The total amount of money that's moved out of Prime and Tax Exempt MMFs combined approached $1.0 trillion (-$988B) this week, as the "Big Shift" of assets into Government money funds accelerated ahead of the mid-October money fund reform deadline. ICI's latest "Money Market Fund Assets" report shows MMFs overall increasing $10.5 billion in the latest week, but Prime funds fell by over $85 billion (after falling by $60 billion a week the prior 2 weeks). Prime has declined in 17 out of the past 18 weeks (-$579B), and has averaged outflows of $33 billion a week since June 1 and $59 billion since Sept. 1.
Since Oct. 29, 2015, Prime assets have fallen by a massive $875 billion, or 60%, and Tax Exempt funds have declined by another $113 billion, or 46%. Combined these two non-Government sectors (which will be subject to emergency gates and fees come October 14) have fallen by $988 billion (58%) since this giant migration started. We expect the total amount shifted to break above $1.0 trillion within the next few days. We look at these latest asset totals, and we also review ICI's latest monthly "Trends" data below.
Government funds (including Treasury funds) gained $102 billion in the past week. They've increased by $952 billion since last October (up 94%) and by $745 billion, or 61%, YTD. (YTD in 2016, Prime MMFs are down by $700 billion, or 55%.) Over the past 6 weeks, Prime MMFs have fallen by $320 billion and they've fallen by $464 billion over the past 13 weeks. Govt MMFs have risen $321 billion over 6 weeks and $488 billion over 13 weeks.
ICI's latest release says, "Total money market fund assets increased by $10.51 billion to $2.68 trillion for the week ended Wednesday, September 28, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $102.07 billion and prime funds decreased by $85.65 billion. Tax-exempt money market funds decreased by $5.92 billion."
It continues, "Assets of retail money market funds decreased by $6.14 billion to $924.82 billion. Among retail funds, government money market fund assets increased by $10.96 billion to $538.02 billion, prime money market fund assets decreased by $13.44 billion to $279.39 billion, and tax-exempt fund assets decreased by $3.66 billion to $107.41 billion."
The update adds, "Assets of institutional money market funds increased by $16.65 billion to $1.76 trillion. Among institutional funds, government money market fund assets increased by $91.11 billion to $1.43 trillion, prime money market fund assets decreased by $72.20 billion to $304.04 billion, and tax-exempt fund assets decreased by $2.25 billion to $24.16 billion." Government assets, including Institutional and Retail (and Treasury and Government) stand at $1.965 trillion, while Prime assets fell below $600 billon and are now at $583 billion.
ICI explains, "Since January 2015, prime and tax-exempt money market funds have seen a decrease in assets of $1.00 trillion, in response to the Securities and Exchange Commission's 2014 money market fund reforms, which must be implemented by October 14. During the same period, government money market funds have seen an increase in assets of $974.77 billion, and total money market fund assets have remained consistently close to $2.7 trillion."
Chief Economist Brian Reid comments, "Retail and institutional investors, intermediaries, and funds have reacted to the requirement for floating net asset values and the prospect of liquidity fees and redemption gates by significantly reducing assets held in prime and tax-exempt money market funds. Extensive preparation by money market fund sponsors has helped funds, investors, and markets manage those flows and make a smooth transition so far to the new rules."
ICI's latest "Trends in Mutual Fund Investing" and "Month-End Portfolio Holdings of Taxable Money Funds," which confirmed earlier reports of jumps in Treasury, Agency and Repo holdings. (See our Sept. 13 News, "Sept. Portfolio Holdings: CDs, CP Plunge in Aug., Repo, T-Bills Jump.") The report shows an $18 billion increase in money market fund assets in August to $2.723 trillion. The increase follows an increase of $14 billion in July, and declines of $8 billion in June and $12 billion in May. In the 12 months through August 31, money fund assets have gone up by $51 billion, or 1.9%. (Month-to-date in Sept. through 9/28, our Money Fund Intelligence Daily shows total assets down by $36 billion with Prime MMFs down $224 billion, Tax Exempt MMFs down $21 billion, and Govt MMFs up $210 billion.)
The monthly report states, "The combined assets of the nation’s mutual funds increased by $55.80 billion, or 0.3 percent, to $16.36 trillion in August, according to the Investment Company Institute’s official survey of the mutual fund industry. In the survey, mutual fund companies report actual assets, sales, and redemptions to ICI.... Bond funds had an inflow of $23.08 billion in August, compared with an inflow of $24.48 billion in July.... Money market funds had an inflow of $17.63 billion in August, compared with an inflow of $14.08 billion in July. In August funds offered primarily to institutions had an inflow of $40.56 billion and funds offered primarily to individuals had an outflow of $22.94 billion."
The latest "Trends" shows that while Taxable MMFs overall increased again in August, Tax-Exempt MMFs continued to bleed assets. Tax-Exempt MMFs declined by $31 billion, compared to taxable, which increased by $49 billion. Year-to-date through August 31, MMFs have had $30 billion in outflows, with $70 billion in inflows to Taxable funds and $100 billion in outflows from Tax-Exempt funds. Money funds now represent 16.7% (up from 16.6%) of all mutual fund assets, while bond funds represent 22.7%. The total number of money market funds dropped to 426 in August, down from 432 in July and down from 506 a year ago.
ICI's Portfolio Holdings confirms a jump in Treasuries, Repo and Agencies in August, and continued declines in CDs and CP. Repo remained the largest portfolio segment, rising by $97 billion, or 15%, to $730 billion or 28% of holdings. Treasury Bills & Securities jumped into second place among composition segments, rising $76 billion, or 14%, to $616 billion, or 24% of holdings. U.S. Government Agency Securities dropped to third place, gaining $22 billion, or 4%, to $607 billion or 24% of holdings. These moves continue to be driven by the ongoing shifts of Prime fund assets into Government funds.
Certificates of Deposit (CDs) stood in fourth place, but decreased $51 billion, or 11%, to $396 billion (15% of assets). Commercial Paper remained in fifth place but decreased $59B, or 24%, to $184 billion (7% of assets). Notes (including Corporate and Bank) were down by $1 billion, or 8%, to $16 billion (0.6% of assets), and Other holdings (including Cash Reserves) jumped to $45 billion, up from $35 billion.
The Number of Accounts Outstanding in ICI's series for taxable money funds increased by 147 thousand to 23.914 million, while the Number of Funds fell by 5 to 315. Over the past 12 months, the number of accounts rose by 621 thousand and the number of funds declined by 37. The Average Maturity of Portfolios was 35 days in August, up 1 day from July. Over the past 12 months, WAMs of Taxable money funds have declined by 1 day. Note: Crane Data also revised its Sept. MFI XLS this week to reflect the latest 8/31/16 Portfolio Composition data and Maturity breakouts. (Visit our Content Center and the latest Money Fund Portfolio Holdings download page to access our Sept. Money Fund Portfolio Holdings and the latest files.)
The Investment Company Institute published a three-part series on money market mutual funds ahead of the October 14 Money Fund Reform deadline. We reviewed the first piece, "For Money Market Funds, Massive Preparation Has Paid Off in Smooth Transition," in yesterday's "Link of the Day," and we review Parts II and III below. The second "Viewpoints" post, "As Money Market Fund Investors Adjust, Funds Have Managed Flows," and the third, "Money Market Fund Reforms Combine with Bank Regulations to Boost Interest Rates," were written by ICI's Sean Collins and discuss the massive shift of Prime MMF assets to Government MMFs and its implications.
ICI's "Second in a series on money market funds" says, "The Securities and Exchange Commission's new rules for money market funds, which must be fully implemented by October 14, largely center around two key reforms: Prime and tax-exempt money market funds that are sold to institutional investors must price their shares and transact using a "floating" net asset value (NAV), rather than the stable $1.00 NAV that such funds have long maintained; All nongovernment money market funds (i.e., prime and tax-exempt funds, whether retail or institutional) can impose delays ("gates") or redemption fees on redeeming shareholders under limited situations. A fund is required to impose redemption fees if the fund's weekly liquid assets fall below 10 percent of its total assets, unless the fund's board decides a redemption fee is not in the fund's best interests."
It explains, "These changes are pushing investors toward government money market funds -- those that invest principally in securities issued by the US Treasury or government agencies (or repurchase agreements backed by government securities). Institutional investors who prefer money market funds with stable $1.00 NAVs, and retail investors who want to avoid even the remote chance of redemption fees or gates, will have no choice but to invest in a government money market fund."
ICI adds, "According to weekly data, from January 7, 2015, to September 21, 2016, assets in prime institutional money market funds dropped $547 billion. Over the same period, assets in government institutional money market funds rose by a nearly identical amount, $544 billion. A similar, though more muted, shift occurred in retail share classes of money market funds. From January 7, 2015, to September 21, 2016, assets in prime retail money market funds dropped $235 billion. In addition, over the same period, assets in tax-exempt money market funds—the vast majority of which are held by retail investors -- fell $128 billion. Over the same period, assets of government retail money market funds rose by $328 billion."
They write, "Though we can't track the actual dollars moving from one fund to another, it seems likely that most of the $910 billion in assets that have moved out of prime and tax-exempt money market funds in response to the SEC's rule has ended up in government funds.... Many large money market fund sponsors have announced the dates on which they will implement floating NAVs, ranging from October 1 to October 14. So a natural question arises: How much more money could shift from prime to government funds by October 14?"
The Viewpoint answers, "Ballpark estimates by industry participants suggest the flow could total anywhere between $200 billion and $400 billion. Estimates at the upper end of this range are not implausible.... Thus far, the massive shift in assets has proceeded smoothly -- and all indications are that it will continue to do so. Prime money market funds have prepared for the October 14 deadline by making their portfolios extremely liquid."
Finally, it tells us, "In sum, although vast amounts of assets have left prime money market funds for government money market funds, and although even more will leave by October 14, the transition has been orderly -- and all indications are that it will continue to be orderly. In no small part, this reflects the time and effort funds have put into transition planning and execution since the SEC adopted its new rule in 2014."
ICI's Part III piece <i:https://www.ici.org/viewpoints/view_16_mmf_transition_3>_ explains, "`As detailed in the previous ICI Viewpoints in this series, the new Securities and Exchange Commission (SEC) rules for money market funds induced a drop in the assets of prime and tax-exempt money market funds of $910 billion since January 2015 and a roughly comparable $872 billion rise in the assets of government money market funds. This Viewpoints discusses some of the effects of that shift in money market fund assets—combined with Federal Reserve policy and changes in banking rules -- on the market for short-term borrowing and lending (i.e., the money market)."
It comments, "One effect is that with the steep drop in their assets, prime money market funds have had to reduce their holdings of money market instruments. For example, from April 2016 to August 2016, prime money market funds' holdings of large time deposits at banks (bank certificates of deposit and non-negotiable time deposits) declined $163 billion, while their holdings of commercial paper fell $149 billion.... Since last October, interest rates on money market instruments have jumped."
ICI's Collins writes, "Market participants note, however, that part of the rise in short-term interest rates probably reflects regulatory changes for both money market funds and banks: In advance of the October 14 deadline, prime funds have sought to lend dollars at the very short end of the yield curve, limiting their lending almost entirely to 30 days or less. Banks, in contrast, have been less willing to borrow at the very short end of the yield curve, because bank regulators have pushed them to limit their use of overnight or very short-term borrowing in funding their longer-term assets. This mismatch -- between prime money market funds seeking to lend short and banks seeking to borrow longer -- may help explain why the yield on three-month commercial paper has risen more rapidly than the yield on one-month commercial paper since June 2016."
He tells us, "So far, the effects of the new money market fund rules have been largely predictable: Institutional investors have reacted to the floating NAV and the prospect of fees and gates by reducing their holdings of prime money market funds. Retail investors and their intermediaries have reacted (perhaps more strongly than expected) to the prospect of fees and gates by reducing their holdings of prime and tax exempt money market funds. Government funds, which are exempt from the two main changes under the rules, have gained substantial new assets."
Finally, ICI adds, "Throughout all these shifts since January 2015, total money market fund assets have remained at a consistent level around $2.7 trillion. Money market interest rates have responded to the reforms and related flows, particularly as combined with the effects of bank regulatory changes and Federal Reserve policy. Extensive preparation by money market fund sponsors has helped funds, investors, and markets make a smooth transition. ICI will continue to monitor developments in the money markets as the October 14 implementation date approaches, and beyond."
Below, we reprint our latest BFI profile, "Diversity Key at Dimensional: Discussion w/Dave Plecha".... This month, Bond Fund Intelligence interviews Dave Plecha, Global Head of Fixed Income at Dimensional Fund Advisors and manager of the DFA One-Year Fixed Income Portfolio. We ask Dave about Dimensional's history, strategies and presence in the ultra-short, and overall, bond market. We also discussed Dimensional's views about timing the market, ultra-short funds benefiting from money fund reforms and more. Our Q&A follows.(Contact us if you'd like to see the latest Bond Fund Intelligence.)
BFI: Give us a little bit of your history. Plecha: Dimensional was founded in 1981. We launched our first fixed income strategy in 1983 -- an ultra-short bond fund with a maximum average maturity of one year. So we've had 33 years of experience investing in short term fixed income. I joined the firm in 1989 and was involved in the One-Year Fixed Income Portfolio from my start, so it has been 27 years for me.
We have a large, experienced team of portfolio managers and traders. Our fixed income teams are in Santa Monica, Austin, and Charlotte in the US, as well as in London, Sydney, and Tokyo. The One-Year Fixed Income Portfolio team is based in the US. We employ a team-based approach, which we like because it helps establish clear responsibility and multiple levels of accountability without too much reliance on any one person. This helps ensure continuity for our investment process.
BFI: Is One-Year Fixed Income Portfolio Dimensional's biggest bond fund? Plecha: The fund was the largest for a number of years, and today it is still one of our biggest fixed income funds and is used widely by our clients. But we manage a lot of fixed income, almost $90 billion across strategies with different maturity and credit quality constraints, including European based UCITS and Australian based trusts for investors in those regions. What was appealing to our investors in 1983 is still appealing to investors today.
BFI: Talk about that fund's position relative to the other funds in the lineup. Plecha: In the US we have two funds that I would categorize as ultra-short bond funds. The One-Year is focused on U.S. dollar-denominated, short term and high quality bonds, and the average maturity is no more than one year. The fund can buy individual bonds with up to two years maturity, which has basically been the structure of the portfolio since inception. In 1996, we launched a global version, which is fully currency hedged and invests in high quality global bonds, as well as bonds with up to two years maturity. Dimensional has other U.S. and global taxable and non-taxable portfolios that seek higher expected returns while investing in a broader set of credit qualities and maturities.
BFI: What was the original impetus? Plecha: The strategy was designed to offer investors a premium over cash, while maintaining capital preservation. If you care about capital preservation then you probably want to focus on short duration, high quality issues, and you want to be diversified -- that lines up with how we position the portfolio. But within that universe, we can still pursue higher expected returns. So for investors who might otherwise still be in cash, the strategy offered them the ability to have a portfolio that extended duration and the premium that comes with taking that approach.
BFI: What are your biggest challenges? Plecha: We have no challenge finding the securities we want to execute our strategy. Today, we are in a low yield environment and some investors are tempted to reach for yield and extend duration in an attempt to get a bit more yield. But yield is not the only component of expected returns. Our approach of finding portions of the yield curve with higher expected capital appreciation, and our willingness to roll bonds instead of holding to maturity, adds an expected capital appreciation component of returns to the yield. As with any strategy, we believe it is critical to set the proper expectations with our clients -- in a low rate environment and otherwise -- to help them understand there are no free lunches and the importance of remaining disciplined.
BFI: What can and can't you do in the fund? Plecha: At Dimensional, we believe you can't time the market -- that markets are very difficult to outguess consistently. We believe in market prices and that new information is quickly reflected in prices. We believe we provide value to our investors by having a deep understanding of the relationship between the current term structure, the current yield curve, and expected return premiums. This is where we focus.
BFI: Do you adhere to pretty tight maturity guidelines? Plecha: We have a one-year maximum (for our average security). Our maturity guidelines are essentially a function of the shape of the yield curve and the term structure. When yield curves are upwardly sloped, on average we expect larger premiums for moving out towards the one-year limit. When yield curves are flat or inverted, we don't expect the same premium. The Fama research shows that there is a positive relationship between forward rates and term premiums. When yield curves are upwardly sloped, expected premiums are positive. So while our average maturity will vary between zero and one year, it will be near the upward limit in upwardly sloped curves and near the lower limit in flat or inverted curves.
BFI: What about quality guidelines? Plecha: In our opinion, one of the most important attributes of an ultra-short strategy with an objective of capital preservation is liquidity, and we take that very seriously. We stay broadly diversified on the very high end of the credit spectrum, investing primarily in double- and triple-A government and corporate securities.
BFI: What about diversification limits? Plecha: We put a lot of emphasis on diversification, not only to reduce volatility or minimize the risk of losses but also to enhance liquidity. We have tighter maximum allocation limits per issuer than what is allowed for credit issuers in money market regulations. So within a portfolio of very high quality issuers, triple-A and double-A issuers, we are highly diversified. We fix limits by issuer, by guarantor and by industry. Even though we are investing in U.S. dollar-denominated bonds, there are issuers from all over the world that come into the U.S. corporate bond market to issue debt. So we look at the country of issuer and put limits on that. We believe that diversification is important in all of the portfolios we manage -- fixed income and equity.
BFI: How about sectors in general? Plecha: We buy commercial paper which is a big market with new issues every single day. We also have floating rate notes in the portfolio which we often buy on new issue, as two-year issues of FRNs are not uncommon. We do not invest in mortgage-backed securities in the portfolio.
BFI: Do you have relatively stable cash flows? Plecha: Our client base is made up of institutional investors and financial advisors. We've been fortunate to see pretty steady inflows across our fixed income offering as more clients recognize the benefits of our approach. That being said, for the One-Year Fixed Income Portfolio we are talking about a highly liquid strategy -- stable cash flows are not a requirement for the strategy to be successful.
BFI: How about expenses? Plecha: There are a couple of aspects to think about when thinking about costs. Obviously the expense ratio of the strategy is important, but also important are the costs of executing the strategy, which some people forget about. The expense ratio for this portfolio is 17 basis points. We care a lot about the costs of executing the strategy, as anything we can do to reduce them can be passed along as higher returns for clients.
BFI: What about the regulatory environment? Plecha: As you know, the recent focus has been on money market fund reform. Money market funds have an opportunity cost due to the regulatory constraints in the way they need to be managed. Historically, they were able to provide stable NAVs as a benefit to investors. The reform in October and the switch to floating NAVs for prime money market funds take away that "main attraction" if you will. Without this benefit, I would expect that many investors who were or are in 2a-7 funds may be considering ultra-short portfolios.
BFI: Do you have an outlook on the Fed? Plecha: The whole market has an outlook on the Fed, and that outlook, together with all other information, is embedded in the term structure of interest rates. Rather than forecasting in the traditional sense, we use the broader information provided by the yield curve to assess difference in expected returns among different maturities when implementing our strategy, and we do this every day.
BFI: Any thoughts on the future? Plecha: We have 33 years of live history, and I think the One-Year Fixed Income Portfolio and its successful track record is a great example of our investment process at work. At all points during the last 33 years there have been investors who have found a favorable tradeoff to take some extra duration out of cash. And there's nothing that indicates that over the next 33 years, or the 33 years after, will be any different.
The SEC released its latest "Money Market Fund Statistics" last week, and the latest data shows that assets were flat in August but that another $200 billion shifted from Prime to Government MMFs. Yields increased slightly for Prime MMFs and jumped for Tax Exempt MMFs. The SEC's Division of Investment Management summarizes monthly Form N-MFP data and includes asset totals and averages for yields, liquidity levels, WAMs, WALs, holdings, and other money market fund trends. The Commission's latest statistics show total money market fund assets decreased by $33.7 million in August to $2.980 trillion. (The SEC's series includes some private and internal funds not reported to ICI, Crane Data or other reporting agencies.) Assets fell $21.2 billion in July, $20.7 billion in June, $18.7B in May, and $40.5B in April. Year-to-date, total assets are down $105.0 billion, or 3.4%, through 8/31. We analyze the latest numbers below, and also review S&P's ratings releases on 2 Federated "private" money funds. (See yesterday's "News".)
Of the $2.980 trillion in assets, $1.033 trillion was in Prime funds, which dropped by $201.3 billion in August after falling $44.5 billion in July, $124.5 billion in June, and $66.9B in May. Prime funds now represent 36.7% of total assets; they've declined by $538.9 billion YTD, or 34.3%, and they've fallen $757.8 billion, or 42.3% since 10/31/15. Government & Treasury funds total $1.787 trillion, or 60.6% of assets, up $198.7 billion in August, after being up $77.0 billion in July, $120 billion in June and $53.7B in May. Govt & Treas MMFs are up $538.3 billion YTD (43.1%) and $746.7 billion (71.7%) since 10/31/15, just prior to the start of the Prime to Govt conversion trend. Tax Exempt Funds were down sharply again, dropping $31.2 billion to $159.1 billion, or 5.3% of all assets. The number of money funds was 443, down 10 for the month and down 80 from 8/31/15.
Yields decreased slightly in August. The Weighted Average Gross 7-Day Yield for Prime Funds on August 31 was 0.57%, up 2 basis point from the previous month, and more than double the 0.27% of November 2015 (before the Fed hike). Gross yields were 0.41% for Government/Treasury funds, unchanged from the previous month but up 0.26% from 11/15. Tax Exempt Weighted Gross Yields jumped 13 basis points in August to 0.60%. The `Weighted Average Net Prime Yield was 0.35%, up by 0.01% from the previous month and up 0.24% since 11/15. For the year-to-date, 7-day gross yields are up 16 basis points and net yields are up 13 basis points. The Weighted Average Prime Expense Ratio was 0.22% in August (up one bps from July). Prime expense ratios have risen from 0.16% in November 2015.
Maturities continued to move lower and liquidity continued to inch higher in August. The average Weighted Average Life, or WAL, was 36.5 days (down 3.3 from last month) for Prime funds, 98.4 days (down 0.5 days) for Government/Treasury funds, and 29.0 days (up 2.3 days) for Tax Exempt funds. The Weighted Average Maturity, or WAM was 21.8 days (down 3.0 days from the previous month) for Prime funds, 41.2 days (up 0.6 days) for Govt/Treasury funds, and 26.6 days (up 1.7 days) for Tax-Exempt funds. Total Daily Liquidity for Prime funds was 38.7% in August (up 4.1% from previous month). Total Weekly Liquidity was 62.2% (up 6.5%) for Prime MMFs.
In the SEC's "Prime MMF Holdings of Bank Related Securities by Country" table, France topped the list with $145.5 billion, followed by the U.S. with $100.5 billion. Canada was third with $99.8 billion, followed by Sweden ($95.7B), Japan with $87.6 and Australia/New Zealand ($50.4B), the UK ($40.6B) and Germany ($39.5B). The Netherlands ($28.0B) and Switzerland ($24.6B) round up the top 10.
The biggest gainers among Prime MMF bank related securities for the month were Spain (up $2.5B) and China (up $1.1B). The biggest drops came from Japan (down $41.3B), the US (down $27.1B), Canada (down $12.8B), and the U.K. (down $12.0B). For Prime MMF Holdings of Bank-Related Securities by Major Region, Europe had $414.7 billion (down from $478.2 last month), while the Eurozone subset had $227.8 billion (down from $256.2B). The Americas had $201.5 billion (down from $241.7B), while Asian and Pacific had $162.0 billion (down from $219.5B).
Of the $1.030 trillion in Prime MMF Portfolios as of August 31, $458.6B (44.5%) was in CDs (down from $528.7B), $220.1B (21.4%) was in Government securities (including direct and repo), down from $276.8B, $159.0B (15.4%) was held in Non-Financial CP and Other Short Term Securities (down from $177.2B), $141.5B (13.7%) was in Financial Company CP (down from $179.3B), and $50.5B (4.9%) was in ABCP (down from $70.8B).
The Proportion of Non-Government Securities in All Taxable Funds was 28.5% at month-end, down from 34.6% the previous month. All MMF Repo with Federal Reserve rebounded to $149.9B in August from $84.8B the previous month. Finally, the "Trend in Longer Maturity Securities in Prime MMFs" tables shows 20.9% were in maturities of 60 days and over (down from 21.1%), while 3.0% were in maturities of 180 days and over (down from 3.5%).
In other news, we learned more about Federated's pending Prime Private Liquidity Fund. (See our Sept. 26 News.) Standard & Poor's also rated this new vehicle, and another new Federated private fund, AAA. S&P's release, entitled, "Federated Prime Private Liquidity Fund Rated 'AAAm'," explains, "S&P Global Ratings said today it assigned its 'AAAm' principal stability fund rating to the Federated Prime Private Liquidity Fund. The Federated Prime Private Liquidity Fund is a series of Federated Private Liquidity Funds, a Delaware statutory trust."
It continues, "The fund is a private money market fund that seeks to maintain a stable net asset value of $1.00 per share. The fund is exempt from registration as an investment company pursuant to Section 3(c)(7) of the Investment Company Act of 1940, as amended. The Federated Prime Private Liquidity Fund's investment objective is to provide current income consistent with stability of principal and liquidity by investing primarily in a portfolio of high-credit-quality, U.S.-dollar-denominated fixed-income securities that are issued by banks, corporations, and the U.S. government and mature in 397 days or less."
S&P adds, "The fund will offer four classes of shares: Founders, Builders, Premier, and Institutional. Although the fund will not register as an investment company under the 1940 Act, the fund will seek to maintain a weighted average maturity (WAM) of 60 days or less and maintain a weighted portfolio average life (WAL) of 120 days or less."
They add, "Federated Investment Counseling, a subsidiary of Federated Investors Inc., serves as investment adviser to the fund. Federated Investment Counseling performs services for its affiliated investment advisers, which manage investment company portfolios with combined assets of approximately $370 billion as of March 31, 2016. Federated Securities Corp., also a subsidiary of Federated Investors Inc. and an affiliate of Federated Investment Counseling, acts as primary placement agent to the fund. The fund's custodian, and administrator/fund accountant, is State Street Bank and Trust Co. The fund's transfer agent is State Street Bank and Trust Co. through its service company, Boston Financial Data Services Inc."
S&P also published the release, "Federated Prime Cash Collective Investment Fund Rated 'AAAm'." It explains, "S&P Global Ratings said today it assigned its 'AAAm' principal stability fund rating to the Federated Prime Cash Collective Investment Fund. The Federated Prime Cash Collective Investment Fund is a collective trust fund that seeks to provide current income consistent with stability of principal and liquidity by investing primarily in a portfolio of high-quality, dollar-denominated fixed income securities issued by banks, corporations, and the U.S. government, and mature in 365 days or less. The trust seeks to maintain a stable net asset value (NAV) of $1.00 per unit and is offered to eligible employee benefit trusts."
Finally, it adds, "To achieve its investment object, the Prime Cash Collective Investment Fund will invest in U.S. government obligations, bankers' acceptance, commercial paper, certificates of deposit, repurchase agreements, money market mutual funds, or other short-term investment funds for which the trust is an eligible participant. The fund will maintain a dollar-weighted average portfolio maturity of 60 days or less and a dollar-weighted average portfolio life maturity of 120 days or less."
A press release entitled, "Fitch Assigns First-Time Rating to Federated Prime Private Liquidity Fund" indicates that the first of a handful of "private" money market funds is approaching launch and live status. It says, "Fitch Ratings has assigned an 'AAAmmf' rating to the Federated Prime Private Liquidity Fund, a separately designated series of Federated Private Liquidity Funds, a Delaware statutory trust, managed by Federated Investment Counseling (Federated). The fund commenced operations on September 22 and Fitch's analysis was conducted based on the fund's expected portfolio composition and Federated's experience in managing funds with similar strategies."
Fitch explains, "The 'AAAmmf' rating assignment reflects: The fund's expected overall credit quality and diversification; Expected low exposure to interest rate and spread risks; Expected holdings of daily and weekly liquid assets consistent with shareholder profile and concentration; The capabilities and resources of Federated. The Fund is intended to serve as a cash management vehicle for qualified eligible investors. The trust and the fund are exempt from registration as an investment company pursuant to Section 3(c)(7) of the Investment Act of 1940, as amended."
The release continues, "The fund will not reserve the right to impose a liquidity fee or to suspend redemptions temporarily in accordance with Rule 2a-7(c)(2). The fund seeks to maintain a stable net asset value (NAV) of $1.00 per share by valuing its assets at their amortized cost.... The fund seeks to maintain a diversified, high credit quality portfolio consistent with Fitch's criteria for 'AAAmmf' rated money market funds (MMFs), by investing in highly rated securities with limited exposure to individual issuers."
Fitch comments, "The fund seeks to limit interest rate and spread risk by maintaining a weighted average maturity (WAM) below 60 days and a weighted average life (WAL) below 120 days.... The fund seeks to maintain sufficient levels of daily and weekly liquidity to meet investors' flows. At a minimum, the fund seeks to maintain 10% of its portfolio in daily liquid assets and 30% in weekly liquid assets."
They tell us, "While the fund will not be subject to the liquidity fees and redemption gates provisions of Rule 2a7, the fund has the right to delay redemptions under certain circumstances, including if the fund is liquidating or to protect shareholder interests, as outlined in the fund's private placement memorandum.... The fund seeks to provide current income in line with prevailing money market rates, while aiming to preserve capital consistent with these rates and to maintain a high degree of liquidity."
Fitch adds, "The fund's investment adviser is Federated Investment Counseling, a subsidiary of Federated Investors, Inc. As of Sept. 30, 2015, Federated Investors, Inc had approximately $351 billion in total assets under management. Fitch views Federated Investors, Inc's investment advisory capabilities, financial and resource commitments, operational controls, corporate governance and compliance procedures as consistent with the 'AAAmmf' rating assigned to the funds."
They state, "The fund does not have an independent board of directors that provides oversight. However, the fund has an advisory board of Federated employees that performs certain functions of a Rule 2a7 registered MMF's board of directors, including receiving periodic reporting on the fund's operations and reviewing conflicts of interest. Federated, as a registered investment advisor and trustee of the fund, has a fiduciary responsibility to act in the fund's best interests."
Fitch writes, "The rating may be sensitive to material changes in the credit quality, market risk, and/or liquidity profiles of the fund. Temporary deviations from metrics outlined in Fitch's criteria need not automatically result in a rating change, provided the fund manager is able to address them with credible near-term remedial actions. However, material adverse and continued deviations from Fitch's guidelines for any key rating driver may lead to the rating being placed on Rating Watch Negative or downgraded."
Finally, they say, "Fitch will receive fund holdings information and other pertinent fund data from the fund's administrator -- Federated Administrative Services -- to conduct surveillance against ratings guidelines and to maintain the MMF rating."
Last week, Federated's Deborah Cunningham commented at our European Money Fund Symposium in London, "We just last week started a collective fund that is outside of the SEC's domain and is instead regulated by the Department of Labor. Pennsylvania is its overseer at this point. That product looks and feels like a 2a-7 money fund of old.... That product is designed to attract ... ERISA assets."
She added, "We have a private fund that's designed for non-ERISA assets and very similar coming to market this week, hopefully. It will have a similar structure ... and will continue to use amortized cost. That product will be starting with a 1.00 NAV ... and also will have triple-A ratings. We think the AAA's for these types of products make it a little easier ... to negotiate and get comfortable with them going forward."
We learned from some potential investors that Federated plans to offer two share classes (charging 10 bps and 15 bps with a 25 and 5 million minimums), but that the lower priced "Founders" shares will only be available until the fund reaches 5 billion in assets. The private fund won't commence until it reaches 1 billion in assets, and it intends to adhere to money funds' liquidity, quality, maturity, diversity and disclosure guidelines. It will also be available via "portals". In a FAQ, Federated says it will disclose yield, liquidity, MNAV and other information on its website, but that the Private Placement Memorandum will not be available there. (Crane Data plans on tracking this and any of these funds once they begin publishing performance information.)
The total amount of money that's moved out of Prime and Tax Exempt MMFs combined hit $900 billion this week, as the "Big Shift" of assets into Government money funds accelerated ahead of approaching money market reforms. ICI's latest "Money Market Fund Assets" report shows MMFs overall increasing $10.7 billion in the latest week, after dropping sharply two straight weeks. Prime funds fell by over $60 billion for the second week in a row; they've declined in 16 out of the past 17 weeks (-$496.8B) and have averaged outflows of $29.0 billion a week since June 1 and $52.1 billion since Sept. 1. Since Oct. 29, 2015, Prime assets have fallen by a massive $789.3 billion, or 54.1%, and Tax Exempt funds have declined by another $107.5 billion, or 43.9%. Combined these two sectors have fallen by $896.8 billion (52.6%) since this giant migration started, and we expect the total shift to break $1.0 trillion ahead of the Oct. 14 MMF Reform "live" deadline.
Government funds (including Treasury funds) gained $76.4 billion in the past week. They've increased by $849.8 billion since last October (up 83.8%) and by $642.5 billion, or 52.6%, YTD. (YTD in 2016, Prime MMFs are down by $614.7 billion, or 47.9%.) Over the past 6 weeks, Prime MMFs have fallen by $274.0 billion and they've fallen by $400.9 billion over the past 13 weeks. Govt MMFs have risen $234.6 billion over 6 weeks and $431.5 billion over 13 weeks.
ICI's latest release says, "Total money market fund assets increased by $10.72 billion to $2.67 trillion for the week ended Wednesday, September 21, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $76.40 billion and prime funds decreased by $60.18 billion. Tax-exempt money market funds decreased by $5.51 billion."
It continues, "Assets of retail money market funds increased by $1.24 billion to $930.89 billion. Among retail funds, government money market fund assets increased by $10.00 billion to $527.06 billion, prime money market fund assets decreased by $7.26 billion to $292.84 billion, and tax-exempt fund assets decreased by $1.49 billion to $111.00 billion."
The update adds, "Assets of institutional money market funds increased by $9.48 billion to $1.74 trillion. Among institutional funds, government money market fund assets increased by $66.41 billion to $1.34 trillion, prime money market fund assets decreased by $52.91 billion to $376.25 billion, and tax-exempt fund assets decreased by $4.02 billion to $26.48 billion." Government assets, including Institutional and Retail (and Treasury and Government) stand at $1.863 trillion, while Prime assets fell below $700 billon and are now at $669.1 billion.
ICI adds, "Notes: 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."
A blog post entitled, "OFR Monitor Shows Accelerating Shift to Government Money Market Funds," explains, "Assets of U.S. prime money market funds have decreased by more than $700 billion since the beginning of the year, while assets of government money market funds have increased by about the same amount, according to the OFR's monthly U.S. Money Market Fund Monitor (MMF Monitor). This trend accelerated in August."
It explains, "The OFR's Viktoria Baklanova and Daniel Stemp, lead researchers on the MMF Monitor, attribute the shift to the Oct. 14, 2016, deadline for implementing Securities and Exchange Commission (SEC) reforms. The reforms are intended to make prime money market funds less vulnerable to runs by investors. They also are intended to limit the potential stress on the financial system if a run occurs."
The update adds, "Ahead of the reforms, some investors are moving their assets from prime funds to government funds. Some fund managers are also converting prime funds to government funds. Baklanova and Stemp also note that the sharp decline in the assets of prime money market funds is having ripple effects. For example, demand has declined for commercial paper and banks' certificates of deposit (CDs) -- traditionally common investments for prime funds. In turn, the lower demand for commercial paper and CDs has increased banks' expenses in raising short-term funds in the interbank market. As a result, the benchmark three-month London Interbank Offered Rate (LIBOR) has risen significantly (about 20 basis points) since early July."
In other news, Dan Wiener of the Independent Adviser for Vanguard Investors distributed a brief entitled, "Tax-Exempt Money Fund Yields Ahead of Taxables." It says, "The municipal money market has caught up (and then some.) On Monday Vanguard Tax-Exempt Money Market's yield went ahead of Vanguard Prime Money Market's yield and as of last night the yield is now 2 basis points higher, at 0.57% versus 0.55% for the taxable fund."
He asks, "Why do I care? Well, if you're a high tax-bracket investor who’s been looking at the taxable money funds with envy, well now's your chance to gloat. That 0.57% tax-exempt yield is roughly equivalent to a 0.86% taxable yield. Is 0.86% better than 0.55%? You better believe it, and this is clearly one you can take to the bank." Note: Our latest Money Fund Intelligence Daily shows the Crane Tax Exempt Index yielding (7-day net annualized) 0.24% vs. 0.23% for our Crane 100 Money Fund Index, an average of the 100 largest taxable money market funds.
The Investment Company Institute released its latest "Worldwide Mutual Fund Assets and Flows" data collection recently. The latest report shows that total global money fund assets declined by $67.1 billion, or 1.3%, to $4.996 trillion in Q2 2016. The U.S., China and Luxembourg suffered the biggest declines, while France, Korea and Brazil saw gains. Worldwide MMF assets have increased by $136.0 billion, or 2.8%, over the previous 12 months through 6/30/16. We review the latest Worldwide MMF totals below, and we also discuss Crane Data's latest MFI International statistics below. (Thanks to those who participated and supported Crane's European Money Fund Symposium in London this week! Watch for coverage of some sessions in next week's News.)
ICI's release says, "Worldwide regulated open-end fund assets increased 1.2 percent to $39.29 trillion at the end of the second quarter of 2016, excluding funds of funds. Worldwide net cash inflow to all funds was $210 billion in the second quarter, compared with $145 billion of net inflows in the first quarter of 2016. 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 second quarter of 2016 contains statistics from 46 countries."
It continues, "On a US dollar–denominated basis, equity fund assets increased by 0.8 percent to $16.30 trillion at the end of the second quarter of 2016. Bond fund assets increased by 3.8 percent to $8.81 trillion in the second quarter. Balanced/mixed fund assets increased by 1.3 percent to $5.30 trillion in the second quarter, while money market fund assets decreased by 1.3 percent globally to $5.00 trillion."
ICI explains, "At the end of the second quarter of 2016, 41 percent of worldwide regulated open-end fund assets were held in equity funds. The asset share of bond funds was 22 percent and the asset share of balanced/mixed funds was 13 percent. Money market fund assets represented 13 percent of the worldwide total."
The release adds, "Globally, bond funds posted an inflow of $146 billion in the second quarter of 2016, after recording an inflow of $80 billion in the first quarter.... Money market funds worldwide experienced an outflow of $13 billion in the second quarter of 2016 after registering an outflow of $42 billion in the first quarter of 2016."
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 Q2'16 with $2.692 trillion (or 54.3% of all global MMF assets). U.S. MMF assets decreased by $62.6 billion in Q2'16 and increased by $46.8B in the 12 months through June 30, 2016. China remained in second place among countries overall despite another drop in assets. China saw assets fall $52.5 billion (down 7.7%) in Q2 to $631.9 billion (12.6% of worldwide assets), its first declines since late 2010. However, over the last 12 months through June 30, 2016, Chinese MMF assets have grown an astounding $282.7 billion, or 81.0%.
Ireland remained third among these country rankings, ending Q2 with $510.3 billion (10.2% of worldwide assets). Dublin-based MMFs were up $1.4B for the quarter, or 0.3%, but up $127.1B, or 33.2%, over the last 12 months. France remained in fourth place with $360.0 billion (7.2% of worldwide assets). Assets here jumped $21.4 billion, or 6.3%, in Q2, and were up $31.2 billion, or 9.5%, over one year. (ICI's data no longer includes money fund figures for Australia, but they would rank as the fifth largest market at $322 billion, their level of two years ago, if they were still included. Australia's MMF assets were shifted into the "Other" category several quarters ago.)
Luxembourg was in fifth place with $313.0B, or 6.3% of the total, down $9.4 billion in Q2 (-2.9%) and up $14.8B (4.9%) for 1 year. Korea, the 6th ranked country, saw MMF assets jump $13.3 billion, or 16.6%, to $93.3 billion (1.9% of total) in Q2 and rise $1.0 billion (1.1%) for the year. Brazil remained in 7th place, increasing $19.5 billion, or 37.9%, to $70.8 billion (1.4% of total assets) in Q2. It increased $29.2 billion (70.2%) over the previous 12 months.
ICI's statistics show Mexico in 8th place with $55.4B, or 1.1% of total, up $1.7B (3.2%) in Q2 and down $3.5B (6.0%) for the year. India was in 9th place, increasing $937 million, or 2.7%, to $36.2 billion (0.7% of total assets) in Q2 and increasing $10.1 billion (39.0%) over the previous 12 months. Taiwan was in 10th place with $29.7 billion, or 0.6% of worldwide assets.
Sweden ($21.4B, up $309M for the quarter and up $3.0B for the year), Switzerland ($20.2B, up $970M and up $1.1B), South Africa ($18.7B, up $1.9B and down $976M), Canada ($18.6B, up $368M and down $666M), and Belgium ($16.1B, down $2.2B and up $14.4 billion for the year) ranked 11th through 15th, respectively. Chile, Norway, Spain, Japan and Germany round out the 20 largest countries with money market mutual funds. South Africa moved ahead of Canada and Belgium in the latest rankings.
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), up $33.7 billion year-to-date to $732.7 billion as of 9/21/16. U.S. Dollar (USD) funds tracked by MFII account for over half ($369.2 billion, or 50.4%) of the total, while Euro (EUR) money funds total E86.2 billion and Pound Sterling (GBP) funds total L184.8. USD funds are down $22.9 billion, or 6.2%, YTD, while Euro funds are up E10.8 billion, or 12.5%, and GBP funds are up L34.2 billion, or 18.5%.
Offshore USD MMFs have an average 7-Day Net Yield of 0.39% as of Sept. 20, up 23 basis points YTD. The average 7-Day Net Yield of EUR MMFs is -0.42%, down 24 basis points YTD, while the GBP MMF yields are averaging 0.26%, down 8 basis points on the year. Crane Data tracks 156 USD MMFs, 97 Euro MMFs and 107 Sterling MMFs.
FIS, formerly SunGard, released its "FIS' 2016 Cash Investment Survey" last week, which attempts to gauge corporate investors preferences regarding the new post money fund reform liquidity regime. It explains, "Rapidly changing economic and regulatory conditions are creating enormous investment challenges for organizations globally. With low and negative interest rates, changing bank appetite, and new instruments emerging, how do treasurers and CFOs define, and deliver on, the right investment policies to reflect these changing times?"
FIS explains, "Now in its 6th year, FIS has launched its annual study amongst corporate treasury and finance professionals, and we want to hear from you. This study helps us to understand investment trends and priorities, gain insights into corporate cash investment policies and transaction methodologies, attitudes toward risk and return, and chosen investment instruments. By analyzing results year on year, the survey tracks shifts in investment strategies and priorities over time, and identifies best practices amongst corporations globally."
The survey asks about the company's primary industry, headquarters, and location of treasury center. They also ask: "To what degree is your treasury organization centralized?" "To what extent has your surplus cash balance changed over the past 12 months?" Answers include: Increased by 0-33%, Increased 33-66%, Increased more than 66%, No material change, Decreased by 0-33%, Decreased 33-66%, and Decreased more than 66%." Options for "primary reason for holding a surplus cash balance" include: "Finance capital investment or mergers and acquisitions, Return to shareholders, Pay down debt on maturity, Working capital financing, Protect the business in the event of a fall in revenue, and Other."
Among the "most significant cash investment challenges that you are experiencing today," answers include: "Insufficient credit limits available with highly rated banks, Low or negative interest rates, Inability to gain visibility over cash globally, Inability to access 'trapped' cash in some markets, Concern over risks in Eurozone/Brexit, Insufficient range of suitable investment, Instruments available, Money market reform (fees, gates, floating NAV), Reduction in banks' appetite for time deposits below 31 day maturity, and Lack of automation."
FIS also asks, "Which of the following statements best describes your cash investment strategy? Preservation of capital while ensuring immediate access to all cash; Preservation of capital while ensuring immediate access to short term cash, and a higher yield on cash not required immediately; Preservation of capital and liquidity as required, but aiming for optimum return; and, Other (please specify)."
They inquire, "What is your current asset allocation by instrument type?" Possible answers include: Certificates of deposit, Commercial paper, Deposits, Fixed rate bonds, Floating rate/variable rate notes, Constant NAV money market funds (MMFs), Floating NAV money market funds (MMFs), Private placement fund, Tri-party repos, Treasury bill/notes (government debt), Separately managed accounts, and Short-term bond funds.
The FIS survey continues, "Over the next 12 months, how important will the following cash instrument types be in your portfolio? Certificates of deposit, Commercial paper, Deposits, Fixed rate bonds, Floating rate/variable rate notes, Constant NAV MMFs, Floating NAV MMFs, Private placement fund, Tri-party repos, Treasury bill/notes (government debt), Separately managed accounts, and Short-term bond funds."
They ask, "If you do not use money market funds, why is this? Not familiar with instrument, Not available in base/operating currency, Concerns over counterparty risk, Fees and gates, Floating NAV, Concerns over liquidity, Low yield compared with other instruments, and Other (please specify)."
Another question is: "How do you transact money market funds (MMFs)? Telephone, Standalone, proprietary bank portal(s), Proprietary bank portal(s) integrated with treasury management system, Third party portal, not integrated with treasury management system, Third party portal, integrated with treasury management system, and Other (please specify)." It adds, "If you currently use a MMF portal to transact business, what kind of functionality do you value most? Limits and compliance, Reporting, Research, Risk analysis, Trading, Integration, and Other (please specify)."
FIS writes, "With new regulations impacting U.S. domiciled prime and municipal MMFs in the fall of 2016, how is your use of these fund types likely to change?" Reponses include: "Decrease materially, Decrease a little, Remain unchanged, Increase a little, and Increase materially." They add, "If you answered 'decrease' to the question above, why is this? Investment policy limitations, Accounting concerns, Intraday liquidity concerns, Gates and fees, and Other (please specify)."
The Cash Investment Survey inquires, "What asset classes do you anticipate adding to your portfolio as an alternative to MMFs? (choose all that apply) Certificates of deposits, Commercial paper, Deposits, Fixed rate bond funds, Floating rate/variable rate notes, Money market funds, Separately managed accounts, Short-term bond funds, Private placement funds, Treasury bills/notes (government debt), Tri-party repo, and Other." It continues, "Based on the MMF changes highlighted above, at what spread would you considers shifting assets? (e.g. constant NAV to fluctuating or government to prime) 21–34 bps, 35–50 bps, or More than 50 bps."
Finally, the survey also asks, "How do you execute your time deposit transactions? What are your key criteria when placing a time deposit? And, if time deposit transactions could be placed automatically (with authorized banks and within credit limits), including integration with a treasury management system or another back office solution, would you be: More likely to use a cash management portal, Less likely to use a cash management portal, Would need more information to understand the opportunity, No impact on my decision."
This month, MFI interviews several key members of Western Asset Management's Liquidity Business, including Client Service Executives John Bonczek and Zak Green, and Head of Liquidity Justin Rose. The three discuss the current cash environment, both in the U.S. and "offshore," and recent changes at Western, which is an affiliate of Legg Mason. Our discussion follows. (The interview below is reprinted from our Sept. Money Fund Intelligence.)
MFI: Give us a little bit of history. Green: Western has been involved in running cash in various products since its inception in 1971. We acquired Citi Asset Management in December 2005, [and] we still manage largely with the same team today. Those funds date back to around 1990. Bonczek: We always like to point out that for the most part, the investment and credit research team has been in place from the Citigroup days. [They have] an average tenure of 22 years.
MFI: How about your own histories? Bonczek: I came over in the CAM [Citi] acquisition and I've been with Western for over 10 years. Green: I have been working in the short duration space in various sales, product development, and management roles for more than 20 years. Rose: I was director at UBS on the short term interest rate desk for 18 years, and former head of money market funds at Standard Life Investments. Prior to coming to New York, I was a Client Service Executive in the Western Asset in London.
MFI: What is your biggest priority? Green: Without a doubt, our clients are always our biggest priority. Working with them to help ensure a smooth implementation of the SEC reforms has been the main focus of our time over the past several months. We're working to make sure that our clients are comfortable with the changes and understand what they entail. We're just trying to serve as a resource to them. Bonczek: Education is a big thing to our clients, making sure they understand everything that's involved and all of the ramifications.
MFI: Talk about your recent changes? Rose: We have put out a couple of press releases on this subject. Last year was principally outlining where we thought our fund lineup would be for money market reform. We also terminated funds that we viewed as "sub-scale" and consolidated our Tax Exempt line-up. This year, we've done a further press release and made the required filings for our final fund line-up. However, the work is still ongoing [but we’ll be ready by] the 11th of October. Green: In anticipation of these reforms, we also looked to bolster our Government fund presence and launched the Treasury Obligations Fund, a dual, triple-A rated Treasury & Repo fund. Outside of the 2a-7 space we also launched two new Ultra Short Bond Funds.
MFI: Could you talk for a moment about your master feeder structure? Bonczek: Basically, under the hub and spoke, master feeder structure, you have one hub portfolio, and in that hub portfolio, we have assets that come in from both offshore and onshore.... The advantage is it's a 2-a7 regulated hub portfolio [and you have] economies of scale, diversification, and the ability for certain spoke funds to have investments that would not normally be available to them. Going forward, that master hub portfolio has to float because it is a 2-a7 regulated hub. (See our recent LOTD on www.cranedata.com for more.)
Rose: I also think in the offshore space our investors are very comfortable with our fund restructuring including our Cayman Island spokes. We also have a Dublin-domiciled, UCITS US Dollar Prime money market fund which follows ESMA guidelines, the European regulator on money market funds.
Bonczek: [The Cayman Islands-domiciled fund is for] offshore clients in general, whether it's Latin America or global clients.... If you have an interest in investing offshore (US) dollars, this is a perfect vehicle. The Cayman-domiciled funds ... have a 5 pm EST instead of other domiciles where you have a much earlier cut-off. So, that plays well for multinationals on the West Coast because they have time to invest their money.
MFI: What is your biggest challenge? Bonczek: I think it's been dealing with the low interest rate environment and money fund reforms. Rose: The low interest rate environment for money market fund has been an extremely important factor. I mean, two years ago nobody would have expected the US to still be at this low level of interest rates.... Thankfully, it's not negative like [much] of the G7.... There's always the constant challenge of making sure that we're providing a sufficient yield for investors and obviously paying our costs. It's an expensive business. We're having to always balance that.... Going forward, we're trying to anticipate change in regulation and in client wants and needs, and developing products that really service those needs and wants.
MFI: How defensive are the funds? Green: The Prime portfolios are definitely ready [for Oct. 14]. Our PMs, we think, have done a really terrific job in shortening the WAM gradually so as to maintain a very competitive prime fund yield with our peers. We see that our WAMs are shortened to largely the same levels as most of the industry ... in order to provide that ample of liquidity that clients are going to be looking for.
MFI: Any other customer concerns? Green: In general, all clients do have questions and concerns about gates and fees.... So that requires some additional education on our part to let clients know the scenarios that the SEC envisioned these potentially being used.... We stress and feel that there are very remote opportunities where fees would ever be implemented.
Bonczek: I'd add that clients have operational concerns. Things like earlier cut-off times. West coast clients realistically only have two cut-off times, because the 8 o'clock or 9 o'clock cut-off time is very early for them.... It's just a whole change of behavior in how they have to invest, if they're going to invest in institutional prime funds.
Rose: I would add, I deal a lot with the money fund boards. There's been a huge amount of work done to educate directors on their new responsibilities are going forward. I don't think that should be underestimated. The Fund Boards will have to make key decisions going forward and they are asking all the right questions.
MFI: What about fee waivers? Green: Generally speaking, I don't think we're alone in that we've certainly seen fee relief since the rate hike in December. Obviously, if we remember back before then, there was really no spread to speak of between Treasury and Prime funds. Now, there is a meaningful spread between the two. That's really what we would stress.
MFI: What do you have left to do? Rose: I think a lot of the work has really been done, operationally.... Don't underestimate how much this is actually going to cost at the end of the day. It's been a very expensive exercise to meet these new requirements. As I've said, I think most of the work has actually been completed. Investors should [benefit from] the data that the funds are providing on websites and the huge amount of transparency now in the product. We're in the home stretch, but there's still more to do.
MFI: What about Europe? Rose: They're a long way behind the U.S. and still have not completed their final reforms. We have a very sizeable offshore money market fund business [in] U.S. dollars specifically. We closed a number of funds last year.... [It's] still a key part of our business, we're watching it with interest.... It looks like European regulations are going to allow, at least for the next couple of years, CNAV prime funds albeit in a low volatility form. [But] there is a disconnect between [these regulations and] the SEC, and that's never a good thing in markets.
MFI: Tell us about your clients. Bonczek: We have a diverse client base of large corporate clients, hedge funds, municipalities and endowments. Rose: I would say hedge funds are an increasing user base, because they're obviously being pushed off bank balance sheets. So there's definitely a growth area there. But again, obviously because of the floating NAV and gates and fees, prime money market funds will lose their eligibility for margin, etc. So there are some funds where investors have reduced [their usage].
Green: The relationship is very, very important. It's one of the ways that clients can differentiate between products.... One of the things clients appreciate is who can understand their needs, who can understand their business, who can serve as a true consultant for them and be a resource as well as a trusted partner, providing them with information not only on their funds but on the industry as a whole.
MFI: How about the future of MMFs? Green: We think the money fund industry has really demonstrated remarkable resilience despite the changes the pending reforms require. We've been impressed with the way providers have really banded together, worked to educate their clients and fostered them through the unchartered waters of these reforms. We're confident that money funds are here to stay and we believe they will continue to play a really vital and necessary role in client investment strategies. There really is no other solution that is their equal when it comes to providing safety and liquidity.
Bonczek: I think that some of our clients are sitting on the sidelines and they want to see what happens as October 14th comes and goes. In regard to institutional prime funds, they want to see how the assets of the portfolio hold up, how the NAV fluctuates, if it does fluctuate, and investors want to make sure they're compensated for moving back in or staying in institutional prime funds.
Rose: I think if you look back at what money market funds set out to give investors, it was preservation of capital, liquidity, and yield, those three key cornerstones. But the rule changes have made sure that you can't get access to all three in one product, so the investor has to make a choice. We believe whatever choice our clients have to make, we have the full range of funds to meet their needs.
The Federal Reserve released its latest quarterly "Z.1 Financial Accounts of the United States" statistical survey (formerly the "Flow of Funds"). Among the 4 tables it includes on money market mutual funds, the Second Quarter, 2016 edition shows that the Household Sector remains the largest investor segment, though assets here declined again and fell back below the $1.0 trillion level. Funding Corporations, Nonfinancial Corporate Businesses and Private Pension Funds showed gains in the latest quarter, while Funding Corporations, Nonfinancial Corporate Businesses, State & Local Governments, and Private Pension Funds showed increases over the past 12 months. We review the latest Fed Z.1 numbers below, and we also review the ICI's latest "Money Market Fund Holdings" summary below.
The Fed's "Table L.206," "Money Market Mutual Fund Shares," shows total assets declining by $56 billion, or 2.0%, in the second quarter to $2.703 trillion. Over the year through June 30, 2016, assets are up $87 billion, or 3.3%. The largest segment, the Household sector, totals $989 billion -- or 36.6% of assets. The Household Sector decreased by $47 billion, or -4.5%, in the quarter, after decreasing $30 billion in the 1st quarter, and increasing $60 billion in Q4'15. Over the past 12 months through June 30, 2016, Household assets are down $10.0 billion, or 1.0%. Household 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 $577 billion, or 21.4% of the total. Business assets in money funds increased $4.0 billion in the quarter, or 0.6%, 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 $470 billion, or 17.4% of money fund shares. They increased by $6 billion in the latest quarter and by $42 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 ($180 billion) -- down $9 billion, or 4.7%, for the quarter, and up $7 billion, or 4.1%, for the year. Private Pension Funds, which held $155 billion (5.7%), 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 $112 billion, while Nonfinancial Non-Corporate Businesses held $95 billion (3.5%), State and Local Government Retirement Funds held $49 billion (1.8%), Life Insurance Companies held $55 billion (2.0%), and Property-Casualty Insurance held $21 billion (0.8%), according to the Fed's Z.1 breakout.
The Fed's "Flow of Funds" Table L.121 shows "Money Market Mutual Funds" largely invested in "Debt Securities," or Credit Market Instruments, with $1.595 trillion, or 59.0%. Debt securities includes: Open market paper ($277 billion, or 10.2%; we assume this is CP), Treasury securities ($518 billion, or 19.2%), Agency and GSE backed securities ($566 billion, or 20.9%), Municipal securities ($216 billion, or 8.0%), and Corporate and foreign bonds ($18 billion, or 0.7%).
Other large holdings positions in the Fed's series include Security repurchase agreements ($643 billion, or 23.8%) and Time and savings deposits ($430 billion, or 15.9%). Money funds also hold minor positions in Foreign deposits ($13 billion, or 0.5%), Miscellaneous assets ($8 billion, or 0.3%), and Checkable deposits and currency ($13 billion, 0.5%). Note: The Fed also recently added a new breakout line to this table which lists "Variable Annuity Money Funds;" they currently total $36 billion, down $3 billion in the quarter.
During Q2, Agency- and GSE-Backed Securities (up $105 billion), Security Repurchase Agreements (up $46 billion), and Checkable Deposits and Currency (up $6 billion) showed increases. Time and Savings Deposits (down $63 billion), Open Market Paper (down $57 billion), Corporate and foreign bonds (down $34 billion), Treasury Securities (down $28 billion), and Municipal Securities (down $23 billion) all showed declines.
In other news, the Investment Company Institute released its latest "Money Market Fund Holdings" summary (with data as of August 31, 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 Sept. 13 News, "Sept. Portfolio Holdings: CDs, CP Plunge in Aug., Repo, T-Bills Jump.")
The release explains, "The Investment Company Institute (ICI) reports that, as of the final Friday in August, prime money market funds held 37.9 percent of their portfolios in daily liquid assets and 62.1 percent in weekly liquid assets, while government money market funds held 55.4 percent of their portfolios in daily liquid assets and 72.0 percent in weekly liquid assets."
It says, "At the end of August, prime funds had a weighted-average maturity of 21 days and a weighted-average life of 34 days. Average WAMs and WALs are asset-weighted. Government money market funds had a weighted-average maturity of 41 days and a weighted-average life of 99 days."
On Holdings By Region of Issuer, it adds, "Prime money market funds' holdings attributable to the Americas declined from $365.15 billion in July to $318.04 billion in August. Government money market funds' holdings attributable to the Americas rose from $1,267.45 billion in July to $1,476.63 billion in August."
The Prime Money Market Funds by Region of Issuer table shows Americas at $318.0 billion, or 38.7%; Asia and Pacific at $140.1 billion, or 17.0%; Europe at $359.5 billion, or 43.7%; and Other at $4.6 billion, or 0.5%. The Government Money Market Funds by Region of Issuer table shows Americas at $1.477 trillion, or 82.8%; Asia and Pacific at $37.0 billion, or 2.0%; and Europe at $270.0 billion, or 15.1%.
The release explains, "Each month, ICI reports numbers based on the Securities and Exchange Commission's Form N-MFP data. The report includes all money market funds registered under the Securities Act of 1933 and the Investment Company Act of 1940, that are publicly offered. All master funds are excluded, but feeders are apportioned from the corresponding master and included in the report."
Prime money fund assets saw their biggest drop of the year over the past week, losing $61.8 billion, as the "Big Shift" of assets into Government money funds accelerates as we approach October. ICI's latest "Money Market Fund Assets" report shows MMFs overall decreasing $38.5 billion in the latest week, their second sharp drop in a row and 4th in the past 5 weeks. Prime funds fell almost twice as much as the previous week, when they declined by $37.3 billion; they've declined in 15 out of the past 16 weeks (-$436.6B) and have averaged outflows of $27.0 billion a week since June 1, $37.0 billion since August 1, and $47.0 billion since Sept. 1. Since Oct. 29, 2015, Prime assets have fallen by a massive $729.1 billion, or 50.0%, and Tax Exempt funds have declined by another $102.0 billion, or 41.6%. Combined these two sectors have fallen by $831 billion since this giant migration started, and we expect the total shift to break $1.0 trillion ahead of the Oct. 14 MMF Reform "live" deadline.
Government funds gained $30.6 billion in the past week. Govt MMFs have increased by $773.4 billion since last October (up 76.3%) and by $566.1 billion, or 46.4%. (YTD in 2016, Prime MMFs are down by $554.5 billion, or 43.2%.) Over the past 6 weeks, Prime MMFs have fallen by $236.4 billion and they've fallen by $367.9 billion over the past 13 weeks. Govt MMFs have risen $198.5 billion over 6 weeks and $380.9 billion over 13 weeks.
ICI's latest release says, "Total money market fund assets decreased by $38.52 billion to $2.66 trillion for the week ended Wednesday, September 14, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $30.56 billion and prime funds decreased by $61.75 billion. Tax-exempt money market funds decreased by $7.33 billion."
It continues, "Assets of retail money market funds decreased by $4.43 billion to $929.65 billion. Among retail funds, government money market fund assets increased by $12.37 billion to $517.06 billion, prime money market fund assets decreased by $11.67 billion to $300.10 billion, and tax-exempt fund assets decreased by $5.13 billion to $112.49 billion."
The update adds, "Assets of institutional money market funds decreased by $34.09 billion to $1.73 trillion. Among institutional funds, government money market fund assets increased by $18.19 billion to $1.27 trillion, prime money market fund assets decreased by $50.08 billion to $429.16 billion, and tax-exempt fund assets decreased by $2.20 billion to $30.50 billion." Government assets, including Institutional and Retail (and Treasury and Government) stand at $1.784 trillion, while Prime assets are now at $729.3 billion.
ICI adds, "Notes: 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."
Month-to-date in September, our MFI Daily shows Prime MMF assets down by $98.0 billion and Govt assets up just $51.6 billion. We expect outflows to be even heavier next week, which will include yesterday's September 15 quarterly corporate tax payment date. Overall Prime exits should easily break $200 billion for Sept. overall. Crane Data's latest Money Fund Intelligence XLS showed that Prime MMFs lost $131 billion in August, their third worst month ever. (Prime MMFs lost 142 billion in November 2015 when Fidelity Cash Reserves converted from Prime to Government and they lost 448 billion in September 2008 when Reserve Primary Fund "broke the buck".)
In other news, Fidelity Investments published a new update entitled, "Government Money Market Funds in the New Reality." It reviews the huge asset shift over the past year and the key characteristics of Govt MMFs, mainly the $1.00 NAV and lack of gates and fees. They write, "The relative stability of government money market funds (MMFs) and ease of use make them an attractive short-term investment option for institutional liquidity managers."
The update emphasizes the company's "Size and Scale," saying, "Fidelity is the largest manager of government money market funds, with market share greater than 20% and assets that are more than double that of our nearest competitor <b:>`_. The update emphasizes the company's "Size and Scale," saying, "Fidelity is the largest manager of government money market funds, with market share greater than 20% and assets that are more than double that of our nearest competitor <b:>`_."
Finally, it adds, "Fidelity's government money market funds follow a team-oriented decision-making process, led by portfolio managers that are supported by a highly experienced team of credit analysts and traders. A bottom-up, fundamental investment platform complemented by top-down inputs, results in a robust and durable process.... We use proprietary technology to simulate thousands of scenarios in near-real time to help portfolio managers better understand the sensitivity of fund attributes with respect to changes in major risk factors. We continue to enhance our process as we seek to ensure that the portfolios can withstand market events or other exterior forces."
Dechert published a new "OnPoint" legal update, entitled, "CFTC Guidance on FCM and DCO Investments in Money Market Funds." The brief, written by Stephen Cohen, Jack Murphy, Philip Hinkle, and Neema Nassiri, says, "Divisions of the U.S. Commodity Futures Trading Commission (CFTC) on August 8, 2016 issued letters restricting futures commission merchants (FCMs) and derivatives clearing organizations (DCOs) from investing in money market funds that have the authority to impose redemption restrictions under 2014 amendments to Rule 2a-7 under the Investment Company Act of 1940 (Amended Rule 2a-7). FCMs and DCOs will nonetheless continue to be permitted to make certain investments in other money market funds, as discussed below." (See our August 25 News, "CME Says CFTC Interpretation to Prohibit Prime Money Funds for Margin.")
It explains, "The no-action letter issued by the staff of the Division of Swap Dealer and Intermediary Oversight (DSIO) and the interpretative letter issued by the staff of the Division of Clearing and Risk (DCR) were issued in anticipation of the October 14, 2016 compliance date for Amended Rule 2a-7 -- after which a money market fund that is not a "government money market fund" (Non-Government MMF) or a government money market fund that elects to retain the authority to impose redemption restrictions (Electing Government MMF) will be required to impose redemption restrictions in the event its liquidity level falls below certain thresholds. A government money market fund is a money market fund that invests at least 99.5% of its total assets in cash, U.S. government securities and/or certain repurchase agreements."
Dechert continues, "Specifically, in light of the letters, FCM and DCO investments of customer funds in Non-Government MMFs and Electing Government MMFs will be prohibited as of October 14, 2016. However, the DSIO letter states that DSIO will not recommend an enforcement action against an FCM that: Invests customer funds in a government money market fund that is not an Electing Government MMF (Non-Electing Government MMF); Treats investments of customer funds in a Non-Electing Government MMF as not subject to any CFTC concentration limit (provided the Non-Electing Government MMF satisfies a new, heightened minimum asset requirement); or Invests amounts of its own funds held in customer accounts in a Non-Government MMF or Electing Government MMF, to the extent such amounts are in excess of the FCM's "targeted residual interest" (discussed below). This OnPoint describes key issues arising under applicable CFTC rules in light of the authority to impose redemption restrictions under Amended Rule 2a-7, and provides an overview of the guidance and relief set forth in the letters."
They explain, "CFTC regulations provide that customer collateral posted for transactions in futures, futures and commodity options, cleared swaps and uncleared swaps may only be invested by FCMs and DCOs as specifically permitted in CFTC Regulation 1.25. Money market funds are listed as permitted investments in CFTC Regulation 1.25. However, to qualify as a permitted investment under CFTC Regulation 1.25: Any investment must be "'highly liquid' such that [it has] the ability to be converted into cash within one business day without material discount in value" (Highly Liquid Requirement); and A money market fund also must be "legally obligated to redeem an interest and to make payment in satisfaction thereof by the business day following a redemption request" (Next-Day Redemption Requirement)."
The article continues, "CFTC Regulation 1.25(c) enumerates certain exceptions to the Next-Day Redemption Requirement, and generally permits FCMs to invest customer assets in money market funds that could postpone or suspend redemptions, as long as the funds could do so only in certain circumstances specified in the regulation (Enumerated Redemption Requirement Exemptions). The DSIO letter identifies conflicts with each of the Highly Liquid and Next-Day Redemption Requirements relating to Non-Government and Electing Government MMFs."
It tells us, "The DCR letter notes that each of the above requirements obligates a DCO to maintain liquid resources sufficient to make prompt payments to members with gains opposite a defaulting member. The DCR letter notes that redemption gates would not serve to minimize, and could instead substantiate, the risk of delayed access to assets belonging to the DCO, its clearing members or their customers.... `Any assets subject to a redemption gate would not be available for prompt liquidation to ensure that a DCO is able to make on-time payments to its customers; as such, the DCR letter notes that these assets do not present minimal liquidity risks for purposes of the DCO core principles. Accordingly, the DCR letter states that DCR interprets these requirements as incompatible with the prospect of the redemption gates that may be imposed by Non-Government and Electing Government MMFs."
Dechert states, "For these reasons, the DCR letter states that DCR interprets the CFTC's Part 39 regulations to prohibit DCOs from accepting or holding initial margin, or investing in Non-Government or Electing Government MMFs any assets belonging to the DCO, its clearing member FCMs or clearing members' customers. However, while the DCR letter does not address Non-Electing Government MMFs, it appears that DCOs may continue to invest in such funds."
Finally, they conclude, "The DSIO and DCR letters substantially restrict FCM and DCO investments in Non-Government MMFs and Electing Government MMFs. Importantly, under the letters, Non-Electing Government MMFs that do not choose to participate in the ability to impose redemption restrictions would remain permissible investments for customer funds. Accordingly, prior to the October 14, 2016 compliance date for Amended Rule 2a-7, money market fund sponsors may need to modify their arrangements with FCMs and DCOs so that the FCMs and DCOs invest in Non-Electing Government MMFs to the extent required under the letters."
In other news, a press release entitled, "Fitch: Prime Money Fund Liquidity Buffers Surge One Month Ahead of Reform," explains, "While prime institutional money market funds already lost $733 billion in assets, primarily to government money funds, the continued build-up of liquidity in these funds indicates fund managers expect additional outflows ahead of reform, as well as a structural shift in portfolio management post-reform."
It tells us, "As of Sept. 9, prime institutional funds' weekly liquidity averaged 75.5%, up 3.6% from Aug. 31 and 11.4% from Aug. 15. Some prime money funds' weekly liquidity is at 100%, and others will likely reach similar levels in the month running up to reform.... Prime institutional money funds continue to experience significant asset outflows, declining $176 billion during the two weeks between Aug. 26 and Sept. 9.... Meanwhile, government institutional funds' assets increased by $178 billion in the same period, reaching a total of approximately $1.3 trillion."
The update adds, "Fitch expects continued outflows from prime funds driven by investors in the one month remaining before the reform compliance deadline of Oct. 14. This, in turn, has led to a widening of the yield spread between assets such as Tier 1 90-day commercial paper held by prime funds and the 30-day net yield on government institutional money market funds. At Sept. 12, this spread had widened to 72 basis points from 55 at June 30.... The presence of these features means that investors will be monitoring weekly liquidity closely, ready to pull cash out of prime money funds on indications of stress. To avoid even coming close to the regulatory threshold of 30%, fund managers will be maintaining buffers to weekly liquidity well above this level."
Ahead of next week's Crane's European Money Fund Symposium (Sept. 20-21 at the London Tower Bridge Hilton), we noticed some fresh analysis and new product announcements involving European and "offshore" money market mutual funds. J.P. Morgan Securities latest "Short-Term Fixed Income" discusses how offshore prime money market funds are not shortening maturities or avoiding CDs and CP like their U.S. counterparts, and J.P. Morgan Asset Management announced the launch of a new "enhanced cash" Sterling fund. We review these updates below, and we look forward to seeing many of you in London next week.
JPM Securities writes on "Offshore MMFs," "One theme that has emerged since prime MMFs began to shorten their maturities is the increased importance of other investors to the US money markets. Other money market investors include offshore prime MMFs, Separately Managed Accounts, securities lenders, short-term bond funds and corporations with excess cash on their balance sheets. In addition to this, recent cheapening has attracted non-traditional buyers, moving investments in along the curve to take advantage of improved risk reward trade-offs in the money markets that are now available. By and large, their participation in buying bank CP/CD has moderated Libor's rise as they opportunistically took advantage of wider credit spreads particularly in the 6m and 1y part of the money markets curve."
Authors Alex Roever, Teresa Ho, and John Iborg, write, "Against this backdrop, we are often asked why offshore prime MMFs are not impacted by US MMF reform. Do they have to follow the same structural changes as onshore prime MMFs? The answer is no. In a nutshell, offshore prime MMFs are not governed by SEC's Rule 2a-7 whose structural changes go into effect next month. Domiciled predominately in the EU, they are instead governed by the European Securities and Market Authority (ESMA) as well as the Institutional Money Market Funds Association (IMMFA) in the case of institutional funds. While ESMA's and IMMFA's guidelines resemble SEC’s Rule 2a-7 in terms of portfolio management, they have not finalized any structural changes to offshore prime MMFs as of yet."
They explain, "European MMF reform is still a work in progress. To this end, assets under management at offshore USD prime MMFs have been fairly stable at slightly above $225bn according to iMoneyNet, in contrast to onshore USD prime MMFs which has suffered a dramatic decline in assets over the past year. This suggests that money that has left prime MMFs has not migrated into offshore prime MMFs, as to be expected. Offshore USD funds are predominately used by corporations that have cash trapped overseas for tax reasons. In general, shareholders do not have the ability to easily move cash from onshore to offshore. As such, the size of the USD offshore complex is not enormous and is slightly smaller than the prime retail MMF complex in the US at roughly $290bn."
JPM continues, "As offshore prime MMFs are unaffected by SEC's MMF reforms, they have, in contrast to onshore of longer dated bank CP/CD while the latter group has pulled back. Indeed, a closer look at offshore funds' bank CP/CD holdings suggests they have maintained roughly $8-9bn of assets in the 6m-1y part of the curve predominately across Australian, Canadian and US issuers. To a smaller extent, they also added exposures to Japanese issuers in this part of the curve recently." (Note: JPM cites Crane Data info in a chart; our 8/31 cut of MFI International Portfolio Holdings is scheduled to ship Thursday, 9/15.)
They add, "While exposure to the long end of the money markets curve has held constant, the story inside of 6 months has not. In fact, offshore funds appeared to have increased their allocation to 1-3m maturities but decreased their 3-6m maturities. As offshore MMFs are not impacted by SEC MMF reforms, it's not obvious why they would look to reduce their WAMs and WALs. One explanation could be that the recent cheapening in the 1-3m part of the curve has provided them with better spreads even with a shorter duration, incentivizing them to allocate more here. It's also possible that given the chance of a Fed rate hike this year, funds want to shorten their maturities and minimize their duration risks."
In other news, a press release entitled, "J.P. Morgan Asset Management announces launch of Sterling Managed Reserves Fund" and subtitled, "Cash alternative investment for Sterling investors in post-Brexit low rate environment," tells us, "J.P. Morgan Asset Management's Global Liquidity business has launched a new UCITS fund, JPMorgan Funds – Sterling Managed Reserves Fund."
It explains, "Whereas traditional money market funds are designed to meet short-term working capital requirements, managed and regulated extremely conservatively to ensure capital preservation and liquidity at all times, Managed Reserves strategies incrementally extend maturities to generate slightly higher returns, but with a similar discipline on risk management. For liquidity investors with a longer investment horizon, Managed Reserves can offer an interesting cash alternative: returns above money market funds coupled with a focus on capital preservation and liquidity."
The release continues, "JPMorgan Funds – Sterling Managed Reserves Fund will seek to deliver consistent returns while preserving principal and providing liquidity. It will invest in GBP-denominated short-term debt securities, including commercial paper, certificates of deposit, bank deposits and AAA rated money market funds, as well as UK and European sovereigns, Supranationals and Agencies, corporate securities and asset- and mortgage-backed securities. The funds weighted average duration will not exceed one year."
Portfolio Manager Neil Hutchison, who will be speaking at next week's European Money Fund Symposium, comments, "Treasurers are being forced to rethink short-term investment strategies. Following Brexit the Bank of England's bank rate and corresponding cash yields are down to record lows -- and likely to go even lower -- so liquidity investors are increasingly being more strategic with their non-immediate cash. A Managed Reserves strategy, which can take advantage of higher yields in maturities slightly longer than money market funds, can be an effective supplement in this environment to AAA rated liquidity funds."
JPMAM's release comments, "The fund, which will be benchmarked to the BofAML Sterling 3-Month Government Bill Index, will target an excess return of 20 to 40 basis points, net of all fees. Lead Portfolio Manager Neil Hutchison has 18 years of industry experience."
Hutchison adds, "Having globally managed portfolios to this strategy since 2004, with $50 billion in Managed Reserves assets already under management, we've observed the evolution in cash segmentation that corporate treasurers are increasingly undertaking. Allocating a portion of non-immediate cash to Managed Reserves, often as a first step beyond money market funds, can allow cash investors to benefit from a broader investible universe with greater corporate diversity, all within a highly risk controlled environment."
Crane Data released its September Money Fund Portfolio Holdings yesterday, and our latest collection of taxable money market securities, with data as of August 31, 2016, shows big increases in Repo and Treasuries, and big decreases in CDs and CP. Money market securities held by Taxable U.S. money funds overall (tracked by Crane Data) increased by $75.9 billion to $2.668 trillion last month, after increasing by $47.9 billion in July, decreasing by $59.7 billion in June, and increasing by $24.6 billion in May. Repos remained the largest portfolio segment, followed by Treasuries and Agencies. "Credit" instruments continued to shrink dramatically as the shift from "Prime" to "Government" money funds accelerated in August. CDs were in fourth place, followed by Commercial Paper, Other/Time Deposits and VRDNs. Money funds' European-affiliated securities fell to 24.9% of holdings, down from the previous month's 26.7%. Below, we review our latest Money Fund Portfolio Holdings statistics.
Among all taxable money funds, Repurchase Agreements (repo) leapt by $102.6 billion (24.4%) to $735.4 billion, or 24.4% of holdings, after falling $13.3 billion in July, and increasing $71.4B in June and $32.6B in May. Funds dramatically shortened their WAMs (weighted average maturities) in August and continue to shorten in September. Government Agency Debt increased $23.9 billion (4.2%) to $595.7 billion, or 22.3% of all holdings, after increasing $27.0B in July, $37.4B in June, and $34.4B in May. Treasury securities rose $79.4 billion (14.2%) to $640.5 billion, or 24.0% of holdings, after rising $38.8 billion in July, falling $12.8B in June and $3.8B in May. The rise in Repo, Treasuries and Agencies is being driven by the shift of over $650 billion of Prime MMF assets and another $100 billion in Tax Exempt MMF assets (since late 2015) into Government MMFs (so far). The total move by the time the mid-October reforms kick in could top $1 trillion.
CDs and CP both dropped to their lowest levels since Crane Data began tracking these in early 2011. Certificates of Deposit (CDs) were down $55.4 billion (-17.4%) to $262.6 billion, or 9.8% of taxable assets, after declining $37.6 billion in July, $53.6 billion in June, $4.6 billion in May and falling $17.0 billion in April. Commercial Paper (CP) was down $71.8 billion (-26.2%) to $202.1 billion, or 7.6% of holdings, while Other holdings, primarily Time Deposits, fell $14.5 billion (7.0%) to $191.4 billion, or 7.2% of holdings. VRDNs held by taxable funds increased by $11.8 billion (41.1%) to $40.4 billion (1.5% of assets).
Prime money fund holdings tracked by Crane Data fell below $1 trillion to $913 billion (down from $1.074 trillion last month), or 34.2% (down from 41.4%) of taxable money fund holdings' total of $2.668 trillion. Among Prime money funds, CDs represent under one-third of holdings at 28.8% (down from 29.6% a month ago), followed by Commercial Paper at 22.2% (down from 25.5%). The CP totals are comprised of: Financial Company CP, which makes up 13.9% of total holdings, Asset-Backed CP, which accounts for 5.4%, and Non-Financial Company CP, which makes up 2.9%. Prime funds also hold 3.9% in US Govt Agency Debt (same as last month), 6.6% in US Treasury Debt (up from 5.3%), 4.1% in US Treasury Repo (down from 4.6%), 1.6% in Other Instruments, 18.9% in Non-Negotiable Time Deposits, 5.7% in Other Repo, 3.9% in US Government Agency Repo, and 3.8% in VRDNs.
Government money fund portfolios totaled $1.143 trillion, up from $962 billion in July, while Treasury money fund assets totaled another $612 billion, up from $556 billion the prior month. Government money fund portfolios were made up of 49.0% US Govt Agency Debt, 18.2% US Government Agency Repo, 11.7% US Treasury debt, and 20.7% in US Treasury Repo. Treasury money funds were comprised of 72.9% US Treasury debt, 26.8% in US Treasury Repo, and 0.2% in Government agency repo, Other Instrument, and Investment Company shares. Government and Treasury funds combined now total $1.755 trillion, or almost 2/3 (65.8%) of all taxable money fund assets, up from 58.6%.
European-affiliated holdings decreased $27.8 billion in August to $663.3 billion among all taxable funds (and including repos); their share of holdings decreased to 24.9% from 26.7% the previous month. Eurozone-affiliated holdings decreased $1.5 billion to $422.8 billion in August; they now account for 15.9% of overall taxable money fund holdings. Asia & Pacific related holdings decreased by $53.2 billion to $195.3 billion (7.3% of the total). Americas related holdings increased $157.1 billion to $1.807 trillion and now represent 67.7% of holdings.
The overall taxable fund Repo totals were made up of: US Treasury Repurchase Agreements, which increased $91.6 billion, or 26.4%, to $438.6 billion, or 16.4% of assets; US Government Agency Repurchase Agreements (up $19.6 billion to $244.8 billion, or 9.2% of total holdings), and Other Repurchase Agreements ($52.0 billion, or 2.0% of holdings, down $8.6 billion from last month). The Commercial Paper totals were comprised of Financial Company Commercial Paper (down $36.9 billion to $126.6 billion, or 4.7% of assets), Asset Backed Commercial Paper (down $21.5 billion to $49.0 billion, or 1.8%), and Non-Financial Company Commercial Paper (down $13.3 billion to $26.5 billion, or 1.0%).
The 20 largest Issuers to taxable money market funds as of August 31, 2016, include: the US Treasury ($640.5 billion, or 25.5%), Federal Home Loan Bank ($433.6B, 17.3%), Federal Reserve Bank of New York ($146.7B, 5.8%), BNP Paribas ($100.8B, 4.0%), Credit Agricole ($78.6B, 3.1%), Wells Fargo ($67.4B, 2.7%), Societe Generale ($67.2B, 2.7%), Federal Home Loan Mortgage Co. ($61.8B, 2.5%), Federal Farm Credit Bank ($56.3B, 2.2%), RBC ($50.6B, 2.0%), Mitsubishi UFJ Financial Group Inc. ($41.2B, 1.6%), Federal National Mortgage Association ($39.3B, 1.6%), Credit Suisse ($36.9B, 1.5%), Bank of Nova Scotia ($36.8B, 1.5%), Natixis ($36.5B, 1.5%), Bank of America ($35.5B, 1.4%), HSBC ($32.5B, 1.3%), Citi ($32.4B, 1.3%), JP Morgan ($30.1B, 1.2%), and Svenska Handelsbanken ($27.6B, 1.1%).
In the repo space, the 10 largest Repo counterparties (dealers) with the amount of repo outstanding and market share (among the money funds we track) include: Federal Reserve Bank of New York ($146.7B, 19.9%), BNP Paribas ($76.6B, 10.4%), Societe Generale ($54.6B, 7.4%), Wells Fargo ($53.9B, 7.3%), Credit Agricole ($48.5B, 6.6%), RBC ($35.1B, 4.8%), Bank of America ($28.6B, 3.9%), Credit Suisse ($26.7B, 3.6%), HSBC ($24.0B, 3.3%) and JP Morgan ($22.6B, 3.1%). The `10 largest Fed Repo positions among MMFs on 8/31 include: JP Morgan US Govt ($13.7B), Morgan Stanley Inst Lq Gvt ($10.0B), BlackRock Lq T-Fund ($7.1B), Goldman Sachs FS Gvt ($6.4B), Federated Gvt Oblg ($5.5B), Goldman Sachs FS Treas Sol ($5.5B), Wells Fargo Gvt MMkt ($5.5B), BlackRock Lq FedFund ($5.3B), Fidelity Inst MMkt Gvt ($5.2B), and Fidelity Cash Central Fund ($4.5B).
The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: Credit Agricole ($30.1B, 5.1%), Mitsubishi UFJ Financial Group Inc. ($28.0B, 4.8%), Svenska Handelsbanken ($27.6B, 4.7%), Natixis ($23.7B, 4.0%), BNP Paribas ($23.5B, 4.0%), Swedbank AB ($23.0B, 3.9%), DnB NOR Bank ASA ($21.9B, 3.7%), Skandinaviska Enskilda Banken AB ($21.0B, 3.6%), Nordea Bank ($19.7B, 3.4%) and Credit Mutuel ($18.4B, 3.1%).
The 10 largest CD issuers include: Mitsubishi UFJ Financial Group Inc. ($18.5B, 7.1%), Bank of Montreal ($16.3B, 6.2%), Sumitomo Mitsui Banking Co ($15.4B, 5.9%), Canadian Imperial Bank of Commerce ($12.0B, 4.6%), Sumitomo Mitsui Trust Bank ($11.9B, 4.6%), Toronto-Dominion Bank ($10.7B, 4.1%), Wells Fargo ($10.7B, 4.1%), Svenska Handelsbanken ($9.7B, 3.7%), Bank of Nova Scotia ($8.6B, 3.3%) and Credit Agricole ($8.6B, 3.3%).
The 10 largest CP issuers (we include affiliated ABCP programs) include: BNP Paribas ($14.1B, 8.0%), Societe Generale ($11.4B, 6.5%), Commonwealth Bank of Australia ($7.8B, 4.4%), Credit Agricole ($7.0B, 4.0%), JP Morgan ($6.7B, 3.8%), ING Bank ($5.9B, 3.3%), Bank of Nova Scotia ($5.8B, 3.3%), Natixis ($5.6B, 3.2%), Australia and New Zealand Banking Group Ltd. ($5.5B, 3.1%) and Mitsubishi UFJ Financial Group Inc. ($5.3B, 3.0%),
The largest increases among Issuers include: US Treasury (up $79.4B to $640.5B), Federal Reserve Bank of New York (up $65.9B to $146.7B), Federal Home Loan Bank (up $25.9B to $433.6B), BNP Paribas (up $11.6B to $100.8B), Canadian Imperial Bank of Commerce (up $9.0B to $24.2B), Societe Generale (up $7.9B to $67.2B), Goldman Sachs (up $5.2B to $17.8B), Nomura (up $4.0B to $18.8B) and Deutsche Bank AG (up $3.9B to $17.8B).
The largest decreases among Issuers of money market securities (including Repo) in July were shown by: Mitsubishi UFJ Financial Group Inc (-$10.8B to $41.2B), Mizuho Corporate Bank Ltd (-$10.8B to $19.9B), Sumitomo Mitsui Banking Co (-$10.4B to $18.3B), Wells Fargo (-$8.6B to $67.4B, DnB NOR Bank ASA (-$6.0B to $21.9B), Australia & New Zealand Banking Group Ltd -$5.4B to $14.7B), Federal Home Loan Mortgage Co (-$5.1B to $61.8B), Barclays PLC (-$4.1B to $24.8B), DZ Bank AG (-$4.1B to $7.9B), Citi (-$3.7B to $32.4B) and Rabobank (-$3.6B to $7.4B).
The United States remained the largest segment of country-affiliations; it represents 61.4% of holdings, or $1.638 trillion. France (11.7%, $310.8B) remained in second while Canada (6.3%, $168.1B) remained in 3rd. Japan (4.7%, $125.6B) stayed in fourth, while Sweden (3.4%, $91.7B) held fifth. The United Kingdom (3.0%, $80.5B) remained sixth, while Germany (2.0%, $53.4B) ranked seventh. Australia (1.8%, $47.3B) was eighth and The Netherlands (1.7%, $44.2B) were ninth. Lastly, Switzerland (1.6%, $43.9B) held tenth place among country affiliations. (Note: Crane Data attributes Treasury and Government repo to the dealer's parent country of origin, though money funds themselves "look-through" and consider these U.S. government securities. All money market securities must be U.S. dollar-denominated.)
As of August 31, 2016, Taxable money funds held 33.8% (up from 31.1%) of their assets in securities maturing Overnight, and another 15.2% maturing in 2-7 days (same as last month). Thus, 49.0% in total matures in 1-7 days. Another 19.3% matures in 8-30 days, while 9.0% matures in 31-60 days. Note that more than three-quarters, or 77.3% of securities, mature in 60 days or less (same as last month), the dividing line for use of amortized cost accounting under the new pending SEC regulations. The next bucket, 61-90 days, holds 9.6% (up from 9.0%) of taxable securities, while 10.0% matures in 91-180 days (up from 8.7%), and just 3.2% matures beyond 180 days (up from 2.2%).
Crane Data's Taxable MF Portfolio Holdings (and Money Fund Portfolio Laboratory) were updated Monday, and our Tax Exempt MF Holdings and MFI International "offshore" Portfolio Holdings will be released later this week. Visit our Content center to download files or visit our Portfolio Laboratory to access our "transparency" module. Contact us if you'd like to see a sample of our latest Portfolio Holdings Reports.
HSBC, the 21st largest manager of U.S. money funds with $13 billion ($5.7B in Prime) and 16th largest manager globally with approximately $50 billion, is the latest fund manager to exit the "Prime" money market fund space entirely. (HSBC liquidated its Tax Exempt MMFs in March 2013.) The manager joins a host of others, including Deutsche, TDAM, RBC, Franklin, American Funds, PNC, Oppenheimer, SEI, CNR, and Wilmington, that have given up the Prime "ghost". Outside of the 16 largest money fund managers, almost all of those ranked 17 through 64 appear to be "going government." Since Fidelity Cash Reserves converted into Fidelity Government Cash Reserves in Nov. 2015, Prime MMFs have seen over $300 billion in Prime fund conversions to Government and another $370 billion in outflows and liquidations. In the coming days, overall outflows should approach the 50% level as total Prime assets (currently at $790 billion) drop below $750 billion (they had been $1.5 trillion late last year).
A Prospectus Supplement for HSBC Prime Money Market Fund announces the "Reorganization of the HSBC Prime Money Market Fund with and into the HSBC U.S. Government Money Market Fund." It says, "Upon the recommendation of HSBC Global Asset Management (USA) Inc. ("HSBC"), the Board of Trustees (the "Board") of the HSBC Funds (the "Trust") approved the reorganization of the HSBC Prime Money Market Fund (the "Prime Fund") with and into the HSBC U.S. Government Money Market Fund (the "Government Fund" and, together with the Prime Fund, the "Funds") (the "Reorganization"). Under the Agreement and Plan of Reorganization, (1) the assets of the Prime Fund will be transferred to the Government Fund in exchange solely for shares of the Government Fund and the assumption of the Prime Fund's liabilities; and (2) the shares of the Government Fund received by the Prime Fund will be distributed by the Prime Fund to its shareholders in complete liquidation of the Prime Fund and in cancellation of all of the Prime Fund’s shares."
HSBC's filing continues, "The Reorganization does not require shareholder approval. The Reorganization will be consummated on or about October 7, 2016 (the "Closing Date"). Shareholders of the Prime Fund may redeem or exchange their shares at any time prior to the Closing Date. If you have any questions, please call the Trust at 1-800-782-8183 for Retail Investors and 1-877-244-2424 for Institutional Investors."
On the "Background of the Reorganization," it explains, "HSBC, an investment adviser registered with the U.S. Securities and Exchange Commission ("SEC"), serves as the investment adviser to the Funds. Each Fund is a money market fund registered under the Investment Company Act of 1940 (the "1940 Act") and currently seeks to maintain a stable net asset value ("NAV") of $1.00 per share. HSBC recommended to the Board that it approve the Reorganization because of recent changes to the rules that govern money market funds. On or before October 14, 2016 (i.e., the final compliance date for these changes), the Prime Fund would have been required to price its shares at a floating NAV rounded to the fourth decimal (e.g., $1.0001 or $0.9999) and the Board, on behalf of the Prime Fund, would have been permitted to impose a "liquidity fee" (up to a maximum of 2%) or "redemption gate" that temporarily restricts redemptions from the Fund, if weekly liquid assets fall below the required regulatory threshold."
The supplement continues, "HSBC believes that, because of shareholder preference for a money market fund that seeks to maintain a stable NAV per share (e.g., $1.00) without the potential for the imposition of liquidity fees and redemption gates, the Reorganization is in the best interests of the shareholders of the Prime Fund and preferable to liquidating the Prime Fund, as it will provide shareholders with the opportunity to continue to invest in a money market fund that seeks to maintain a stable NAV of $1.00 per share. In addition, HSBC believes that the Reorganization is in the best interests of the shareholders of the Government Fund because the Reorganization may provide enhanced opportunities for the Government Fund to realize greater economies of scale in the form of lower total operating expenses over time and also would enable the combined Fund to be better positioned for asset growth."
It adds, "As part of the Reorganization, the Board evaluated and discussed multiple factors, including (but not limited to) the following: (1) the recent changes to the rules that govern money market funds adopted by the SEC (as discussed above); (2) shareholder preference for a product that seeks to maintain a stable NAV per share (e.g., $1.00); (3) alternatives to the Reorganization (e.g., liquidation of the Prime Fund); (4) information provided by HSBC regarding the Reorganization and its effect on the existing shareholders of the Funds; (5) the limited growth potential of the Prime Fund without the consummation of the Reorganization; (6) the investment objectives, strategies, risks and policies of each Fund; (7) the fact that the Funds are managed by the same portfolio management team; (8) the potential economies of scale of reorganizing the Prime Fund with and into the Government Fund; and (9) the growth potential of the Government Fund upon consummation of the Reorganization. In addition, while the fees and expenses of the Funds are mostly identical, the Government Fund currently has a lower total expense ratio as compared with the Prime Fund."
Finally, HSBC tells us, "Prior to the Closing Date, the Prime Fund will seek to invest its assets in cash, securities issued or guaranteed by the United States or certain U.S. government agencies or instrumentalities ("U.S. Government Securities") and/or repurchase agreements that are collateralized by cash and U.S. Government Securities.... After the close of business on the Closing Date, each shareholder of the Prime Fund will become the owner of a number of full and fractional shares of the Government Fund of the same class of shares that the shareholder held in the Prime Fund immediately prior to the Reorganization and will no longer own shares of the Prime Fund.... Shareholders of the Prime Fund who do not wish to own shares of the Government Fund may: (1) redeem their shares prior to the Closing Date; or (2) exchange their shares for shares of another series of the Trust prior to the Closing Date."
To see previous Prime fund liquidations, see the following Crane Data News articles: Morgan Stanley Pulls Plug on Prime, Muni Sweeps; ignites on Strikes (8/15), TDAM Does About Face, Liquidates Inst MMF and Inst Muni; More Filings (8/12), BIF Liquidates Muni MMFs; Nicholas Closes; MS; PFM Prime Goes Govt (7/15), Deutsche Daily Assets to Float; CNR Prime, Wells, GS Munis Liquidate (7/7), Northern Streamlines MMFs: One Prime to Govie, Two T-E Liquidations (6/2), Another Two Bite the Dust: SEI Liquidates Prime; Wilmington Goes Govt (3/29), Even More Prime to Govie: Great West; Columbia, ProFund, Rydex File (3/16), Harbor, Payden Convert from Prime to Govt; JPM on Flows; iTreasurer (3/15), Hits Keep Coming to Prime, Tax-Ex: UBS Sweeps Filings, Putnam T-E Exit (2/25), and More Funds Jump on Prime to Govt Conversion Bandwagon; Mergers (12/15).
In other news, a BlackRock Liquidity Funds TempFund, FedFund, and T-Fund filing reminds us about the pending ratings changes in the October 14 reform deadline, including the removal of "First Tier" and "Second Tier" definitions. A new Prospectus Supplement says, "Effective September 22, 2016, BlackRock Advisors, LLC intends to comply with certain amendments to Rule 2a-7 (the "Rule") under the Investment Company Act of 1940, as amended, that remove references in the Rule to credit ratings issued by Nationally Recognized Statistical Rating Organizations ("NRSROs"), remove references in the Rule to first tier and second tier securities and amend the definition of "Eligible Securities" in the Rule to eliminate references to NRSRO ratings, among other amendments." (See our March 3, 2011 News, "SEC Redefines First, Second Tier, Removes NRSRO References from 2a-7.)
It continues, "Accordingly, effective September 22, 2016 the following changes are made to the Funds' Prospectuses: The section entitled "Details About the Funds -- How Each Fund Invests" is amended to delete the fifth bullet of that section in its entirety. The section entitled "Details About the Funds -- Investment Process" is amended to delete the last sentence of the first paragraph of that section in its entirety and replace it with the following: Each Fund will purchase securities (or issuers of such securities) that are Eligible Securities that present minimal credit risk as determined by BlackRock pursuant to guidelines approved by the Board. For a discussion of Eligible Securities, please see the Glossary."
BlackRock explains, "The section entitled "Details About the Funds -- How Each Fund Invests -- Principal Investment Strategies -- TempFund and MuniFund" is amended to add the following after the first paragraph of that section: Additionally, a security purchased by each Fund (or the issuers of such securities) will be: a security that has ratings at the time of purchase (or which are guaranteed or in some cases otherwise supported by credit supports with such ratings) in the highest rating category by at least two unaffiliated nationally recognized statistical rating organizations ("NRSROs"), or one NRSRO, if the security or guarantee was only rated by one NRSRO; a security that is issued or guaranteed by a person with such ratings; a security without such short-term ratings that has been determined to be of comparable quality by BlackRock; a security issued by other open-end investment companies that invest in the type of obligations in which the Fund may invest; or a security issued or guaranteed as to principal or interest by the U.S. Government or any of its agencies or instrumentalities."
Finally, they add, "The Glossary is amended by deleting the definition of "First Tier Securities" in its entirety and deleting the definition of "Eligible Securities" in its entirety and replacing it with the following: Eligible Securities -- Applicable Eligible Securities include: securities with a remaining maturity of 397 calendar days or less (with certain exceptions) that BlackRock determines present minimal credit risks to the fund after considering certain factors; securities issued by other registered investment companies that are money market funds; or securities issued or guaranteed as to principal or interest by the U.S. Government or any of its agencies or instrumentalities."
Crane Data's latest Money Fund Market Share rankings show slight asset increases for a majority of U.S. money fund complexes in August as money market fund assets grew $18.4 billion, or 0.7%. Overall assets continue to be relatively flat, rising by $15.1 billion, or 0.6%, over the past 3 months, but over the past 12 months through August 31, they are up $54.3 billion, or 2.1%. The biggest gainer in August was again JP Morgan, whose MMFs rose by $10.2 billion, or 4.4%. Morgan Stanley, First American, Vanguard, Wells Fargo and Fidelity also saw assets increase, rising by $6.9 billion, $4.1 billion, $3.2 billion, $3.2 billion, and $2.7 billion, respectively. AB (Alliance) also jumped $7.0 billion due to the addition of its AB Govt MM Fund to our listings. (Our domestic U.S. "Family" rankings are available in our MFI XLS product, our global rankings are available in our MFI International product, and the combined "Family & Global Rankings" are available to Money Fund Wisdom subscribers.) We review these below, and we also look at money fund yields the past month, which were flat to mixed.
Fidelity, MS, Vanguard, JP Morgan, PNC and Dreyfus had the largest money fund asset increases over the past 3 months, rising by $10.4 billion, $8.6B, $8.6B, $6.7B, $5.6B and $5.6B, respectively. Over the past year through August 31, 2016, Fidelity was the largest gainer (up $39.4B, or 9.4%), followed by Goldman Sachs (up $35.1B, or 23.1%), BlackRock (up $32.1B, or 15.1%), Vanguard (up $18.4B, or 10.5%), SSGA (up $10.4B, or 13.0%), and PNC (up $7.0B, or 147%). BlackRock was buoyed by its acquisition of BofA's money funds -- a deal which closed in April.
Other asset gainers for the past year include: Wells Fargo (up $6.5B, 6.0%), Invesco (up $6.1B, or 11.5%), Morgan Stanley (up $4.5B, 3.5%), First American (up $2.0B, 4.9%), Northern (up $1.9B, 2.3%) and UBS (up $1.3B, 3.4%). The biggest decliners over 12 months include: Dreyfus (down $14.5B, or -8.6%), JPMorgan (down $13.2B, or -5.1%), Deutsche (down $9.2B, or -30.3%), RBC (down $5.3B, or -35.7%), and SEI (down $4.1B, or -29.5%).
Our latest domestic U.S. Money Fund Family Rankings show that Fidelity Investments remains the largest money fund manager with $456.4 billion, or 17.3% of all assets (up $2.7 billion in August, up $10.4 billion over 3 mos., and up $39.4B over 12 months). BlackRock is second with $244.3 billion, or 9.2% of assets (down $389M, down $7.8B, and up $32.1B for the past 1-month, 3-mos. and 12-mos., respectively). JPMorgan is third with $244.1 billion, or 9.2% market share (up $10.2B, up $6.7B, and down $13.2B for the past 1-month, 3-mos. and 12-mos., respectively). Federated Investors remained fourth with $203.0 billion, or 7.7% of assets (down $1.3B, up $1.1B, and down $2.2B).
Vanguard was in 5th place with $193.0 billion, or 7.3% of assets (up $3.2B, up $8.6B, and up $18.4B). Goldman Sachs held onto sixth place with $186.6 billion, or 7.1%, (up $1.3B, down $3.2B, and up $35.1B). Schwab ($158.6B, 6.0%) was in seventh place, followed by Dreyfus in eighth place with $153.0B (5.8%), Morgan Stanley was in ninth place with $132.2B (5.0%), and Wells Fargo was in tenth place with $114.9B (4.3%).
The eleventh through twentieth largest U.S. money fund managers (in order) include: SSGA ($90.1B, or 3.4%), Northern ($82.6B, or 3.1%), Invesco ($58.8B, or 2.2%), First American ($43.9B, or 1.7%), Western Asset ($42.7B, or 1.6%), UBS ($38.2B, or 1.4%), Franklin ($22.3B, or 0.8%), Deutsche ($21.1B, or 0.8%), American Funds ($16.2B, or 0.6%), and T. Rowe Price ($15.2B, or 0.6%). The 11th through 20th ranked managers are the same as last month, except: First American moved ahead of Western and Franklin moved ahead of Deutsche. Crane Data currently tracks 64 U.S. MMF managers, the same number as last month.
When European and "offshore" money fund assets -- those domiciled in places like Dublin, Luxembourg, and the Cayman Islands -- are included, the top 10 managers match the U.S. list, except for Goldman Sachs moving up to #4 ahead of Federated.
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 ($464.7 billion), JPMorgan ($377.1B), BlackRock ($364.0B), Goldman Sachs ($271.5B), and Federated ($211.1B). Vanguard ($193.0B) was sixth, followed by Dreyfus/BNY Mellon ($177.0B), Schwab ($158.6B), Morgan Stanley ($156.9B), and Wells Fargo ($115.9B), which round out the top 10. These totals include "offshore" US Dollar money funds, as well as Euro and Pound Sterling (GBP) funds converted into US dollar totals.
Finally, our September Money Fund Intelligence and MFI XLS show that yields were flat to mixed in August across most of our Crane Money Fund Indexes. The Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 742), was flat at 0.12% for the 7-Day Yield (annualized, net) Average, while the 30-Day Yield was also flat at 0.12%. The MFA's Gross 7-Day Yield inched higher to 0.45% (up one bps), while the Gross 30-Day Yield was also 0.45% (unchanged).
Our Crane 100 Money Fund Index shows an average 7-Day (Net) Yield of 0.23 (flat) and an average 30-Day Yield of 0.23% (flat). The Crane 100 shows a Gross 7-Day Yield of 0.48% (flat), and a Gross 30-Day Yield of 0.48% (flat). For the 12 month return through 8/31/16, our Crane MF Average returned 0.09% (up 1 bp) and our Crane 100 returned 0.1% (up 1 bps). The total number of funds, including taxable and tax-exempt, fell to 998, down 25 from last month. There are currently 742 taxable and 256 tax-exempt money funds.
Our Prime Institutional MF Index (7-day) yielded 0.24% (flat) as of August 31, while the Crane Govt Inst Index was 0.16% (up 1 bps) and the Treasury Inst Index was 0.11% (down 1 bps). Thus, the spread between Prime funds and Treasury funds is 13 basis points, down from 15 bps 2 months ago but up one bps from last month. The Crane Prime Retail Index yielded 0.11% (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 0.15% (up 8 bps).
The Gross 7-Day Yields for these indexes in July were: Prime Inst 0.54% (unchanged), Govt Inst 0.42% (up 1 bps), Treasury Inst 0.36% (down 1 bps), Prime Retail 0.55% (up 2 bps), Govt Retail 0.39% (down 1 bp), and Treasury Retail 0.35% (up 1 bp). Also, the Crane Tax Exempt Index jumped 9 basis points to 0.52%. The Crane 100 MF Index returned on average 0.02% for 1-month, 0.06% for 3-month, 0.14% for YTD, 0.16% for 1-year, 0.08% for 3-years (annualized), 0.06% for 5-years, and 0.95% for 10-years. (Contact us if you'd like to see our latest MFI XLS, Crane Indexes or Market Share report.)
The September issue of our flagship Money Fund Intelligence newsletter, which was sent to subscribers Thursday, features the articles: "Liquidity, Liquidity & Liquidations: Reform Deadline Nears," which reviews the latest Prime and Tax Exempt changes and liquidations; "Western Asset's Green, Bonczek & Rose on MMFs," which profiles Zak Green, John Bonczek and Justin Rose; and "MFI International Review: LVNAV Coming Soon; Sterling," which reviews the latest on European and "offshore" money funds. We have updated our Money Fund Wisdom database query system with August 31, 2016, performance statistics, and also sent out our MFI XLS spreadsheet Thursday. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our September Money Fund Portfolio Holdings are scheduled to ship Monday, Sept. 12, and our Sept. Bond Fund Intelligence is scheduled to go out Thursday, Sept. 15.
MFI's lead "Liquidity" article says, "With just over a month to go until the SEC's major Money Fund Reforms go live, Prime and Municipal outflows and liquidations have accelerated. WAMs fell sharply and liquidity jumped in August. We discuss the liquidity focus and latest round of liquidations and fund changes below."
It adds, "The number of money funds tracked by Crane Data fell by 40 in the latest month to 998, the first time the number of MMFs has fallen below 1,000 in the 10 years Crane Data has been publishing. Over the past 12 months, we've deleted 218 funds, or 17.9%. Tax Exempt MMFs have declined by 65 to 120 over this period, a drop of 35.1%."
Our latest fund interview reads, "This month, MFI interviews several the key members of Western Asset Management's Liquidity Business, including Client Service Executives John Bonczek and Zak Green, and Head of Liquidity Justin Rose. The three discuss the current cash environment, both in the U.S. and "offshore," and recent changes at Western, which is owned by Legg Mason. Our Q&A follows."
The article says, "Give us a little bit of history. Green: Western has been involved in running cash in various products since its inception in 1971. We acquired Citi Asset Management in December 2005, which ... we still manage today largely with the same team. Those funds date back to around 1990. Bonczek: We always like to point out that for the most part, the investment and credit research team has been in place from the Citigroup days. [They have] an average tenure of 22 years."
The "MFI International" article explains, "The European money market fund industry continues to await new regulations which should establish LVNAV, or limited volatility funds at some point in the next couple of years. Euro MMFs also soldier on through negative rates, while Sterling funds are seeing a surprising surge in assets. With Crane's 4th annual European Money Fund Symposium taking place later this month (Sept. 20-21) in London, we thought it would again be a good time to take a look at the latest trends in Ireland and Luxembourg-domiciled funds -- including assets, largest funds and fund managers, and yields. The two big themes continue to be negative yields and pending regulatory changes."
In a sidebar, we discuss, "LIBOR Spike Gets Attention." This brief says, "J.P. Morgan Securities summed up the flurry of commentary and interest, writing, "Focus in the short-term fixed income markets was centered on Libor's ascent.... Though the pace of increase slowed somewhat relative to prior weeks, it continued to make new multi-year highs." We also do a sidebar on "CME, CFTC Ban Prime MFs," which says, "CME Clearing, a division of the CME Group that clears futures, options and swaps, released a statement entitled, "IEF2 Impact Due to Recent CFTC Staff Interpretation on Prime Money Market Funds" late last month. (See our August 25 News.)"
Our September MFI XLS, with August 31, 2016, data, shows total assets increased $19.3 billion in August to $2.643 trillion after increasing $11.6 billion in July, decreasing $13.8 billion in June, $9.9 billon in May, and $42.0 billion in April. Our broad Crane Money Fund Average 7-Day Yield was flat at 0.12% for the month, while our Crane 100 Money Fund Index (the 100 largest taxable funds) also remained flat at 0.23% (7-day).
On a Gross Yield Basis (before expenses were taken out), the Crane MFA inched up to 0.45% and the Crane 100 was flat at 0.48%. Charged Expenses averaged 0.32% and 0.25% for the Crane MFA and Crane 100, respectively. The average WAM (weighted average maturity) for the Crane MFA was 30 days (down 1 day from last month) and for the Crane 100 was 29 days (down 2 days). (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
As Crane Data prepares for its 4th annual European Money Fund Symposium, which will take place Sept. 20-21 in London, a couple articles discussing pending European Money Fund Regulations have recently been published. PWC's new Asset & Wealth Management Newsletter briefly summarizes the path of reforms in Europe, while Pensions & Investments features an article on why the reaction to European regulatory changes should differ from the U.S. We review these below, and also mention an ignites article on money funds and customer service. (For more, see also our June 16 News, "European Money Fund Reform Deal Poised to Pass; CNAVs to Be LVNAVs.")
PWC Ireland's latest "Asset & Wealth Management Newsletter contains a brief, "Money Market Funds (MMF) Updates." It says, "On 15 June 2016, the Permanent Representatives Committee (COREPER) of the Council reached agreement on the Council's negotiating mandate on the reform of MMFs, paving the way for trilogies with the EP."
It explains, "On 10 May 2016, the Council of the EU published a further Presidency compromise text of the proposed Regulation on MMFs. Amendments particularly relate to the holding of ancillary liquid assets and the use of asset-backed commercial papers. On 14 April 2016, the Council published a presidency compromise on the proposal for a Regulation on MMF. The Council of the EU released an additional Presidency compromise text of the proposed Regulation on MMFs with amendments, on 10 May 2016."
PWC adds, "On 16 February 2016, ESMA issued a follow-up peer review into the compliance of National Competent Authorities (NCAs) with guidelines regarding MMF, which provides an update on the findings of the first peer review and details the result of this second assessment by peers. It highlights the 8 NCAs that were not compliant with the guidelines in 2013 at the time of the initial review. The review period is from 1 May 2014 to 1 May 2015. ESMA has found that, 7 of the 8 jurisdictions are now compliant or are about to with the guidelines."
Pensions & Investments writes "European money market reform on different path: New regs not expected to spark huge outflows like those seen in U.S.." It comments, "Impending reforms to European money market fund regulations will likely spare prime funds from the exodus of assets that the U.S. market has seen following SEC reforms, sources said."
P&I says, "Investors have one more month before the changes in the U.S. fully come into force. Those changes aim to reduce the risk of investor runs and require institutional prime funds to transact at a fluctuating net asset value, rather than the current constant net asset value. But U.S. investment in prime money market funds has fallen by about $338 billion this year through July to $1.23 trillion, according to Securities and Exchange Commission data. Instead, some $339 billion has flown into government money market funds, which remain trading at constant NAV. Observers expect Europe's incoming reforms will avoid this drain, and critically important, maintain the funds' role in financing the real economy."
The article comments, "Dennis Gepp, senior vice president, managing director and chief investment officer, cash, at Federated Investors (UK) LLP based in London, is "certain" the money market fund reform and its effects will take a very different shape in Europe than in the U.S. "One consequence (of the U.S. reform) that Europe would like to avoid is to have cash flow out of the prime money market funds into government funds," Mr. Gepp said."
It continues, "Rudolf Siebel, managing director at German Investment Funds Association BVI and chair of European Fund and Asset Management Association money market fund working group, said the EU was under pressure from both Financial Stability Board and International Organization of Securities Commissions to reform these systemically risky instruments."
P&I explains, "While variable NAV funds should survive if the current proposal from the EC is enforced, there is no doubt that constant NAV funds -- in their new guise as low-volatility NAVs -- would in fact survive in parallel.... While work remains to be done on the reforms, money managers already are looking at the potential impact."
It comments, "[Goldman Sachs' Kathleen] Hughes said the reform proposals are positive for the money market fund industry in Europe for a number of reasons. "The LVNAV model has addressed the need for greater transparency, higher liquidity and for a different type of product due to the fragmentation of investors in Europe and the breadth of jurisdictions they operate in," she said."
Finally, the article adds, "Mr. Siebel said a few elements of the proposed regulation are unworkable and will be addressed by the trialogue -- the European Parliament, European Council and European Commission.... "At present the government CNAVs should not be limited to EU public debt because U.S. Treasury money market funds will essentially become prohibited," Mr. Siebel said. Money managers won't have long to find out how they will be affected. Mr. Gepp and Mr. Siebel both expect the new regulation to be finalized this year. "There is a lot of political pressure to close the file," Mr. Siebel said."
In other news, ignites writes "With Money Funds in Major Flux, Firms Seek Customer-Service Edge". The piece comments, "While customer service has always been part of the broader package that money market fund sponsors offer investors, it has become more critical amid the major changes to sponsors' product lines and operations set into motion by the SEC's July 2014 rules. In the past two years, firms have overhauled their money fund offerings by rolling out new products, converting prime funds to government funds and axing still others."
They add, "The challenge for firms has been to communicate all of these changes to investors, with the dual goal of retaining existing clients and gaining new ones at a time of great flux for the industry. Money funds have always been seen as a commoditized business, so it's been difficult for firms to differentiate themselves, says Peter Crane, CEO of Crane Data. Normally they've done that through yield, assets under management and other features, "but given the shifting landscape ... I'm sure hand-holding and guidance and just being closer to the customers is something that is of import," he says." (See our Aug. 31 News, "PIMCO Liquidating MMF; BlackRock Client Survey; Citi, Fitch on FAQs, CP.")
Federated Investors Money Markets CIO Deborah Cunningham discusses liquidity and in her latest "Month in Cash." The update, entitled, "Preparation for reforms in full swing," tells us, "Liquidity, liquidity, liquidity. Not quite "location, location, location," but as the implementation date for the new SEC money market fund reforms draws near, cash managers have a mantra that is as all-encompassing as that famous Realtor one." We reprint Federated's latest below, and we also review the most recent WAM (weighted average maturity) and WLA (weekly liquid asset) data for Prime Institutional MMFs
Cunningham explains, "The long-term impact of the money fund reforms that take effect on Oct. 14 has dominated the dialogue to this point, and for good reason. As is well known by now, investors and institutions have been forced to decide if they want to stay in the two categories of money funds -- institutional prime and tax-free (municipal) funds -- that will have to float the net asset value (NAV) of their shares, or move into government money market portfolios. The latter will retain the ability to use amortized cost for daily pricing and as such, retain their stable NAV of $1.00. It is not just a case of some investors preferring a stable NAV, many must go that route because of their policies regarding risk."
She continues, "But managers of floating NAV portfolios have plenty to figure out themselves due to the new rules. First and foremost, cash managers and their firms have been working hard to strategize about the future cash flows and to offer their clients new options and products, as we have. Most managers are in a holding pattern as prime and muni clients decide if they will or will not shift money to government portfolios."
Federated adds, "There is really only one recourse for prudent cash managers to prepare for that scenario: build up enough liquidity capable of handling all redemptions. Liquidity, liquidity and, yes, liquidity. Security selection and yield are always prominent, but the responsible approach is to be able to service clients in whatever decision they make."
The update says, "Actually, most money market firms have a good idea what their clients will do, if they haven't already done it. But we respect their right to change their minds. So it is a waiting game to see what will actually happen to flows in October. Until clients actually make or don't make the switch, redemptions need to be more of a focus than decision-making based on expectations of the Fed's next rate hike or even on value. With the prime money market yield curve, i.e., the London interbank offered rate (Libor), currently so high above that of the Treasury yield curve, many clients are going to wait until the last minute to switch to grab as much yield as possible."
It goes on, "So, although our prime portfolios' weighted average maturity (WAM) targets remain at 35-45 days, they are presently in the low-teens and we are buying short-dated instruments. That just shows how much we must prepare for any scenario. The second week in October is going to be one in which TGIF will not apply and lunch breaks will be severely curtailed."
Finally, Cunningham comments, "Having said that, the Fed is still on our minds. The minutes of the most recent Federal Open Market Committee (FOMC) meeting in July, as well as Fed Chair Janet Yellen's speech at the Jackson Hole, Wyo., meeting of central bankers, suggest policymaker confidence in the U.S. economy. She even went so far as to say: "the case for an increase in the federal funds rate has strengthened in recent months" and that the U.S. economy is "now nearing the Federal Reserve's statutory goals of maximum employment and price stability." The data has to stay on its present upward trajectory, but our outlook, therefore, is still that there will be a move in 2016, possibly this month, but more logically in December after the election. It's gearing up to be a momentous autumn."
Weighted average maturities, or WAMs, continued setting record lows in August according to Crane Data's Money Fund Intelligence Daily. Prime Institutional MMFs saw their steepest WAM declines ever, dropping from 18 days to 12 days. Last month, Prime Inst WAMs declined from 22 to 18 days. Since May 31, Prime Inst WAMs have declined by more than half, from 26 days to 12 days. WAMs for our all taxable Crane Money Fund Average remained at 31 days in August, after declining from 36 days in March 2016. The Crane 100 Money Fund Index dipped to 29 days as of August 31, down from 31 days July 31 and 37 days on 3/31.
Prime Retail MMF WAMs dropped to 22 days as of 8/31 from 24 days on 7/31 (and down from 29 days on 5/31). Govt Inst MMF WAMs lengthened again in August, rising to 38 days from 37 (and up from 36 days on 5/31). Treasury Inst MMF WAMs jumped from 39 to 43 days in August, and Treasury Retail MMF WAMs rose from 40 to 42 days. Government Retail MMF WAMs dipped from 37 to 36 days. The Crane Tax Exempt MMF WAM Index declined from 19 to 17 days.
The shortest WAMs, often an indication of either pending liquidation or a sign of funds expecting very large outflows, include: Morgan Stanley Act As Prime Tr, Morgan Stanley Active As CA T-F, Morgan Stanley Liquid Asset (1 day WAMs), Morgan Stanley Act As Govt Sec, Morgan Stanley Act As Money Tr, Morgan Stanley T-F Daily Inc Tr (2 day WAMs), BlackRock Lq TempCash (60 day max maturity fund), Federated Master Trust (soon to be renamed Federated Inst Prime 60 Day), Federated Tax-Free MMF IV, Federated Tax-Free MMF SS, Goldman Sachs FS MM, Goldman Sachs FS Prm Ob, JPMorgan Liquid Assets, Morgan Stanley Active As Tax-Free, PIMCO Government MMF, PIMCO Money Market Fund (3 day WAMs), Dreyfus Cash Mgmt, Dreyfus Municipal Cash Mg Pls, Morgan Stanley CA Tax-Free DIT, Morgan Stanley Inst Liq MMP, Morgan Stanley Inst Liq T-E, Morgan Stanley NY Municipal MM Trust, Wells Fargo Cash Inv and Wells Fargo MMF (4 day WAMs).
Weekly Liquid Assets (WLA), which include securities maturing in 7 days plus Treasury and Government discount securities, rose to 79.9% for All Taxable MMFs (from 75.8% a month ago) and to 76.0% for Prime Inst MMFs (from 59.2% in July). Prime Retail MMFs saw WLAs rise to 63.1% from 55.7%. Treasury Retail MMFs has a WLA of 99.0%, while Govt Retail MMFs had a WLA of 66.7%. Treasury Inst MMFs' WLA was 99.0% as of 8/31 while Govt Inst MMFs' WLA was 68.1%.
In the week through Sept. 1 (Thurs.), money fund assets were flat (down 182 million), but Prime asset outflows accelerated at month-end. Prime MMFs fell 61.6 billion in the week ended 9/1, while Tax Exempt MMFs fell 4.6B and Govt MMFs rose 49.1B. Last Thursday, Prime MMFs (including both Prime Retail and Prime Inst) dropped 16.8B, but Govt MMFs (including Treas Retail, Govt Retail, Treas Inst and Govt Inst) rose by 18.3B.
PIMCO published, "Libor Rising and Money Market Reform: Five Key Questions," which explores elevated LIBOR rates and money market reforms. It says, "Anticipation of U.S. money market reform in October has pressured short-term funding rates higher. What are the implications for banks and investors?" In addition, Treasury Today features an article with Kyriba's Bob Stark on the possibility of an absolute exodus from prime to government funds. We discuss these below, and we also review the latest fund changes and liquidations.
The "Libor Rising" paper summarizes, "U.S. money market reform will take effect on 14 October 2016, and short-term interest rates such as Libor (the London Interbank Offered Rate) have been rising significantly in anticipation. Jerome Schneider, PIMCO's head of short-term portfolio management and Morningstar Fixed-Income Fund Manager of the Year (U.S.) for 2015, addresses five critical questions we're hearing from investors about what to expect next and the implications for portfolios."
PIMCO's piece asks, "Should investors and issuers be prepared for even higher Libor levels in the weeks and months to come, or have we already seen the most significant moves?" Schneider answers, "Anticipation of U.S. money market reform has pressured short-term funding rates higher as U.S. investors move toward money market funds that invest only in government securities and away from prime (credit) money market funds. As a result ... issuers of commercial paper and certificates of deposit, mainly non-U.S.-domiciled banks, have to pay more for funding as yields move higher and funding risk premiums widen. As a result, many funding benchmark rates, including U.S.-dollar-denominated Libor resets, have seen dramatic increases of more than 50 basis points (bps) over the past year – and less than half of that increase can be attributed to the 25 bp hiking action by the Federal Reserve last December."
It continues, "While prime money market funds have raised a lot of liquidity in preparation for the reforms, the "known unknown" factors remain steadfast: How much additional outflow can we expect, and over what timeframe – will 14 October be the turning point, or will outflows continue into 2017? To hedge these known unknowns, we think many prime fund managers will continue to buy shorter and shorter maturities and invest more and more in government-related paper to fund potential outflows. This should keep upward pressure on Libor during the weeks ahead."
PIMCO also asks, "Could the Libor rate be driven down, or at least stabilized, by increasing demand from investors outside the money market sphere?" Schneider responds, "It's important to remember that this is not simply a market reaction to a piece of data, but a structural reform that will change the way most investors allocate their cash liquidity over time. So while this year's spike in Libor reflects the initial market reaction to money market reform, it will take months if not several quarters for rates to recalibrate to lower levels again relative to perceived "risk-free" rates such as OIS or the fed funds rate."
The piece continues, "For investors focused on liquidity and short-term assets, does the increase in Libor signal a potential opportunity?" Schneider says, "It absolutely presents a unique opportunity for those investors willing to assess and adapt to this structural evolution.... Investors should also acknowledge how these structural changes are likely to affect their investment outcomes and risk profiles. Active and innovative management of liquidity ... will likely be critical to preserving not only liquidity, but also purchasing power for their capital over time."
In other news, U.K.-publication Treasury Today published the story, "Will treasurers abandon MMFs after SEC reforms?" It explains, "New rules for US MMFs mean there will be some tough decisions ahead for corporate cash investors. But Kyriba's Bob Stark is convinced that the value proposition of prime MMFs will endure the coming regulatory reform."
The article says, "In the US, a very large area of the financial markets - and one that is crucial to the work of corporate treasurers – is about to undergo substantial changes. Under the reforms to Rule 2a-7 ... prime institutional MMFs must abandon the practice of fixing share prices to $1 and move to a variable net asset value (VNAV) model, and will be subject to liquidity gates and redemption fees <b:>`_.... Government funds, meanwhile, will be able to continue using a stable net asset value (CNAV)."
It continues, "With the new rules due to take effect in October, there has been much speculation that corporate treasurers – many of whom prefer CNAV MMFs – will choose to abandon prime MMFs in favour of government CNAV MMFs in the coming months. That is not a baseless claim ... all the latest survey data, together with what we are already seeing in the market, suggests many treasurers are planning – and indeed doing – exactly that."
Treasury Today adds, "But Bob Stark, Vice President of Strategy at treasury software providers Kyriba is not convinced that this shift away from prime to government funds will be especially long-lived. Stark points out that the two most commonly cited priorities for institutional investors in MMFs – security and liquidity – should not be materially affected by the new rules. Although prime MMFs will henceforth be subject to redemption fees and liquidity gates he thinks it is doubtful that we will ever see these implemented."
Finally, with August month-end, we witnessed and processed another batch of fund changes. (See our pending MFI XLS for the full list.) Liquidated funds include: CNR CA Tax-Exempt MMkt Fund, CNR Prime MMkt Fund, Putnam MM Liquidity, SEI Daily Inc Trust Treas, SEI Daily Inc Trust Treasury II, Wells Fargo MMF B, Western Asset Inst Cash Res SVB, Western Asset Inst Liquid Res SVB, Western Asset Inst Liquid Res SVB Liq, Wilmington Prime MMF, and Wilmington Tax-Free MMF. UBS Select Tax-Free MM also changed its name to UBS Tax-Free Reserve.
The Investment Company Institute released its latest "Trends in Mutual Fund Investing" and "Month-End Portfolio Holdings of Taxable Money Funds," which confirmed our earlier reports of an increase in money fund assets in July and a jump in Treasury and Government Agency holdings. (See our Aug. 10 News, "MF Portfolio Holdings: TDs, Treasuries, Agencies Jump; CDs, CP Plummet.") We examine these latest asset and composition updates below. We also review a new article on navigating the money market's new rules in the latest issue of Money Magazine, and we quote former FDIC head Sheila Bair's comments yesterday on money market reform in a CNBC appearance.
ICI's "July 2016 "Trends" report" shows a $13.9 billion increase in money market fund assets in July to $2.706 trillion. The increase followed declines of $7.5 billion in June, $11.8 billion in May, $41.8 billion in April, and $15.1 billion in March. However, in the 12 months through July 30, money fund assets have gone up by $41.4 billion, or 0.2%. (Month-to-date in August through 8/30, our Money Fund Intelligence Daily shows total assets up by $24.9 billion with Prime MMFs down $116.4 billion, Tax Exempt MMFs down $28.2 billion, and Govt MMFs up $169.5 billion.)
The monthly report states, "The combined assets of the nation's mutual funds increased by $402.49 billion, or 2.5 percent, to $16.30 trillion in July, according to the Investment Company Institute's official survey of the mutual fund industry. In the survey, mutual fund companies report actual assets, sales, and redemptions to ICI.... Bond funds had an inflow of $24.45 billion in July, compared with an inflow of $8.66 billion in June.... Money market funds had an inflow of $14.41 billion in July, compared with an outflow of $18.37 billion in June. In July funds offered primarily to institutions had an inflow of $12.33 billion and funds offered primarily to individuals had an inflow of $2.08 billion."
The latest "Trends" shows that while Taxable MMFs increased in July, Tax-Exempt MMFs continued to bleed assets. Tax-Exempt MMFs declined by $10.1 billion, compared to taxable, which increased by $24.0 billion <b:>`_. Year-to-date through July 31, MMFs have had $47.1 billion in outflows, with $22.1 billion in inflows to Taxable funds and $69.2 billion in outflows from Tax-Exempt funds. Money funds now represent 16.6% (down from 17.0%) of all mutual fund assets, while bond funds represent 22.6%. The total number of money market funds dropped to 432 in July, down from 444 in June and down from 508 a year ago.
ICI's Portfolio Holdings confirms a jump in Treasuries and Agencies in July, and a steep decline in CDs and CP. Repo remained the largest portfolio segment, but declined by $7.9 billion, or 1.2%, to $633.6 billion or 25.1% of holdings. U.S. Government Agency Securities gained ground in second place, gaining $22.1 billion, or 3.9%, to $587.9 billion or 23.3% of holdings. Treasury Bills & Securities stayed in third place among composition segments, rising $18.8 billion, or 3.6%, to $537.1 billion, or 21.3% of holdings. These moves continue to be driven by the ongoing shifts of Prime fund assets into Government funds.
Certificates of Deposit (CDs) stood in fourth place, and increased $5.1 billion, or 1.2%, to $429.2 billion (17.0% of assets). Commercial Paper remained fifth; they decreased $30.8B, or 11.3%, to $241.4 billion (9.6% of assets). Notes (including Corporate and Bank) were flat, increasing by $47 million, or 0.3%, to $17.8 billion (0.7% of assets), and Other holdings (including Cash Reserves) jumped to $59.1 billion, up from $47.1 billion.
The Number of Accounts Outstanding in ICI's series for taxable money funds increased by 358.6 thousand to 23.767 million, while the Number of Funds fell by 2 to 320. Over the past 12 months, the number of accounts rose by 486.6 thousand and the number of funds declined by 32. The Average Maturity of Portfolios was 34 days in July, down 2 days from June. Over the past 12 months, WAMs of Taxable money funds have declined by 4 days. Note: Crane Data also revised its August MFI XLS this week to reflect the latest 7/31/16 Portfolio Composition data and Maturity breakouts. (Visit our Content Center and the latest Money Fund Portfolio Holdings download page to access our June Money Fund Portfolio Holdings and the latest files.)
In other news, Money recently published an article by John Waggoner entitled "How to Navigate a Safe-ish Harbor." Subtitled, "Money Funds Pay Little but Still Offer Ballast and Convenience – If You Understand the New Rules," the piece gives investors an overview of money funds and the new rules that will be effective October 14th.
Waggoner writes, "Here's the most astonishing fact on Wall Street: $2.7 trillion is cooling its heels in money-market mutual funds, earning less than an ant's allowance. The average yield on retail money funds -- which invest in short-term government securities, commercial paper, and bank CDs -- is a paltry 0.04%." He proceeds to say, "All that cash is a testament to the durability of money funds as the investor's parking place of choice."
According to Waggoner, a large draw towards money funds is their convenience. He says, "You can move cash from a money fund into your stock fund or bank account swiftly and easily." He quotes Crane Data President and Publisher Peter Crane, "They are like the Federal Express of mutual funds: They're for when you absolutely, positively have to have your money overnight."
The article proceeds to discuss the new reforms in store for October. "Through an accounting convention, money funds can keep share prices steady at $1, giving them the illusion of being as risk-free as a bank deposit, though they aren't FDIC insured," writes Waggoner. "If assets fall below $1 a share, the fund sponsor will backstop the fund. But that's not always possible, as in 2008 when the Reserve Fund let its shares fall below $1 in the financial panic."
Money explains that following the reforms, most institutional funds will have to endure floating share prices while individual funds will have the ability to keep their shares at $1. Waggoner then discusses tax-free money funds and prime funds. He tells us, "Going forward, prime and tax-free money funds will have to ensure they have enough cash on hand to handle large redemptions. So both types can institute a 2% redemption fee if their liquid assets fall below certain levels." According to Waggoner, "to avoid restrictions and fees, use a government fund instead of a prime or tax-free fund."
Also, in an interview yesterday with CNBC's Rick Santelli, Sheila Bair, former FDIC Chair, commented briefly on upcoming money market reforms. "We obviously are now in stronger hands," states Santelli, "but are there any issues that make you worry about the reforms? We've already seen a rather large exodus from some of the money market funds."
Bair replied, "I am worried about it.... Their shares should be marked based on what the underlying assets are worth. They didn't do that." Bair proceeds to discuss the complications, "If it's a prime institutional fund, it floats. If it's a government or retail, it doesn't float." She continues, "I think one of the worst things they did is put on gates and fees. The ability of funds to impose gates and fees, which basically says, 'Well, we're going to stop money market fund runs by denying people access to their money or making it more expensive for them to get their money.'" Bair ends the speech by expressing her concern, "`[I]t's not working as well as it might have if we had just simple good or floating NAV and be done with it."