher yields. Mr.Crane expects to the benefits of a rate increase to be shared more equitably in the future. "It may be an even split now," he said [referring to the next hike]. As of February 29, Crane's Prime Institutional Money Fund Index yielded 0.27%, its Government Institutional Money Fund Index yielded 0.12% and its Tax-Exempt Institutional Index 0.01%."
Morgan Stanley Investment Management, the 9th largest money market fund manager with $132.6 billion in assets, provides some details on its post-reform lineup of Institutional and Government money funds in a recent Prospectus filing. It designates the $19.9 billion Prime Portfolio, the Money Market Portfolio, and the $80 million Tax-Exempt Portfolio as "Institutional". It also designates four portfolios as "Government" -- MS Government Portfolio, Government Securities Portfolio, Treasury Portfolio, and Treasury Securities Portfolio. This latest filing did not discuss plans for MS Liquid Assets or any Retail funds <b:>`_. Morgan Stanley also released a new commentary, entitled, "Global Liquidity Solutions: Institutional Government & Treasury Money Market Funds." We discuss these below, and we also review some new BlackRock FFI changes.
The updated March 1 Prospectus for the "Morgan Stanley Institutional Liquidity Funds Institutional Class Portfolios" includes Prime Portfolio, Government Portfolio, Government Securities Portfolio, Treasury Portfolio, Treasury Securities Portfolio, and Tax-Exempt Portfolio. Within the description of the Prime Portfolio, under the header "Money Market Fund Regulations," it says, "The SEC recently adopted changes to the rules that govern money market funds. The Portfolio intends to operate as an "institutional money market fund," which will require the Portfolio to have a floating NAV, rounded to the fourth decimal place, effective October 2016. Also effective October 2016, the Portfolio will be permitted to impose a liquidity fee on redemptions or temporarily restrict redemptions if weekly liquid assets fall below required regulatory thresholds. These changes may affect the investment strategies, performance and operating expenses of the Portfolio."
Under the Tax-Exempt Portfolio, the language is similar, saying, "The Portfolio intends to operate as an "institutional money market fund," which will require the Portfolio to have a floating NAV, rounded to the fourth decimal place, effective October 2016. Also effective October 2016, the Portfolio will be permitted to impose a liquidity fee on redemptions or temporarily restrict redemptions if weekly liquid assets fall below required regulatory thresholds." Morgan Stanley joins only a handful of money fund managers, including BlackRock, Dreyfus, Federated, Invesco and Wells Fargo, that will offer Tax Exempt Institutional MMFs. Shockingly, the two largest managers, Fidelity and JPMorgan, will not offer T-E Inst funds.
The description for the other four Morgan Stanley portfolios -- Government, Govt Securities, Treasury, and Treasury Securities -- states, "The Portfolio intends to operate as a "government money market fund," which allows the Portfolio to continue to seek a stable NAV. The Portfolio will also not impose a liquidity fee or temporarily suspend redemptions in the event that the Portfolio's weekly liquid assets fall below specified regulatory thresholds."
Morgan Stanley's commentary, "Global Liquidity Solutions: Institutional Government & Treasury Money Market Funds" says, "The Morgan Stanley Institutional Liquidity Funds Government and Treasury Portfolios are managed with the conservative natures of their shareholders in mind.... [T]he Morgan Stanley Government and Treasury fund positioning and scale has resonated well with clients as the funds' asset growth have both consistently outperformed the industry since 2011. This can be attributed to several factors including our defensive portfolio management approach, our tailored resources and expertise, and our strategic focus on building up our government and treasury money market funds in anticipation of money market regulatory reform."
It continues, "Early on we identified the direction of money market fund reform was suggesting a regulator and investor preference toward government and treasury funds. We therefore placed significant emphasis on building scale in this category of money market funds by positioning our funds in a manner to be most attractive to investors. We believe that scale is important because it allows for greater accessibility coupled with greater stability for a fund."
Morgan Stanley explains, "Government and treasury money market funds play a significant role in today's $2.8 trillion money fund industry, representing nearly half of total industry assets. When safety and liquidity are the most critical investment objectives, government and treasury funds may offer an attractive investment option. In some cases, selection of a government or treasury fund is dictated by policy mandate; in others, it stems simply from a desire to take a more defensive path."
Finally, it says, "The amended money market fund rules to be implemented in October 2016 will not require these funds to float their net asset value (NAV) nor have the potential for liquidity fees or redemption gates, rendering them an attractive alternative for some current Prime fund investors. Since safety is the highest priority, for some investors, a government or treasury fund's yield may be a secondary consideration. Nonetheless, investors have a natural desire to maximize returns within the parameters of their risk profiles."
In other news, BlackRock filed to close the FFI Government (MLGXX) and FFI Treasury (MLTXX) funds to share purchases. They say, "On February 18, 2016, the Board of Trustees of Funds For Institutions Series on behalf of its series, FFI Government Fund and FFI Treasury Fund approved a proposal to close each Fund to share purchases. Accordingly, effective at the close of business on September 1, 2016, each Fund will no longer accept purchase orders. Shareholders may continue to redeem their Fund shares at any time."
Also, BlackRock filed with the SEC to change the name of BlackRock Government Institutional and BlackRock Select Government Institutional funds and to turn these funds into Treasury and Fed Repo funds. (Goldman was the first to launch a Treasury and Fed Repo fund -- see our July 30, 2015 News, "Goldman Sachs to Launch New Prime Retail, Treasury Fed RRP Funds.") The filing says, "The Board of Trustees of Funds For Institutions Series, on behalf of each Fund, recently approved certain changes to the principal investment strategies of the Funds in order to restrict each Fund's eligible investments as described below. Each Fund would continue to meet the definition of a "government money market fund" under Rule 2a-7 under the Investment Company Act of 1940, as amended. The Board has chosen not to subject the Funds to discretionary or default liquidity fees or temporary suspensions of redemptions due to declines in a Fund's weekly liquid assets."
They write, "In connection with such changes, the Board also approved a change in the name of each Fund and the master portfolio corresponding to each Fund. These changes will become effective May 2, 2016. Investors should review carefully the specific changes to the prospectus of the Funds, which are detailed below. Accordingly, effective May 2, 2016, the Funds' prospectus is amended as follows: BlackRock Government Institutional Fund is renamed "BlackRock Treasury Strategies Institutional Fund"; BlackRock Select Government Institutional Fund is renamed "BlackRock Select Treasury Strategies Institutional Fund"; and Master Government Institutional Portfolio is renamed "Master Treasury Strategies Institutional Portfolio."
Finally, it explains, "BlackRock Treasury Strategies Institutional Fund will invest 100% of its total assets in cash, U.S. Treasury bills, notes and other obligations issued or guaranteed as to principal and interest by the U.S. Treasury, and repurchase agreements with the Federal Reserve Bank of New York secured by U.S. Treasury obligations. The Fund invests in securities maturing in 397 days (13 months) or less [and] will have a dollar-weighted average maturity of 60 days or less and a dollar-weighted average life of 120 days or less.... The Fund is a "feeder" fund that invests all of its assets in Master Treasury Strategies Institutional Portfolio.... All investments are made at the Treasury Strategies Institutional Portfolio level." (The Investment Strategy of the Select Treasury Strategies Inst fund is the same.)
Recent SEC filings reveal yet another batch of smaller money funds that have switched from Prime to Government, including Great West, Columbia, and ProFunds. Further, Rydex updated the investment strategy for its Rydex Variable Trust US Government Money Market Fund, while PNC reduced the fees on its PNC Treasury Money Market Fund. To date, Crane Data has tracked $274.6 billion in Prime funds that have converted to Government. The $950 million Great West Money Market Fund is the latest fund to "go Government." Its SEC filing says, "Effective October 14, 2016, the Fund intends to: (1) operate as a government money market fund in connection with the amendments adopted by the U.S. Securities and Exchange Commission to Rule 2a-7 and other rules governing money market funds under the Investment Company Act of 1940, as amended, and (2) change its name to "Great-West Government Money Market Fund"."
The Great West filing adds, "Accordingly, at a meeting held on February 25, 2016, the Fund's Board of Directors approved the adoption of: (1) a non-fundamental investment policy requiring the Fund to invest 99.5% or more of its total assets in cash, government securities, and/or repurchase agreements that are collateralized fully by cash and/or government securities; and (2) revisions to the Fund's principal investment strategy, requiring the Fund to invest 99.5% or more of its total assets in cash, government securities, and/or repurchase agreements that are collateralized fully, as of Effective Date."
Columbia will also transition its $456 million Columbia Variable Portfolio: Cash Management Fund to a Government fund. The Columbia filing says, "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 May 1, 2016. Accordingly, on the Effective Date the Fund's name will change to Columbia Variable Portfolio - Government Money Market Fund and all references in the prospectuses to Columbia Variable Portfolio - Cash Management Fund are deleted and replaced with Columbia Variable Portfolio - Government Money Market Fund."
It continues, "As of the Effective Date, the information under the caption "Principal Investment Strategies" in the "Summary of the Fund" or "Summary of Columbia VP - Cash Management Fund" section is hereby superseded and replaced with the following: The Fund invests at least 99.5% of its total assets in government securities, cash and/or repurchase agreements collateralized by government securities or cash." In our Nov. 18, 2015 News we reported, "Columbia Threadneedle Going Govt; Dreyfus Details MF Moves; Deutsche," on Columbia converting its $1.5 billion Columbia Money Market Fund into a Govt MMFs.
Further, the ProFund VP Money Market Fund and the Money Market ProFund are both going Government, according to recent filings. A March 14 SEC filing for the $241 million ProFund VP MMF states, "The ProFund VP Money Market will begin operating as a government money market fund on or about May 2, 2016. The Fund will change its name to "ProFund VP Government Money Market." The Fund's Board of Trustees has adopted a non-fundamental policy, effective May 2, 2016, to invest at least 99.5% of the Fund's total assets at the time of investment in cash, U.S. government securities, and/or repurchase agreements that are collateralized by these instruments. The Fund intends to gradually transition its investments and allocate a larger percentage of its assets to government securities over time until it reaches its new target allocation."
A Feb. 1 SEC filing for the $331 million Money Market ProFund says, "At a shareholder meeting held on January 28, 2016, shareholders of the Money Market ProFund voted to approve changes to the investment policies of the Fund that will enable the Fund to operate as a government money market fund. Shareholders of the Cash Management Portfolio (the "Portfolio"), the master portfolio in which the Fund invests substantially all of its assets, approved a nearly identical proposal on the same day. As a result, the Portfolio intends to gradually transition its investments and allocate a larger percentage of its assets to government securities over time until it reaches its new target allocation."
The ProFund filing adds, "The Fund, as a feeder fund investing substantially all of its assets in the Portfolio, will consequently also have its underlying investments reallocated to government securities. The Fund and Portfolio intend to complete this transition and begin operating as government money market funds in early May 2016." The Master Portfolio, Deutsche Govt Cash Management Portfolio, announced that it was going Government last summer, as we reported in our July 21, 2015 News, "Deutsche Announces Reform Plans, Will Convert Most Prime MFs to Govt."
Also, Rydex Variable Trust US Government Money Market Fund changed the description of its investment strategy to meet the new requirements for Govt MMFs. The Rydex filing says, "In response to recent amendments to Rule 2a-7 under the Investment Company of 1940, the Board of Trustees of Rydex Variable Trust approved changes to the U.S. Government Money Market Fund's principal investment strategies to facilitate the Fund's operation as a "government money market fund." Under amended Rule 2a-7, a government money market fund is a money market fund that invests at least 99.5% of its total assets in U.S. government securities, cash, and/or repurchase agreements that are fully collateralized by U.S. government securities or cash."
It continues, "Effective on or about May 1, 2016, the current description of the Fund's "Principal Investment Strategies" will be deleted in its entirety and replaced with the description set forth below. In connection with the changes to the Fund's principal investment strategies, the Board also approved a change to the Fund's non-fundamental 80% investment policy adopted pursuant to Rule 35d-1. The revised non-fundamental 80% investment policy is reflected in the description below."
Finally, PNC filed to lower the fees on the $542 million PNC Treasury MMF. The filing states, "Effective February 26, 2016 the Board of Trustees of PNC Treasury Money Market Fund approved a reduction in the Fund's Management Fee from 0.25% of the Fund's average daily net assets to 0.15% of the Funds average daily net assets. Due to, among other things, the recent low interest rate environment, PNC Capital Advisors, LLC has been waiving a portion of its Management Fee over recent periods so that the Fund has not recently paid a Management Fee greater than 0.15%. Accordingly, this change in the Fund's contractual management fee rate is not expected to have a short-term effect on the Fund's net expense ratio."
We've come across yet more funds that have converted from Prime to Government recently, including Harbor Money Market Fund, UBS PACE Select Money Market Investment Fund, and Payden Cash Reserves. Among the most recent batch of conversions is the $111 million Harbor Money Market Fund. Its March 1 "Summary Prospectus update" explains, "The Harbor Money Market Fund has adopted a policy to invest 99.5% or more of the Fund's total assets in cash, "government securities" and/or repurchase agreements that are "collateralized fully" (i.e.collateralized by cash or government securities) so as to qualify as a "government money market fund" under Rule 2a-7 of the Investment Company Act." We review the latest batch below, and we also excerpt from JPMorgan Securities latest update and a piece by iTreasurer. Crane Data now shows a total of $272.6 billion slated to convert from Prime to Govt, with $191.9 billion worth of funds already converted, or 70.4%. By April 1, another $19.9 will have converted from Prime to "Govie".
Harbor's prospectus explains, ""Government securities," as defined under the Investment Company Act and interpreted, include securities issued or guaranteed by the United States or certain U.S. government agencies or instrumentalities.... Effective March 1, 2016, the Fund changed its principal investment strategies. The past performance data in the bar chart and table reflect the Fund's prior principal investment strategies." The fund is subadvised for by Fischer Francis Trees and Watts.
Also, the $311 million Payden Cash Reserves fund has converted from Prime to Government, but will retain its name. A Feb. 29 SEC filing states, "The Fund invests at least 99.5% of its total assets in cash, Government Securities, and repurchase agreements collateralized by cash or Government Securities. "Government Securities" generally means any security issued or guaranteed as to principal or interest by the U.S. Government or certain of its agencies or instrumentalities; or any certificate of deposit for any of the foregoing."
It explains, "The Fund intends to be a "government money market fund," as defined by Rule 2a-7 under the Investment Company Act of 1940, as amended, that seeks to maintain a stable price of $1.00 per share by using the amortized cost method to value portfolio securities and rounding the share value to the nearest cent. The Fund does not currently intend to impose liquidity fees or redemption gates on Fund redemptions; however, the Fund's Board of Trustees may reserve the ability to subject the Fund to a liquidity fee and/or redemption gate in the future, after providing prior notice to Fund shareholders."
In addition, the $218 million UBS Pace Money Market Investments also converted, to UBS Pace Government Money Market Investment Fund late last year, according to the fund's portfolio and a recent SEC filing. The Prospectus Supplement says, "On September 22, 2015, the Portfolio's Board of Trustees approved a new policy on behalf of the Portfolio 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 to allow the Portfolio to qualify as a government money market fund, as defined under the amended Rule 2a-7 of the Investment Company Act of 1940. In addition, the Board approved changing the Portfolio's name to PACE Government Money Market Investments to ensure that the Portfolio is understood to be a government money market fund.... The changes are expected to become effective on or about November 28, 2015."
A filing submitted Sept. 25, 2015 adds, "So that the fund may qualify as a government money market fund, the board of trustees for the fund approved the adoption of a non-fundamental investment policy requiring the fund to invest 99.5% or more of its total assets in cash, government securities, and/or repurchase agreements that are collateralized fully (i.e., collateralized with cash and/or government securities). The Board also determined to approve modifications to the fund's principal investment strategies to reflect this new policy."
UBS continues, "In addition, the Board determined that the fund: (i) will continue to use the amortized cost method of valuation to seek to maintain a $1.00 share price and (ii) will not be subject to a liquidity fee and/or a redemption gate on fund redemptions.... Prior to November 28, 2015, the fund was named PACE Money Market Investments, and the fund operated under certain different investment policies." (See too our Feb. 25 News, "Hits Keep Coming to Prime, Tax-Ex: UBS Sweeps Filings, Putnam T-E Exit, where we reported on UBS Liquid Assets Fund's conversion to Government.)
JP Morgan Securities discusses the potential for investors to shift from Prime to Govt in its latest "Short Term Market Outlook and Strategy." They write, "Away from the Fed, focus in the money markets is increasingly turning towards MMF outflows. As we now head into the middle of March, we are only about seven months away from the MMF reform deadline in October. To this end, we have still yet to see any meaningful reform outflows driven by active shareholder withdrawals. Indeed, as of the beginning of last week, total prime fund AuM was down by $18bn YTD, driven almost entirely by prime to government fund conversions."
Strategists Alex Roever, Teresa Ho, and John Iborg continues, "Currently, over $200bn in prime fund AuM has officially been converted to government fund status. Over the next six months, we look for an additional $64bn to be converted. Still, while we have yet to see any visible reform-related investor outflows, anecdotally, we have heard of some smaller scale shifts beginning to take place."
Finally, in related news, iTreasurer posted the story, "Not Enough Urgency Ahead of MMF Reform?" that includes some new color on how Treasurers feel about Prime funds. It says, "Later this year money market funds are going to change dramatically as new Securities and Exchange Commission rules kick in. Prime funds are going to adopt a floating net asset value regime and will also employ if necessary limits to accessing fund cash (via gates) and penalties for actually taking the cash out (via fees).... Some companies have been taking steps to prepare, seeking alternatives or making their investment policies more dynamic and flexible. But for the most part, many are taking a wait-and-see attitude, choosing to see how the rules will impact the market."
It continues, "Other surveys show many companies are happy to stay in prime MMFs. According to a SunGard survey from late 2015, 60% of treasurers in the US expect to invest in prime MMFs "at a similar level post-2016 SEC reforms." Some 37% expect to decrease their holdings, anticipating that accounting, intraday liquidity and investment policy constraints will be big headaches.... In a NeuGroup pre-meeting survey for its Treasury Investment Managers' Peer Group-2, 23% of respondents said they were considering switching to government-only MMFs; 10% plan to switch to separate accounts; 10% are not concerned; and the remainder are making some type of other change or have not decided yet."
The Federal Reserve released its latest quarterly "Z.1 Financial Accounts of the United States for the Fourth Quarter, 2015" statistical survey (formerly the "Flow of Funds") late last week. Among the tables it includes on money market mutual funds, the Fed shows that the Household Sector remains the largest investor segment; assets here moved back over $1.0 trillion after dipping below this level in mid-2015. Households, Nonfinancial Corporate Businesses, and State & Local Governments showed the biggest gains in the latest quarter, while Nonfinancial Corporate Businesses, State & Local Governments, and Fund Corporations showed the largest increases over the past 12 months. We review the latest Fed Z.1 numbers below, and we also preview the March issue of our Bond Fund Intelligence newsletter, which was sent to subscribers this weekend.
The Fed's "Table L.206," "Money Market Mutual Fund Shares," shows total assets increasing by $89 billion, or 3.4%, in the fourth quarter to $2.716 trillion. Over the year through Dec. 31, 2015, assets are up $28 billion, or 1.0%. The Household sector totals $1.056 trillion -- or 38.9% of assets. The Household Sector increased by $65 billion, or 6.6%, in the quarter, after increasing $5 billion in the 3rd quarter, and decreasing $45 billion in Q2. Over the past 12 months through Dec. 31, 2015, Household assets are down $64 billion, or 5.7%. Household assets fell below $1 trillion in Q2, a level they hadn't been below for a decade, and these assets remain well below their record level of $1.581 trillion (from year-end 2008).
Nonfinancial Corporate Businesses were the second largest investor segment, according to the Fed's data series, with $586 billion, or 21.6% of the total. Business assets in money funds increased $15 billion in the quarter, or 2.7%, and have risen by $31 billion over the past year, or 5.6%. Funding Corporations, which includes Securities Lending cash, remained the third largest investor segment with $444 billion, or 16.3% of money fund shares. They dropped by $12 billion in the latest quarter, but remain up $18 billion over the previous 12 months. Funding Corporations held over $906 billion in money funds at the end of 2008.
The fourth largest segment, State and Local Governments held 6.7% of money fund assets ($182 billion) -- up $11 billion, or 6.6%, for the quarter, and up $16 billion, 9.8%, for the year. Private Pension Funds, which held $143 billion (5.3%), remained in 5th place. The Rest of the World category was the sixth largest segment in market share among investor segments with 4.2%, or $115 billion, while Nonfinancial Non-Corporate Businesses held $92 billion (3.4%), State and Local Government Retirement Funds held $52 billion (1.9%), Life Insurance Companies held $29 billion (1.1%), and Property-Casualty Insurance held $18 billion (0.7%), according to the Fed's Z.1 breakout.
The Fed's "Flow of Funds" Table L.121 shows "Money Market Mutual Funds" largely invested in Credit Market Instruments ($1.561 trillion, or 57.5%), which includes: Open market paper ($294 billion, or 10.8%; we assume this is CP), Treasury securities ($475 billion, or 17.5%), Agency and GSE backed securities ($460 billion, or 16.9%), Municipal securities ($268 billion, or 9.9%), and Corporate and foreign bonds ($63 billion, or 2.3%). Overall, Credit Market Instruments are up $119 billion, or 8.2%.
Other large holdings positions in the Fed's series include Security repurchase agreements ($668 billion, or 25.3%) and Time and savings deposits ($438 billion, or 16.1%). Money funds also hold minor positions in Foreign deposits ($11 billion, or 0.4%), Miscellaneous assets ($10 billion, or 0.4%), and Checkable deposits and currency ($7 billion, 0.3%).
During Q4, `Treasury Securities (up $92 billion), Agency and GSE-Backed Securities (up $68 billion), Municipal Securities (up $12 billion), Security Repurchase Agreements (up $8 billion), and Checkable Deposits and Currency (up $6 billion), showed increases. Open Market Paper (down $38 billion), Time and Savings Deposits (down $39 billion), Corporate and foreign bonds (down $13 billion), Misc. Assets (down $4 billion), and Foreign Deposits (down $2 billion) all showed declines.
In other news, the March issue of our Bond Fund Intelligence was sent out to subscribers this weekend. Our lead story, "Bond Fund Inflows Return; High Yield Gets Lion's Share," looks at the rebound in bond assets and record inflows to high yield bonds. Also, we profile Michael Reinartz, co-Portfolio Manager of the $5.4 billion T. Rowe Price Short-Term Bond Fund. In addition, we recap the latest Bond Fund News, including commentary on bond funds from ICI, new fund launches, and the performance of our Crane BFI Indexes. Subscribers can now access the latest and back issues of BFI on our "`Content" page (scroll down to see Bond Fund Intelligence).
The lead BFI story on "Inflows," says, "Bond fund assets rebounded in February after suffering outflows in 6 of the last 7 months. The February gains were led by a big gain in high yield fund assets. Bond funds have seen $5.6 billion in inflows in February through March 2, according to ICI's weekly "Estimated Long-Term Fund Flows," with most of it coming in the week ended March 2, when there was $4.1 billion in inflows."
It adds, "Bond fund assets tracked by Crane Data increased by $8.0 billion in February, led by Long-Term and Intm-Term Bond Funds. Ultra-Short Bond Fund assets fell by $1.9 billion and Global BFs fell by $1.8 billion, but all other categories experienced increases. Returns were relatively flat overall; our BFI Total Index rose by 0.18% in Feb., but it's still down by 0.53% over 1-year. Though High Yield assets rebounded, these funds continue to show deep losses over 1-year (-7.9%) and one fund is showing a loss of over 21.0%." (Contact us if you'd like to see a copy of our latest Bond Fund Intelligence.)
Crane Data released its March Money Fund Portfolio Holdings yesterday, and our latest collection of taxable money market securities, with data as of Feb. 29, 2016, shows increases in Treasuries, Other (Time Deposits), CDs, Agencies, and Repo. The only sectors that were down were CP and VRDNs. Money market securities held by Taxable U.S. money funds overall (tracked by Crane Data) increased by $64.2 billion in February to $2.676 trillion. MMF holdings increased by $6.0 billion in January, but decreased by $2.2 billion in December. Repos remained the largest portfolio segment, followed by Treasuries and Agencies. CDs were in fourth place, followed by Commercial Paper, Other (mainly Time Deposits) securities and VRDNs. Money funds' European-affiliated securities represented 27.6% of holdings, up slightly from the previous month's 27.0%. Below, we review our latest Money Fund Portfolio Holdings statistics.
Among all taxable money funds, Repurchase Agreements (repo) increased $4.4 billion (0.8%) to $558.3 billion, or 20.9%, after decreasing $182.2 billion in January and increasing $176.6 billion in December. Treasury securities had the biggest increase, rising $40.9 billion (8.2%) in February to $538.2 billion, or 20.1% of holdings, after falling $3.4 billion in January and $33.2 billion in December. Government Agency Debt increased $5.5 billion (1.1%) to $496.8 billion, or 18.6% of holdings, after increasing $7.5 billion in January and $35 billion in December. The steady rise in Treasuries and Agencies has been driven by the conversion of about $190 billion (so far) of Prime fund assets to Government funds.
Certificates of Deposit (CDs) were up $7.6 billion (1.6%) to $472.5 billion, or 17.7% of holdings, after rising $33.0 billion in January and decreasing $51.8 billion in December. Commercial Paper (CP) was down $1.8 billion (0.5%) to $355.8 billion, or 13.3% of taxable assets, while Other holdings, primarily Time Deposits, jumped $8.1 billion (3.5%) to $239.4 billion, or 8.9% of holdings. VRDNs held by taxable funds decreased by $500 million (3.4%) to $15.2 billion (0.6% of assets).
Among Prime money funds, CDs represent just under one-third of holdings at 32.9% (up from 31.0% a month ago), followed by Commercial Paper at 24.7% (down from 26.6%). The CP totals are primarily Financial Company CP (14.5% of total holdings), with Asset-Backed CP making up 6.2% and Other CP (non-financial) making up 4.0%. Prime funds also hold 6.4% in Agencies (down from 7.2%), 5.9% in Treasury Debt (up from 5.2%), 3.3% in Treasury Repo (down from 3.6%), 4.8% in Other Instruments, 5.1% in Other Instruments (Time Deposits), and 6.3% in Other Notes. Prime money fund holdings tracked by Crane Data total $1.439 trillion (up from $1.427 trillion last month), or 53.8% of taxable money fund holdings' total of $2.676 trillion.
Government fund portfolio assets totaled $704 billion, up from $683 billion in January, while Treasury money fund assets totaled $533 billion, up from $502 billion in January. Government money fund portfolios were made up of 57.4% Agency Debt, 20.7% Government Agency Repo, 8.4% Treasury debt, and 13.3% in Treasury Repo. Treasury money funds were comprised of 74.1% Treasury debt, 25.2% in Treasury Repo, and 0.7% in Government agency, repo and investment company shares. Government and Treasury funds combined total $1.237 trillion, or 46.2% of all taxable money fund assets.
European-affiliated holdings rose $34.7 billion in February to $739.0 billion among all taxable funds (and including repos); their share of holdings increased to 27.6% from 27.0% the previous month. Eurozone-affiliated holdings increased $24.5 billion to $436.7 billion in February; they now account for 16.3% of overall taxable money fund holdings. Asia & Pacific related holdings decreased by $11.3 billion to $274.6 billion (10.3% of the total). Americas related holdings increased $39.0 billion to $1.658 trillion and now represent 62.0% of holdings.
The overall taxable fund Repo totals were made up of: Treasury Repurchase Agreements, which dropped $9.0 billion, or 3.2%, to $275.2 billion, or 10.3% of assets; Government Agency Repurchase Agreements (up $9.5 billion to $211.1 billion, or 7.9% of total holdings), and Other Repurchase Agreements ($71.9 billion, or 2.7% of holdings, up $3.9 billion from last month). The Commercial Paper totals were comprised of Financial Company Commercial Paper (up $500 million to $209.1 billion, or 7.8% of assets), Asset Backed Commercial Paper (down $3.5 billion to $89.7 billion, or 3.4%), and Other Commercial Paper (up $1.2 billion to $57.0 billion, or 2.1%).
The 20 largest Issuers to taxable money market funds as of Feb. 29, 2016, include: the US Treasury ($438.2 billion, or 20.1%), Federal Home Loan Bank ($349.3B, 13.1%), Wells Fargo ($88.3B, 3.3%), BNP Paribas ($83.0B, 3.1%), Credit Agricole ($81.0B, 3.0%), Federal Reserve Bank of New York ($68.6B, 2.6%), Federal Home Loan Mortgage Co. ($62.0B, 2.3%), Societe Generale ($59.9, 2.2%), RBC ($59.2B, 2.2%), Bank of Tokyo-Mitsubishi UFJ Ltd ($56.7B, 2.1%), Bank of Nova Scotia ($55.7B, 2.1%), Federal Farm Credit Bank ($50.7B, 1.9%), JP Morgan ($50.7B, 1.9%), Bank of America ($46.5B, 1.7%), Credit Suisse ($45.6, 1.7%), Natixis ($44.8B, 1.7%), HSBC ($39.3B, 1.5%), DnB NOR Bank ASA ($39.0B, 1.5%), Citi ($37.8B, 1.4%), and Sumitomo Mitsui Banking Co ($36.6B, 1.4%).
In the repo space, the Federal Reserve Bank of New York's RPP program issuance (held by MMFs) remained the largest repo program with $68.6B, or 12.3% of money fund repo. The 10 largest Fed Repo positions among MMFs on 2/29 include: Fidelity Govt Cash Reserves ($27.6B in Fed RRP), Goldman Sachs FS Govt ($22.6B), JP Morgan US Govt ($20.4B), Morgan Stanley Inst Lq Res ($18.3B), Federated Govt Oblg ($16.4B), Federated Trs Oblig ($14.7B), Fidelity Govt MM ($14.0B), Wells Fargo Govt MMkt ($13.6B), Morgan Stanley Inst Lq Trs ($13.3B), and Northern Trust Trs MMkt ($13.0B).
The 10 largest Repo issuers (dealers) with the amount of repo outstanding and market share among the money funds we track) include: Federal Reserve Bank of New York ($68.6B, 12.3%), Wells Fargo ($56.2B, 10.1%), BNP Paribas ($50.8B, 9.1%), Societe Generale ($48.2B, 8.6%), Credit Agricole ($37.6B, 6.7%), Bank of America ($35.6B, 6.4%), Credit Suisse ($30.6B, 5.5%), JP Morgan ($28.9B, 5.2%), RBC ($23.4B, 4.2%), and Bank of Nova Scotia ($22.7B, 4.1%).
The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: Credit Agricole ($43.4B, 4.6%), Bank of Tokyo-Mitsubishi UFJ Ltd ($43.2B, 4.5%), DnB NOR Bank ASA ($39.0B, 4.1%), Sumitomo Mitsui Banking Co ($36.6B, 3.9%), RBC ($35.8B, 3.8%), Bank of Nova Scotia ($33.0B, 3.5%), Natixis ($32.9B, 3.5%), BNP Paribas ($32.1B, 3.4%), Wells Fargo ($32.1B, 3.4%), and Skandinaviska Enskilda Banken AB ($30.5B, 3.2%).
The 10 largest CD issuers include: Bank of Tokyo-Mitsubishi UFJ Ltd ($29.7B, 6.4%), Sumitomo Mitsui Banking Co ($28.0B, 6.0%), Toronto-Dominion Bank ($25.4B, 5.4%), Wells Fargo ($25.0B, 5.4%), Canadian Imperial Bank of Commerce ($23.7B, 5.1%), Bank of Nova Scotia ($21.6B, 4.6%), Mizuho Corporate Bank Ltd ($20.3B, 4.3%), Bank of Montreal ($19.7B, 4.2%), Sumitomo Mitsui Trust Bank ($18.5B, 4.0%), and RBC ($17.3B, 3.7%).
The 10 largest CP issuers (we include affiliated ABCP programs) include: BNP Paribas ($17.4B, 5.7%), JP Morgan ($17.1B, 5.6%), Commonwealth Bank of Australia ($16.0B, 5.3%), RBC ($15.2B, 5.2%), HSBC ($12.7B, 4.2%), Westpac Banking Co ($12.4B, 4.1%), Bank of Tokyo-Mitsubishi UFJ Ltd ($10.9B, 3.6%), Bank of Nova Scotia ($10.4B, 3.4%), Credit Agricole ($10.1B, 3.3%), and ING Bank ($9.3B, 3.1%).
The largest increases among Issuers include: US Treasury (up $40.9B to $538.2B), Wells Fargo (up $9.4B to $88.3B), Natixis (up $8.7B to $44.8B), Canadian Imperial Bank of Commerce (up $8.4B to $29.1B), Federal Home Loan Bank (up $8.2B to $349.3B), DnB NOR Bank ASA (up $5.7B to $39.0B), Credit Agricole (up $5.0B to $81.0B), Societe Generale (up $4.8B to $59.9B), Bank of Nova Scotia (up $4.5B to $55.7B), and Swedbank AB (up $4.2B to $28.0B).
The largest decreases among Issuers of money market securities (including Repo) in February were shown by: Federal Reserve Bank of New York (down $26.6B to $68.6B), Federal Home Loan Mortgage Co. (down $5.1B to $62.0B), State Street (down $4.7B to $11.6B), Nordea Bank (down $4.5B to $20.2B), Sumitomo Mitsui Banking Co. (down $3.9B to $36.6B), Toronto-Dominion Bank (down $3.7B to $36.5B), Barclays PLC (down $3.4B to $17.7B), Svenska Handelsbanken (down $3.2B to $27.0B), Credit Mutuel (down $2.9B to $20.0B), and Goldman Sachs (down $2.3B to $10.1B).
The United States remained the largest segment of country-affiliations; it represents 53.3% of holdings, or $1.425 trillion (down $29.0B). France remained in second (11.3%, $302.5B), followed by Canada (8.6%, $231.2B) in third. Japan (6.6%, $176.0B) stayed in fourth, while Sweden (4.0%, $105.9B) held fifth. The United Kingdom (3.4%, $91.0B) remained sixth, while Australia (2.9%, $76.5B) stayed in seventh. The Netherlands (2.4%, $65.1B), Switzerland (2.3%, $62.1B), and Germany (2.0%, $52.1B) round out the top 10 among country affiliations. (Note: Crane Data attributes Treasury and Government repo to the dealer's parent country of origin, though money funds themselves "look-through" and consider these U.S. government securities. All money market securities must be U.S. dollar-denominated.)
As of Feb. 29, 2016, Taxable money funds held 29.4% (up from 27.9%) of their assets in securities maturing Overnight, and another 12.0% maturing in 2-7 days (down from 13.5%). Thus, 41.4% in total matures in 1-7 days. Another 20.6% matures in 8-30 days, while 12.5% matures in 31-60 days. Note that about three-quarters, or 74.5% of securities, mature in 60 days or less, the dividing line for use of amortized cost accounting under the new pending SEC regulations. The next bucket, 61-90 days, holds 10.5% of taxable securities, while 12.8% matures in 91-180 days, and just 2.2% matures beyond 180 days.
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 Friday and Monday, respectively. 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.
One of the largest "private label" relationships in the money fund business is changing after over 3 1/2 decades. Federated Investors, the fourth largest money fund manager, and brokerage firm Edward Jones, will alter the terms of their money fund management agreement later this year, according to recent Federated 10-K Filing and recent comments from Federated CEO Chris Donahue. The 10-K explains, "On February 18, 2016, the Board of Directors of Federated Investors, Inc. approved the transfer by its wholly owned subsidiary, Federated Investment Management Company (FIMCO), of FIMCO's general partnership interest in Passport Research, Ltd. (Passport) to a wholly owned subsidiary (Buyer), of The Jones Financial Companies, L.L.L.P. (Jones Financial). FIMCO and Jones Financial, for itself and on behalf of Edward D. Jones & Co., L.P. (Jones), previously entered into a non-binding letter of intent, dated as of February 5, 2016, regarding the transfer. The transfer is expected to be consummated in the fourth quarter of 2016, after completion of certain related transactions in the third and fourth quarters of 2016."
It continues, "Passport currently serves as the investment adviser for two registered investment companies (Funds), the Federated Tax-Free Money Market Fund (TFMMF), a tax-exempt money market fund with approximately $4 billion in net assets as of January 31, 2016, and the Edward Jones Money Market Fund (EJMMF), a government money market fund with approximately $15 billion in net assets as of January 31, 2016.... Prior to the partnership interest transfer, it is anticipated that customers of Jones with accounts in the TFMMF will be given the opportunity to transition from the TFMMF to the EJMMF during the third quarter of 2016 and, thereafter, the TFMMF will be reorganized into another Federated-sponsored tax-exempt money market fund prior to the transfer being consummated."
Federated's filing continues, "After the transfer and subject to the contingencies described below, (1) Passport, as a subsidiary of Jones Financial, will remain the investment adviser for the EJMMF, (2) FIMCO will be the sub-adviser for the EJMMF and (3) Federated Administrative Services (FAS), a wholly owned subsidiary of Federated Investors, Inc. and an affiliate of FIMCO, will continue to provide certain administrative services with respect to the EJMMF."
It adds, "Jones Financial, Jones, FIMCO and Passport are currently negotiating a definitive agreement, and certain ancillary agreements, for the partnership interest transfer and related transactions.... The transfer, and related transactions, may reduce Federated's pre-tax income up by to $6 million per quarter after the transfer is consummated in the fourth quarter of 2016, depending upon market conditions at the time.... Federated has a majority interest (50.5%) and acts as the general partner in Passport Research Ltd., a limited partnership. Edward D. Jones & Co., L.P. is the limited partner with a 49.5% interest. The partnership is an investment adviser to two sponsored funds."
Speaking at the Citi's "2016 Asset Management and Broker Dealer Investor Conference" last week, Federated's Donahue elaborated on the new arrangement with Edward Jones, saying, "The [Edward] Jones relationship is a $15 billion money market fund on the government side and a little less than $4 billion on the tax-free side. Edward Jones has done an excellent job of getting ready for the new tomorrow of the "DOL-land" [referring to pending new Department of Labor rules expected to impact revenue sharing]. They have put together a "Bridge Builder" series of funds and a new enterprise where they will enable their salespeople to charge a given percentage.... The last piece of that puzzle from their perspective was to put the money market fund into that structure."
Donahue adds, "We have had a deal with them since 1980, being the investment manager for their money funds. Obviously, everybody wanted to continue that, which is what we're doing. But it [is now] in a new structure.... As we reported in the 10-K, we have a jointly owned investment advisor and we are turning over to them our portion of that advisor.... We will be a subadvisor to the fund." He reassured analysts that this was a "one-off" situation, since Edward Jones is the only group "we had this kind of relationship with".
At his Citi presentation, Donahue also touched on a few other money fund related subjects. On sweep funds, he says, "The Broker-Dealer community on the sweep side generally don't like fees and gates, so therefore a lot of the Broker-Dealer sweep money is going to go to government funds. This is exactly the situation with Edward Jones. Why deal with fees and gates if you don't have to?"
He comments on investor flows after MMF reforms kick in, "Just because the clients decide in the second or third quarter ahead of the October deadline to do something, that doesn't mean that is a permanent decision. We don't know how much is going to shift from prime to Govie ... and nobody knows what the spreads are going to be between Govies and Prime ... and how people will react to what those spreads are. They are 18-20 basis points right now, and that's higher than the 10 basis points they were before. So you don't know how that's going to go."
He commented on their pending new "Private" money fund which they are planning to launch. He also said Federated is "creating a new money market-esque type fund as a collective fund" that can only be utilized by ERISA accounts. Donahue tells us, "We are developing a fund that will look, taste, and smell just like a money market fund, and yet be consistent with how 2a-7 funds used to run back in the old days." He concludes, "We think we will have enough buckets to capture whatever our clients want to do on the cash management side.... We look at it as an opportunity to build all the products, strengthen the relationship with the client, and then look forward to 'up' assets for us in money market funds in the post '16 environment."
Federated's new 10-K also includes some additional information on MMF Reforms. It says, "This increased regulation and oversight has required, and is expected to continue to require, additional internal and external resources to be devoted to technology, legal, compliance, operations and other efforts to address regulatory-related matters, and has caused, and may continue to cause, product structure, pricing, offering and development effort adjustments, as well as changes in assets flows and customer relationships. The current regulatory environment has affected, and is expected to continue to affect, to varying degrees Federated's business, results of operations, financial condition and/or cash flows."
It adds, "Management believes that the floating NAV under the 2014 Money Fund Rules will be detrimental to Federated's money market fund business and could materially and adversely affect Federated's business, results of operations, financial condition and/or cash flows. Federated continues to dedicate internal and external resources to analyzing and addressing the evolving changes to these various regulations applicable to Federated.... While significant steps in Federated's efforts to adjust its product line in response to the 2014 Money Fund Rules, Money Fund Rules Guidance, and Other Regulatory Developments have been completed, Federated's plans are not finalized or completed, continue to evolve and remain subject to fund board and, in certain cases, fund shareholder and other review and approvals."
The 10-K summarizes actions so far, explaining, "Federated will continue to offer Treasury and government money market funds without the liquidity fees or gates as permitted by the 2014 Money Fund Rules.... Federated has designated a subset of its prime and municipal money market funds as retail money market funds under the 2014 Money Fund Rules.... Federated plans to offer four institutional prime and national municipal (or tax-exempt) money market funds that will, beginning on or about October 14, 2016, have an initial NAV of $1.0000 that fluctuates and have the required provisions for liquidity fees and gates."
Finally, it says, "Federated has filed a registration statement for an institutional 60-day maximum maturity fund, and continues to evaluate converting certain existing Federated Funds to 60-day maximum maturity funds, while other existing funds will remain 397-day maximum maturity funds.... Federated continues to explore investment options for certain customers and anticipates launching in 2016 one or more private funds that mirror existing Federated money market funds as investment options for qualified investors. Federated anticipates that the adjustments to Federated's product line will offer investors a full menu of product choices for liquidity management.... Federated will announce any further plans relating to the adjustments to its product line periodically in advance of the October 14, 2016 final mandatory compliance date under the 2014 Money Fund Rules to give customers the opportunity to plan for their liquidity management needs."
Our March Money Fund Market Share, with data as of Feb. 29, 2016, shows asset increases for about half of the largest U.S. money fund complexes in the latest month, led by a huge spike by Goldman Sachs assets. Money market funds increased by $37.3 billion overall, or 1.4%, in February, and increased by $59.1 billion, or 2.2%, over the past 3 months. For the past 12 months through Feb. 29, total assets are up $100.4 billion, or 3.9%. The biggest gainer by far in February was Goldman Sachs, which rose by $25.1 billion, or 15.1%. Also increasing were JP Morgan, Western, Federated, SSGA, and Invesco, which rose by $9.1 billion, $5.0B, $3.2B, $2.3B, and $2.2B, respectively. With its jump, Goldman moved into the top 5 MMF managers, displacing Vanguard. (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.) In other news, T. Rowe Price set the date on its planned conversion of Prime Reserves to Government, and filed for a name change on another fund.
Goldman Sachs, Fidelity, Federated, Northern, and Schwab had the largest money fund asset increases over the 3 months, rising by $36.5 billion, $15.7B, $10.0B, $9.3B, and $7.8B, respectively. Over the past year through Feb. 29, 2016, Goldman Sachs showed the largest asset increase (up $45.2B, or 31.0%), followed by Fidelity (up $42.8B, or 10.6%), Morgan Stanley (up $22.5B, or 20.4%), SSGA (up $10.0B, or 12.0%), and Northern (up $9.0B, or 10.8%). Other asset gainers for the past year include: Vanguard (up $8.3B, 4.8%), Federated (up $7.5B, or 3.6%), Schwab ($5.9B, 3.6%), BlackRock (up $3.6B, 1.7%), and BofA (up $2.4B, or 4.8%). The biggest decliners over 12 months include: Dreyfus (down $17.1B, or -9.9%), JP Morgan (down $15.3B, or -6.0%), Invesco (down $6.0B, or -9.8%), Deutsche (down $5.1B, or -15.4%), and Western (down $4.0B, or -8.5%). (Note that money fund assets are volatile month to month.)
We asked Goldman about their recent asset gains, but they didn't single out any particular factor or transaction. We'd guess that financial institutions and hedge fund money being pushed out of bank deposits is the culprit, but we can't confirm this. (Note that GSAM recently signed a deal to manage cash holdings for hedge funds -- see our Dec. 17, 2015 "Link of the Day", "GSAM, HazelTree Partner on Hedge Fund Sweep.")
Our latest domestic U.S. Money Fund Family Rankings show that Fidelity Investments remains the largest money fund manager with $447.2 billion, or 16.6% of all assets (down $786 million in February, up $15.7B over 3 mos., and up $42.8B over 12 months). Fidelity was followed by JPMorgan with $238.8 billion, or 8.9% market share (up $9.1B, down $10.4B, and down $15.3B for the past 1-month, 3-mos. and 12-mos., respectively). BlackRock remained the third largest MMF manager with $221.1 billion, or 8.2% of assets (up $1.1B, up $5.4B, and up $3.6B). Federated Investors was fourth with $214.7 billion, or 8.0% of assets (up $3.2B, up $10.0B, and up $7.5B). As we mentioned, Goldman Sachs moved ahead of Vanguard to become the fifth largest MMF manager, with $190.7 billion, or 7.1% of assets (up $25.1B, up $36.5B, and up $45.2B). (Last month, Goldman Sachs had moved up to sixth place from eighth.)
Vanguard fell to sixth place with $181.3 billion, or 6.7%, (up $503M, up $4.1B, and up $8.3B). Schwab ($167.7B, 6.2%) stayed in seventh place, followed by Dreyfus in eighth place with $154.7B (5.7%), Morgan Stanley in ninth place with $132.7B (4.9%), and Wells Fargo in tenth place with $113.7B (4.2%). The eleventh through twentieth largest U.S. money fund managers (in order) include: SSGA ($93.8B, or 3.5%), Northern ($92.3B, or 3.4%), Invesco ($55.2B, or 2.0%), which moved ahead of BofA ($53.3B, or 2.0%), Western Asset ($43.3B, or 1.6%), First American ($39.4B, or 1.5%), UBS ($38.7B, or 1.4%), Deutsche ($28.1B, or 1.0%), Franklin ($23.0B, or 0.9%), and American Funds ($16.3B, or 0.6%), which displaced RBC from the top 20. Crane Data currently tracks 65 U.S. MMF managers, the same number as last month.
When European and "offshore" money fund assets -- those domiciled in places like Dublin, Luxembourg, and the Cayman Islands -- are included, the top 10 managers match the U.S. list, except for Goldman moving up to No. 4 (dropping Vanguard to 6) and SSGA breaking into the top 10. Looking at the largest Global Money Fund Manager Rankings, the combined market share assets of our MFI XLS (domestic U.S.) and our MFI International ("offshore"), the largest money market fund families are: Fidelity ($454.8 billion), JPMorgan ($360.8 billion), BlackRock ($326.3 billion), Goldman Sachs ($278.5 billion), and Federated ($222.9 billion). Vanguard ($181.3B) moved up one spot to sixth, followed by Dreyfus/BNY Mellon ($177.9B), Schwab ($167.7B), Morgan Stanley ($153.7B), and SSGA ($115.0B) round out the top 10. SSGA broke into the top 10, displacing Wells Fargo. These totals include "offshore" US Dollar money funds, as well as Euro and Pound Sterling (GBP) funds converted into US dollar totals.
Finally, our March Money Fund Intelligence and MFI XLS show that both net and gross yields continue to rise in February, after jumping in January. The Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 813), rose 2 basis points to 0.11% for the 7-Day Yield (annualized, net) Average, while the 30-Day Yield also went up 2 basis points 0.10%. The Gross 7-Day Yield was 0.38% (up 7 basis points), while the Gross 30-Day Yield was 0.37% (up 6 basis points).
Our Crane 100 Money Fund Index shows an average 7-Day (Net) Yield of 0.21 (up 3 basis points) and an average 30-Day Yield of 0.20% (up from 0.16%). The Crane 100 shows a Gross 7-Day Yield of 0.44% (up 7 basis points), and a Gross 30-Day Yield of 0.43% (up 8 basis points). For the 12 month return through 2/29/16, our Crane MF Average returned 0.04% (up 1 basis point) and our Crane 100 returned 0.07% (up 2 basis points). The total number of funds fell to 1,161, down 6 from last month.
Our Prime Institutional MF Index (7-day) yielded 0.24% (up 4 bps) as of Feb. 29, while the Crane Govt Inst Index was 0.12% (up 2 basis points) and the Treasury Inst Index was 0.09% (up 2 bps). The Crane Prime Retail Index yielded 0.07% (up 2 bps), while the Govt Retail Index yielded 0.03% (unchanged) and the Treasury Retail Index was 0.02% (unchanged). The Crane Tax Exempt MF Index yielded 0.01% (unchanged).
The Gross 7-Day Yields for these indexes in February were: Prime Inst 0.51% (up 6 basis points from last month), Govt Inst 0.35% (up 6 bps), Treasury Inst 0.30% (up 9 bps), Prime Retail (0.43%), Prime Govt (0.30%), Treasury Retail (0.24%), and Tax Exempt 0.08% (down 3 bps). The Crane 100 MF Index returned on average 0.01% for 1-month, 0.04% for 3-month, 0.03% for YTD, 0.07% for 1-year, 0.04% for 3-years (annualized), 0.04% for 5-year, and 1.20% for 10-years. (Contact us if you'd like to see our latest MFI XLS, Crane Indexes file or "Market Share" report.)
In other news, T. Rowe Price set the conversion date for its $6.5 billion Prime Reserve Portfolio to "go Government" in an SEC filing. (See our Aug. 19, 2015 News, "T Rowe Price to Launch Prime Inst MMF; ICI, JPM on Holdings, WAMs," where we wrote that T. Rowe Price was planning to launch a Prime Inst fund and convert Prime Reserves portfolio to Government.) The recent filing sets the conversion date at May 2. It says, "T. Rowe Price has been carefully considering these SEC rule changes and their implications and is crafting responses designed to minimize the impacts on our money fund shareholders. As such, we will introduce changes to our money fund lineup in 2016. While most modifications will have little effect on the majority of shareholders, some will be more noticeable, such as changes to some funds' investment objectives or the suitability of a given fund for certain classes of investors."
It continues, "As for the Prime Reserve Portfolio, we have decided to change its name to Government Money Portfolio, effective May 1, 2016. The portfolio will invest only in government money market securities, and it will not be subject to liquidity fees or redemption restrictions (also known as "gates") that the SEC is mandating for retail and institutional money funds. We expect to provide more detailed information about these and other money fund rule-related changes within the coming months to help shareholders make informed decisions."
Finally, a separate filing says, "Effective August 1, 2016, the T. Rowe Price Summit Cash Reserves Fund will change its name to T. Rowe Price Cash Reserves Fund. The fund intends to qualify as a "retail money market fund" in accordance with amendments to Rule 2a-7 that go into effect on October 14, 2016. The fund's overall investment program will remain unchanged <b:>`_. "Retail money market funds" are required to implement policies and procedures reasonably designed to limit investments in the fund to accounts beneficially owned by natural persons. On or before July 1, 2016, the fund will implement these policies and procedures to limit investments in the fund to accounts beneficially owned by natural persons. On or before September 30, 2016, the fund will, upon advance written notification, involuntarily redeem investors that do not satisfy these eligibility requirements."
It may be a long shot, but Federal lawmakers have filed a bill that would allow all money market funds continue to have a constant or stable NAV. The bill, the Consumer Financial Choice and Capital Markets Protection Act of 2015, was introduced in the Senate (S.1802) on July 16, 2015, by Sen Pat Toomey (R-PA), and in the House (H.R.4216) on Dec. 10, 2015 by Rep. Gwen Moore (D-WI-4). There is no mention of the pending SEC MMF reforms in the text of the bill. But if passed, this presumably would supersede reforms which call for a Floating NAV for Prime and Tax-Exempt Institutional money funds. Neither the House nor the Senate bill have progressed very far, and may not advance at all, but the issue bears watching. The Senate bill was referred to the Committee on Banking, Housing, and Urban Affairs, while the House bill was referred to the Financial Services Committee. Supporters are hoping to have a hearing on the issue in the coming months.
The Consumer Financial Choice and Capital Markets Protection Act, as currently written, says, "This bill amends the Investment Company Act of 1940 to authorize any open-end investment company to elect, in its registration statement, to be a money market fund and to compute the current price per share, for purposes of distribution or redemption and repurchase, of any redeemable security issued by the company using the amortized cost method of valuation or the penny-rounding method of pricing, regardless of whether its shareholders are limited to natural persons, if: the company's objective is the generation of income and preservation of capital through investment in short-term, high-quality debt securities; the company elects to maintain a stable net asset value per share or stable price per share, by virtue of such methods, and the board of directors of the company has determined in good faith that it is in the best interests of the company and its shareholders to do so and that the money market fund will continue to use such method(s) only as long as the board believes that the resulting share price fairly reflects the market-based net asset value per share of the company; and the company agrees to comply with such quality, maturity, diversification, and liquidity requirements as the Securities and Exchange Commission (SEC) prescribes as necessary or appropriate in the public interest or for the protection of investors, if consistent with this Act."
The Bill's text continues, "The bill prohibits covered federal assistance from being provided directly to any money market fund. The bill defines: (1) "covered federal assistance" as federal assistance used for the purpose of making any loan to, or purchasing any stock, equity interest, or debt obligation of, any money market fund, guaranteeing any loan or debt issuance of any money market fund, or entering into any assistance arrangement, loss sharing, or profit sharing with any money market fund; and (2) "federal assistance" as insurance or guarantees by the Federal Deposit Insurance Corporation, transactions involving the Secretary of the Treasury, or the use of any advances from any Federal Reserve credit facility or discount window that is not part of a program or facility with broad-based eligibility established in unusual or exigent circumstances."
It adds, "No principal underwriter of a redeemable security issued by a money market fund nor any dealer shall offer or sell any such security to any person unless the prospectus of the money market fund and any advertising or sales literature for such fund prominently discloses such prohibition against direct covered federal assistance. A company that elects to be a money market fund shall remain subject to the provisions of this Act and SEC rules and regulations that would otherwise apply to a registered open-end company, if consistent with this Act."
An organization has formed to support the bill, the Coalition for Investor Choice, which is made up primarily of state treasurers, universities, state and local government, businesses, trade associations, and pension funds. The Coalition website explain, "These funds, which collectively have more than $1 trillion in assets, will be forced into a "floating" net asset value or "NAV" requiring them to value shares in increments of .0001 cents per share. Only money market funds that hold more than 99 percent of their assets in U.S. government securities, along with funds for retail investors, will be allowed to offer a stable $1-per-share value. Any investor not considered a "natural person" -- meaning an "institutional" investor –- will be forced to use a Floating NAV."
It continues, "As a consequence, hundreds of billions in assets currently in stable NAV funds must now move to bank accounts or to government money market funds, providing lower returns for investors. The outflows from prime and tax-exempt funds will shrink the market for commercial paper and municipal debt, raising borrowing costs for both private and government issuers. Already, the repercussions of this rule change are being felt."
On the website's "Facts" page, the Coalition explains, "By ending the stable $1 per share valuation, new government regulations eliminated a key aspect of Money Market Funds that make them a vital tool for institutions. Without a stable valuation, institutions will have trouble using these funds as a way of handling daily cash needs. The effects will ripple across the financial sector where institutions already hold more than $1 trillion of assets in stable NAV, prime and tax-exempt money market funds."
It adds, "S. 1802/H.R. 4216, the "Consumer Financial Choice and Capital Markets Protection Act of 2015," will preserve Money Market Funds for all investors while ensuring continuing safeguards and the Securities and Exchange Commission's careful regulation. S. 1802/H.R. 4216 enables institutions to continue to access the high-quality, liquid cash management tools they have relied on for more than four decades."
One of the hundred-plus support letters, written by the Ohio Council of County Officials to Senator Sherrod Brown, comments, "Over the past two (2) years, several of our member organizations expressed their concerns with proposed securities and Exchanges commission ("SEC") Rule changes. We believe the proposed changes adopted in 2014 could have a negative impact upon the viability of money market funds ("MMFs") and in turn, the financial viability of local governments in Ohio. We respectfully request your support for legislation that is being developed by members of the Senate Banking, Housing and Urban Affairs Committee. The Act would appear to correct a significant impediment to the SEC's 2014 money market reform rule. If not corrected, these changes could be harmful to Ohio's local governments. While many local governments from numerous states appealed to the SEC directly in 2013 and 2014, the Commission was not persuaded to avoid the potential negative consequences resulting from these provisions, and ultimately chose to include them. The proposed legislation adds a mechanism for MMF sponsors to create a MMF with a fixed NAV, if the sponsor so requests at the time the fund is created."
It continues, "The OCCO supports this change for a number of reasons. As investors, local governments rely on MMFs as one of the main components of their short- and mid-term investing needs.... Many local governments are subject to policies and legal restrictions permitting them to invest only in funds that are stable and risk adverse. If the SEC's new floating NAV requirement is imposed on prime MMFs beginning in 2016, governments may be forced out of these funds and would have to look to other investment vehicles that have historically paid lower yields, or to other less secure products with equal or less liquidity than MMFs.... The new floating NAV requirement would also harm Ohio local governments that issue municipal securities or "tax advantaged" debt."
We became aware of bill via an article in Alabama Construction News', entitled, "Losing Money Market Funds: Why it Matters to the Construction Industry." It says, "There are many significant consequences of a floating NAV that will have negative effects on the construction industry. "By requiring institutional tax-exempt MMFs to change from a fixed NAV to a floating NAV, MMFs will be far less attractive to investors, thereby limiting the availability for MMFs to purchase municipal securities," said J. Lister Hubbard of Capell & Howard, P.C.... "Furthermore, these MMF changes are coming at precisely the same time that global banking regulations known as Basel III are being put in place, making banks less capable of filling the gap," Hubbard added."
It continues, "To address the negative impact of the SEC amendment, the Coalition for Investor Choice, Inc. is supporting S. 1802/H.R. 4216, the Consumer Financial Choice and Capital Markets Protection Act. The Act seeks to preserves MMFs as a source of liquidity and capital for public infrastructure needs. "It ensures that all MMFs, both institutional and retail, across the government, prime, and municipal spectrum, are able to continue to function at a stable $1 per share net asset value after pending SEC reforms take effect in October," said [The Coalition's Vince] Randazzo. Randazzo also noted that the legislation does not alter any aspect of the Dodd-Frank Act of 2010, which imposes new regulatory requirements on U.S. banks. Nor does it alter any of the other regulations adopted by the SEC in 2010 and 2014, which addressed and enhanced MMF liquidity, credit quality, transparency and regulatory monitoring and made MMFs more resilient to future market turmoil."
The March issue of our flagship Money Fund Intelligence newsletter was sent to subscribers Monday morning. It features the articles: "Exodus: Prime & Tax-Exempt MMFs Liquidate En Masse," which reports on the most recent rash of fund conversions and liquidations; "UBS Asset Management's Abed & Sabatino on MMFs," where we profile Joe Abed and Rob Sabatino from UBS; and "Tweaks Keep Coming: JPM, Wells, BlackRock, Dreyfus," which looks at more lineup shuffles and announcements from fund groups. We have also updated our Money Fund Wisdom database query system with Feb. 29, 2016, performance statistics, and sent out our MFI XLS spreadsheet Monday morning. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our February Money Fund Portfolio Holdings are scheduled to ship Wednesday, March 9, and our March Bond Fund Intelligence is scheduled to go out Monday, March 14.
MFI's lead article on the "Exodus," says, "We've documented the massive shift from Prime to Government funds, but the latest fallout from the SEC's MMF reforms is widespread fund liquidations. February was another busy month for both liquidations, especially Tax-Exempt MMFs, and fund conversions. This month's wave of Prime to Government declarations brings our total to $272.0 billion in MMFs "going Government" ($172.4 billion of this has converted to date). The new moves come from BBH, Invesco, MassMutual, PIMCO, PNC, and UBS."
The piece explains, "Among the most recent Prime to Govt conversion announcements, the $1.8 billion BBH Money Market Fund filed to convert to BBH US Govt MMF on April 1. (See our Feb. 16 News.) The $441 million MassMutual Premier MMF will change into MassMutual US Govt Premier MMF on May 1. (See our Feb. 11 Link of the Day.)"
It adds, "Crane Data's Pete Crane tells Fund Action, "For most of these small providers that have under $1bn and use their money fund just as a convenience for their clients, it's a no brainer.... The costs of converting to prime are substantial with the systems issues of dealing with a floating NAV, if they're institutional, or the gates and fees if they're retail or institutional. It's a pain for the systems. Their boards of directors don't want the responsibility of the gates and fees even though it's unlikely to happen."
Our UBS Profile reads, "This month, Money Fund Intelligence profiles the leaders of the money market fund team at UBS Asset Management, Joe Abed, Global Head of Distribution for Liquidity Management, and Rob Sabatino, Global Head of Liquidity Portfolio Management. They discuss how UBS is tackling the changing money fund environment, expanding its fund offerings and increasing its resources. Says Abed, "We're not just committed to the liquidity business, we're growing both our fund family and our distribution and investment team globally."
Responding to the question: What is your top priority right now? Abed says, "[It is] assuring that our menu of offerings continues to meet the needs of our clients -- both in the U.S., with the changes in money market fund regulations, and globally, to serve the liquidity needs of our clients around the world.... And we're adjusting other funds to ensure we continue to serve all of our clients. Outside the U.S. we have an equally long history in the money fund business.... Last year we expanded our fund range, launching additional CNAV, short term money market funds in Euro and Sterling to sit alongside our existing short term US Dollar money market fund. We see a significant opportunity to grow our business outside the U.S., and under the leadership of James Finch, we will continue to expand our liquidity distribution team in Europe."
The "Tweaks Keep Coming" article says, "In addition to the myriad Prime to Govt conversions and fund liquidations (see our lead story), there were a number of other money fund lineup tweaks and changes announced over the past month. Among the most notable, both JP Morgan Asset Management and Wells Fargo Funds revealed multiple strike times for their Prime Inst floating NAV funds, the first managers to declare intraday pricing details. Also, we report new details on the BofA Funds/BlackRock merger, and the latest lineup tweaks by Dreyfus."
We also discuss in a sidebar, "Negative Rates in the News." It says, "Michael Cloherty, Head of US Rates Strategy at RBC Capital Markets, asks, "Why is everyone talking about negative rates? We think this all stems from the Fed's 2016 bank stress tests and the Street echo chamber." We provide an overview of IMMFA's stance on European MMF reforms in the sidebar, "IMMFA on European Regs." Finally, as we do every month, we also review all the important "Money fund News."
Our March MFI XLS, with Feb. 29, 2016, data, shows total assets increasing $37.4 billion in February to $2.698 trillion, after decreasing $22.4 billion in January, increasing $44.2 billion in December, rising $3.5 billion in November, and jumping $56.5 billion in October. Our broad Crane Money Fund Average 7-Day Yield climbed by 2 bps to 0.11% for the month, while our Crane 100 Money Fund Index (the 100 largest taxable funds) increased 3 basis points to 0.21% (7-day).
On a Gross Yield Basis (before expenses were taken out), funds averaged 0.38% (Crane MFA, up 8 basis points) and 0.44% (Crane 100, up 7 bps). Charged Expenses averaged 0.27% (up 6 bps) and 0.24% (up 5 bps) for the Crane MFA and Crane 100, respectively. The average WAM (weighted average maturity) for the Crane MFA was 37 days (up 2 days from last month) and for the Crane 100 was 37 days (up 1 day). (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
Money fund assets increased for the fourth straight week, jumping $26.0 billion and breaking above $2.8 billion trillion, their highest level since the end of 2010. The Investment Company Institute's weekly statistics also show that Government money funds now have more assets than Prime funds. Government MMF assets surpassed Prime last week for the first time ever and appear poised to stay that way. The latest weekly asset update says, "Total money market fund assets increased by $26.01 billion to $2.80 trillion for the week ended Wednesday, March 2, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $16.04 billion and prime funds increased by $11.61 billion. Tax-exempt money market funds decreased by $1.64 billion."
Government assets, including Institutional and Retail (and Treasury and Government), stand at $1.270 trillion, slightly ahead of Prime assets, which are at $1.277 trillion. Since November, over $172 billion has converted from Prime MMFs to Govt, and another $100 billion is scheduled to switch over the next several months. Later this year, investors could shift hundreds of billions more in assets from Prime to Government funds as the October 14 deadline for the SEC's floating NAV, and emergency gates and fees, reforms approach.
ICI's weekly release explains, "Assets of retail money market funds decreased by $3.72 billion to $1.01 trillion. Among retail funds, government money market fund assets increased by $340 million to $376.31 billion, prime money market fund assets decreased by $2.56 billion to $461.20 billion, and tax-exempt fund assets decreased by $1.50 billion to $175.71 billion." It adds, "Assets of institutional money market funds increased by $29.73 billion to $1.79 trillion. Among institutional funds, government money market fund assets increased by $15.70 billion to $910.06 billion, prime money market fund assets increased by $14.17 billion to $815.42 billion, and tax-exempt fund assets decreased by $140 million to $65.12 billion." Year-to-date through March 2, MMF assets are up $45 billion.
For the month of February, assets are up about $52 billion. In six of the last 7 years, MMF assets have declined in February, averaging a drop of about $22 billion. A Footnote to ICI's release adds, "In anticipation of the Securities and Exchange Commission's (SEC) new money market fund regulations, many advisers are changing their prime money market funds into government money market funds. As a result, there have been, and will continue to be, large shifts in assets from prime funds to government funds before the October 2016 deadline."
In other news, BofA Merrill Lynch Rates Strategist Mark Cabana published the commentary, “Money Fund Reform Drawing Closer." He writes, "Compliance dates for SEC 2a-7 money fund reforms are drawing closer, with the deadline for diversification, stress testing, and disclosure requirements on April 14 and the floating NAV, gate, and fee requirements on October 14. `We expect additional prime fund outflows as a result of the October reforms, the magnitude of which will be largely driven by liquidity and return considerations."
Cabana continues, "Money managers concerned with liquidity are likely to (1) shift their most needed cash into government funds or bank deposits while using prime funds for yield enhancement, or (2) exit the 2a-7 money fund space to invest in separately managed accounts or short-duration funds. Managers focused on return may require additional yield pickup to remain in prime funds. Since 1995, the average spread between prime to Treasury and prime to government funds has been 26 and 12 bps, respectively, versus current spreads to both of around 15bps.... [S]ome additional spread widening from current levels may be required to keep investors in prime funds after October."
He adds, "The vast majority of prime fund financial CP and CDs are concentrated within 6 months according to Crane [Data]. While the distribution of these holdings has not materially changed over recent months, prime fund investments have become slightly more concentrated in tenors with maturities less than 3 months. The shorter-dated concentration may be due to Fed rate hike expectations or a more conservative approach to liquidity management ahead of money fund reform. Prime funds will likely remain very liquid and keep their maturities short ahead of the October implementation date.... Heading into the fall, CP issuers may find that they need pay higher rates in order to fund themselves at short tenors or consider alternatives."
Cabana writes "Given the increased yield and the desire for liquidity, there may be funding pressure on financial CP and CD rates in coming months. Some of this may be evident starting in April, when 6 month issuance will be rolled into October. This could bias FRA / OIS or LIBOR basis spreads wider and these pressures will likely increase should prime fund outflows accelerate ahead of the reform implementation date."
Finally, Principal Financial released a statement entitled, "Money Market changes will impact many clients in 2016," which announces changes to Principal's mutual fund platform for 401k plans. The update, says, "As part of the U.S. Securities and Exchange Commission's (SEC) money market fund rule amendments, effective October 14, 2016 all mutual fund companies must classify their money market mutual funds as either retail, institutional or government. Principal Life Insurance Company will not recordkeep retail or institutional money market funds due to the liquidity fees and redemption gates that may be imposed on these types of funds."
They add, "As a result, retail and institutional money market funds will be removed from our retirement plan platform. Government money market funds are not required to impose liquidity fees or redemption gates, but a government money market fund could voluntarily elect to be subject to them. We will continue to recordkeep government money market funds that do not intend to be subject to requirements surrounding the imposition of liquidity fees and redemption gates."
Regarding its own Principal Money Market Institutional Fund, they comment, "Effective on or about 10/7/16, this fund will be classified as a Retail fund and will close to retirement plans on our platform." Finally, they add, "Although not directly impacted by the SEC's money market fund rule amendments, we've decided to rename the Principal Money Market Separate Account. The Separate Account is being renamed the Liquid Assets Separate Account to distinguish it from a money market mutual fund and prevent investor confusion about the upcoming SEC money market rule amendments, which pertain primarily to mutual funds."
J.P. Morgan Asset Management filed a Prospectus Supplement for the J.P. Morgan Market Funds that summarizes its latest Money Fund Reform plans and detail a number of fund changes, including categorizations, cutoff times, fees and gates policies, and weekly liquid asset levels. The filing says, "The Securities and Exchange Commission ("SEC") has amended the rules that govern the operation of registered money market funds ("MMFs"). The compliance date for certain of these amendments is October 14, 2016.... The following is a summary of the major components of these amendments, as well as information pertaining to certain changes that will impact the JPMorgan MMFs." We review this latest filing below, and we also get comments from JPMAM's Andrew Linton, Managing Director and Head of Product Development for Global Liquidity, about the compliance dates and implications for investors. (See our Feb. 23, 2015 News, "JPMorgan Announces MMF Changes; Prime to Float; First Designations," and see our Jan. 6, 2016 News, "Rolling w/Reform Changes II: Recap of '15 Announcements, '16 Plans.")
The Supplement explains, "Under the amendments, MMFs that qualify as "retail" ("Retail MMFs") or "government" ("Government MMFs") will be permitted to utilize the amortized cost method of valuation to transact at a stable NAV of $1.00 per share. MMFs that do not qualify as Retail MMFs or Government MMFs (collectively, "Institutional MMFs") will be required to price and transact in their shares at a floating NAV reflecting current market-based values of their portfolio securities. The floating NAV will need to be rounded to four decimal places for a MMF utilizing a $1.00 NAV per share (e.g., $1.0000). Additionally, as discussed below, all Retail and Institutional MMFs must adopt policies and procedures to enable them to impose liquidity fees on redemptions and/or redemption gates in the event that the MMF's weekly liquid assets (as defined below) were to fall below a designated threshold, subject to the actions of the MMF's board. Government MMFs are exempt from this requirement."
It continues, "At a February 2016 meeting, the Funds' Board of Trustees (the "Board") agreed with management's recommendation that each of the JPMorgan MMFs be designated as set forth below." JPMorgan Prime MMF will be designated as Institutional and will have a floating NAV starting Oct. 1, 2016; JPMorgan Liquid Assets MMF, JPMorgan California Municipal MMF, JPMorgan New York Municipal MMF, JPMorgan Municipal MMF, and JPMorgan Tax Free MMF will "seek to qualify" as Retail by October 1 and keep a stable NAV; and, JPMorgan 100% U.S. Treasury Securities Money Market Fund, JPMorgan Federal MMF, JPMorgan U.S. Government MMF and JPMorgan U.S. Treasury Plus MMF (all share classes) will be designated Government. Only the Government funds won't have the ability to use liquidity fees and temporary gates, but the filing says in a footnote, "The Board has no current intention to subject the Government MMFs to temporary liquidity fees and redemption gates. Please note, however, that the Board may reserve the ability to subject the Government MMFs to a liquidity fee and/or redemption gate in the future after providing appropriate prior notice to shareholders."
Regarding "Retail MMFs," JPMAM comments, "As required under the rule amendments, each Retail MMF must adopt policies and procedures reasonably designed to limit all beneficial owners of the Fund to natural persons. In order to separate retail and non-retail investors, a Retail MMF may redeem investors that do not satisfy the eligibility requirements for Retail MMF investors. Each Fund that will operate as a retail MMF will provide advance written notice of its intent to make any such involuntary redemptions.... The Funds listed in the table above will seek to qualify as Retail MMFs by October 1, 2016. On or before October 1, 2016, investments in those Funds will be limited to accounts beneficially owned by natural persons. Natural persons may invest in a Retail MMF through certain tax-advantaged savings accounts, trusts and other retirement and investment accounts, which may include, among others: participant-directed defined contribution plans; individual retirement accounts ... or certain other retirement and investment accounts with ultimate investment authority held by the natural person beneficial owner, notwithstanding having an institutional decision maker making day to day decisions."
For the "JPMorgan Institutional MMF," it says, "Under the rule amendments, both retail and non-retail investors will be able to own shares of the JPMorgan Prime Money Market Fund, but the Fund will be required to transition to a floating NAV calculated to four decimals (e.g., $1.0000) on or before October 14, 2016. This transition currently is expected to occur with respect to the JPMorgan Prime Money Market Fund on or about October 1, 2016. The JPMorgan Prime Money Market Fund will also be subject to the liquidity fee and redemption gate provisions described below. Effective on or about October 1, 2016, the NAV of each class of shares of the JPMorgan Prime Money Market Fund will ordinarily be calculated as of the following times on each day the Fund accepts purchase orders and redemption requests: JPMorgan Prime Money Market Fund -- 8:00 a.m., 12:00 p.m. and 3:00 p.m. ET."
Under a section "More Information on Liquidity Fees and Redemption Gates," the filing explains, "Under the rule amendments, if a MMF's weekly liquid assets fall below 30% of its total assets, the MMF's board, in its discretion, may impose liquidity fees of up to 2% of the value of the shares redeemed and/or redemption gates. In addition, if a MMF's weekly liquid assets fall below 10% of its total assets at the end of any business day, the MMF must impose a 1% liquidity fee on shareholder redemptions unless the MMF's board determines that not doing so is in the best interests of the MMF. "Weekly liquid assets" include (i) cash; (ii) direct obligations of the U.S. Government ... (iv) securities that will mature or are subject to a demand feature that is exercisable and payable within five business days; and (v) amounts receivable and due unconditionally within five business days.... With regard to all Funds that do not qualify as Government MMFs (as set forth above), the liquidity fee and redemption gate powers described above will be available to the Board on October 14, 2016."
It adds, "Liquidity fees and redemption gates are most likely to be imposed, if at all, during times of extraordinary market stress. The Board generally expects that a redemption gate would be imposed prior to notification to shareholders and financial intermediaries that a gate would be imposed. Additionally, the Board generally expects that a liquidity fee would be implemented, if at all, after a Fund has notified financial intermediaries and shareholders that a liquidity fee will be imposed (generally, applied to all redemption requests processed at the first net asset value calculation on the next business day following the announcement that the Fund will impose a liquidity fee).... In the event that a liquidity fee or redemption gate is imposed, the Board expects that for the duration of its implementation and the day after which such gate or fee is terminated, the Fund would strike only one NAV per day, at the Fund's last scheduled NAV calculation time. The imposition and termination of a liquidity fee or redemption gate will be reported by a Fund to the SEC on Form N-CR. Such information will also be available on the Fund's website (www.jpmorganfunds.com).
The Prospectus Supplement continues, "The Board may, in its discretion, terminate a liquidity fee or redemption gate at any time if it believes such action to be in the best interest of a Fund and its shareholders. Also, liquidity fees and redemption gates will automatically terminate at the beginning of the next business day once a Fund's weekly liquid assets reach at least 30% of its total assets. Redemption gates may only last up to 10 business days in any 90-day period.... The Board may, in its discretion, permanently suspend redemptions and liquidate if, among other things, a Fund, at the end of a business day, has less than 10% of its total assets invested in weekly liquid assets. The Board of a Fund that operates as a Retail or Government MMF may suspend redemptions and liquidate the Fund if the Board determines that the deviation between its amortized cost price per share and its market-based NAV per share may result in material dilution or other unfair results to investors or existing shareholders."
JPMAM also writes, "Effective September 1, 2016, each of the JPMorgan California Municipal Money Market Fund, JPMorgan New York Municipal Money Market Fund and JPMorgan Municipal Money Market Fund has adopted a non-fundamental policy to ordinarily invest, under normal circumstances, 100% of its total assets in weekly liquid assets (as defined under Rule 2a-7). The maturity restrictions applicable to weekly liquid assets may reduce these Funds' yield and performance. Investors should note that the historical yield and performance information for these Funds, as described in their prospectuses, is based on the investment policies of the Funds prior to the implementation of these changes."
Finally, the filing adds, "With regard to each Fund, the following language applies and has been added to the prospectus: You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund's sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time." Note: A separate filing comments, "Effective April 1, 2016, JPMorgan Funds Management, Inc., the Funds' administrator, will be merged with and into J.P. Morgan Investment Management Inc. As a result of this action, all references to JPMorgan Funds Management, Inc. will be replaced with J.P. Morgan Investment Management Inc."
JPMAM's Linton tells us, "The key decision for investors is whether to maintain their current cash investments (assuming they remain eligible to do so) or move to new investments. We expect that this decision will be based on fund classifications, the potential imposition of redemption fees and gates and the investors' needs. For example, under MMF reform, institutions that currently invest in Retail MMFs will no longer be eligible to do so and will have to move cash investments to a Government or Institutional MMF. Those currently invested in Institutional MMFs, but who want to remain invested in a fund that (1) can continue to utilize amortized cost accounting to seek to maintain a stable NAV and (2) is not subject to fees and gates, may find a Government MMF more appropriate for some or all of these cash investments, despite a potential give-up in yield."
He explains, "Most investors understand the concepts of a floating NAV and fees and gates. What they have less clarity on is how their MMFs will be classified and the details of how FNAVs and fees and gates will be implemented.... Effective liquidity management is key for our investors. We want to help investors in the JPMorgan MMFs to plan for these changes in a timely, thoughtful and informed way. Without fund-specific information, they can't do that. Now is the time to assess current investment strategies, talk with money managers and determine what, if any, changes to their cash investments may be warranted."
Linton says, "The JPMorgan Prime Money Market Fund currently plans to calculate its net asset value three times per day, at 8:00 a.m., 12:00 p.m. and 3:00 p.m., EST. We think these times will meet the liquidity needs of investors by allowing the fund to ordinarily make redemption proceeds available throughout the day, following the calculation of the NAVs. We also felt that transitioning to a floating NAV around the start of a calendar quarter might be helpful for investors."
He adds, "I think some investors are still more concerned about fees and gates than floating NAVs. Simply put, these investors want ready access to their funds if and when they need them.... First, investors should keep in mind that redemption gates and liquidity fees are powerful tools that, during times of extraordinary market stress, may enable MMF boards to provide shareholders with equitable treatment. I believe gates and fees are most likely to be imposed, if at all, only during times of extraordinary market instability.... This decision is ultimately at the discretion of a board, which is not required to implement a gate or a fee. However, in the rare event that either step is deemed to be in the best interest of a MMF, I would generally expect that a board would consider implementing a gate first, without prior notification to shareholders or intermediaries, to prevent a sudden, disorderly flood of redemptions and to allow time to implement a liquidity fee."
Finally, Linton comments, "I would emphasize the following: Think strategically about cash segmentation. By that I mean, forecast cash flows and use these estimates to classify cash balances as, for example, "operating" (requiring daily liquidity), "reserve" (available in a 6- to 12-month timeframe), or "strategic" (available beyond a 1-year horizon). Segmentation helps define the priorities for liquidity and investment return.... For strategic cash, if investment policies permit, some liquidity investors may decide to move beyond MMFs -- to ultra-short duration or short-duration bond funds (with floating NAVs) which may assume greater risk.... Certain liquidity investors that want to avoid a floating NAV and fees and redemption gates are likely to move assets to Government MMFs, potentially challenging supply/demand dynamics for securities held by Government MMFs. This could result in a widening of spreads, making Institutional MMFs more appealing to liquidity investors.... Finally, don't delay decision making. Consider the options, obtain required information and approvals -- and then, take action. There is no reason to wait until October 14 to implement appropriate changes."
The London-based Institutional Money Market Funds Association published "IMMFA Position on the Money Market Fund Regulation," an Executive Summary of the lobbying group's "grab bag" of thoughts on pending money market fund reforms in Europe. It says, "This paper summarizes the key issues for IMMFA members in the MMFR. It draws on both the Commission and European Parliament texts. IMMFA supports the introduction by the Parliament of new types of fund, but further work is needed to make these funds viable." We discuss the latest on European money fund reforms, assets and yields below, and also review our latest MFI International Money Fund Portfolio Holdings summary. Finally, the website is now live for Crane's 4th Annual European Money Fund Symposium, which will be held Sept 20-21, 2016 in London.
The IMMFA release examines the reform proposal from a variety of angles. On "Product Design," it says: "Low Volatility NAV (Articles 2(12b), 27): requires further key amendments to ensure the product has longevity and stability, and therefore can offer an attractive investment option for clients (sunset clause and 20bp "collar" need reworking). Public Debt CNAV (Article 2(22a)): limited scope of eligible investments questioned; currently 95% of CNAV government funds are US$. Retail CNAV (Article 2(12a)): narrow investor base is less stable; funds would be better widened to allow investment by pension funds and natural persons."
On "Structural Reforms," IMMFA says, "Capital buffers (Articles 29-30): introduction of capital buffers would make existing CNAV funds non-viable and pose substantial barrier to entry for new funds. Sponsor support (Article 35): we support restrictions on sponsor support, and suggest that these should be recognised explicitly in Basel III related capital provisions that assume support may be provided to MMF."
On "MMF Investments," the summary explains, "IMMFA agrees that risk controls for Short Term MMFs should promote the use of high quality assets. It is important that this does not unnecessarily restrict the ability of MMF to invest.... Eligible assets (Article 8): investment in other MMF should be included. Whilst reverse repo is an appropriate asset for MMF, repo (added by the EP Article 8.1(d)) is not.... Eligible securitisation (Article 10): the limits set on securitisation holdings are overly tight and will impede funding to business, SMEs. The ESMA guidelines deal with this already. Diversification (Articles 14, 15): To avoid impacting business funding, the diversification and concentration rules should be grouped and limits set in line with existing UCITS rules. Liquidity (Article 21): Equal treatment should be applied to all MMF."
For more on the status of pending, stalemated European money fund reforms, see our "Dec. 2 News, "FT Says Lux Blocking European MF Reforms; MFI Intl Update, Holdings," which quotes a Financial Times article, "Luxembourg 'blocking' money market reform." It says, "A spokesman for the Dutch EU Presidency, which took over in January, said the MMF file is not among its priorities." (See also our Sept. 23 News, "European Money Fund Symposium: Kooy, Lardner Push Viable Solutions.")
European money fund assets domiciled in Dublin and Luxembourg and denominated in USD, Euro and Sterling are up $1.5 billion to $677.0 billion in the latest month (through 2/29) and down $22.1 billion year-to-date, according to our Money Fund Intelligence International. U.S. Dollar (USD) funds (157) tracked by MFII account for over half ($368.6 billion, or 54.5%) of the total, while Euro (EUR) money funds (98) total just E77.2 billion and Pound Sterling (GBP) funds (110) total L150.3. USD funds were down $3.5 billion in February and $23.5 billion, or 5.9%, YTD through 2/29. Euro funds are up E3.5 billion for the month and up E1.8 billion YTD, while GBP funds are up L700 million in February and down L200 million YTD. USD MMFs yield 0.26% (7-Day) on average (2/29/16), up from 0.23% on 1/31 and up from 0.16% on 12/31/15. EUR MMFs yield -0.20% on average, unchanged from the previous month, while GBP MMFs yield 0.40%.
European USD MMFs, on average, consist of 24.0% in Certificates of Deposit (CDs), 23.0% in Commercial Paper (CP), 24.0% in Treasury securities, 11.0% in Other securities (primarily Time Deposits), 12.0% in Repurchase Agreements (Repo), 4.0% in Government Agency securities, and 2.0% in VRDNs (Variable-Rate Demand Notes). USD funds have on average 28.0% of their portfolios maturing Overnight, 8.7% maturing in 2-7 Days, 20.1% maturing in 8-30 Days, 11.8% maturing in 31-60 Days, 14.4% maturing in 61-90 Days, 12.4% maturing in 91-180 Days, and 4.5% maturing beyond 181 Days. USD holdings are affiliated with the following countries: US (37.2%), France (15.0%), Japan (9.4%), Canada (8.0%), Sweden (6.2%), Great Britain (3.4%), Australia (4.0%), Germany (3.7%), Netherlands (4.0%), and Singapore (2.2%), according to our latest MFII MF Portfolio Holdings report, with data as of Jan. 31, 2016.
The 20 Largest Issuers to "offshore" USD money funds include: the US Treasury with $101.5 billion (24.1% of total portfolio assets), Credit Agricole with $15.3B (3.6%), BNP Paribas with $14.2B (3.4%), Bank of Tokyo-Mitsubishi UFJ Ltd with $11.3B (2.7%), Wells Fargo with $11.1B (2.6%), Societe Generale with $10.8B (2.6%), Sumitomo Mitsui Banking Co with $9.4B (2.2%), Bank of Nova Scotia with $9.4B (2.2%), Natixis with $8.5B (2.0%), Federal Reserve Bank of New York with $8.4B (2.0%), Svenska Handelsbanken with $8.2B (1.9%), RBC with $7.4B (1.8%), Credit Mutuel $7.3B (1.7%), Rabobank with $7.3B (1.7%), DnB NOR Bank ASA with $7.0B (1.7%), Nordea Bank with $6.8B (1.6%), JP Morgan with $6.6B (1.6%), Mizuho Corporate Bank Ltd with $6.1B (1.4%), ING Bank with $6.0B (1.4%), and Bank of America with $5.9B (1.4%).
Euro MMFs tracked by Crane Data contain, on average 20.0% in CDs, 45.0% in CP, 17.0% in Other (primarily Time Deposits), 11.0% in Repo, 2.0% in Agency securities, and 5.0% in Treasury securities. EUR funds have on average 20.5% of their portfolios maturing Overnight, 8.1% maturing in 2-7 Days, 21.8% maturing in 8-30 Days, 14.0% maturing in 31-60 Days, 15.0% maturing in 61-90 Days, 17.1% maturing in 91-180 Days, and 3.6% maturing beyond 181 Days. EUR MMF holdings are affiliated with the following countries: France (31.3%), US (16.9%), Japan (10.7%), Sweden (6.7%), Great Britain (5.9%), Germany (8.1%), Netherlands (6.3%), Belgium (4.3%), Switzerland (1.4%), and Canada (1.3%) <b:>`_.
The 15 Largest Issuers to "offshore" EUR money funds include: Republic of France with E4.4B (6.2%), BNP Paribas with E3.9B (5.4%), Proctor & Gamble with E3.0B (4.2%), General Electric with E3.0B (4.1%), Svenska Handelsbanken with E2.9B (4.1%), Rabobank with E2.8B (3.9%), Societe Generale with E3.6B (2.6%), Credit Agricole with E2.3B (3.3%), HSBC with E2.0B (2.8%), Sumitomo Matsui Banking Co. with E2.0B (2.8%), Nordea Bank with E1.7B (2.4%), Dexia Group with E1.6B (2.2%), Bank of Tokyo-Mitsubishi UFJ Ltd with E1.6B (2.2%), Credit Suisse with E1.6B (2.2%), BRED Banque Populaire SA with E1.6B (2.2%), and Mizuho Corporate Bank with E1.6B (2.2%).
The GBP funds tracked by MFI International contain, on average (as of 1/31/16): 26.0% in CP, 27.0% in Other (Time Deposits), 32.0% in CDs, 8.0% in Repo, 5.0% in Treasury, 1.0% in Agency, and 1.0% in VRDNs. Sterling funds have on average 20.7% of their portfolios maturing Overnight, 4.0% maturing in 2-7 Days, 19.6% maturing in 8-30 Days, 17.9% maturing in 31-60 Days, 17.2% maturing in 61-90 Days, 15.1% maturing in 91-180 Days, and 5.4% maturing beyond 181 Days. GBP MMF holdings are affiliated with the following countries: France (15.1%), Great Britain (14.7%), Japan (11.2%), Germany (9.3%), Australia (8.9%), US (6.5%), Netherlands (7.3%), Canada (6.5%), Sweden (5.5%), and Singapore (3.2%).
The 15 Largest Issuers to "offshore" GBP money funds include: UK Treasury with L8.0B (6.0%), Rabobank with L4.6B (3.5%), Sumitomo Mitsui Banking Co with L4.2B (3.1%), BNP Paribas with L4.2B (3.1%), Bank of Tokyo-Mitsubishi UFJ Ltd with L4.1B (3.1%), Nordea Bank with L4.0B (3.0%), Bank of America with L3.7B (2.8%) <b:>`_, Toronto Dominion Bank with L3.5B (2.7%), National Australia Bank Ltd with L3.5B (2.6%), Erste Abwicklungsanstalt with L3.4B (2.6%), Credit Mutuel with L3.2B (2.4%), HSBC with L3.1B (2.3%), Standard Chartered Bank with L3.0B (2.2%), and Mizuho Corporate Bank Ltd with L2.9B (2.2%). (E-mail us at email@example.com to request a copy of our latest MFI International or MFII Portfolio Holdings.)
Finally, the conference website (www.euromfs.com) is now live for our 4th Annual Crane's European Money Fund Symposium, which will be held Sept. 20-21 at the London Tower Bridge Hilton. Last year's "European" conference in Dublin attracted a record 120 attendees, making it the largest money fund event outside of the U.S. (The largest in the U.S. of course is our Money Fund Symposium, which will be held June 22-24 in Philadelphia.) The European Symposium's Preliminary Agenda is also out, but it remains a work in progress for now. (So let us know if you'd like to speak or sponsor.)
Yet another round of money fund liquidations, prime-to-government conversions and fund lineup change announcements surfaced over the last several days. Among the latest batch: PNC Funds filed with the SEC to liquidate its Prime and Tax-Exempt money funds; PIMCO filed to convert its Prime MMF to Government; and, First American Funds announced a series of changes to its fund lineup, including the launch of a new Prime Retail MMF. With the PIMCO and PNC changes, we now count $272 billion in Prime money funds that have liquidated or converted to Government MMFs, or plan to convert prior to October 2016. (About $100 billion of this total still hasn't converted, though about $25 billion will convert in April and over $20 billion in May.) Though the vast majority of these have been conversions from Prime into Govt funds, PNC joins RBC in liquidating its Prime funds instead of converting them. We also report on a new filing from the Schwab Variable Share Price Money Fund.
PNC's filing explains, "On February 25, 2016, the Board of Trustees of PNC Funds and PNC Advantage Funds approved plans of liquidation for each of PNC Money Market Fund, PNC Tax Exempt Money Market Fund, and PNC Advantage Institutional Money Market Fund, with such liquidations expected to take place on or about May 31, 2016. Effective as of the close of business on March 31, 2016, the Funds' shares will no longer be available for purchase by new investors. The proceeds per share to each shareholder on the Liquidation Date will be the net asset value per share of the relevant class of shares of such Fund after all expenses and liabilities of the Fund have been paid or otherwise provided for." PNC Advantage Institutional MMF has $1.2 billion in assets, while PNC MMF has $1.5 billion. PNC Tax-Exempt fund has $589 million.
PNC still will offer its PNC Govt MMF, which has $1.8 billion in assets, and its PNC Treasury MMF, which has $544 million. PNC also filed to lower the management fee on its Treasury fund. The Prospectus Supplement states, "Effective February 26, 2016 the Board of Trustees of PNC Treasury Money Market Fund approved a reduction in the Fund's Management Fee from 0.25% of the Fund's average daily net assets to 0.15% of the Funds average daily net assets. Due to, among other things, the recent low interest rate environment, PNC Capital Advisors, LLC has been waiving a portion of its Management Fee over recent periods so that the Fund has not recently paid a Management Fee greater than 0.15%. Accordingly, this change in the Fund's contractual management fee rate is not expected to have a short-term effect on the Fund's net expense ratio."
Also, PIMCO filed with the SEC to reorganize the $908 million PIMCO Money Market Fund into the $207 million PIMCO Govt Money Market Fund. The filing says, "The Board has approved the reorganization of the PIMCO Money Market Fund into the PIMCO Government Money Market Fund. Under the Reorganization: (1) the assets of the Acquired Fund will be transferred to the Surviving Fund in exchange solely for shares of the Surviving Fund and the assumption of the Acquired Fund's liabilities; and (2) the shares of the Surviving Fund received by the Acquired Fund will be distributed by the Acquired Fund to its shareholders in complete liquidation of the Acquired Fund and in cancellation of all of the Acquired Fund's shares. The Reorganization does not require shareholder approval."
It continues, "The Board considered multiple factors, including, but not limited to, the Funds' substantially similar investment objectives, principal investment strategies, principal risks, policies, restrictions and distribution schedules and the fact that the Funds are managed by the same portfolio manager. In addition, while the fees and expenses for the Funds are mostly identical, the Surviving Fund currently has lower supervisory and administrative fees as compared with corresponding share classes of the Acquired Fund, resulting in a lower total expense ratio for the Surviving Fund as compared with the Acquired Fund. The Reorganization is expected to occur on September 23, 2016, or on such other date as determined by appropriate officers of the Trust."
In other news, US Bancorp's First American Funds, the 15th largest money fund manager with $40.2 billion in assets, has made additional changes to its money fund lineup, launching a new Prime Retail fund and changing the names of two others. A press release entitled, "First American Funds to Offer New Retail Prime Obligations Fund, Designates Tax Free Obligations Fund as Retail, says, "The First American family of mutual funds today announced that it intends to launch a new money market mutual fund, First American Retail Prime Obligations Fund. The new fund is tentatively scheduled to launch July 18, 2016 and will be open to eligible retail investors. The new fund will seek to maintain a stable $1.00 per share net asset value. Beginning October 14, 2016, the new fund will be subject to the possibility of liquidity fees and redemption gates, as required by the money market fund reform rules adopted by the Securities and Exchange Commission in July 2014."
It continues, "The current First American Prime Obligations Fund will be renamed First American Institutional Prime Obligations Fund, likely at the time of the launch of the new fund. Beginning October 14, 2016, the current fund will be subject to the possibility of liquidity fees and redemption gates and will transact at a floating NAV which will be calculated out to four decimal places, as required by the SEC Rules. Retail shareholders invested in the current fund will be able to exchange into the new fund at the time of the new fund's launch. More information will be provided to retail shareholders as the launch date approaches."
The release adds, "First American today also announced the intention to designate First American Tax Free Obligations Fund as a retail fund, open only to natural persons. It will be renamed the First American Retail Tax Free Obligations Fund and will continue to seek to maintain a stable $1.00 per share NAV. Beginning October 14, 2016, it will also be subject to the possibility of liquidity fees and redemption gates, as required by the SEC Rules."
Finally, we previously reported on a money fund launch by Charles Schwab. (See our Nov. 10 News, "Schwab Files Variable NAV Money Fund; Invesco Announces Changes.") At the time, we said that Schwab will launch a new floating NAV money market fund, Schwab Variable Share Price Money Fund. On January 20, the new fund's Prospectus appeared, and it reveals plans for Ultra Shares (SVUXX), Premier Shares (SVRXX, Select Shares (SVCXX), and Investor Shares (SVOXX). (The fund is not live yet though.)
Under "Principal Investment Strategies," Schwab says, "The fund is a money market fund that is designed to serve as a complementary product to traditional stable share price money market funds. Unlike a traditional stable share price money market fund, the fund will not use the amortized cost method of valuation or round the per share net asset value (NAV) to the nearest whole cent and does not seek to maintain a stable share price. As a result, the fund's share price, which is its NAV, will vary and reflect the effects of unrealized appreciation and depreciation and realized losses and gains."