ICI released its latest monthly "Trends in Mutual Fund Investing" and "Month-End Portfolio Holdings of Taxable Money Funds" updates yesterday. The first report showed that `both taxable and tax-exempt money fund assets inched up in December, and MMFs assets were down slightly in 2016. ICI's second report confirmed that Treasury holdings plunged while Repo jumped last month. (See our Jan. 12 News, "Government Takeover: Treasuries, Agencies Dominating MMF Holdings.") We review these, as well as a new ICI "Viewpoints", below.
ICI's latest "Trends in Mutual Fund Investing - December 2016" shows a $6.5 billion increase in money market fund assets in December to $2.721 trillion. The increase follows an increase of $55.3 billion in November and a decrease of $12.1 billion in Oct. and $51.1 billion in Sept. In the 12 months through Dec. 31, money fund assets were down slightly, -$26 billion, or 0.9%. (Month-to-date in January through 1/29/17, our Money Fund Intelligence Daily shows total assets down by $34.4 billion. `Govt MMFs are down $43.4 billion, but Prime MMFs are up $9.1 billion and Tax Exempt MMFs are up $1.1 billion.)
The monthly report states, "The combined assets of the nation's mutual funds increased by $100.55 billion, or 0.6 percent, to $16.34 trillion in December, 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 outflow of $10.19 billion in December, compared with an outflow of $16.53 billion in November.... Money market funds had an inflow of $6.14 billion in December, compared with an inflow of $56.02 billion in November. In December funds offered primarily to institutions had an outflow of $6.44 billion and funds offered primarily to individuals had an inflow of $12.58 billion."
The latest "Trends" shows that both Taxable MMFs and Tax-Exempt MMFs increased slightly in December. Taxable MMFs increased by $6.3 billion, after rising $53.4 billion in Nov. after dropping $11.7 billion the prior month. Tax-Exempt MMFs added $0.3 billion, after rising $1.9 billion in Nov. and falling $0.4 billion in October and $15.3 billion in September. In 2016, MMFs showed $29.6 billion in outflows, with $86.5 billion flowing into of Taxable funds and a huge $116.1 billion flowing out of Tax-Exempt funds. Money funds now represent 16.7% (same as last month) of all mutual fund assets, while bond funds represent 22.3%. The total number of money market funds was down 2 to 421 in December, and down from 481 a year ago. (Tax exempt money funds have declined from 145 to 102 over the last year.)
ICI's Portfolio Holdings confirms a huge drop in Treasuries and a jump in Repo in December. Repo rose to reclaim the largest portfolio segment, up by $28.1 billion, or 3.6%, to $800.1 billion or 30.8% of holdings. Repo increased by $100.9 billion in 2016, or 14.4%. Treasury Bills & Securities fell to second place among composition segments, declining $50.5 billion, or -6.0%, to $796.7 billion, or 30.7% of holdings. Treasury holdings rose by $313.8 billion, or 65.0%, in 2016. U.S. Government Agency Securities remained in third place, falling $6.4 billion, or -0.9%, to $678.5 billion or 26.1% of holdings. Govt Agency holdings rose by $211.1 billion, or 45.2%, in 2016.
Certificates of Deposit (CDs) stood in fourth place; they decreased $5.7 billion, or -3.7%, to $148.3 billion (5.7% of assets). CDs held by money funds fell by $305.4 billion, or 67.3%, in 2016. Commercial Paper remained in fifth place but decreased $5.3B, or -4.9%, to $104.1 billion (4.0% of assets). CP plummeted by $194.7 billion, or 65.2%, in 2016. Notes (including Corporate and Bank) were down by $3.9 billion, or -39.0%, to $6.2 billion (0.2% of assets), and Other holdings inched up to $36.4 billion.
The Number of Accounts Outstanding in ICI's series for taxable money funds decreased by 58.2 thousand to 25.328 million, while the Number of Funds was down 2 to 319. Over the past 12 months, the number of accounts rose by 1.934 million and the number of funds declined by 17. The Average Maturity of Portfolios was 44 days in Dec., up 1 day from Nov. Over the past 12 months, WAMs of Taxable money funds have lengthened by 9 days.
In related news, ICI's Sean Collins penned a new "ViewPoint," entitled, "What's the "Exposure" of Money Market Funds to Europe <i:https://www.ici.org/viewpoints/>`_?" He writes, "At the American Economic Association (AEA) meetings in Chicago early this month, speakers and attendees at several sessions asked: do money market funds pose systemic risks? Recent developments -- both in regulation and in the markets—make it even more difficult to argue that they do. On the regulatory front, the Securities and Exchange Commission (SEC) in 2014 revised Rule 2a-7, which money market funds must follow, and required funds to fully implement the changes by October 2016."
He explains, "As we discussed in a recent series of ICI Viewpoints, the rule changes induced investors to move an estimated $1 trillion out of prime money market funds (those that invest significantly in commercial paper and bank CDs) into government money market funds (which invest almost entirely in Treasury and agency securities, as well as repurchase agreements backed by those securities) from January 1, 2015 to December 31, 2016."
ICI's Collins continues, "As a result, the composition of the assets in taxable money market funds (i.e., the combined assets of government and prime funds) is quite different today than it was even a few months ago. The vast majority (87 percent) of the assets of taxable money market funds now consist of government securities or repurchase agreements backed by government securities.... Compare that to two years ago, when the share was considerably smaller (56 percent). Why does this matter? Treasury and agency securities are the most creditworthy and liquid securities in the market -- precisely the kinds of securities that investors demand during periods of financial stress."
He adds, "Other market developments also have eased concerns about systemic risk in money market funds. One concern -- expressed, for example, during the eurozone crisis of 2011 -- was that money market funds were exposed to large European banks that were under stress. Such concerns have resurfaced, with a recent government report suggesting that money market funds could still be vulnerable to shocks to European banks. But any "exposure" that money market funds now have to European entities is quite different from that of 2011."
Federated Investors reported its Fourth Quarter Earnings late last Thursday and hosted its Q4 2016 Earnings Conference Call on Friday. (See the Seeking Alpha transcript here.) Federated's release says, "Federated's money market assets were $252.2 billion at Dec. 31, 2016, down $4.2 billion or 2 percent from $256.4 billion at Dec. 31, 2015 and up $3.8 billion or 2 percent from $248.4 billion at Sept. 30, 2016. Money market mutual fund assets were $206.4 billion at Dec. 31, 2016, down $15.2 billion or 7 percent from $221.6 billion at Dec. 31, 2015 and down $3.0 billion or 1 percent from $209.4 billion at Sept. 30, 2016."
Comparing Q4 2016 vs. Q4 2015, the release says, "Revenue increased by $46.3 million or 19 percent primarily due to a decrease in voluntary fee waivers related to certain money market funds in order for those funds to maintain positive or zero net yields (voluntary yield-related fee waivers) and, to a lesser extent, an increase in revenue from higher average equity assets. The increase in revenue was partially offset by a decrease in revenue from lower average money market assets.... During Q4 2016, Federated derived ... 44 percent from money market assets. Operating expenses increased by $38.3 million or 23 percent primarily due to an increase in distribution expenses as a result of a decrease in voluntary yield-related fee waivers, partially offset by lower average money market assets."
President & CEO Christopher Donahue commented on the earnings call, "Now looking at money markets, total assets in funds and separate accounts increased by $4 billion from Q3 and were down $4 billion from the end of 2015. Money market mutual fund assets decreased by $3 billion from Q3 and $15 billion from Q4 of 2015, while separate accounts added $7 billion from the prior quarter and $11 billion for the full year. The post-October 14th reform driven shift from Prime and Muni money funds into Government money funds didn't change much through the year. We expect that as spreads widen investors who exited Prime Funds will we consider their options over time, including our newly launched Private Prime and Collective Prime Funds. We also expect a rising rate environment will be positive for money funds generally and in particular as compared to banks deposit alternatives."
On recent assets, he continued, "As of January 25, managed assets were approximately $363 billion, including $249 billion in money markets.... The money market mutual fund assets were $199 billion and the January average money market fund assets are running about $200 billion. Looking at distribution, Q4 was another solid sales quarter for our SMA business with over $2 billion in gross sales and $600 million in net sales. Total SMA assets ended the quarter at $23.6 billion, an increase of nearly 7 or 40% for the year 2016. SMA assets nearly doubled over the past three years.... We also continue to seek alliances, acquisitions and other activities to advance our business in Europe and Asia PAC region as well as in the U.S. and the rest of the Americas."
CFO Thomas Donahue said, "Revenue was up 19% compared to Q4 of last year due to lower money fund yield waivers. Revenue decreased 2% from the prior quarter due to lower money market asset and related revenue. Q4 revenues include the impact of approximately $3 million related to a non-recurring fee credit from a fund service provider, which resulted in reduced regular fund fee waivers. Revenue increased 23% for 2016 compared to 2015 driven by improvements in money fund waivers and equity related revenue."
He continued, "The increase from 2015 was due mainly to higher money market fund distribution expense as a result of the lower waivers. The sequential decrease was due mainly to lower costs and related expenses reflecting changes to incentive compensation accruals. Distribution expense includes a $2 million expense to correct certain under payments of past distribution costs. The previously discussed change in one of our customer relationship is expected to be completed today. For Q1, the reduction to our pre-tax income is expected to about $1 million compared to Q4's run rate and $2 million on a full quarter basis for future quarters."
Donahue added, "The pre-tax impact of money fund yield waivers of $3.4 million was down from the prior quarter's number of $4.2 million and Q4 of last year's number of $16.4 million. The decreases were due mainly to higher fund gross yields. Based on our current assets and yields, and with the expected customer change, we expect the impact of these waivers on our pre-tax income in Q1 to be about $1 million, dropping down to about $350,000 in Q2 and if there are further Fed rate increases, these numbers should go immaterial level."
When asked about separate accounts, flows and their new private fund, Tom Donahue responded, "The vast majority of the separate account money market inflows would have been from our existing separate accounts to state pool business.... We talk about seasonality in that business runs along the tax collection and the state spending cycle. So typically Q4 and Q1 into the first part of Q2, we see inflows and outflows over the subsequent two quarter as money is being utilized by the state."
He also commented, "We did have positive flows in the private prime fund; they would have been fairly nominal at this point, but there is a considerable amount of the interest. There is a long runway ... to having our clients adopt the agreements necessary to use that kind of fund. It is structurally much different than a mutual fund. But we did add customer relationships in the fourth quarter to the private fund and we have a good pipeline of interest and agreements in process now."
Chris Donahue told the call, "What the clients were doing, as we have mentioned before and I think that's been true across the industry, is ... really looking and seeing what the lay of the land was going to be. [They wondered] how things were going to work, [and were] play[ing] it safe in governments. [They wanted to] check out and see how the new products work, how much spread is there going to be and bide their time as they come into 2017. And I think that's what is going to happen. It isn't going be any kind of sudden movement, it will be something that occurs over time."
When asked about rates, Donahue answered, "I think that basically when you have rates going up, when you look at the onslaught that money funds have suffered over these many, many years, there is a great desire to have the final end product, i.e. daily liquidity of par. And so as rates go up, I think you will see increasing amounts of money coming into the business.... Then as you point out, because they have put a few dents in the prime product, maybe more than dents, those receptacles aren't there. So the spreads are going to be a key factor. Once they get to 50 basis points or so, I think you will see more movement occurring. They're around 40 or so right now and I think people will be digesting that and seeing what to do."
He added, "I also think there are some, at least we are working on it, [that are] trying to change these products and get them back to the way they were in 2010. And there are lot of different angles on that as well.... Finally, I would add that it also depends on when these rates come through. Our house view is that we think two more are likely and more than likely get coming in March and September rather than June and December and then that would leave open yet another possibility in December."
This month, Bond Fund Intelligence interviews Tony Wong, Invesco's Head of Global Credit Research & Liquidity. Invesco manages over $201.7 billion in bond fund assets and another $78.3 billion in money markets. We ask Wong about the manager's latest challenges and strategies, and he explains why recent concerns over the bond market are overstated. Our Q&A follows. (Note: This "profile" is reprinted from the January issue of BFI. Contact us if you'd like to see the full issue. Also, note that Wong will be a featured speaker at our upcoming Bond Fund Symposium, March 23-24, in Boston.)
BFI: Tell us about your history. Wong: We've been in the U.S. bond mutual fund business since the 1970's and liquidity since the 1980's. As a global fixed income house, we have a broad range of asset class solutions and capabilities for both institutional and retail markets.... Personally I've been with the firm for 20 years now. I started as a research analyst ... and eventually moved into my current role of overseeing our global credit research platform. [I also have] business oversight of our global liquidity franchise.
Invesco Fixed Income underwent a transformation in 2011. [We've] added significantly to our talent and capabilities, most notably by strengthening our macro team. As you know, we have a strong legacy in bottom up capabilities and we have continued to strengthen our research platform and investment processes. Additionally, we've taken the effort to drive more collaboration and what I call 'IQ compounding' by co-locating many of our team members in Atlanta. Previously, the liquidity and high yield teams were in Houston, core fixed income -- investment grade and macro teams -- was based in Louisville, and emerging markets was in New York. (Our offshore businesses are still concentrated in London and Hong Kong.)
BFI: Tell us about Conservative Income. Wong: I am very excited about this solution in the post MMF reform world. We're coming up on our 3-year anniversary.... Knowing the landscape and liquidity markets were going to change with money market reform, this fund provides an alternative. It's not a constant NAV product, obviously. We priced the product at $10.00 NAV at inception. I don't like using the term "cash plus" or "enhanced cash," given the stigma that's associated with those terms. But we intentionally designed something that's ultra-conservative, ultra-short duration. It's just a little bit further out the curve than a money market fund but positioned inside of a typical short term bond fund. Our intention with this product is to invest roughly about half of it in typical 2a-7-type securities, and with the remaining half invest it in very high quality short duration corporates and ABS securities, as well as plain vanilla student loans, credit cards and auto loans.
BFI: What's your biggest challenge? Wong: A big challenge for products like Invesco Conservative Income Fund is market and client education. Most of the products in that space are still relatively new.... It takes folks some time to learn about ... the value attributes, as well as the risks. Institutional investors, especially, need to get comfortable with [these characteristics] if they are to be used as surrogates for cash. It has to make its way through investment policy committees, etc., before those strategies can ramp up to a meaningful degree. I think the retail market for these products may be very interesting. If you have a rising rate environment, based on our views of the marketplace right now, shorter duration products may make a whole lot of sense to investors. So we feel very optimistic about that particular solution. You get a little more yield and current income than money funds but without taking as much of the attendant risk [as] longer duration products.
BFI: What is driving bond fund flows? Wong: There are major drivers of flows in the fixed income market, post-crisis. You have had a low, zero-rate interest rate policy environment, in some cases a negative rate environment (like in Europe and Japan).... You also have a demographic issue in terms of the aging of society, [and] as people age, the need for income normally increases. [Given the] experience of some investors during the crisis, many have also looked for the sanctuary of something that has more downside protection [than equities].
In this current environment, what's challenging is [that] politics, starting with Brexit and leading into the U.S. elections in November and upcoming European elections, is likely going to matter a lot in 2017. When I say politics, I'm talking about the implications of policies, whether it's trade, taxes, economic formation; all those things will have implications on growth and inflation outlook. [This] is a very major contrast to the markets that we saw post financial crisis, which [were] driven by expectations on central bank policies. There's a lot of uncertainty around the timing, around the size, around the composition of what these future policies may look like.... What will winners and losers look like, especially when I think about the credit space? Some of the things that are being talked about have material implications for industries and companies. Those are some of the challenges any bond manager faces right now: to understand the policies and the implications they will have on monetary and fiscal policy more broadly ... and then to specific industries and individual credits.
BFI: What kinds of investment strategies can and can't you use? Wong: Our funds, in terms of what they can buy and what they can't invest in ... are dictated by the prospectuses and the investment objectives for the funds.... We have a process and a platform that incorporates both our top-down and bottom-up capabilities.... On our public sector credit research team, we're following more than 3,500 issuers globally on a real time basis around the world, across different industries and geographies.
On the macro, the top-down side, [we have] similar breadth in terms of our ability to cover countries and form views on both growth and inflation, on currency, on rates across your major G-20 countries [and] extending more broadly across the emerging markets landscape. So combined, we bring a powerful [package] of resources applied to deliver ideas from our global platform to our clients. In the bond space, investors are looking at the depth and scale of your offerings. A lot of our distribution partners are looking to [align] more closely with a smaller set of providers, not a larger set. For Invesco and our competitors, [the question is] are we able to deliver full scale solutions across the range of strategies and do it in a very competitive manner? That's one of the challenges I think for the marketplace as a whole. We feel we're very well positioned given some of those attributes I talked about.
BFI: Do you run SMAs and/or ETFs? Wong: We run the full gamut in the fixed income space, everything from closed end bond funds to unit investment trusts, ETFs and separately managed accounts. We are really [agnostic] about the product wrapper -- we believe in delivering world class institutional quality active management. Certain investors want certain things and we have the infrastructure and the platform to provide that.... In terms of our ETF strategy, while we certainly have our share of passive strategies, our focus has been more in the "smart beta" space, where we can leverage our unique expertise ... to provide more value-added solutions, but through the ETF wrapper.
BFI: What are fee pressures like? Wong: I think investors everywhere are assessing, and rightfully so, the value they’re getting from their various investment choices.... I think the general trend, in terms of fees, is down, and I would expect that to persist. Some people attribute this to the growth of passive [strategies]. So active managers, ourselves included, are going to have to prove our value, prove our worth.... I would highlight our High Income Muni Fund or our Core Plus Fund, as examples where -- if you can consistently generate performance, whether during both up-markets and down-markets, manage your volatility, and have that performance be sustainable ... you're going to be a winner.
BFI: What about your outlook for 2017? Wong: As a large institutional manager, we’re always mindful of the attendant risk in the marketplace. With the policy and political uncertainly going into this early part of 2017, the playbook has changed.... But we feel like we're very well positioned as a firm to localize, understand, and manage those risks, [in order to] best position our portfolios to capture opportunities in this environment. This should be a bond picker's market, and well-resourced, active managers like Invesco should be well positioned to generate alpha.
Second, this narrative in pockets of the market about the demise of bond funds and a structural reallocation away from fixed income investments ... my feeling is that it's widely overstated. If you look at the world today in terms of demographics, motivations of institutional investors [and the] needs of retail investors for income and capital preservation ... the data I see does not suggest an imminent and structural re-risking towards equities. [T]hose are all very supportive factors for fixed income solutions."
Recently, Richard Berner, head of the Treasury's Office of Financial Research (OFR), spoke on "Lessons from the Financial Crisis - Eight Years Later, and mentioned repo and money funds a couple of times. He commented, "The financial crisis of 2007-09 now seems distant, and the chance of a future financial disruption seems remote. So it's not surprising that some question why we need continued vigilance over financial stability." We review his comments below, and we also excerpt from recent briefs from Fidelity Investments and Wells Fargo Securities.
OFR's Berner tells us, "If nothing else, we learned in the crisis that vigilance is vital. The years of calm before the crisis bred complacency about risk. Hidden weak spots in the financial system surfaced in the crisis, with significant adverse consequences for the economy. Major gaps in our ability to measure financial activity also surfaced and limited our ability to recognize weak spots, even when they were in front of us. The Office of Financial Research (OFR) was established to provide data and analysis that policymakers and industry need to assess and monitor coming storms. The OFR has played key roles in filling those gaps."
He explains, "Collecting data describing bilateral repurchase (repo) agreements is an important example of the OFR's essential work to improve data scope. Repo markets, a linchpin for financial system functioning, provide more than $3 trillion in daily funding for securities transactions. But those funding sources misfired in the financial crisis. Investors under stress ran from them, and funding and liquidity dried up."
Berner continues, "Bilateral repo transactions, settled between the transacting parties, account for half the U.S. repo market. But data about bilateral repo are limited. The OFR, in collaboration with the Federal Reserve System, is filling that gap with a permanent collection of repo data. Those data will help industry to manage risk and officials to improve market resilience."
He says, "Creating an alternative to LIBOR is another example of essential OFR work. LIBOR, formerly the London Interbank Offered Rate, is an interest-rate benchmark used to price borrowing rates on major consumer purchases, such as homes and cars, and for $150 trillion in derivatives. LIBOR's central role and broad use as a reference rate mean it must be reliable. Attempts at manipulation and the decreasing relevance of the markets used to establish the rate sparked calls for alternatives. The Federal Reserve Bank of New York and the OFR are working to devise a more reliable, widely accepted alternative. Even if financial activity moves out of the range of the Federal Reserve's collection authority, the OFR would still be able to collect the needed data."
Finally, Berner adds, "While some OFR monitors use data unavailable elsewhere, the U.S. Money Market Fund Monitor makes existing Securities and Exchange Commission data accessible to industry and policymakers in new ways to reveal risk. This monitor puts at users' fingertips more than 4 million records of monthly data on the holdings of about 500 funds spanning the last five years -- previously available only as separate individual filings and industry-level monthly reports. The monitor is gaining wide acceptance in the industry, and other agencies are calling on the OFR for access to the money fund monitor and other monitors, and for help in developing similar ones."
In other news, an update from Fidelity Investments entitled, "Money Market Investors Ponder Rate Outlook and Looming Debt Ceiling states, "With supply constrained nearing year-end, the Fed RRP facility was the next viable source of supply for MMFs.... At the end of 2016's third quarter, many MMFs had one-third or more of their portfolios invested in the facility. At year-end, investors had utilized $468.4 billion of the facility -- close to the 2015 year-end total of $474.6 billion. The government's borrowing limit -- the debt ceiling -- is anticipated to be reinstated in mid-March. Post-election politics could influence the process. In a scenario where Congress doesn't raise the limit, experience from recent years would indicate that the Treasury's cash balance -- regulated by law -- would have to decrease dramatically, curtailing T-bill issuance."
The piece continues, "The Treasury has already started taking steps to address this possibility. It has drawn down its cash balance while scaling back recent T-bill auctions. With little incentive for the Treasury to change this strategy in the first quarter, investors could see reduced auction sizes, which could put downward pressure on rates. Reduced auction sizes could also put downward pressure on other money market rates, such as agency securities and the repurchase (repo) markets.... If Congress doesn't act by the deadline, the Treasury can use "extraordinary measures," but that would only give it breathing space until late summer or early fall. In such a scenario, interest rates on bills set to mature around the time of a potential payment default may rise."
Fidelity also comments, "As of December 31, 2016, government MMFs stood at $2,181 billion -- 81% of total money market assets. To the extent that debt ceiling constraints result in fewer T-bills, government MMFs may be more dependent on the Fed's RRP facility for supply, which could mean lower yields on those funds. With this imbalance, yield spreads between prime and government MMFs could widen further and potentially offer additional incentives for short-term institutional investors to segment their cash, to try and take advantage of the higher prime rates."
Finally, Wells Fargo Securities' latest "Short-Term Market Strategy" says that, "2016 was the year of Money Market Fund Reform; a much talked about and debated regulatory change whose final chapter closed on October 14, 2016, resulting in a complete flip flop of the money market landscape.... Despite the exodus from Prime funds, total Money Market fund assets remained relatively stable in 2016, averaging $2.72 trillion. Total fund assets touched a low point around the October reform implementation date, but have since recovered, ending 2016 above $2.7 trillion. The influence of MMF reform will be apparent in many of the 2016 Year in Review charts as we consider it to be the most significant structural short-term market event of the year."
Wells writes, "Although Prime and Government funds make up the lion's share of MMF assets, tax-exempt funds are another important asset category that experienced dramatic outflows in 2016. Tax-exempt fund assets dropped by 50 percent, which contributed to a sharp spike in the weekly SIFMA index, attracting a number of a-typical investors to the VRDN market, which eventually caused the index to partially retrace."
They conclude, "With the amount of cash that moved to Government funds in late 2016, eligible investment supply quickly became a concern for many asset managers. This was alleviated by a sharp increase in short-dated government assets. Treasury bills outstanding rose, trough-to-peak, by almost $400 billion. Short-term agency issuance also supported the growth of government funds, particularly floating rate securities issued by the Federal Home Loan Bank."
Invesco Fixed Income posted a recent "Investment Insights," entitled, "Prime Institutional funds may offer renewed value in a post-ZIRP, post-reform world." Written by Robert Corner, senior client portfolio manager, it says, "Yields of floating net asset value (FNAV) prime institutional money market funds have increased and may now offer an attractive relative value opportunity. Following many years of zero interest rate policy (ZIRP) and recent money market fund reform implementation, we believe the yield advantage of prime institutional funds has increased enough to compensate investors for political fluctuations in FNAVs. And to reduce the risk of being subject to potential liquidity fees and redemption gates (fees and gates), we believe investors should consider segmenting their cash investments." We excerpt from the Invesco paper below, and we also look at the recent upturn in Prime fund assets.
Invesco's piece explains, "We have been asked by clients whether there is value in FNAV prime institutional funds in the new, post-reform, world of money market fund investing? In this short article, we attempt to answer this question by highlighting three key factors we believe institutional investors should evaluate when considering a prime institutional fund." These include: Yield, Net Asset Value (NAV), and Fees and gates.
It continues, "Yields of FNAV prime institutional funds have increased and we believe these funds may now offer an attractive relative value opportunity for investors who have a large concentration of their cash in bank deposits and government institutional money market funds.... Historically, prime institutional money market funds have tended to provide a higher yield than government institutional money market funds.... However, during the post-financial crisis era of zero interest rate policy (ZIRP), the yield advantage of prime institutional funds over government institutional funds compressed as many government funds waived expenses to maintain their yields above the zero bound."
Corner tells us, "In 2016 the typical yield advantage of prime institutional funds reappeared after the Federal Reserve (Fed) raised monetary policy rates in December 2015. As a result, the average yield spread of prime institutional funds versus Government institutional funds increased to an average of 16 basis points in 2016 after averaging just 3 basis points over the preceding five years.... As of Dec. 27 2016, after significant outflows from prime institutional funds due to reform and another rate hike by the Fed, the average yield advantage of prime institutional funds over government institutional funds jumped 30 basis points. These higher relative yield levels currently provide an opportunity for investors to reconsider prime institutional funds."
He says, "We believe the yield advantage of prime institutional funds could remain near its current high or rise further (i) as investment managers adjust strategies in a more normalized post-reform world, (ii) if supply and demand dynamics of government securities keep government yields relatively suppressed and (iii) if the Fed keeps interest rates comfortably above the zero bound."
Corner explains that, "Variation in FNAV could be tolerable," writing, "Transacting at a floating net asset value (FNAV) is relatively new to prime institutional fund investors, but the reality is that the underlying market value of money market funds has always fluctuated. Recent money market fund reform took valuable steps to improve the transparency of money market funds. In 2010, funds were required to track their 'shadow' price, or market value NAV. In April 2016, funds were required to disclose on their web sites at least six months of market value NAV history."
He adds, "If a recent history is any guide, the NAV fluctuations of prime institutional funds are likely to be relatively well contained under normal circumstances, in our opinion. We reviewed six months of market NAV history of 32 FNAV prime institutional funds as of Dec. 30, 2016. The median range was +/- $0.0002. Regarding the one outlier fund that moved by +/-$0.0009, that fund also paid a capital gain distribution of $0.0007. Based on this history of subdued volatility, we believe investors should take a fresh look at prime institutional funds if NAV volatility remains in a narrow range and their yield advantage continues to provide enough of a cushion to help minimize the potential impact of changes in FNAVs."
Invesco also says, "Investors concerned about the potential for fees and gates may consider segmenting, or bucketing, their cash investments by liquidity priority. Under new Securities and Exchange Commission (SEC) rules, the maximum length of time a fund can enforce gates is 10 business days. With these new rules in place, a basic 'cash segmentation' implementation strategy would be to have at least 10 days of cash, plus a cushion for uncertainty, invested in securities not subject to the SEC's new fees and gate rules."
They add, "For example, cash that is absolutely necessary on a day to day basis, or on very short notice, could be invested in bank deposits and government money market funds while excess cash balances that ate not expected to be utilized in the short run could be deployed into prime money market funds to achieve a higher return. We believe this simple cash segmentation strategy is an easy method to circumvent being caught short by the unlikely probability of a fund imposing fees or gates."
In other news, J.P. Morgan Securities says, "MMFs may be seeing early signs of cash creeping back into the prime universe," in its latest "Short Duration Strategy Weekly. It explains, "Anecdotally, we've heard of a few funds who anticipate modest inflows as investors become more comfortable. Furthermore, it looks as if the yield spread between prime and government funds is drawing some money into prime. Since the Fed hike this spread has widened about 11bp, appearing to have lured about $10bn into prime MMFs."
Crane Data's latest Money Fund Intelligence Daily product shows Prime assets up by $5.0 billion in the latest week and $10.1 billion month-to-date through Jan. 23. Prime Institutional assets have increased by $5.5B over 7 days and $11.5B MTD. Prime Inst MMFs are now yielding 0.52%, 27 bps over Treasury Inst MMFs (0.27%) and 22 bps over Govt Inst MMFs.
Last week, Fitch Ratings hosted a "European Money Market Fund Reform Teleconference," which featured Senior Director Alastair Sewell and Associate Director Evangelia Gkeka from Fitch's Fund and Asset Manager Rating Group. They discussed the "timing and implications of European money fund reform," "new fund types ... the low volatility net asset value fund," and, "inner workings of liquidity fees and redemption gates." Sewell explains, "European money fund reforms were finally agreed in December of last year. That's arguably almost 7 years after the process started, with the DeLarosierre report, which called in common definition of European money funds, or more recently, approximately 3 years after the first draft of money fund reforms in Europe were tabled."
He continues, "The reforms in Europe follow on the heels of money fund reform in the U.S., which became affective after a 2 year implementation period in October 2016. Money fund reform in the US was a big deal, over $1 trillion dollars of assets moved out of prime money market funds and into government money market funds, which caused significant funding dislocation for commercial paper issuers, and wider issues, as much as the effect on the money market industry itself. Today, we're going to talk you through the when, the what and the how of money fund reform, and above all what those questions will mean for investors, as these reforms will certainly herald changes for investors."
Fitch's Gkeka says, "The political agreement on money market reform has been reached. There is still some technical and legal work to do. But our expectation is that the reform will appear in the official website newsletter of the European Union at some point in the first half of this year. There will be an 18-month implementation period.... [I]f something is published in June of this year, the implementation period will end in December 2018. During this period, we expect to see a high level of activity from fund providers, potentially in multiple new fund launches. Some investors might face some challenges in understanding how the reforms and new products associated with it fit into their cash management practices."
She continues, "The new regulations will allow 4 different types of money market funds in Europe. Those are public debt CNAV funds, low volatility NAV funds, VNAV funds and standard money market funds. That's an increase from the current 2 forms of funds, which are short term money market funds, and standard money market funds... There are three particularly important developments. First, prime funds, meaning funds primarily investing in bank deposits and other non-government securities will no longer be able to transact at the stable unit value per share. It is a big change, because investors are accustomed to the simplicity and operational ease of using [these] funds for their cash investments."
Gkeka adds, "Government only funds will still be able to offer stable unit values per share. One interesting possibility, is whether we see the launch of government CNAV funds, investing in lower credit quality government securities, in response to the strong negative yields on core Eurozone government debt. Provided the fund manager's credit assessment of an issuer is favorable credit ... then it's possible to include it in the fund.... Whether we will see this remains to be seen, but clearly [some] may not achieve a AAA-mmf rating, typically assigned to existing MMFs. However, we think it's unlikely that there will be major flows to govie funds ... as happened in the U.S., because the normal fees and gates in the US were only associated with prime funds ... compared to the European regulations where fees and gates apply to both CNAV and MVNAV."
She also comments that, "The LNAV structure has CNAV like features.... We expect to see multiple fund launches of this type." Sewell tells us, "Now fees and gates are a headline issue in the money market reform process. You could ask the question in Europe, 'What difference does it really make?' Given that money funds in Europe already have the potential for a fee, when fees and gates being applied. To be specific about that, the vast majority of money funds reform in Europe ... already have a wide range of liquidity and management tools available to them."
See our review of Fitch's earlier piece, "Finalised EU MMF Reform Starts Implementation Clock," which was reported in our Dec. 9, 2016 "Link of the Day", "Fitch on EU Reform, Gates." It says, "Fitch Ratings published the brief, "Finalised EU MMF Reform Starts Implementation Clock - Liquidity Fees and Redemption Gates Create Uncertainty," which is subtitled, "Finalized EU MMF Reform Starts Implementation Clock Liquidity Fees and Redemption Gates Create Uncertainty."
It summarizes, "An agreement has finally been reached on European money fund regulation between the EU, Parliament and Council after three years of debate.... Low-volatility net asset value (LVNAV) funds are a workable alternative to existing constant net asset value (CNAV) funds, notably as a previously proposed sunset clause has been removed and liquidity requirements have been adjusted. It will result in LVNAV co-existing with a new form of public debt CNAV funds, short-term variable NAV (VNAV) funds and standard VNAV money funds."
The piece comments, "Public debt CNAV and LVNAV funds will be subject to liquidity fees and redemption gates, similar to US Prime MMFs, which suffered large outflows in the run-up to US reform implementation. It remains to be seen how European investors will react to such redemption limiting provisions. Some may turn to full VNAV funds but we expect the impact of the European reform to be smaller than in the US as investors accustomed to CNAV funds, which account for half of EU MMF assets, may be comfortable with LVNAV funds."
Finally, they add, "The regulation should come into effect by the end of 2018, given an 18-month implementation period after its enforcement, which is likely to be in 1H17. Fitch Ratings expects this period to be characterized by new fund launches and the adaptation of existing fund ranges into the new fund categories."
The SEC's latest "Money Market Fund Statistics" data summary shows that total assets decreased in December, with Prime funds losing $15.5 billion, Tax Exempt MMFs losing $0.8 billion and Government funds losing $0.2 billion. Gross yields continued higher for Prime MMFs and 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. Money market fund assets decreased by $16.6 billion in December to $2.958 trillion. (The SEC's series includes some private and internal funds not reported to ICI, Crane Data or other reporting agencies.) Overall assets increased by $60.1 billion in November, but fell $30.0 billion in October, $35.2 billion in Sept., and $33.7 billion in August. In 2016, total assets were down $127.1 billion, or 4.1%, through 12/31.
Of the $2.958 trillion in assets, $550.4 billion was in Prime funds, which decreased by $15.5 billion in Dec., after increasing $3.4 billion in Nov., but falling $177.4 billion in October, $293.2 billion in Sept., and $201.3 billion in August. Prime funds represented 18.6% of total assets at the end of December. They declined by $1.022 trillion in 2016, or 65.0%, and they plunged $1.241 trillion, or 69.3% since 10/31/15.
Government & Treasury funds totaled $2.273 billion, or 76.9% of assets,, down $10.2 billion in December, after rising $56.4 billion in November, $148.0 billion in October, $268.3 billion in Sept., and $212.0 billion in August. Govt & Treas MMFs are up $1.024 trillion in 2016 (81.3%) and $1.232 trillion (118.4%) since 10/31/15, just prior to the start of the Prime to Govt conversion trend. Tax Exempt Funds declined $0.8 billion to $134.5 billion, or 4.5% of all assets. The number of money funds was 413, down 2 from last month and down 89 from 12/31/15.
Yields increased in December for Taxable MMFs. The Weighted Average Gross 7-Day Yield for Prime Funds on Dec. 31 was 0.87%, up 14 basis point from the previous month, and more than triple the 0.27% of November 2015 (before the first Fed hike). Gross yields increased to 0.56% for Government/Treasury funds, up 0.12% from the previous month and up 0.41% since 11/15. Tax Exempt Weighted Average Gross Yields increased 0.15% in December to 0.77% (after falling 7 bps in Nov. and rising 70 bps since 11/30/15).
The Weighted Average Net Prime Yield was 0.62%, up 0.13% from the previous month and up 0.51% since 11/15. In 2016, 7-day gross yields for Prime were up 46 basis points (to 0.87%) and net yields are up 40 basis points. The Weighted Average Prime Expense Ratio was 0.24% in December (up one bps from November). Prime expense ratios have risen from 0.17% in November 2015. (Note: These averages are asset-weighted.)
Weighted Average Maturities were mixed and liquidity inched up in December. The average Weighted Average Life, or WAL, was 61.5 days (down 0.8 days from last month) for Prime funds, 96.1 days (up 1.5 days) for Government/Treasury funds, and 28.5 days (up 1.3 days) for Tax Exempt funds. The Weighted Average Maturity, or WAM, was 31.3 days (down 3.3 days from the previous month) for Prime funds, 45.6 days (up 2.3 days) for Govt/Treasury funds, and 26.4 days (up 1.5 days) for Tax-Exempt funds. Total Daily Liquidity for Prime funds was 35.6% in November (up 3.5% from previous month). Total Weekly Liquidity was 51.2% (up 0.1%) for Prime MMFs.
In the SEC's "Prime MMF Holdings of Bank Related Securities by Country" table, Canada topped the list with $70.6 billion, followed by the US with $58.5 billion. Japan was third with $44.8 billion, followed by France ($41.6B), Australia/New Zealand with $34.5B, Sweden ($23.4B), Germany ($19.9B) and the UK ($13.6B). The Netherlands ($12.4B) and Switzerland ($11.3B) rounded out the top 10.
The only gainers among Prime MMF bank related securities for the month included: Canada (up $10.3 billion), US (up $5.6B), Australia/New Zealand (up $5.5B) and Japan (up $996M). The biggest drops came from France (down $16.0B), Sweden (down $15.8B), Netherlands (down $9.4B), the UK (down $8.2B) and Norway (down $3.3B). For Prime MMF Holdings of Bank-Related Securities by Major Region, Europe had $132.2B (down $57.2B from last month), while the Eurozone subset had $78.4 billion (down $29.7B). The Americas had $129.8 billion (up from $113.7B), while Asian and Pacific had $88.7 billion (up from $80.5B).
Of the $545.3 billion in Prime MMF Portfolios as of Dec. 31, $191.5B (35.1%) was in CDs (down from $211.1B), $138.1B (25.3%) was in Government securities (including direct and repo), up from $125.2B, $104.5B (19.2%) was held in Non-Financial CP and Other Short Term Securities (down from $112.7B), $78.7B (14.4%) was in Financial Company CP (down from $86.1B), and $32.5B (5.9%) was in ABCP (down from $32.6B).
The Proportion of Non-Government Securities in All Taxable Funds was 15.0% at month-end, down from 15.8% the previous month. All MMF Repo with Federal Reserve increased to $403.4B in December from $177.3B the previous month. Finally, the "Trend in Longer Maturity Securities in Prime MMFs" tables shows 37.4% were in maturities of 60 days and over (down from 38.2%), while 6.9% were in maturities of 180 days and over (up from 6.2).
In other news, the Treasury's Office of Financial Research has also updated its U.S. Money Market Fund Monitor with Dec. 31, 2016 data. OFR's tool "is designed to track the investment portfolios of money market funds by funds asset types, investments in different countries, counterparties, and other characteristics."
The Investment Company Institute released its latest weekly "Money Market Mutual Fund Assets" report and "Money Market Fund Holdings" summary (with data as of Dec. 31, 2016) yesterday. The former shows assets plunging in the latest week and the latter reviews the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds. J.P. Morgan Securities also released its latest "Prime money market fund holdings update" earlier this week. Both "holdings" updates, which review below, confirm our earlier reports of a jump in repo holdings at year-end. (See our Jan. 12 News, "Government Takeover: Treasuries, Agencies Dominating MMF Holdings.") Finally, thanks to our speakers, sponsors and attendees of Money Fund University, which ends today in Jersey City. We hope you had a good show!
ICI's MMF Assets release says, "Total money market fund assets decreased by $24.78 billion to $2.67 trillion for the week ended Wednesday, January 18, the Investment Company Institute reported today. Among taxable money market funds, government funds decreased by $25.65 billion and prime funds increased by $680 million. Tax-exempt money market funds increased by $190 million." Total Government MMF assets, which include Treasury funds too and which represent 80.7% of all money funds, stand at $2.152 trillion, while Total Prime MMFs, which total 14.4%, stand at $383.0 billion. Tax Exempt MMFs total $131.3 billion, or 4.9%.
It explains, "Assets of retail money market funds decreased by $1.67 billion to $984.88 billion. Among retail funds, government money market fund assets decreased by $1.18 billion to $606.44 billion, prime money market fund assets decreased by $570 million to $252.11 billion, and tax-exempt fund assets increased by $80 million to $126.34 billion." Retail assets account for over a third of total assets, or 36.9%, and Government Retail assets make up 61.6% of all Retail MMFs.
The release continues, "Assets of institutional money market funds decreased by $23.11 billion to $1.68 trillion. Among institutional funds, government money market fund assets decreased by $24.47 billion to $1.55 trillion, prime money market fund assets increased by $1.25 billion to $130.87 billion, and tax-exempt fund assets increased by $110 million to $4.94 billion." Institutional assets account for 63.1% of all MMF assets, with Government Inst assets making up 91.9% of all Institutional MMFs.
ICI's MMF Holdings release explains, "The Investment Company Institute (ICI) reports that, as of the final Friday in December, prime money market funds held 31.2 percent of their portfolios in daily liquid assets and 45.6 percent in weekly liquid assets, while government money market funds held 62.7 percent of their portfolios in daily liquid assets and 75.7 percent in weekly liquid assets."
It says, "At the end of December, prime funds had a weighted average maturity (WAM) of 34 days and a weighted average life (WAL) of 67 days. Average WAMs and WALs are asset-weighted. Government money market funds had a WAM of 46 days and a WAL of 97 days." Prime WAMs were down from 37 days in November and Prime WALs were down from 68 days the prior month.
On Holdings By Region of Issuer, it adds, "Prime money market funds' holdings attributable to the Americas rose from $170.07 billion in November to $192.64 billion in December. Government money market funds' holdings attributable to the Americas rose from $1,896.11 billion in November to $2,002.11 billion in December."
The Prime Money Market Funds by Region of Issuer table shows Americas at $192.6 billion, or 51.4%; Asia and Pacific at $73.9 billion, or 19.7%; Europe at $104.7 billion, or 27.9%; and Other (including Supranational) at $3.8 billion, or 1.1%. The Government Money Market Funds by Region of Issuer table shows Americas at $2.002 trillion, or 91.1%; Asia and Pacific at $65.5 billion, or 3.0%; and Europe at $126.4 billion, or 5.8%.
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."
J.P. Morgan's latest update comments, "Typical turn dynamics led to a reduction in holdings of bank debt at the end of the year. In total, prime fund bank holdings fell by $49bn or 17%. The decline was driven evenly across CP, CD and time deposits.... Year-over-year, holdings of bank debt plunged $603bn or 72%. Fund allocations show that prime funds increased usage of the RRP as a substitute for reductions in bank supply around year-end. Indeed, prime money funds increased RRP facility usage by $47bn month-over-month. Away from banks and RRP, most other sector allocations remained stable."
It also explains, "Since the Fed hiked rates in mid-December, MMF yields have been on the rise. Both gross and net average yields on prime and government funds have increased by several basis points during recent weeks.... Further more, since the FOMC meeting the yield spread between prime and government funds has increased by 9bp to 32bp."
Finally, JPM's update adds, "In the bills market, things are looking grim in the near-term. Due to the looming expiration of the debt ceiling suspension, over the next two months we anticipate at least a $350bn drawdown in Treasury's cash balance. Most of this cut will come through reductions in bill supply. Between now and mid-March, we project bill supply to decrease by $196bn.... Naturally, stark reduction in the stock of T-bills will make things tighter for government funds who unremittingly bid for short-term government/agency securities. Along with bills, we expect yields on other securities such as discos and repo to get pressured lower. However, it appears as if the Fed RRP will suffice in absorbing excess cash. [A]t year-end, the tightest day for supply of the year, no fund maxed out on usage and the number of funds heavily relying on the RRP was not alarming."
This month, Money Fund Intelligence interviews AB Government Money Market Portfolio Vice President & Portfolio Manager Ed Dombrowski. AB, the former AllianceBernstein, whose motto is "Ahead of Tomorrow," has been rebranding and focusing on expanding their money market fund presence by courting the "portal" and institutional marketplace, among other things. Our Q&A follows. (This interview is reprinted from the January issue of our flagship Money Fund Intelligence newsletter; e-mail email@example.com to request the full issue. Note too: We'd like to welcome those of you attending the 7th annual Crane's Money Fund University, which takes place today and Friday at the Jersey City Westin! Crane Data subscribers may access the conference materials at the bottom of our "Content" page.)
MFI: Tell us a little bit about your history. Dombrowski: We have a long history, nearly 40 years, in the money fund business. The first fund started in July 1978. Alliance Capital was a top 15 sponsor in the 90's and early 2000's. In 2005, the firm sold its money fund business to Federated. From 2005-2013, we refocused our efforts to efficiently manage internal cash, and one of the results of that was creating our Government Money Market Portfolio (formerly Government STIF Portfolio). I came to AB in 2001, and joined its cash management team in 2004. I spent some time in different areas on the cash management desk before becoming a portfolio manager, running three 2a-7 registered government funds, as well as separate accounts.
MFI: What is your biggest priority now? Dombrowski: One of our priorities for 2017 is externally marketing and building brand recognition around our biggest fund, the AB Government Money Market Portfolio. In the past, we were big in the retail channel, but our new goal is targeting institutional corporate treasurers. We're going to try to market our fund in two ways. The first is through the technology and marketing ability of portals; we currently have one agreement in place and will be exploring executing more in the future. Secondly, as an organization with nearly $500 billion in AUM, AB has an extensive internal sales force that enables us to leverage our existing relationships across the firm. We think now is the right time to do this because money market reform and the rising rate environment have investors paying closer attention to their front end allocations. Both should help with our efforts.
MFI: Tell us about any changes. Dombrowski: As a result of money market fund reforms, we converted our prime money market fund (AB Exchange Reserves) to a government money market fund. At the same time we began offering the AB Government Money Market Portfolio to external investors, adding new share classes and a management fee to that fund.
MFI: What's the biggest challenge in managing cash today? What has it been historically? Dombrowski: I think the fragmented repo markets and the new rules around tri-party repo have made it harder to manage late-day funds and volatile flows. The importance of counterparty relationships is paramount. Flexibility with tri-party trades is the key, more so than the rate. Whether it is in regards to the amount of balance sheet allocated, intraday [issues], fund balance shuffling, or even an agreement on the timing of the matching process, all add value. Having access to the [Fed] reverse repo facility also helps us not only in terms of mitigating the flows and the amount of trading that we have to do every day, but also in securing a fair level. In the past, portfolio managers spent a lot more time focusing on ways to communicate their view on the path of short term interest rates. Today, there's a lot greater focus on ensuring that you meet legal, regulatory and compliance criteria.
MFI: What are you buying now? What aren't you buying? Dombrowski: Needless to say, everyone is buying government securities and a lot of them. At year end, the Fed's reverse repo facility was at $468 billion, which shows there are not enough securities in the market to maintain the floor without the facility. If there is no resolution to the 'debt ceiling' over the next 10 weeks, the Treasury will be forced to significantly take down the amount of bills outstanding. If this plays out without a quick resolution, the Fed repo facility will continue to be critical.
In terms of security types, in the late summer we were buying agency floaters, where we have an oversized position. These securities have richened significantly in the past few months, but using the resets as a way to mitigate uncertainty in a rising rate environment will continue to add value. In terms of agency discos, we have an oversized position in FHLB. The market continues center on the Home Loan banks. FHLB's represent over 75% of the approximately $550 billion of issuance in the "disco" (discount) market, so it is hard not to have an outsized allocation. Some of the fund ratings have maximum limits on percentages allowed in each agency, but it is hard to ignore the pickup over other agency names in such a low rate environment. On the other hand, we've stayed away from T-bills under 50 basis points, the Fed reverse repo facility floor.
MFI: What are customers concerned about these days? Dombrowski: In general, most customers are concerned with liquidity. Maybe not so much in a government fund itself, but liquidity concerns may be the reason clients have chosen a government fund over a prime fund. One of the results of reform was that it showed many investors were as concerned with the fees and gates as they were with the preservation of their capital. Liquidity has been a concern across the entire curve and has manifested itself in varying forms over the past few years. The Treasury flash crash, dealers' ability to hold inventory, and the regulatory effects on the repo market are all examples of how all markets have been affected from overnight out to 30 years.
MFI: Can you tells us about the impact of the latest Fed move on fund yields? Dombrowski: It's definitely a slow-moving process [digesting the recent hike] for government funds. Coming into the rate hike, I think most government funds were pretty long. So it should be a slow grind upward in their yields. It's definitely going to take a while to work its way through. Three factors that caused funds to be long were: the highly technical time of the year the hike occurred, the telegraphing of the move by the Fed, and the uncertainty around the debt ceiling. The combination of these factors is how you get rates three months and shorter trading below 50 bps. Dealers also are reporting that the $30 billion dollar [Fed RRP] cap on funds is pressuring larger funds into buying securities in the market, and causing this leaky floor. These factors will only lengthen the time it takes for rates in the short end to normalize.
MFI: Is there anything left to do with reforms? Dombrowski: No. Our three funds are in compliance with all of the new regulatory requirements.
MFI: What are the challenges of distributing via portals? Dombrowski: They have a lot of reporting requirements, and you want to have good information on your fund. One of the things they're selling is their technology to investors. The detailed information that they would like to see from your holdings is pretty intense. Portals help expose your funds to investors, whether it is though the simple visibility on their fund list or their help in putting together functions with clients directly. In a world of increased regulation and reporting requirements, portals are bringing benefits to clients and helping them meet their needs. This is part of the reason their popularity has grown steadily.
MFI: What is your outlook for the future? Dombrowski: The future is bright for money funds. We just went through a tremendous shift, which taught us a lesson we already knew. That is: everybody has cash and it'll always be a part of any portfolio's allocation. It may be in a slightly different form, but it'll be there. If you look back at that baseline of $2.7 trillion of assets in money funds, they remained a viable option even though rates were 0% for 10 years. There's no real reason to believe that we won't see balances increase, not only because of the rate hikes, but because of what's going on with banks shutting off deposits.
Overall, it's been a relatively low volatility environment in both the equity and the bond markets. If there's turbulence in either of those, money markets have always been a safety net. With president-elect Trump coming into office and a large amount uncertainty around his policies and their implementation, you'll see more volatility and investors turning to cash. There are a number of factors that bode well for money markets ahead.
BlackRock's "Cash Academy" released a video and white paper on "Simplified Tax and Accounting Rules for Money Market Funds. The paper explains, "Regulators finalized much-anticipated and angst-inducing tax and accounting rules for money market funds (MMFs), and in doing so offered a few key modifications that we think will benefit investors. On July 8, 2016, the Internal Revenue Service (IRS) issued final regulations permitting the simplified "Net Asset Value, or NAV, method" of accounting for gains and losses in MMFs (IRS Regulation T.D. 9774), and provided guidance regarding requirements for information reporting via Form 1099-B. The final regulations are similar to the IRS' proposal released in July 2014, with a few small modifications."
The piece explains, "BlackRock believes MMFs and shareholders will benefit from the following simplification measures: Relief from the wash sale rule (IRS Revenue Procedure 2014-45, released in July 2014) , excluding investors in floating NAV (FNAV) MMFs from having to compute or track wash sale adjustments; The assurance that MMFs will continue to be treated as cash equivalents (Securities and Exchange Commission (SEC) Section 220 of the Codification of Financial Reporting Policies, released as a part of the 2014 Rule 2a-7 reforms); and, The exemption from the information reporting requirements of Form 1099-B. We believe that collectively, these rules will ease potential tax or accounting challenges the FNAV environment may have created for cash investors."
It continues, "Prior to the SEC's July 2014 amendments to Rule 2a-7, all MMFs transacted at a constant net asset value (CNAV) per share, which meant there was no need to determine, monitor, or pay taxes on gains and losses on individual shares. With institutional prime and institutional municipal MMFs adopting FNAV per share pricing, there is the possibility for small gains and losses to be realized on individual shares as they are purchased or redeemed. The NAV method does not change the tax treatment of dividends paid by FNAV MMFs. It is important to note that cash investors that do not elect the NAV method will be required to track the basis of FNAV MMF shares and calculate gains and losses themselves."
BlackRock comments on MMFs' "Continued classification as cash equivalents," saying, "The SEC confirmed in 2014 that any fluctuations in the amount of cash an investor would receive upon redemption from a FNAV MMF would likely be small and therefore would be "consistent with the concept of a 'known' amount of cash." This significant clarification confirms that both CNAV and FNAV MMFs can continue to receive the same accounting treatment as cash (i.e. be considered "cash equivalents") under the U.S. Generally Accepted Accounting Principles for bookkeeping purposes."
Finally, on "Easing the tax and accounting uncertainty for MMF investors," the paper tells us, "MMF investors have long chosen this investment vehicle for its relative ease of use and access to liquidity. The introduction of the FNAV pricing for certain types of MMFs left many in the industry wary of the potential for onerous tax and accounting requirements related to this change. The relief provided 2a-7 MMFs under these new regulations is not available to investors in longer duration funds such as short-term bond funds. These longer duration funds are not eligible for the NAV method, and will remain subject to wash sale rules, 1099-B reporting, and may not be considered cash equivalents. We are supportive of these measures outlined above, as we believe they help maintain the benefits and utility of MMFs for investors who have historically valued the relative simplicity and liquidity of this important investment vehicle."
In the video, BlackRock Cash Management MD `Britta Hion tells us, "Today I'll be discussing simplified tax and accounting rules for money market funds, finalized by the Internal Revenue Service in July 2016. We believe these rules should help maintain the utility of money market funds for cash investors. They are principally intended to simplify the process for cash investors utilizing floating net asset value money market funds."
She explains, "In this video, we focus on the application of the NAV method for calculating gains and losses over an investment period for floating net asset value money market funds. Applying these rules to your investment situation may require a review of your policies, and we recommend that you have a conversation with your tax advisor or auditor to discuss the impact of investing in these types of money market funds."
Hion continues, "The NAV method provides investors the ability to report, for tax purposes, their aggregated net gains and losses over a period. That period could represent the investor's tax year, or a shorter period as necessary. Let's walk through a hypothetical calculation.... The calculation begins with the investment balance at the end of your period. Subtract from your end balance what your balance is at the beginning of the period you have elected. Again, this could be your fiscal year, quarter, month, or otherwise. Subtract out the sum of all your transactions during that period. The amount you are left with is the net realized gain or loss for that period, which would be treated as a short-term capital gain or loss."
She adds, "The NAV method does not change the tax treatment of dividends paid by floating NAV money market funds. It is important to note that cash investors that do not elect the NAV method will be required to track the basis of floating NAV money market fund shares, and calculate gains and losses themselves. Although we focus on a floating NAV money market fund in this illustrative calculation, investors can use the NAV method on constant NAV money market funds as well."
The video says, "Clients are inquiring about where to report gains or losses for floating NAV money market funds in their accounting records. The final decision on where to report is up to the investor, who should consult with their tax and accounting advisors for input. We expect most investors to report as part of net operating income, but this will depend on your investment situation."
It adds, "Lastly: We also have clients asking about which accounting method classification to use for floating NAV money market funds. We expect the Financial Accounting Standards Board, or FASB, to require floating NAV money market funds be classified as Available for Sale. This is still pending finalization, but the Hold to Maturity classification typically requires amortized cost accounting."
The January issue of Crane Data's Bond Fund Intelligence, which was sent out to subscribers Monday, features the lead story, "BFI Turns 2; Top Stories & Funds in '16; Outlook for '17," which reviews the top stories and funds of 2016, and it features the profile, "Invesco's Tony Wong Talks Credit, Bond Fund Lineup," an interview with Invesco Fixed Income's Head of Global Credit Research & Liquidity. Also, we recap the latest Bond Fund News, including yield increases in December and a rebound in flows in late December and January. BFI also includes our Crane BFI Indexes, which showed increases in December. We excerpt from the latest BFI below. (Watch for more excerpts from our Invesco profile later this month on www.cranedata.com, and contact us if you'd like to see a copy of our latest Bond Fund Intelligence and BFI XLS.)
Our lead Bond Fund Intelligence story says, "Bond Fund Intelligence officially launched two years ago, and our monthly newsletter on bond mutual funds continues to expand its coverage and content While our initial focus was, and continues to be, on ultra-short and short-term bond funds, we've expanded our news and performance tracking to include the entire spectrum of fixed-income funds. Below, we review BFI's mission, the major events and top-performers of the past year, and the outlook for 2017."
It continues, "BFI's mission is to bring affordable and comprehensive news and statistics coverage to the bond fund investment community. In our first issue, we began tracking about 200 bond funds, but by December 2015 we were tracking 359 funds, totaling $1.663 trillion in assets -- about half the market. Over the past year, we've grown our collection to 489 funds and $2.096 trillion in assets. We'll continue to gradually add funds, refine and expand our collection of data points, and move towards launching a database and daily product in the coming year. We'll also launch our first Crane's Bond Fund Symposium, March 23-24, 2017, in Boston."
BFI's Invesco Profile says, "This month, Bond Fund Intelligence interviews Tony Wong, Invesco's Head of Global Credit Research & Liquidity. Invesco manages over $201.7 billion in bond fund assets and another $78.3 billion in money markets. We ask Wong about the manager's latest challenges and strategies, and he explains why recent concerns over the bond market are overstated. Our Q&A follows."
The profile asks about Invesco's history, and Wong responds, "We've been in the U.S. bond mutual fund business since the '70's and liquidity since the '80's. As a global fixed income house, we have a broad range of asset class solutions and capabilities for both institutional and retail markets.... Personally I've been with the firm for 20 years now. I started as a research analyst ... and eventually moved into my current role of overseeing our global credit research platform as well as business oversight of our global liquidity franchise."
A Bond Fund News brief entitled, "Bond Fund Returns Rebound in December; Yields Rise on Fed Hike," explains, "Returns rose across most of the Crane BFI Indexes. Our BFI Total Index averaged a 1-month return of 0.51% and gained 3.71% in 2016. The BFI 100 had a return of 0.50% in Dec. and rose 4.55% for the year. The BFI Conservative Ultra-Short Index returned 0.07% and was up 1.09% in '16; the BFI Ultra-Short Index had a 1-month return of 0.14% and 1.37% for the year. Our BFI Short-Term Index returned 1.80% and 2.41% for the month and year. The BFI High Yield Index increased 1.56% in Dec. and is up 12.19% in 2016. (See p. 8+ or BFI XLS for more return data.)"
Another brief, entitled, "WSJ on Active vs. Passive & Fee Cuts," explains, "`The Wall Street Journal writes, "Investors Leave Active Funds Despite Fee Cuts." It says, "Those stock and bond pickers that cut mutual-fund fees most aggressively in 2016 are the ones that continue to lose clients to lower-cost rivals. The average asset-weighted fee for actively managed stock mutual funds fell by 4.8% in 2016 ... according to Morningstar. Meanwhile the average asset-weighted fee for actively managed bond funds fell more than 6%."
Yet another brief comments, "Bank of America Merrill Lynch Strategist Hans Mikkelsen writes, "The return of bond inflows. Last week (ending on January 4th) saw the first inflow to rate-sensitive fixed-income funds and ETFs since the US election. Flows follow returns, and the jump higher in interest rates following the elections in November has generated seven consecutive weeks of outflow from fixed income.... Similarly, the decline in interest rates from the peak reached in mid-December has allowed for inflows to return this past week."
A sidebar entitled, "World Bond Funds Up in Q3," tells us, "The U.S., by far the world's largest bond fund market, and the others in the five largest markets -- Luxembourg, Brazil, Germany and Ireland -- all showed gains in the latest quarter (Q3'16) according to the Investment Company Institute's "Worldwide Open-End Fund Assets and Flows, Third Quarter 2016." ICI's report shows worldwide bond fund assets increased $402.7 billion, or 4.6%, to $9.210 trillion in the third quarter. Bond funds represent 22.5% of the $40.85 trillion in worldwide mutual fund assets. Globally, bond funds posted inflow of $281 billion in Q3 of 2016, after inflows of $147B in Q2 and $80 billion in Q1'16."
It adds, "According to Crane Data's analysis of ICI data, the U.S. had $4.166 trillion in bond fund assets as of Sept. 30, 2016, representing 45.2% of the worldwide market. US bond fund assets were up $134.5.7 billion in the quarter, or 3.3%. Luxembourg remained the second largest bond fund market with $1.262 trillion, or 13.7%, after a $63.1 billion, or 5.3% jump. Brazil remained in third place with $598.8 billion, or 6.5% of worldwide bond fund assets. Germany ranked fourth with $562.8 billion, or 5.7%. Ireland remained in 5th place with $458.3 billion, or 5.0%. (Luxembourg and Ireland are the most popular domiciles for funds marketed across Europe.)"
Finally, Bond Fund Intelligence features the "Top Performers for 2016," stating, "The table below lists the No.-1 performing bond funds based on total return for through 12/31/16 in each of our 7 bond fund categories. Federated Ultra Short Bond Inst (FULIX) was the top-performing fund in our Conservative Ultra-Short category, Fidelity New Markets Income Fund (FNMIX) won in the Global category, AllianceBernstein High Income A (AGDAX) returned the most in our High Yield category, PIMCO Income Inst (PIMIX) was No. 1 among IntmTerm BFs, PIMCO Long-Term Credit Inst (PTCIX) was No. 1 among Long Term Bond Funds, Oppenheimer Ro High Yield Muni A (ORNAX) was No. 1 among Muni Bond Funds, Eaton Vance Short Dur Strategic Inc I (ESIIX) was No. 1 among Short Term BFs, and BBH Limited Duration I (BBBIX) placed first among Ultra-Short Bond Funds. Congratulations to the winners! Note that we continue to tweak our collections and categorizations, so watch for more changes in 2017."
A press release entitled, "SEC Announces 2017 Examination Priorities," and subtitled, "New Areas of Focus Include Electronic Investment Advice, Money Market Funds, and Senior Investors," tell us, "The Securities and Exchange Commission today announced its Office of Compliance Inspections and Examinations' (OCIE) 2017 priorities. Areas of focus include electronic investment advice, money market funds, and financial exploitation of senior investors. The priorities also reflect a continuing focus on protecting retail investors, including individuals investing for their retirement, and assessing market-wide risks." We first learned of the SEC news from a Reuters article. We review the brief update below, and we also cover the latest "Money Market Mutual Fund Assets report from the Investment Company Institute.
Outgoing SEC Chair Mary Jo White comments, "These priorities make clear we are continuing to focus on a wide range of issues impacting our markets, from traditional areas such as market-wide risks to new forms of technology including automated investment advice.... Whether it is protecting our most vulnerable senior investors or those investing in the trillion dollar money market fund industry, OCIE continues its efficient and effective risk-based approach to ensure compliance with our nation's securities laws."
OCIE Director Marc Wyatt adds, "OCIE's priorities identify where we see risk to investors so that registrants can evaluate their own compliance programs in these important areas and make necessary changes and enhancements." Note: Four of the money fund industry's top lawyers will present at our Money Fund University late next week in Jersey City, and we expect them to discuss the SEC's notice in more detail.)
The full "Examination Priorities for 2017" document explains, "As part of the SEC's mission to maintain fair, orderly, and efficient markets, we will examine for structural risks and trends that may involve multiple firms or entire industries. In 2017, we will focus on the following initiatives: Money Market Funds. In 2014, the SEC adopted amendments to rules governing money market funds to make structural and operational reforms to address redemption risks in money market funds, while preserving the benefits of the funds for remaining investors."
It continues, "We will examine money market funds for compliance with these rule amendments, which became effective in October 2016. Examinations will likely include assessments of the boards' oversight of the funds' compliance with these new amendments as well as review of compliance policies and procedures relating to stress testing and funds' periodic reporting of information to the Commission." A Footnote says, "See Money Market Fund Reform; Amendments to Form PF, Release No. 33-9616, (July 23, 2014)."
Reuters first wrote about the news in "SEC to review money market funds for compliance in 2017." The piece explains, "Money market mutual fund operators can expect a visit this year from federal securities regulators, who announced on Thursday they plan to conduct exams to ensure funds are complying with sweeping new rules that took effect in October. The Securities and Exchange Commission announced its intention to scrutinize money funds, as part of its annual list of top compliance examination priorities for the coming year."
The article continues, "The priorities were announced by outgoing SEC Chair Mary Jo White, who is slated to depart after President-elect Donald Trump takes office. It is unclear whether Trump's pick to replace her, attorney Jay Clayton, would seek to make any changes to the priorities. Money market mutual funds were the target of major structural reforms in 2014, in an effort by regulators to reduce the risk of runs on the funds by panicked investors in the event of a market crisis. The final rules required "prime" money funds used by institutional investors to float their values, instead of letting them maintain a stable value at $1 per share."
It adds, "The SEC said on Thursday its exams in 2017 will focus on a few key themes: retail investors, senior investors and retirees, cyber security, market-wide risks and a closer look at how the Financial Industry Regulatory Authority (FINRA) is carrying out its duties as Wall Street's self-funded regulator."
In other news, ICI MMF Assets release says, "Total money market fund assets decreased by $22.49 billion to $2.69 trillion for the week ended Wednesday, January 11, the Investment Company Institute reported today. Among taxable money market funds, government funds decreased by $25.43 billion and prime funds increased by $3.48 billion. Tax-exempt money market funds decreased by $540 million." Total Government MMF assets, which include Treasury funds too and which represent 80.9% of all money funds, stand at $2.177 trillion, while Total Prime MMFs, which total 14.2%, stand at $389.3 billion. Tax Exempt MMFs total $131.1 billion, or 4.9%.
ICI explains, "Assets of retail money market funds decreased by $3.48 billion to $986.55 billion. Among retail funds, government money market fund assets decreased by $2.46 billion to $607.61 billion, prime money market fund assets decreased by $490 million to $252.68 billion, and tax-exempt fund assets decreased by $530 million to $126.26 billion." Retail assets account for just over a third of total assets, or 36.7%, and Government Retail assets make up 61.6% of all Retail MMFs.
The release continues, "Assets of institutional money market funds decreased by $19.00 billion to $1.70 trillion. Among institutional funds, government money market fund assets decreased by $22.97 billion to $1.57 trillion, prime money market fund assets increased by $3.97 billion to $129.61 billion, and tax-exempt fund assets were unchanged at $4.83 billion." Institutional assets account for 63.3% of all MMF assets, with Government Inst assets making up 92.1% of all Institutional MMFs.
Crane Data released its January Money Fund Portfolio Holdings yesterday, and our latest collection of taxable money market securities, with data as of Dec. 31, 2016, shows a big jump in Fed repo, with Repo, Treasuries and Agencies holding a record 86.9% of all holdings. Money market securities held by Taxable U.S. money funds overall (tracked by Crane Data) decreased by $34.7 billion to $2.658 trillion last month, after increasing by $106.5 billion in November and $32.0 billion in Oct., but decreasing by $123 billion in Sept. Repo jumped back over Treasuries as the largest portfolio segment, as quarter-end drove a spike in usage of the Fed's RRP "reverse repo" program, followed by Agencies. CDs were in fourth place, followed by Commercial Paper, Other/Time Deposits and VRDNs. Money funds' European-affiliated securities fell to 9.7% of holdings, down from the previous month's 16.4% and the lowest level since the SEC began requiring monthly money fund portfolio disclosures in November 2010. Below, we review our latest Money Fund Portfolio Holdings statistics.
Among all taxable money funds, Treasury securities fell $59.4 billion (-6.7%) to $822.7 billion, or 31.0% of holdings, after rising $101.6 billion in November, $112.2 billion in Oct. and $27.7 billion in Sept. Repurchase Agreements (repo) jumped $56.3 billion (7.3%) to $832.4 billion, or 31.3% of holdings, after falling $21.1 billion in Nov., $65.2 billion in Oct., and rising $127 billion in Sept. Government Agency Debt decreased $7.7 billion (-1.2%) to $652.5 billion, or 24.6% of all holdings, after increasing $20.3 billion in Nov., $32.3 billion in Oct. and $11.8 billion in Sept. The record levels in Repo, Treasuries and Agencies had been driven by the shift of almost $1.1 trillion of Prime MMF assets and another $100 billion in Tax Exempt MMF assets (since late 2015) into Government MMFs, though this month's numbers saw a retreat in Govt and Treasury MMF assets and an increase in Prime MMFs.
CDs and Other (Time Deposits) inched lower again, hitting their lowest levels since Crane Data began tracking these in early 2011, while CP also fell. Certificates of Deposit (CDs) were down $0.2 billion (-0.2%) to $147.6 billion, or 5.6% of taxable assets, after declining $1.0 billion in Nov., $13.6 billion in Oct., and $100.1 billion in Sept. Commercial Paper (CP) was down $9.5 billion (-7.1%) to $123.6 billion, or 4.7% of holdings (after increasing $5.8B last month), while Other holdings, primarily Time Deposits, fell $13.8 billion (-23.9%) to $44.0 billion, or 1.7% of holdings. (Time Deposits normally drop at quarter-end and Repo spikes.) VRDNs held by taxable funds decreased by $0.5 billion (-1.3%) to $34.9 billion (1.3% of assets).
Prime money fund assets tracked by Crane Data (in our holdings collection) rose to $501 billion (up from $491 billion last month), or 18.2% (down from 18.8%) of taxable money fund holdings' total of $2.692 trillion. (Note that we added the $23.0 billion internal DFA Short Term Investment Fund, which inflated these numbers, to our collections this month.) Among Prime money funds, CDs represent less than a third of holdings at 29.4% (down from 30.1% a month ago), followed by Commercial Paper at 24.7% (down from 27.1%). The CP totals are comprised of: Financial Company CP, which makes up 13.4% of total holdings, Asset-Backed CP, which accounts for 6.4%, and Non-Financial Company CP, which makes up 4.9%. Prime funds also hold 1.5% in US Govt Agency Debt (up from last month), 9.8% in US Treasury Debt (up from 13.3%), 10.5% in US Treasury Repo, 3% in Other Instruments, 2.3% in Non-Negotiable Time Deposits, 8.3% in Other Repo, 2.3% in US Government Agency Repo, and 5.1% in VRDNs.
Government money fund portfolios totaled $1.531 trillion (57.6% of all MMF assets), down from $1.552 trillion in November, while Treasury money fund assets totaled another $625 billion (23.5%) in November, down from $649 billion the prior month. Government money fund portfolios were made up of 42.1% US Govt Agency Debt, 13.3% US Government Agency Repo, 20.4% US Treasury debt, and 23.4% in US Treasury Repo. Treasury money funds were comprised of 73.8% US Treasury debt, 26.0% in US Treasury Repo, and 0.1% in Government agency repo, Other Instrument, and Investment Company shares. Government and Treasury funds combined now total $2.156 trillion, or over 80% (81.1%) of all taxable money fund assets, down from 81.8% last month.
European-affiliated holdings decreased $184.6 billion in December to $257.9 billion among all taxable funds (and including repos); their share of holdings decreased to 9.7% from 16.4% the previous month. Eurozone-affiliated holdings decreased $130 billion to $176.4 billion in Dec.; they now account for 6.6% of overall taxable money fund holdings. Asia & Pacific related holdings increased by $0.5 billion to $159.8 billion (6.0% of the total). Americas related holdings increased $150 billion to $2.240 trillion and now represent 84.3% of holdings.
The overall taxable fund Repo totals were made up of: US Treasury Repurchase Agreements, which increased $127.0 billion, or 28.4%, to $573.9 billion, or 21.6% of assets; US Government Agency Repurchase Agreements (down $84.0 billion to $216.9 billion, or 8.2% of total holdings), and Other Repurchase Agreements ($41.6 billion, or 1.6% of holdings, up $13.3 billion from last month). The Commercial Paper totals were comprised of Financial Company Commercial Paper (down $11.7 billion to $67.0 billion, or 2.5% of assets), Asset Backed Commercial Paper (up $0.3 billion to $32.1 billion, or 1.2%), and Non-Financial Company Commercial Paper (up $1.9 billion to $24.5 billion, or 0.9%).
The 20 largest Issuers to taxable money market funds as of Dec. 31, 2016, include: the US Treasury ($822.7billion, or 31.0%), Federal Home Loan Bank ($483.3B, 18.2%), Federal Reserve Bank of New York ($389.9B, 14.7%), Federal Home Loan Mortgage Co. ($67.8B, 2.6%), Federal Farm Credit Bank ($66.2B, 2.5%), BNP Paribas ($55.7B, 2.1%), RBC ($55.4B, 2.1%), Wells Fargo ($50.3B, 1.9%), Nomura ($34.7B, 1.3%), Bank of America ($33.1B, 1.2%), Mitsubishi UFJ Financial Group Inc. ($32.6B, 1.2%), Federal National Mortgage Association ($32.1B, 1.2%), Bank of Nova Scotia ($31.1B, 1.2%), Citi ($28.0B, 1.1%), Bank of Montreal ($27.9B, 1.1%), Societe Generale ($23.0B, 0.9%), Toronto-Dominion Bank ($22.8B, 0.9%), JP Morgan ($22.1B, 0.8%), HSBC ($21.4B, 0.8%), and Natixis ($18.6B, 0.7%).
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 ($389.9B, 46.8%), BNP Paribas ($48.2B, 5.8%), RBC ($41.8B, 5.0%), Wells Fargo ($39.6B, 4.8%), Nomura ($34.7B, 4.2%), Bank of America ($30.2B, 3.6%), Bank of Nova Scotia ($21.1B, 2.5%), Citi ($20.4B, 2.4%), Societe Generale ($17.8B, 2.1%), and JP Morgan ($17.6B, 2.1%). The 10 largest Fed Repo positions among MMFs on 12/31 include: JP Morgan US Govt ($25.0B), Goldman Sachs FS Gvt ($20.0B), Northern Trust Trs MMkt ($18.5B), Dreyfus Govt Cash Mngt ($18.3B), Vanguard Prime MMkt Fund ($14.0B), Federated Gvt Oblg ($13.5B), Vanguard Fed MMkt ($13.4B), Fidelity Govt Cash Reserves ($12.8B), Fidelity Inv MM: Govt Port ($12.5B), and State Street Inst US Gvt ($12.2B).
The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: Mitsubishi UFJ Financial Group Inc. ($15.7B, 5.6%), RBC ($13.6B, 4.9%), Toronto-Dominion Bank ($13.0B, 4.7%), Bank of Montreal ($11.1B, 4.0%), Wells Fargo ($10.7B, 3.8%), Canadian Imperial Bank of Commerce ($10.2B, 3.7%), Bank of Nova Scotia ($10.0B, 3.6%), Sumitomo Mitsui Banking Co ($9.8B, 3.5%), Australia & New Zealand Banking Group Ltd ($9.8B, 3.5%), and Credit Agricole ($9.5B, 3.4%).
The 10 largest CD issuers include: Mitsubishi UFJ Financial Group Inc. ($11.8B, 8.1%), Toronto-Dominion Bank ($11.4B, 7.8%), Bank of Montreal ($10.6B, 7.2%), Wells Fargo ($10.6B, 7.2%), Bank of Nova Scotia ($7.1B, 4.8%), Svenska Handelsbanken ($7.0B, 4.8%), RBC ($6.5B, 4.5%), Canadian Imperial Bank of Commerce ($6.1B, 4.2%), Sumitomo Mitsui Banking Co ($5.9B, 4.0%), and Sumitomo Mitsui Trust Bank ($5.6B, 3.8%). The 10 largest CP issuers (we include affiliated ABCP programs) include: Commonwealth Bank of Australia ($5.9B, 5.4%), Societe Generale ($4.9B, 4.4%), Microsoft Co. ($4.9B, 4.4%), Credit Agricole ($4.2B, 3.9%), Westpac Banking Co ($4.0B, 3.7%), JP Morgan ($3.9B, 3.6%), Australia & New Zealand Banking Group Ltd ($3.7B, 3.4%), RBC ($3.7B, 3.4%), FMS Wertmanagement ($3.7B, 3.3%), and BNP Paribas ($3.6B, 3.3%),
The largest increases among Issuers include: Federal Reserve Bank of New York (up $216.5B to $389.9B), Federal Home Loan Bank (up $9.4B to $483.3B), RBC (up $6.0B to $55.4B), Bank of Montreal (up $5.3B to $27.9B), Australia & New Zealand Banking Group Ltd (up $3.1B to $9.9B), Toronto-Dominion Bank (up $2.1B to $22.8B), Citi (up $1.9B to $28.0B), Westpac Banking Co (up $1.6B to $7.0B), Mitsubishi UFJ Financial Group Inc (up $1.5B to $32.6B), and Canadian Imperial Bank of Commerce (up $1.2B to $16.9B).
The largest decreases among Issuers of money market securities (including Repo) in Dec. were shown by: the US Treasury (down $59.3B to $822.7B), Credit Agricole (-$40.9B to $16.2B), BNP Paribas (-$33.6B to $55.7B), Societe Generale (-$16.3B to $23.0B), Credit Suisse (-$15.5B to $8.7B), Barclays PLC (-$15.3B to $8.0B), Deutsche Bank AG (-$12.7B to $12.0B), Federal Home Loan Mortgage Co (-$10.2B to $67.8B), Wells Fargo (-$9.8B to $50.3B), and JP Morgan (-$9.7B to $22.1B).
The United States remained the largest segment of country-affiliations; it represents 78.1% of holdings, or $2.075 trillion. Canada (6.2%, $163.6B) moved up to second place ahead of France (4.5%, $120.2B), now in 3rd. Japan (4.3%, $114.9B) stayed in fourth, while the United Kingdom (1.5%, $39.9B) remained in fifth place. Australia (1.3%, $35.6B) moved up to sixth, ahead of Germany (1.0%, $27.4B) in seventh. The Netherlands (0.9%, $24.2B) and Sweden (0.9%, $23.0B) were eighth and ninth, respectively. Switzerland (0.5%, $12.8B) was tenth. (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 Dec. 31, 2016, Taxable money funds held 35.5% (down from 28.8%) of their assets in securities maturing Overnight, and another 10.0% maturing in 2-7 days (down from 14.0%). (Note that due to the weekend at month-end and New Year's Day Holiday on 1/2/17, our "1-day" maturity was actually 3 days.) Thus, 45.5% in total matures in 1-7 days. Another 12.5% matures in 8-30 days, while 11.7% matures in 31-60 days. Note that almost three-quarters, or 69.7% of securities, mature in 60 days or less (down from last month), the dividing line for use of amortized cost accounting under the new pending SEC regulations. The next bucket, 61-90 days, holds 11.7% of taxable securities, while 11.4% matures in 91-180 days, and just 7.2% matures beyond 180 days.
Crane Data's Taxable MF Portfolio Holdings (and Money Fund Portfolio Laboratory) were updated Friday, 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 our Portfolio Laboratory to access our "transparency" module. Contact us if you'd like to see a sample of our latest Portfolio Holdings Reports.
Below, we reprint the article, "Top Money Funds of 2016; 8th Annual MFI Awards," from the January edition of our Money Fund Intelligence.... In this issue, we recognizes the top‐performing money funds, ranked by total returns, for calendar year 2016, as well as the top ranked funds for the past 5‐year and 10‐year periods. We present the funds below with our annual Money Fund Intelligence Awards. These include the No. 1‐ranked funds based on 1‐year, 5‐year and 10‐year returns, through Dec. 31, 2016, in each of our major fund categories -- Prime Institutional, Government Institutional, Treasury Institutional, Prime Retail, Government Retail, Treasury Retail and Tax‐Exempt. (Note: We've posted the latest versions of our "Funds" and "Portfolio Holdings" data files from the SEC's Form N-MFP data series here. Our normal January Money Fund Portfolio Holdings will also be released later today.)
The Top-Performing Taxable fund overall in 2016 and top among Prime Institutional funds was Deutsche Variable NAV MM Cap (VNVXX), which returned 0.68%. The Top Prime Inst fund over $100 million (and unrestricted) was Western Asset Inst Liquid Res Inst (CILXX), which returned 0.55%. Among Prime Retail funds, Vanguard Prime MMF Adm (VMRXX) had the best returns in 2016 (0.55%).
The Top‐Performing Government Institutional fund in 2016 was Oppenheimer Inst Govt MM E (IOEXX), which returned 0.40%. Vanguard Federal Money Mkt Fund (VMFXX) was the Top Government Retail fund over a 1‐year period with a return of 0.30%. BlackRock Cash Treas MMF SL (BRC03) ranked No. 1 in the Treasury Institutional class with a return of 0.30%. Western Asset Inst US Treas Obl MMF Inst (LUIXX) was the top-performing unrestricted fund with a return of 0.28%. Federated Trust for US Treas Obl IS (TTOXX) was No. 1 among Treasury Retail funds, returning 0.21%.
Top Funds over Past Five Years. For the 5-year period through Dec. 31, 2016, Deutsche Variable NAV MM Cap (VNVXX) took top honors for the best performing Prime Institutional money fund with returns of 0.33%. (BlackRock Cash Inst MMF Inst was No. 2.) Fidelity Inv MM: MM Port Inst (FNSXX) ranked No. 1 among Prime Retail with an annualized return of 0.22%.
Oppenheimer Inst Govt MM E (IOEXX) ranked No. 1 among Govt Institutional funds with a return of 0.19%, while Vanguard Federal Money Mkt Fund (VMFXX) ranked No. 1 among Govt Retail funds over the past 5 years with a return of 0.08%. BlackRock Cash Treas MMF SL (BRC03) ranked No. 1 in 5‐year performance among Treasury Inst money funds with a return of 0.08% (Morgan Stanley Inst Liq Treas Inst ranked first among unrestricted funds at 0.07%), and Invesco Treas Obligations Reserve (AIM45) ranked No. 1 among Treasury Retail funds with a return of 0.07%.
Best Money Funds of the Decade. The highest‐performers of the past 10 years include: BlackRock Cash Inst MMF Inst (BGIXX), which returned 1.05% (No. 1 among Prime Inst MMFs); Fidelity Inv MM: MM Port Inst (FNSXX), which returned 1.06% (best among Prime Retail); Oppenheimer Inst Govt MM L (IOLXX), which returned 1.04%, (No. 1 among Govt Inst funds); and Fidelity MMT: Retire Govt MMP II (FRTXX), which ranked No. 1 among Govt Retail funds (0.87%). Invesco Treas Obligations Institutional (TSPXX) and Vanguard Treasury Money Market (VUSXX) returned the most among Treasury Inst funds over the past 10 years at 0.77%; and, Invesco Treas Obligations Private (TXPXX) ranked No. 1 among Treasury Retail MMFs at 0.70%.
Top Tax‐Exempt Funds. We're also giving out awards for the best‐performing Tax‐Exempt money funds. Dreyfus Municipal Cash Mg Pls Ins (DIMXX) ranked No. 1 for the 1‐year period ended Dec. 31, 2016, with a return of 0.55%. Over the last 5 years, BMO Tax Free MMF Premier (MFIXX) was the top performer with a return of 0.15%. BMO Tax Free MMF Premier also was the top‐ranked fund for the 10‐year period with a return of 0.85%.
See the MFI Award Winner listings in `MFI, and see our latest Money Fund Intelligence XLS for more detailed rankings. Winners will receive a letter and certificate stating their No. 1 ranking, the number of funds in their category, and the criteria used. The tables in MFI below show the No. 1 ranked money fund for each category based on 1‐year, 5‐year, and 10‐year annualized total returns.
Crane Data's latest Money Fund Market Share rankings show modest asset increases for the majority of U.S. money fund complexes in December, as total assets increased by $116.3 billion, or 4.2%. (Note: December's asset totals were inflated by the addition of $110 billion in "internal" money funds to our collections.) Overall assets rose by $159.8 billion, or 6.1%, over the past 3 months. Over the past 12 months through Dec. 31, they've increased by $79.1 billion, or 2.9%. (Both totals were also inflated by our added assets though.) The biggest gainers in December were Vanguard, whose MMFs rose by $55.8 billion, or 27.3%, and Fidelity, whose MMFs rose by $42.9 billion, or 9.3%. (Note: These two complexes were inflated by the addition of the $49.6 billion Vanguard Liquidity Fund, the $2.4B Vanguard Muni Cash Management, the $34.6B Fidelity Cash Central Fund, the $5.6B Fidelity NC Capital Mmgt Govt Port and the $1.8B Fidelity Money Market Central Fund. TIAA-CREF and PFM's totals were also inflated by the addition of new funds to our collections.)
Goldman Sachs, Dreyfus, and Western also saw (unadulterated) assets increase, rising by $6.0 billion, $5.8B, and $4.0B, respectively. The biggest declines were seen by JPMorgan, Wells Fargo and Invesco. (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 market share totals below, and we also look at money fund yields the past month, which jumped for Taxable and Tax Exempt funds.
Over the past year through Dec. 31, 2016, Vanguard (up $81.0B) and Fidelity (up $60.4B) were the largest gainers, but Goldman Sachs would have been the largest gainer (up $31.5B, or 18.8%) had we adjusted for the added Vanguard ($52.0B) and Fidelity ($42.0B) assets. These were followed by BlackRock (up $22.0B, or 9.8%), First American (up $6.3B, or 15.8%), PNC (up $6.2B, or 117.8%), TIAA-CREF (up $5.5B, but all was due to the addition of the $5.5B TIAA-CREF Money Market Account to MFI XLS), and Northern (up $5.1B, or 6.0%). Vanguard, Fidelity, Goldman Sachs, JP Morgan, and Morgan Stanley had the largest money fund asset increases over the past 3 months, rising by $65.2B, $61.7B, $13.2B, $11.1B and $5.6B, respectively.
Other asset gainers for the past year include: AB (Alliance Bernstein) (up $4.3B; we added AB Govt MM in late 2016), UBS (up $1.4B, 3.9%), American Funds (up $1.1B, 7.2%), USAA (up $1.1B, or 12.2%), Oppenheimer (up $1.1B, 11.5%), and American Beacon (up $1.0B, 254.3%). The biggest decliners over 12 months include: Wells Fargo (down $21.3B, or -17.4%), Federated (down $15.8B, or -7.4%), Dreyfus (down $13.1B, or -8.0%), SSGA (down $12.5B, or -13.0%), Deutsche (down $10.1B, or -33.4%), and Franklin (down $6.2B, or -26.3%).
Our latest domestic U.S. Money Fund Family Rankings show that Fidelity Investments remains the largest money fund manager with $505.9 billion, or 18.3% of all assets (up $42.9 billion in Dec., up $61.7 billion over 3 mos., and up $60.4B over 12 months). Vanguard is now second with $260.3 billion, or 9.4% of assets (up $55.8B, up $65.2B, and up $81.0B for the past 1-month, 3-mos. and 12-mos., respectively). BlackRock is third with $247.1 billion, or 8.9% market share (down $1.3B, up $1.8B, and up $22.0B for the past 1-month, 3-mos. and 12-mos., respectively). JPMorgan is in fourth with $244.0 billion, or 8.8% of assets (up $6.9B, up $11.1B, and down $664M).
Goldman Sachs moved up to 5th with $199.3 billion, or 7.2% of assets (up $6.0B, up $13.2B, and up $31.5B). Federated dropped down to sixth place with $196.1 billion, or 7.1% (up $2.0B, down $2.9B, and down $15.8B). Schwab ($160.5B, or 5.8%) was in seventh place, followed by Dreyfus in eighth place ($150.0B, or 5.4%), Morgan Stanley in ninth place ($134.8B, or 4.9%), and Wells Fargo in tenth place ($101.5B, or 3.7%).
The eleventh through twentieth largest U.S. money fund managers (in order) include: Northern ($90.4B, or 3.3%), SSGA ($83.2B, or 3.0%), Invesco ($52.0B, or 1.9%), First American ($46.3B, or 1.7%), Western ($38.4B, or 1.4%), UBS ($38.3B, or 1.4%), Deutsche ($20.2B, or 0.7%), Franklin ($17.4B, or 0.6%), American Funds ($16.8B, or 0.6%), and T. Rowe Price ($15.9B, or 0.6%). The 11th through 20th ranked managers are the same as last month, except Western moved ahead of UBS. Crane Data currently tracks 64 U.S. MMF managers, one more than last month. (We added Jackson National Life's JNL Money Market Fund this month.)
When European and "offshore" money fund assets -- those domiciled in places like Ireland, Luxembourg, and the Cayman Islands -- are included, the top 10 managers match the U.S. list, except for JPMorgan moving ahead of BlackRock and Vanguard, BlackRock and Goldman Sachs moving ahead of Vanguard, Dreyfus/BNY Mellon and Morgan Stanley moving ahead of Schwab to 7th and 8th, and SSGA moving ahead of Wells Fargo into 10th place.
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 ($514.0 billion), JP Morgan ($393.4B), BlackRock ($363.6B), Goldman Sachs ($300.3B) and Vanguard ($260.3B). Federated ($204.4B) was sixth, followed by Dreyfus/BNY Mellon ($173.7B), Morgan Stanley ($164.1B), Schwab ($160.5B), and SSGA ($108.6B), 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.
The January issue of our Money Fund Intelligence and MFI XLS, with data as of 12/31/16, shows that yields jumped across all of the Crane Money Fund Indexes following the Fed hike on Dec. 14. The Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 728), was up 9 bps to 0.26% for the 7-Day Yield (annualized, net) Average, and the 30-Day Yield was up 6 bps to 0.22%. The MFA's Gross 7-Day Yield moved higher to 0.61% (up 11 bps), while the Gross 30-Day Yield was up 8 bps to 0.57%.
Our Crane 100 Money Fund Index shows an average 7-Day (Net) Yield of 0.43% (up 13 bps) and an average 30-Day Yield of 0.38% (up 9 bps). The Crane 100 shows a Gross 7-Day Yield of 0.68% (up 14 bps), and a Gross 30-Day Yield of 0.57% (up 8 bps). For the 12 month return through 12/31/16, our Crane MF Average returned 0.13% and our Crane 100 returned 0.25%. The total number of funds, including taxable and tax-exempt, increased to 975, up 5 from last month. There are currently 728 taxable and 247 tax-exempt money funds.
Our Prime Institutional MF Index (7-day) yielded 0.49% (up 17 bps) as of Dec. 31, while the Crane Govt Inst Index was 0.27% (up 11 bps) and the Treasury Inst Index was 0.24% (up 10 bps). Thus, the spread between Prime funds and Treasury funds is 25 basis points, up 7 bps from last month. The Crane Prime Retail Index yielded 0.35% (up 10 bps), while the Govt Retail Index yielded 0.06% (up 3 bps) and the Treasury Retail Index was 0.07% (up 3 bps). The Crane Tax Exempt MF Index yield rose to 0.26% (up 11 bps).
The Gross 7-Day Yields for these indexes in December were: Prime Inst 0.84% (up 19 bps), Govt Inst 0.53% (up 12 bps), Treasury Inst 0.50% (up 10 bps), Prime Retail 0.84% (up 12 bps), Govt Retail 0.48% (up 5 bps), and Treasury Retail 0.45% (up 8 bps). Also, the Crane Tax Exempt Index increased 14 basis points to 0.71%. The Crane 100 MF Index returned on average 0.03% for 1-month, 0.08% for 3-month, 0.25% for YTD, 0.25% for 1-year, 0.10% for 3-years (annualized), 0.08% for 5-years, and 0.80% for 10-years. (Contact us if you'd like to see our latest MFI XLS, Crane Indexes or Market Share report.)
The January issue of our flagship Money Fund Intelligence newsletter, which was sent to subscribers Monday morning, features the articles: "Money Fund Highlights of '16; Higher Yields The Story in '17," which reviews the top stories of 2016; "AB's Ed Dombrowski on Growing Govt MMFs," which profiles the Portfolio Manager of the AB Government Money Market Portfolio; and "Top Money Funds of 2016; 8th Annual MFI Awards," which looks at the top-performing money funds of 2016. We have updated our Money Fund Wisdom database query system with Dec. 31, 2016, performance statistics, and also sent out our MFI XLS spreadsheet Monday a.m. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our January Money Fund Portfolio Holdings are scheduled to ship Wednesday, Dec. 11, and our Dec. Bond Fund Intelligence is scheduled to go out Tuesday, Jan. 17.
MFI's lead "Money Fund Highlights of '16" article says, "In 2016, we witnessed historic changes to money market mutual funds. Money Fund Reforms went live in October, and prior to this date we witnessed a $1 trillion-plus shift from Prime to Government funds. This "big sort" drove lineup changes, liquidations, and consolidation last year, but amazingly overall asset levels remained flat for their fifth straight year. Below, we take a look back at the highlights of 2016, and we also give a brief outlook for 2017."
It adds, "The unprecedented changes were driven by provider and investor fears of gates and fees, and flows in 2016 were driven by sweep providers converting funds and institutional investors fleeing Prime to "go Government." We show monthly asset levels and yields in the chart on page 1. In the coming year, however, higher rates, the acceptance of prime money fund alternatives and investors' potential return to Prime look to be the big stories." (See also, Crane Data's Dec. 28 News, "Top 10 Stories of 2016: Prime to Govie Shift, Reforms Go Live, Changes.")
Our latest fund "profile" interview reads, "This month, Money Fund Intelligence interviews AB Government Money Market Portfolio Vice President & Portfolio Manager Ed Dombrowski. AB, the former AllianceBernstein, whose motto is "Ahead of Tomorrow," has been rebranding and focusing on expanding their money market fund presence by courting the "portal" and institutional marketplace, among other things. Our Q&A follows."
MFI asks, "Tell us a little bit about your history." Dombrowski answers, "We have a long history, nearly 40 years, in the money fund business. The first fund started in July 1978. Alliance Capital was a top 15 sponsor in the 90's and early 2000's. In 2005, the firm sold its money fund business to Federated. From 2005-2013, we refocused our efforts to efficiently manage internal cash, and one of the results of that was creating our Government Money Market Portfolio (formerly Government STIF Portfolio). I came to AB in 2001, and joined its cash management team in 2004. I spent some time in different areas on the cash management desk before becoming a portfolio manager, running three 2a-7 registered government funds, as well as separate accounts."
Our "Top Money Funds of 2016" article explains, "In this issue, we recognize the top‐performing money funds, ranked by total returns, for calendar year 2016, as well as the top ranked funds for the past 5-year and 10-year periods. We present the funds below with our annual Money Fund Intelligence Awards. These include the No. 1-ranked funds based on 1-year, 5-year and 10-year returns, through Dec. 31, 2016, in each of our major fund categories -- Prime Institutional, Government Institutional, Treasury Institutional, Prime Retail, Government Retail, Treasury Retail and Tax‐Exempt."
The article continues, "The Top-Performing Taxable fund overall in 2016 and top among Prime Institutional funds was Deutsche Variable NAV MM Cap (VNVXX), which returned 0.68%. The Top Prime Inst fund over $100 million (and unrestricted) was Western Asset Inst Liquid Res Inst (CILXX), which returned 0.55%. Among Prime Retail funds, Vanguard Prime MMF Adm (VMRXX) had the best returns in 2016 (0.55%)."
In a sidebar, we discuss, "Worldwide MF Assets: Lux, China, France, India Gain," saying, "The Investment Company Institute released its "Worldwide Regulated Open-End Fund Assets and Flows Third Quarter 2016" earlier this week. The latest data collection on mutual funds in other countries (as well as the U.S.) shows that money fund assets globally rose by $56.3 billion, or 1.1% in Q3'16, led by increases in Luxembourg, China, France and India. MMF assets worldwide have risen by $220.4 billion, or 4.6%, the past 12 months. China, Brazil, Luxembourg, France, Ireland and India showed the biggest asset increases in the past 12 months through Sept. 30, 2016. The U.S., Ireland, Brazil and Japan showed the largest declines in Q3, while Japan, Mexico and Sweden posted the largest declines over the past year."
We also do a sidebar, entitled, "MFI Adding Internal MFs." It comments, "Since the SEC began disclosure of its Form N-MFP filings without a 2-month lag in April 2016, we've been parsing and integrating this new trove of data into our existing collections and products. This month, we've added a big batch (10) of private and internal money market funds to our listings. We've been offering the full N-MFP fund listings in our "fundsnmfp" file (available via our "Content" center) for months now, but now we've begun integrating many of the previously non-public money funds. We list the 15 largest of these internal and private money funds below. They total $219.7 billion, with 10 Prime funds totaling $178.3B. Note that we've added $110.3B of these assets (the funds in bold) this month."
Our January MFI XLS, with Dec. 31, 2016, data, shows total assets increased $115.1 billion in December to $2.761 trillion (this includes the addition of $110.3 billion in new funds) after increasing $32.1 billion in November, and decreasing $3.1 billion in October and $48.5 billion in September. Our broad Crane Money Fund Average 7-Day Yield was up 9 bps to 0.26% for the month, while our Crane 100 Money Fund Index (the 100 largest taxable funds) rose 13 bps to 0.43% (7-day).
On a Gross Yield Basis (before expenses were taken out), the Crane MFA rose 0.11% to 0.61% and the Crane 100 rose 14 bps to 0.68%. Charged Expenses averaged 0.35% and 0.25% for the Crane MFA and Crane 100, respectively (unchanged). The average WAM (weighted average maturity) for the Crane MFA was 36 days (up 1 day from last month) and for the Crane 100 was 37 days (up 1 day). (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
Money market fund assets were roughly flat for the 5th year in a row in 2016, but they actually fell slightly, ending four straight years of fractional gains. While official monthly numbers aren't in yet, ICI's weekly "Money Market Fund Assets" report shows money fund assets down about $31 billion, or 1.1%, in 2016 (through 12/28), compared to increases of $26 billion in 2015, $14 billion in 2014, $14 billion in 2013, and $10 billion in 2012. (Assets suffered steep declines in 2009, 2010, and 2011, falling $537 billion, $483 billion and $115 billion, respectively, after rising an average of $591 billion the prior 3 years.) In 2017, though, money fund assets declined in the first week of the New Year.
Yesterday's ICI release says, "Total money market fund assets decreased by $11.25 billion to $2.72 trillion for the week ended Wednesday, January 4, the Investment Company Institute reported.... Among taxable money market funds, government funds decreased by $12.64 billion and prime funds increased by $1.22 billion. Tax-exempt money market funds increased by $170 million." Total Government MMF assets, which include Treasury funds too and which represent 81.3% of all money funds, stand at $2.209 trillion, while Total Prime MMFs, which total 13.9%, stand at $377.6 billion. Tax Exempt MMFs total $131.1 billion, or 4.8%.
ICI explains, "Assets of retail money market funds increased by $4.47 billion to $987.68 billion. Among retail funds, government money market fund assets increased by $3.52 billion to $607.77 billion, prime money market fund assets increased by $1.11 billion to $253.50 billion, and tax-exempt fund assets decreased by $150 million to $126.41 billion." Retail assets account for just over a third of total assets, or 36.3%, and Government Retail assets total 61.5% of all Retail MMFs.
The release continues, "Assets of institutional money market funds decreased by $15.72 billion to $1.73 trillion. Among institutional funds, government money market fund assets decreased by $16.16 billion to $1.60 trillion, prime money market fund assets increased by $110 million to $124.06 billion, and tax-exempt fund assets increased by $330 million to $4.74 billion." Institutional assets account for 63.7%, with Government Inst assets making up 92.6% of all Institutional MMFs.
The update notes, "ICI reports money market fund assets to the Federal Reserve each week. Data for previous weeks reflect revisions due to data adjustments, reclassifications, and changes in the number of funds reporting. Weekly money market assets for the last 20 weeks are available on the ICI website. For more information about the implementation of new money market fund rules by the Securities and Exchange Commission (SEC), please see our ICI Viewpoints."
Prime money fund assets have been roughly flat since the October 14 transition to "floating" (4-digit) NAVs, down a mere $5.4 billion since 10/19 and up $4.8 billion since 11/2/16. But in 2016 (from 12/30/15 through 12/28/16), Prime MMF assets declined by $907.4 billion, or 70.7%, and they declined by $1.082 trillion, or 74.2%, since 10/31/15 (just prior to the start of the massive Prime to Government migration).
Govt MMFs, on the other hand, were up by $1.001 trillion in 2016 (82.0%), and they're up by $1.208 trillion (119.2%) since 10/31/15. Govt money fund assets have increased by $85.2 billion since 10/19 and by $33.8 billion since 11/2/16. Tax Exempt MMFs were down by $123.4 billion in 2016 (-48.5%) and they're down by $114.0 billion (-46.5%) since 10/31/15.
We expect overall money fund assets to rebound moderately in 2017, growing by 5-10% overall. We're also assuming a modest recovery in Prime (and Tax Exempt) assets, as higher yields and larger spreads between Prime and Govt funds begin slowly attracting investors back to Prime. The Fed's Dec. 14 rate hike, which moved rates from a range of 0.25% to 0.5%, to 0.5% to 0.75%, has pushed overall money fund yields (as measured by our Crane 100 Money Fund Index, an average of the 100 largest taxable funds) from 0.33% to 0.43% so far. But rates have stalled out over the last few days, after increasing from the hike through Christmas.
Spreads between Prime Inst and Treasury Inst MMFs, which had been 20 basis points (0.36% to 0.16%), or 17 bps comparing Prime Inst with Govt Inst MMFs (0.36% to 0.29%), are now at 24 bps (0.48% vs. 0.24%), or 20 bps comparing Prime Inst with Govt Inst MMFs (0.48% vs. 0.28%). On the Retail side, spreads are even larger (27 bps) with Prime Retail MMFs yielding 0.34% vs. 0.07% for Govt Retail and 0.07% for Treasury Retail MMFs.
While yields overall likely still have more of the Fed hike to go before they truly flatten, this is unclear. From the start of 2015 through year-end, though, they are substantially higher. Our Crane 100 started 2016 yielding 0.13% and ended it at 0.43%, while our broader Crane Money Fund Average (which includes all Taxable MMFs) rose from 0.06% to 0.25% as of 12/31/16. (Watch for Crane Data's month-end asset totals and yield averages Monday with the publication of our monthly Money Fund Intelligence and MFI XLS. Note that our asset series will be showing large increases in December due to the addition of a number of private and "internal" funds -- see our Jan. 4 News and the pending MFI for more.)
Since the SEC began publicly disclosing its Form N-MFP filings without a 2-month delay in April 2016, Crane Data has been parsing and integrating this new trove of data into our existing collections and products. Beginning with the January 2017 issue of our Money Fund Intelligence newsletter and MFI XLS performance spreadsheet (which will ship on 1/9), we will add a number of private and internal money market funds previously unreported to our listings. We've been offering these full fund listings in "beta" format in our "fundsnmfp" file (available to Money Fund Wisdom subscribers via our "Content" center) for a number of months now, and we've listed several of these in our Money Fund Portfolio Holdings collections for awhile, but watch for more inclusion in the coming months. We review the largest of these and our latest fund additions below, and we also review a name change for the TDAM Money Market Funds and money fund reform piece from T. Rowe Price below.
The largest of these internal and private money funds include: Vanguard Market Liquidity Fund ($49.6 billion), Fidelity Cash Central Fund ($34.6B), DFA Short Term Investment Fund ($26.4B), Fidelity Securities Lending Cash Central Fund ($20.4B), Franklin U.S. Government MMP ($18.3B), Prudential Institutional MMF ($13.9B), Columbia Short-Term Cash Fund ($11.3B), State Street Navigator Securities Lending Govt MMP ($11.0B), TIAA-CREF Money Market Account ($11.1B), MFS Institutional Money Market Portfolio ($5.5B), JNL Money Market Fund ($3.8B), T. Rowe Price Treasury Reserve Fund ($3.2B), Vanguard Municipal Cash Management Fund ($2.4B), Fidelity Municipal Cash Central Fund ($2.1B), and Fidelity Money Market Central Fund ($1.8B). (Note that most of these do not have ticker symbols and many don't include the advisor name in their official filing names.)
The 15 funds above total $219.7 billion, while the 10 Prime funds among these total $178.3 billion. We'll be adding approximately just over half of the assets this month ($110.3 billion), with most of the remainder added over the first half of 2017. (So be wary of these asset distortions in the coming months.) Note that these funds, and those listed in our Form N-MFP files (and on the SEC's site) are all true "money market mutual funds" -- if they report as money funds, they're money funds -- but most aren't available to outside investors. These additions don't, however, include private or internal "pools" that aren't registered as MMFs. (We're still slowly attempting to locate and identify many of these too. Contact us if you'd like to see our latest "fundsnmfp" list.)
For more information on internal and private money funds and other pools, see our June 29, 2016 News, "UBS Liquidates Sweeps, Goes Govt; Vanguard Floats Internal Money Fund," our April 4, 2016 News, "Prudential Core MMF Goes Bond; BlackRock, BofA Approved; Calamos," and our July 10, 2015 News, "OFR Sheds Light on Liquidity Funds, STIFs, Managed Accts in Form PF."
In other news, a recent Prospectus Supplement filing for TD Asset Management Funds USA Funds tells us, "Effective December 7, 2016: The TDAM Money Market Portfolio is renamed TD Money Market Portfolio; the TDAM U.S. Government Portfolio is renamed TD U.S. Government Portfolio; the TDAM Municipal Portfolio is renamed TD Municipal Portfolio; the TDAM California Municipal Money Market Portfolio is renamed TD California Municipal Money Market Portfolio; and the TDAM New York Municipal Money Market Portfolio is renamed TD New York Municipal Money Market Portfolio."
It adds, "Accordingly, effective December 7, 2016, all references in the Prospectus and SAI to "TDAM Money Market Portfolio", "TDAM U.S. Government Portfolio" , "TDAM Municipal Portfolio", "TDAM California Municipal Money Market Portfolio", and "TDAM New York Municipal Money Market Portfolio" are replaced with the "TD Money Market Portfolio", "TD U.S. Government Portfolio", "TD Municipal Portfolio", "TD California Municipal Money Market Portfolio", and "TD New York Municipal Money Market Portfolio", respectively."
No word yet on whether TD Asset Management, the manager, will be changing its name or why the funds are changing names. TDAM is the 31st largest manager of U.S. money market funds with $5.5 billion. (See our August 12, 2016 News, "TDAM Does About Face, Liquidates Inst MMF and Inst Muni; More Filings," and our April 1, 2016 News, "All In: TDAM to Maintain Full MMF Roster; ICI Trends, Composition.")
Finally, in mid-December, T. Rowe Price published "New Rules for Money Market Mutual Funds," which says, "Money funds generally will remain low-risk, highly liquid places to keep cash for the short term."
The piece says, "Individual investors in money market mutual funds saw some federal rule changes governing their funds as of the middle of October of this year. The Securities and Exchange Commission (SEC) rules divide money funds into two camps -- government and nongovernment funds. The changes are most significant for nongovernment money funds. However, overall, the new rules should have little or no everyday impact on many investors."
TRP's update adds, "Money funds generally will remain low-risk, highly liquid places to keep cash for short-term needs, and those for individual investors will continue to be managed to keep their net asset value (NAV) at $1.00 per share. Under the new rules, nongovernment money funds are now required to have the ability, under certain extreme circumstances, to put into place liquidity fees and to restrict redemptions to prevent an investor "run" on money funds. This change was prompted by the money market stresses following the Lehman Brothers bankruptcy filing in 2008 that caused at least one non-T. Rowe Price money market fund's NAV to go below $1.00 per share."
Federated Investors Global Money Markets CIO and Senior Portfolio Manager Deborah Cunningham discusses her "2017 Outlook in the latest "Month in Cash commentary, and also in a new video entitled, "Will the Fed and Trump administration play nice? Cunningham discusses the Fed, flows, floating NAVs (or lack thereof) and the benefits of a regulatory rollback for money market funds. Federated writes, "The Federal Reserve met expectations -- essentially 100% of them -- by hiking its target rate in mid-December. That's good news, of course, but don't get used to expectations being met in 2017. It is setting up to be volatile, with expectations a little too positive amid many unknowns. One uncertainty is the tease the Federal Open Market Committee gave with new "dot plot" projections indicating the potential for three hikes in 2017. The market seems to have bought it. We still think two are more likely, although coming in March and September rather than June and December. That shift would leave open the possibility for a third move in December."
They explain, "The largest variable is the fiscal policy the Trump administration will officially propose. We know less about his plans than those of any incoming administration in recent times. That spells volatility, even though its impact won't be felt immediately. We have been conditioned in recent years to look to monetary policy alone for action on the economy. Now we should finally have real fiscal changes to consider. Expectations again play a role as people have high hopes for the positives Trump could serve up. We hope those will be met and that the Fed will keep its upward momentum, but there is plenty of room for disappointment.... It might not take much to throw the Fed off course again."
The update continues, "But the most significant element in 2017 could relate to regulation -- specifically the peeling back of some. This would be a boon to cash managers. While the recent money market fund reform is likely to remain, other regulations also have impacted us. Over the course of 2016, banking regulators influenced the patterns and predictability of issuers, leading many to cut back issuance lest they not have the required liquidity levels. This uncertainty was detrimental to the industry; money markets need short-term financing to work smoothly. It would help tremendously if banks were able to issue more 1-, 2- and 3-month commercial paper and CDs without worrying about being penalized. Thankfully, the U.S. Treasury stepped in and issued more bills and notes to bridge the gaps in 2016. But if banking regulations get rolled back to some degree, it should make for a more productive world for cash managers and their clients."
Federated's monthly adds, "Overall, we are positive about 2017 and see upward steps for cash management. Yields most likely will increase as we get Fed moves, and there has been little movement in the net asset values (NAVs) of fluctuating NAV money funds in the industry as a whole. None of our floating-NAV funds deviated from the $1.0000 share valuation around the recent Fed move. We are still targeting our weighted average maturity to a range of 40-50 days for our prime and government money funds, and the London interbank offered rate (Libor) continues to be supportive. December ended the year on an upbeat note, and it may very well be a happy new one."
In the video, Cunningham was asked what her outlook is for rates in 2017. She tells us, "Our expectation would be for two 25 basis point rate increases in 2017, which is really unchanged from where we've been since the middle of last year. What has changed would be the timing of those rates moves. We were originally considering something that was more like June and December for those rate increases.... I would say now [we] are more in line with what would be a March and September expectation, which would leave them a little wiggle room at the end of the year if we continue to see a need for increasing rates at that point."
She was asked for her outlook on the money market landscape in 2017. Cunningham explains, "I think at this point with rates above the abysmal level, the expectation would be that we start to see some cash flow back in from an industry stand point." She states, "The industry from an asset standpoint has been very steady, around $2.7 trillion, for the last several years.... The expectation would be that with increasing rates, and overall higher yields and spreads, that you would see government products continue to do well from a cash flow perspective. But perhaps prime and muni products that have been disenchanted from a user-ship standpoint because of money market reform maybe gain a little traction just simply because their spread is a little bit more attractive at this point."
Finally, Cunningham ends the video with her opinion on how the Fed will operate under a Trump Presidency. She comments, "Given that the Fed is an independent entity, we do think that they will continue their independence throughout 2017. But obviously they have to coexist and work productively with the current administration. So given that the Trump Presidency will likely involve a little bit more stimulus, a little higher growth from a GDP perspective, and with that a little bit higher inflation, `what we think is in store is the Fed that becomes a little bit more cautious. The Fed has certainly been very accommodative over the course of the last several years and we do think that there will be more caution that is brought into the picture from a Fed standpoint for 2017."
In other news, a Prospectus Supplement for BlackRock's money funds obtains permission for an "interfund lending" program. It explains, "The Funds have received an order from the Securities and Exchange Commission granting exemptions from certain provisions of the Investment Company Act of 1940, as amended, and rules thereunder, including a provision requiring that certain borrowings be made only from banks. Pursuant to the Order, the Funds may participate in an interfund lending program (the "Interfund Lending Program") under which each Fund may lend money directly to and borrow money directly from certain other open-end BlackRock funds, including the Funds, for temporary purposes, to the extent consistent with its investment objectives, restrictions, policies, limitations and organizational documents, and subject to the conditions of the Order."
The filing explains, "Pursuant to an exemptive order granted by the SEC, an open-end BlackRock fund, including a Fund, to the extent permitted by its investment policies and restrictions and subject to meeting the conditions of the IFL Order, has the ability to lend money to, and borrow money from, other BlackRock funds pursuant to a master interfund lending agreement. Under the Interfund Lending Program, BlackRock funds may lend or borrow money for temporary purposes directly to or from other BlackRock funds.... All Interfund Loans would consist only of uninvested cash reserves that the lending BlackRock fund otherwise would invest in short-term repurchase agreements or other short-term instruments. Although the Funds may, to the extent permitted by their investment policies, participate in the Interfund Lending Program as borrowers or lenders, they typically will not need to participate as borrowers because the Funds are money market funds and are required to comply with the liquidity provisions of Rule 2a-7 under the 1940 Act."
Finally, it adds, "If a BlackRock fund has outstanding bank borrowings, any Interfund Loans to such BlackRock fund would: (a) be at an interest rate equal to or lower than that of any outstanding bank loan, (b) be secured at least on an equal priority basis with at least an equivalent percentage of collateral to loan value as any outstanding bank loan that requires collateral, (c) have a maturity no longer than any outstanding bank loan (and in any event not over seven days), and (d) provide that, if an event of default occurs under any agreement evidencing an outstanding bank loan to the BlackRock fund, that event of default will automatically (without need for action or notice by the lending BlackRock fund) constitute an immediate event of default under the interfund lending agreement, entitling the lending BlackRock fund to call the Interfund Loan immediately (and exercise all rights with respect to any collateral), and cause such call to be made if the lending bank exercises its right to call its loan under its agreement with the borrowing BlackRock fund."
The Federal Reserve updated its "Money Market Funds: Investment Holdings Detail," a recent addition to its "Financial Accounts Guide" portion of the Fed's Z.1 (formerly Flow of Funds) data series. The Fed writes, "These tables provide additional detail on the investment holdings of U.S. money market funds, based on a monthly dataset of security-level holdings for all U.S. money market funds. Table 1 reports the aggregate dollar amount of investments of U.S. money market funds since 2010, by the world region and country of the security issuer.... U.S. investments are subcategorized into Treasury securities, agency and GSE securities, Federal Reserve reverse repurchase agreements, municipal securities, and other U.S. investments."
They continue, "Table 2 provides a finer level of detail by month, showing, for each country of issuer, the aggregate dollar amount of investments of U.S. money market funds by type of money fund (i.e., prime, government, and municipal bond funds), type of security (i.e., direct debt and deposits, repurchase agreement, asset-backed commercial paper, and other), and by maturity of the security. The first figure depicts the asset allocation of U.S. money market fund portfolios over time. Figures 2, 3, and 4 show the asset allocation of prime, government, and tax-exempt money market funds, respectively, over time.... Figures 5 and 6 report additional detail on the repurchase agreement holdings and the commercial paper holdings, respectively, for U.S. money market funds."
Tables now provided by the Fed include: Table 1. U.S. Money Market Fund Investment Holdings by Country of Issuance, Table 2. U.S. Money Market Fund Investment Holdings by Country of Issuance, Fund Type, Instrument, and Maturity.
They also include the following Charts: Figure 1. Total Money Market Fund Investment Holdings by Instrument, Figure 2. Prime Money Market Fund Investment Holdings by Instrument, Figure 3. Government Money Market Fund Investment Holdings by Instrument, Figure 4. Tax-exempt Money Market Fund Investment Holdings by Instrument:, Figure 5. Money Market Fund Repo Holdings, and, Figure 6. Money Market Fund Commercial Paper (CP) Holdings.
The Fed explains in its "Documentation," "The data on money market fund investments are taken from the SEC form N-MFP filings. The reported values are the sums of the investments of all U.S. money market funds for the respective category. The country labels represent the country of domicile of the security issuer. The data are available at a monthly frequency beginning in December 2010. Total assets reported differ slightly from the number reported in Table L.121 of the Financial Accounts of the United States. The main difference is due to the fact that the data presented on this page include money market funds that are not marketed to the public, which are excluded from Table L.121."
In other news, a new study on the $4.9 trillion in 401(k) plans, entitled, "The BrightScope/ICI Defined Contribution Plan Profile: A Close Look at 401(k) Plans, 2014," analyzes "the most recent detailed data available from the Department of Labor on a wide range of private-sector 401(k) plans." It says, "Mutual funds were the most common 401(k) investment vehicle, holding 46 percent of 401(k) plan assets in the sample in 2014.... Equity funds accounted for the largest share of assets in 401(k) plans. In 2014, 44 percent of assets were held in equity funds, 21 percent was held in balanced funds (with most of that being held in target date funds), and 8 percent was held in bond funds. GICs and money funds accounted for 11 percent of assets."
They wrote, "[D]omestic equity funds, international equity funds, and domestic bond funds were the most likely investment options to be offered in 401(k) plans in 2014. Nearly all plans offered these types of funds.... About half of 401(k) plans offered money funds and seven in 10 offered guaranteed investment contracts (GICs).... More than 30 percent of 401(k) plans had international bond funds in their investment lineups.... However, larger plans were more likely to offer other investments (which include company stock) and money funds."
The table, "Average Number of Investment Options in 401(k) Plans by Type of Investment" shows domestic bond funds averaging 3.7 choices in all of the plans, international bond funds 0.4, money funds averaging 0.6, and guaranteed investment contracts 0.8. Another table that shows the "percentage of total assets among plans with audited 401k filings" estimates that domestic bond fund had 7.5% of assets, international bond funds 0.3%, money funds 2.1%, and guaranteed investment contracts 8.9%. Thus, money funds represent approximately $102.9 billion of 401(k) plan assets, bond funds would be $382.2 billion and GICs about $436.1 billion. Lastly, a table on "Average Expense Ratios of Mutual Funds in 401(k) Plans, 2014" shows that domestic bond funds averaged 0.39% in expenses, international bond funds averaged 0.71%, and money market mutual funds averages 0.14%.
Also, a press release entitled, "Weitz Funds Reduces Expenses and Repositions Fixed Income Offerings," tells us, "Weitz Investment Management, Inc. (weitzinvestments.com), advisor to the Weitz Funds, has reduced expenses for its suite of fixed income Funds, including the Short Duration Income Fund, Core Plus Income Fund and Ultra Short Government Fund.... `The fee caps for the Short Duration Income Fund (formerly the Short-Intermediate Income Fund) have been reduced for the Institutional Class (WEFIX) from 0.62% to 0.48% and the Investor Class (WSHNX) from 0.85% to 0.68%."
The release adds, "Weitz also converted its Government Money Market Fund to the Ultra Short Government Fund (SAFEX) in an effort to better align fixed income offerings, provide more clarity and streamline fixed income solutions for its investors. The Fund will no longer operate as a 'money market fund' under Rule 2a-7 of the Investment Company Act of 1940."
Weitz Investment Management President Ken Stoll tells us, "Regulations and requirements for money market funds have become progressively more onerous. We evaluated various options and believe the best solution for our shareholders was to convert our money market fund to the Ultra Short Government Fund, retaining the investment objective of current income consistent with the preservation of capital and maintenance of liquidity."
Finally, in other news, a statement entitled, "New York Fed updates reverse repo counterparties list says, "Northern Funds - U.S. Government Money Market Fund has been added to the list of reverse repo counterparties, effective December 27, 2016."