News Archives: May, 2017
The Investment Company Institute released its latest monthly "Trends in Mutual Fund Investing," and its latest "Month-End Portfolio Holdings of Taxable Money Funds" updates yesterday. The report confirmed that `Treasury holdings plunged while Repo moved higher in April. (See our May 10 News, "May Money Fund Portfolio Holdings: Repo, CD, CP Up; Treasuries Plunge.") We review these latest reports below, and we also cite a filing from Federated Investors in what could be the first of a series of mergers in the Prime fund space.
ICI's latest "Trends in Mutual Fund Investing - April 2017" shows a $24.0 billion decrease in money market fund assets in April to $2.640 trillion. The decrease follows a $17.7 billion decrease in March, a $0.4 billion dollar increase in February, and a $46.6 billion increase in January. In the 12 months through April 30, money fund assets were down $76.7 billion, or -2.8%. (Month-to-date in May through 5/29/17, our Money Fund Intelligence Daily shows total assets up by $13.9 billion.)
The monthly report states, "The combined assets of the nation's mutual funds increased by $148.59 billion, or 0.9 percent, to $17.14 trillion in April, 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."
It explains, "Bond funds had an inflow of $14.98 billion in April, compared with an inflow of $29.09 billion in March.... Money market funds had an outflow of $24.86 billion in April, compared with an outflow of $18.47 billion in March. In April funds offered primarily to institutions had an outflow of $6.31 billion and funds offered primarily to individuals had an outflow of $18.55 billion."
The latest "Trends" shows that both Taxable MMFs and Tax-Exempt MMFs declined last month. Taxable MMFs decreased by $21.9 billion in April, after decreasing $17.5 billion in March, increasing $0.8 billion in February and decreasing $46.8 billion in January. Tax-Exempt MMFs decreased $2.2 billion in April, after decreasing $0.3 billion in March, $0.3 billion in February and adding $0.1 billion in Jan. Over the past year through 4/30/17, Taxable MMF assets decreased by $9.9 billion while Tax-Exempt funds fell by $86.7 billion.
Money funds now represent 15.4% (down from 15.7% last month) of all mutual fund assets, while bond funds represent 22.3%, according to ICI. The total number of money market funds was down 2 to 418 in April, but down from 455 a year ago. (Taxable money funds have decreased from 320 to 318 and Tax-exempt money funds were unchanged at 100 over the last month.)
ICI's Portfolio Holdings showed a huge drop in Treasuries in April and a jump in Repo. Repo remained the largest portfolio segment and rose by $21.9 billion, or 2.7%, to $830.0 billion or 33.0% of holdings. Repo has increased by $300.1 billion over the past 12 months, or 56.6%. Treasury Bills & Securities remained in second place among composition segments, but they plummeted $101.7 billion, or -13.1%, to $674.9 billion, or 26.9% of holdings. Treasury holdings rose by $158.8 billion, or 30.8%, over the past year. U.S. Government Agency Securities remained in third place, but were flat (down $491 million, or -0.1%) at $643.2 billion or 25.6% of holdings. Govt Agency holdings rose by $172.5 billion, or 36.6%, over the past 12 months.
Certificates of Deposit (CDs) stood in fourth place; they increased $7.8 billion, or 4.3%, to $189.9 billion (7.6% of assets). CDs held by money funds fell by $386.2 billion, or -67.0%, over 12 months. Commercial Paper remained in fifth place but increased $8.3B, or 7.6%, to $117.7 billion (4.7% of assets). CP has plummeted by $213.3 billion, or -64.4%, over one year. Notes (including Corporate and Bank) were up by $338 million, or 4.2%, to $48.6 billion (0.3% of assets), and Other holdings inched down to $1.8 billion.
The Number of Accounts Outstanding in ICI's series for taxable money funds increased by 367.9 thousand to 25.945 million, while the Number of Funds inched down by two to 318. Over the past 12 months, the number of accounts rose by 2.667 million and the number of funds declined by 8. The Average Maturity of Portfolios was 35 days in April, down 3 days from March. Over the past 12 months, WAMs of Taxable money funds have shortened by 3 days.
In other news, a Prospectus Supplement filing from Federated Investors tells us, "The Board of Trustees ("Board") of Money Market Obligations Trust ("Trust") has approved a change in investment strategy pursuant to which, effective on or about July 31, 2017, Federated Institutional Prime Value Obligations Fund (PVOF) will invest all or substantially all of its assets in Federated Institutional Prime Obligations Fund (POF). POF is an affiliated institutional money market fund with an investment objective and investment strategies substantially the same as PVOF."
It explains, "The change in PVOF's investment strategy represents an efficient means for PVOF to achieve its investment strategy. POF also may have the opportunity to derive potential benefits from an investment by a large shareholder like PVOF, such as, for example, the opportunity for POF to invest more assets in pursuit of POF's investment strategy and for additional assets being available in POF to fund redemption requests and other liquidity needs."
Federated continues, "Upon the change in PVOF's investment strategy becoming effective, in instances where PVOF is unable to invest all of its assets into POF (for example, due to late-day purchases or trades), PVOF will invest its excess cash in overnight repurchase agreements, other affiliated money market funds or other eligible securities, in the discretion of PVOF's investment adviser, Federated Investment Management Company (the "Adviser"). PVOF has filed an amendment to its registration statement to incorporate these changes, which amendment must become effective with the U.S. Securities and Exchange Commission before the change in PVOF's investment strategy becomes effective."
They write, "To avoid charging duplicative fees, the Adviser will waive and/or reimburse PVOF's Management Fee with respect to the amount of its net assets invested in POF. PVOF's proportionate share of the fees and expenses of POF (including Management Fees) will be reflected as Acquired Fund Fees and Expenses in PVOF's fee table under "Risk/Return Summary: Fees and Expenses" in PVOF's prospectus.... Both PVOF and POF have previously adopted and maintain policies and procedures such that they will be able to impose liquidity fees on redemptions and/or temporarily suspend redemptions for up to 10 business days in any 90 day period in the event that either fund's weekly liquid assets were to fall below a designated threshold, subject to a determination by the Trust's Board that such a liquidity fee or redemption gate is in the best interest of PVOF or POF (as applicable)."
Federated adds, "Similar to a substantial investment by any shareholder, once PVOF invests all or substantially all of its assets in POF, POF will be subject to large shareholder risk. This is the risk that a significant percentage of POF's shares are owned or controlled by a large shareholder, such as PVOF or other funds or accounts, including any regarding which the Adviser or an affiliate of the Adviser has investment discretion. Accordingly, POF can be subject to the potential for large scale inflows and outflows as a result of purchases and redemptions made by significant shareholders like PVOF. These inflows and outflows could be significant and, if frequently occurring, could negatively affect POF's net asset value and performance and could cause POF to sell securities at inopportune times in order to meet redemption requests."
A website called LeapRate.com published a brief entitled, "ESMA consults on Money Market Fund rules." It says, "The European Securities and Markets Authority (ESMA) has published a Consultation Paper (CP) on the Money Market Funds Regulation (MMFR). The CP contains proposals on draft technical advice (TA), draft implementing technical standards (ITS), and guidelines under the MMFR. The key proposals relate to asset liquidity and credit quality, the establishment of a reporting template and stress test scenarios." We review this article, ESMA's paper, and a new Fitch update on European money funds, below. (Note: Just another reminder to register ASAP for our upcoming Money Fund Symposium, June 21-23 in Atlanta, and to mark your calendars for our next European Money Fund Symposium, Sept. 25-26 in Paris, France.)
The article explains, "These represent the detailed rules required for the implementation of the new European Union regulatory framework aimed at ensuring the stability and integrity of money market funds. The key draft proposals under the different policy tools include: Technical Advice; Implementing Technical Standards - the development of a reporting template containing all the information managers of MMFs are required to send to the competent authority of the MMF; and Guidelines - guidelines on common reference parameters of the scenarios to be included in the stress tests that managers of MMFs are required to conduct."
The piece adds, "Stakeholders are invited to provide their feedback on these proposals by 7 August. ESMA will finalise the TA and ITS for submission to the Commission, and issue the guidelines, by the end of the year."
ESMA's publication, entitled, "Draft technical advice, implementing technical standards and guidelines under the MMF Regulation," explains in its "Executive Summary," its "Reasons for publication," "Article 15(7) of Regulation (EU) 2017/XX on money market funds ("MMF Regulation") empowers the Commission to adopt delegated acts specifying liquidity and credit quality requirements applicable to assets received as part of a reverse repurchase agreement. In a letter dated 20 January 2017 (see Annex II to this paper), ESMA was asked to provide technical advice to the European Commission."
It continues, "Article 22 of the MMF Regulation empowers the Commission to adopt a delegated act specifying: i) the criteria for the validation of the credit quality assessment methodologies referred to in Article 17 of the MMF Regulation; ii) the meaning of the "material change" that could have an impact on the existing assessment of the instrument and that would trigger a new credit quality assessment for a money market instrument; iii) the criteria for quantification of the credit risk and the relative risk of default of an issuer and of the instrument in which the MMF invests; as well as iv) the criteria to establish qualitative indicators on the issuer of the instrument. In its aforementioned letter of 20 January 2017, the Commission asked ESMA to provide technical advice on these topics."
ESMA's update adds, "Article 37 of the MMF Regulation (see Annex II to this paper for the full text of these Articles) provides that ESMA shall develop draft implementing technical standards to establish a reporting template containing all the information managers of MMFs are required to send to the competent authority of the MMF. Article 28 of the MMF Regulation provides that ESMA shall develop guidelines with a view to establishing common reference parameters of the stress test scenarios to be included in the stress tests managers of MMFs are required to conduct. This CP represents the first stage in the development of the technical advice, implementing technical standards and guidelines described above and sets out proposals for each on which ESMA is seeking the views of external stakeholders."
On Background, they write, "The proposal for a Regulation on Money Market Funds (MMFs) was published by the European Commission in September 2013. In June 2016, the Council succeeded in finding an agreement on this text under the Netherlands Presidency. On 7 December 2016, the Council confirmed its agreement on the final text of the Regulation negotiated with the European Parliament and the Commission. The publication of the Regulation in the Official Journal is expected in the second quarter of 2017."
The publication tells us, "In the most recent version of the text, there are a number of deliverables explicitly allocated to ESMA, as well as well as empowerments for delegated acts on which ESMA has been asked to provide technical advice to the European Commission.... The aforementioned letter from the Commission to ESMA indicates that the deadline for ESMA to transmit its advice to the Commission is 31 July. With respect to the implementing technical standards to be developed by ESMA, the MMF Regulation indicates that the Commission shall adopt the delegated act no later than 6 months after the entry into force of the Regulation."
In related news, Fitch Ratings published its "European MMF Quarterly 1Q17 on Money Market Funds/Europe last week, which commented, "Fitch saw minimal changes in asset allocations and flows in 1Q17 in anticipation of the French elections in May. In fact, exposure to France increased in EUR-denominated funds driven by increased French agency and corporate exposure. France exposure slightly increased in GBP-denominated funds, driven by increased French agency exposure, but decreased in USD-denominated funds. Similarly, we saw negligible changes in relation to Dutch issuers around the time of the election in the Netherlands."
They continue, "European constant net asset value (CNAV) MMF AUM increased across all currencies in 1Q17. GBP-denominated funds experienced the largest increase over the quarter, but this increase was in line with historical averages. Overall total European CNAV MMF assets reached EUR644 billion at end-March 2017.... EUR-denominated funds became increasingly barbelled in 1Q17, with substantial increases in assets maturing under seven days and with maturities longer than 90 days.... Average weekly liquidity (including eligible assets) increased to 39% at end-1Q17 from 37% at year-end. This increase was mainly driven by increase in overnight deposits."
Fitch adds, "The 7D gross yield on sterling prime MMFs fell further, to 0.34% (from 0.38% at end-4Q16).... Similarly, the 7D gross yield on EUR prime MMFs dropped further to minus 0.38%; nevertheless, these funds still saw inflows. In contrast, the 7D gross yield on USD-denominated prime funds increased to a high of 1.11%, reflecting the increase in the federal funds rate."
They write, "BNP Paribas is now the most widely held bank in EUR MMFs, followed by Rabobank and Credit Agricole. The biggest declines in issuer exposure were represented by Bred-Banque Populaire, followed by State Street and Credit Suisse. The biggest increases were observed in La Banque Postale.... The average portfolio WAM and WAL increased to 50 days and 59 days, respectively, compared to 46 days and 53 days the previous quarter.... The UK slipped to fifth-highest average issuer exposure in GBP MMFs and average overall UK exposure fell to 11% at end-1Q17 from 13% at end-4Q16. This will, in part, reflect a fall in direct UK government exposure from the heightened exposure at year-end as funds used government exposure as part of their overnight liquidity bucket."
Finally, they say on USD MMFs, "Average exposure to financials remained high at approximately 76%, albeit marginally below the average level of approximately 77% at end- December-2016. Agency exposure increased modestly during the quarter.... Average WAL increased over 1Q17, rising to 70 days, comparable with the highest levels seen in 2016. WAM remained broadly stable, albeit at the upper end of the recent range at 53 days on average as of end-March 2017."
Prime money market fund assets continued their modest but relentless recovery in the latest week, rising for the 5th week in a row. They're on course to also rise for the 5th month in a row in May, and they've increased by $28.0 billion, or 7.2%, year-to-date. ICI's latest "Money Market Fund Assets" report shows Prime assets rising (barely) by $0.2 billion to $406.8 billion. Our Money Fund Intelligence Daily shows Prime MMFs up by $10.3 billion month-to-date in May (through 5/24/17) to $535.5 billion. (Note: Crane Data's collection is now larger than ICI's due to the addition of a number of internal and private money funds uncovered by the SEC's Form N-MFP reporting. See our Jan. 3, 2017 News, "Internal and Private Money Funds Revealed," for more details, or contact us for a more detailed explanation and for a list of the funds we've added over the past few months.)
ICI's weekly writes, "Total money market fund assets increased by $3.73 billion to $2.65 trillion for the week ended Wednesday, May 24, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $3.49 billion and prime funds increased by $209 million. Tax-exempt money market funds increased by $33 million." Total Government MMF assets, which include Treasury funds too, stand at $2.112 trillion (79.7% of all money funds), while Total Prime MMFs stand at $406.8 billion (15.4%). Tax Exempt MMFs total $129.6 billion, or 4.9%.
They explain, "Assets of retail money market funds decreased by $1.53 billion to $961.60 billion. Among retail funds, government money market fund assets decreased by $1.30 billion to $586.94 billion, prime money market fund assets decreased by $126 million to $251.04 billion, and tax-exempt fund assets decreased by $104 million to $123.62 billion." Retail assets account for over a third of total assets, or 36.3%, and Government Retail assets make up 61.0% of all Retail MMFs.
The release continues, "Assets of institutional money market funds increased by $5.26 billion to $1.69 trillion. Among institutional funds, government money market fund assets increased by $4.79 billion to $1.53 trillion, prime money market fund assets increased by $335 million to $155.80 billion, and tax-exempt fund assets increased by $137 million to $6.00 billion." Institutional assets account for 63.7% of all MMF assets, with Government Inst assets making up 90.4% of all Institutional MMFs.
In other news, we reported earlier this week on the recent New England AFP conference (see our May 22 News, "NEAFP Treasury Show Focuses on Prime MF Issues"). Today, we excerpt from another session from this show, this one from Fidelity Investments' Michael Morin, who presented on "Optimizing Liquidity Through Cash Segmentation."
Morin first commented on the potential move back into Prime, saying, "What's the yield differential? Here we are, we have an opportunity to pick up 35-40 basis points by moving out of government funds back into Prime funds. Is that the right thing to do for my organization, or are there better solutions? Those are the key points of the discussion this morning. A lot of investors are asking, 'What about that 35-40 basis point pick-up?' Is it here to stay? Is it going to get larger? Is it going to shrink? And how much do you need in a pick-up to take on that incremental risk?"
He continued, "Obviously the environment has changed. We survived 7 years of zero interest rates, and the industry has done quite well. We're still $2.65 trillion ... really we've been averaging $2.7 trillion for about 5 years now. So the industry came through that zero rate environment exceptionally well. So I think the [question now] is really, 'Where are we heading and how [do you] optimize your liquidity in the new environment?"
Morin told the NEAFP, "I do think investors need to think about Prime funds. Recognizing that it is a different solution than it was in the past, with a $1.00 NAV and no risk of fees and gates, it was very comparable to the bank solutions. Now I think there is a recognition that it is a slightly different product, and you need to get compensated for that remote risk of fees and gates and a small variability in the NAV. So when we think about how much money is likely to move back in, it's obviously predicated on the idea that the variable NAV is not going to be that variable, and ... any variability is likely to be measured in single basis points or just a handful of basis points."
He explained, "With respect to fees and gates, we obviously do not believe that they're going to happen. But of course it is a real possibility.... [T]he real concern is what if it does happen and what's the impact? So while that is a very low-probability event, the ramifications of losing access to your money for up to 10 days, or even worse having to pay a fee to have access to your money [are a concern]."
Morin told the Boston crowd, "Managing cash used to be easy: leave most of it at the bank and put it all in Prime funds. It's a $1.00 NAV product, what could possibly go wrong? We got the answer to that in the crisis.... Then, we had a series of regulatory reforms, and they took away the $1.00 NAV and gave us fees and gates. So I think the split between banks and prime money funds is no longer going to be the most popular solution for corporate cash, and it really requires a finer segmentation of your cash.... [F]or operating cash, money that you might need ... you can't afford to lose any of that.... So those solutions are going to [keep] you [in] $1.00 NAV product, where there's no volatility and NAV."
He added, "I think the enticing thing today is that you got this 35-40 basis points waiving out in front of you, so the easiest way to capture that is to go back into a prime fund. If you think about the worst thing that could happen ... perhaps the worst thing that could happen in a prime fund today is not as bad as what could happen in a prime fund in the past.... People think several hundred billion dollars is likely to move back into prime funds," and emphasized that any "redemption gate can only go down for 10 days."
Finally, Morin asked, "If you're giving up potential liquidity for return in Prime, another 25-50 bps, why not go out longer?" He said that Ultra-Short Bond Fund assets are up significantly and that a number of "Conservative Ultra-Short Bond Funds" have gained critical mass in size. He believes these new Conservative Ultra-Short Bond Funds will come to rival Prime money funds in size.
The U.S. Securities and Exchange Commission released its latest "Money Market Fund Statistics" summary this week. It shows that total assets were down slightly (-$12.7 billion) in April, with Prime funds rising for the 4th month in a row, gaining $9.8 billion (after gaining $12.1B in March). Tax Exempt MMFs lost $2.5 billion and Government funds lost $19.9 billion. Gross yields rose for both Taxable MMFs and Tax Exempt MMFs following the previous month's Fed hike. The SEC's Division of Investment Management summarizes monthly Form N-MFP data and includes asset totals and averages for yields, liquidity levels, WAMs, WALs, holdings, and other money market fund trends. We review the SEC's latest recap below.
Money market fund assets decreased by $12.7 billion in April to $2.917.0 trillion. (The SEC's series includes some private and internal funds not reported to ICI or other reporting agencies; note that Crane Data has adding many of these to our collections.) Overall assets decreased by $1.7 billion in March, increased by $14.2 in February, but decreased by $41.1 billion in January. Over the past 12 months through 4/30/17, total MMF assets have declined by $116.1 billion, or 3.8%.
Of the $2.917 trillion in assets, $608.9 billion was in Prime funds, which increased by $9.8 billion in April. Prime MMFs increased $12.1 billion in March, $24.9 billion in February and $11.7 billion in Jan. But they decreased $15.5 billion in December, increased $3.4 billion in Nov., and decreased by $177.4 billion in October and $293.2 billion in Sept. Prime funds represented 20.9% of total assets at the end of May. They've declined by $861.3 billion the past 12 months, or 58.6%, but they've increased by $58.6 billion, or 9.6%, YTD.
Government & Treasury funds totaled $2.175 billion, or 74.6% of assets,, down $19.9 billion in April and $14.5 billion in March. They also fell $10.1 billion in February, $53.8 billion in January and $10.2 billion in Dec., but rose $56.4 billion in November, $148.0 billion in October, and $268.3 billion in Sept. Govt & Treas MMFs are up $835.7 billion over 12 months (38.4%). Tax Exempt Funds decreased $2.5 billion to $132.9 billion, or 4.6% of all assets. The number of money funds is 412, up 1 fund from last month and down 61 from 4/30/16.
Yields were up again in April for Taxable MMFs. The Weighted Average Gross 7-Day Yield for Prime Funds on April 30 was 1.08%, up 5 basis points from the previous month, and almost double the 0.55% of April 2016. Gross yields increased to 0.80% for Government/Treasury funds, up 0.04% from the previous month and up 0.41% since 4/16. Tax Exempt Weighted Average Gross Yields increased 0.07% in April to 0.94%, and they've risen 53 bps since 4/30/16.
The Weighted Average Net Prime Yield was 0.86%, up 0.06% from the previous month and up 0.52% since 4/16. The Weighted Average Prime Expense Ratio was 0.22% in April (up 1 bps from the previous month). Prime expense ratios have risen from 0.21% in April 2016. (Note: These averages are asset-weighted.)
WALs shortened in April while WAMs were mixed. The average Weighted Average Life, or WAL, was 58.7 days (down 0.9 days from last month) for Prime funds, 86.2 days (down 4.5 days) for Government/Treasury funds, and 22.1 days (down 1.6 days) for Tax Exempt funds. The Weighted Average Maturity, or WAM, was 28.4 days (up 1.0 days from the previous month) for Prime funds, 35.2 days (down 3.5 days) for Govt/Treasury funds, and 19.5 days (down 1.8 days) for Tax-Exempt funds. Total Daily Liquidity for Prime funds was 28.9% in April (down 6.5% from previous month). Total Weekly Liquidity was 48.9% (down 1.4%) for Prime MMFs.
In the SEC's "Prime MMF Holdings of Bank Related Securities by Country" table, Canada topped the list with $68.9 billion, followed by the U.S. with $61.1 billion. France was third with $59.6B, followed by Japan with $48.3 billion, Sweden ($41.8B), Australia/New Zealand ($39.1B), the UK ($25.9B) and Germany ($25.0B). The Netherlands ($19.9B) and Switzerland ($14.8B) rounded out the top 10.
The gainers among Prime MMF bank related securities for the month included: France (up $12.1 billion), the UK (up $7.8B), Belgium (up $7.0B), the U.S. (up $4.8B), Switzerland (up $3.9B), Norway (up $3.9M), The Netherlands (up $3.5B), Japan (up $873M), Spain (up $696M), China (up $353M), Australia/New Zealand (up $361M).. The biggest drops came from Canada (down $12.2B), Sweden (down $7.5B), Germany (down $1.0B), Singapore (down $509M), and Other (down $494M). For Prime MMF Holdings of Bank-Related Securities by Major Region, Europe had $216.4B (up $11.1B from last month), while the Eurozone subset had $117.2 billion (up $21.9B). The Americas had $130.5 billion (down from $138.3B), while Asian and Pacific had $98.4 billion (up from $97.0B).
Of the $603.7 billion in Prime MMF Portfolios as of April 30, $259.2B (42.9%) was in CDs (down from $259.7B), $105.5B (17.5%) was in Government securities (including direct and repo), down from $122.9B, $101.8B (16.9%) was held in Non-Financial CP and Other Short Term Securities (up from $93.1B), $103.0B (17.1%) was in Financial Company CP (up from $100.7B), and $34.2B (5.7%) was in ABCP (up from $31.4B).
The Proportion of Non-Government Securities in All Taxable Funds was 19.2% at month-end, up from 18.0% the previous month. All MMF Repo with Federal Reserve decreased to $173.8B in April from $328.1B the previous month. Finally, the "Trend in Longer Maturity Securities in Prime MMFs" tables shows 33.1% were in maturities of 60 days and over (down from 35.3%), while 8.2% were in maturities of 180 days and over (down from 8.2%).
Earlier this week, we briefly mentioned the introduction of "H.R.2319 - Consumer Financial Choice and Capital Markets Protection Act of 2017 (see our May 22 News), a bill that could roll back the floating NAV portion of money fund reforms. We finally located the text of the latest bill (with help from a reader), and excerpt from it below. While the bill's odds of passing are unclear, it appears that it would substantially roll back the 2016 money fund reforms by allowing floating NAV money market funds an option to return to amortized cost accounting, the foundation of the "stable" NAV. We'll be watching developments closely in coming months. (See also our March 8, 2016 News, "Long Shot Legislation Could Keep All Money Funds Stable, Ban Bailouts.")
The new House bill, introduced to the 115th Congress by Rep. Keith Rothfus [R-PA] on May 3 to the House and its Financial Services committee, is co-sponsored by Rep. Gwen Moore [D-WI], Rep. Steve Stivers [R-OH], Rep. Terri Sewell [D-AL], Rep. David Trott [R-MI], Rep. Albio Sires [D-NJ], and Rep. Luke Messer [R-IN]. H.R.2319 is meant, "To protect the investment choices of investors in the United States, and for other purposes."
The text states, "Be it enacted by the Senate and House of Representatives of the United States of America in Congress assembled.... This Act may be cited as the "Consumer Financial Choice and Capital Markets Protection Act of 2017"." Section 2 says of the "Treatment of money market funds under the Investment Company Act of 1940. The Investment Company Act of 1940 (15 U.S.C. 80a–1 et seq.) is amended by adding at the end the following: SEC. 66. Money market funds."
It continues, "(a) Definitions. In this section (1) the term 'covered Federal assistance' means Federal assistance used for the purpose of (A) making any loan to, or purchasing any stock, equity interest, or debt obligation of, any money market fund; (B) guaranteeing any loan or debt issuance of any money market fund; or (C) entering into any assistance arrangement (including tax breaks), loss sharing, or profit sharing with any money market fund; and (2) the term 'Federal assistance' means (A) insurance or guarantees by the Federal Deposit Insurance Corporation; (B) transactions involving the Secretary of the Treasury; or (C) the use of any advances from any Federal Reserve credit facility or discount window that is not part of a program or facility with broad-based eligibility established in unusual or exigent circumstances."
The next section explains, "(b) Election To be a stable value money market fund. (1) IN GENERAL. Notwithstanding any other provision of this title, any open-end investment company (or a separate series thereof) that is a money market fund that relies on section 270.2a–7 of title 17, Code of Federal Regulations, may, in the prospectus included in its registration statement filed under section 8 state that the company or series has elected to compute the current price per share, for purposes of distribution or redemption and repurchase, of any redeemable security issued by the company or series by using the amortized cost method of valuation, or the penny-rounding method of pricing, regardless of whether its shareholders are limited to natural persons."
This is conditional, "[I]f (A) the company or series has as its objective the generation of income and preservation of capital through investment in short-term, high-quality debt securities; (B) the board of directors of the company or series elects, on behalf of the company or series, to maintain a stable net asset value per share or stable price per share, by using the amortized cost valuation method, as defined in section 270.2a–7(a) of title 17, Code of Federal Regulations (or successor regulation), or the penny-rounding pricing method, as defined in section 270.2a–7(a) of title 17, Code of Federal Regulations (or successor regulation)."
It also requires, "[T]he board of directors of the company has determined, in good faith, that (i) it is in the best interests of the company or series, and its shareholders, to do so; and (ii) the money market fund will continue to use such method or methods only as long as the board of directors believes that the resulting share price fairly reflects the market-based net asset value per share of the company or series; and (C) the company or series will comply with such quality, maturity, diversification, liquidity, and other requirements, including related procedural and recordkeeping requirements, as the Commission, by rule or regulation or order, may prescribe or has prescribed as necessary or appropriate in the public interest or for the protection of investors to the extent that such requirements and provisions are not inconsistent with this section."
The bill adds an "(2) EXEMPTION FROM DEFAULT LIQUIDITY FEE REQUIREMENTS. Notwithstanding section 270.2a–7 of title 17, Code of Federal Regulations (or successor regulation), no company or series that makes the election under paragraph (1) shall be subject to the default liquidity fee requirements of section 270.2a–7(c)(2)(ii) of title 17, Code of Federal Regulations (or successor regulation)."
The text includes a "(c) Prohibition against Federal Government bailouts of money market funds. Notwithstanding any other provision of law (including regulations), covered Federal assistance may not be provided directly to any money market fund. (d) Disclosure of the prohibition against Federal Government bailouts of money market funds. (1) IN GENERAL. No principal underwriter of a redeemable security issued by a money market fund nor any dealer shall offer or sell any such security to any person unless the prospectus of the money market fund and any advertising or sales literature for such fund prominently discloses the prohibition against direct covered Federal assistance as described in subsection (c)."
The bill adds, "(2) RULES, REGULATIONS, AND ORDERS. The Commission may, after consultation with and taking into account the views of the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, and the Department of the Treasury, adopt rules and regulations and issue orders consistent with the protection of investors, prescribing the manner in which the disclosure under this subsection shall be provided."
Finally, it includes a "(e) Continuing obligation To meet requirements of this title. A company or series that makes an election under subsection (b)(1) shall remain subject to the provisions of this title and the rules and regulations of the Commission thereunder that would otherwise apply if those provisions do not conflict with the provisions of this section."
The Senate version of the bill, S.1117, the "Consumer Financial Choice and Capital Markets Protection Act of 2017," was introduced May 11, 2017, to the Senate Committee on Banking, Housing, and Urban Affairs and is sponsored by Sen. Pat Toomey [R-PA]. It is co-sponsored Sen. Joe Manchin III [D-WV], Sen. Mike Rounds [R-SD], and Sen. Robert Menendez <p:>`_ [D-NJ].
Last week, the Investment Company Institute published a study on fund expenses entitled, "Trends in the Expenses and Fees of Funds, 2016." It says, "The average expense ratios for money market funds rose 5 basis points in 2016 to 0.18 percent. This was indirectly related to the Federal Reserve raising short-term interest rates in December 2015, which prompted fund advisers to begin paring expense waivers that most money market funds offered during the period of near-zero short-term interest rates that had prevailed in the post–financial crisis era."
The report shows average money fund expense ratios declining from 0.52% in 1996 to 0.46% in 2001, 0.40% in 2006, 0.21% in 2011, and a record low of 0.13% in 2014 and 2015. ICI's expense charts source Morningstar and Lipper. (See Crane Data's Money Fund Intelligence XLS for our expense series, and see also ICI's press release, "Equity, Bond, and Hybrid Mutual Funds Continue Two-Decade Trend of Declining Expense Ratios.)
The paper, in a section entitled, "Mutual Fund Expense Ratios Have Declined Substantially over the Past Two Decades," explains, "Fund expenses cover portfolio management, fund administration and compliance, shareholder services, recordkeeping, certain kinds of distribution charges (known as 12b-1 fees), and other operating costs. A fund's expense ratio, which is shown in the fund's prospectus and shareholder reports, is the fund's total annual expenses expressed as a percentage of its net assets. Unlike sales loads, fund expenses are paid from fund assets. Many factors affect a mutual fund's expense ratio, including its investment objective, its assets, the average account balance of its investors, the range of services it offers, fees that investors may pay directly, and whether the fund is a load or no-load fund."
ICI's section on "Money Market Funds," states, "The average expense ratio of money market funds rose to 0.18 percent in 2016, an increase of 5 basis points from the level in 2015.... This marks a reversal from the historical trend in which money market fund expense ratios had remained steady or fallen each year since 1996. From 2000 to 2009, a combination of two factors played a significant role in reducing the average expense ratios of money market funds. First, expense ratios of retail money market fund share classes declined 21 percent over this period. Second, the market share of institutional share classes (which tend to have larger average account balances and therefore tend to have lower expense ratios) rose to two-thirds of total money market fund assets."
It continues, "After 2009, however, other factors had been pushing down the average expense ratios of these funds -- primarily developments that stemmed from the low interest rate environment. Over 2008–2009, the Federal Reserve sharply reduced short-term interest rates. By 2009, the federal funds rate was hovering only a little above zero. Gross yields on taxable money market funds (the yield before deducting the fund's expense ratio), which closely track short-term interest rates, fell to all-time lows. This situation remained in stasis from 2010 to late 2015."
The research piece tells us, "In this environment, most money market funds adopted expense waivers to ensure that net yields (the yield on a fund after deducting fund expenses) did not fall below zero. With an expense waiver, a fund's adviser agrees to absorb the cost of all or a portion of a fund's fees and expenses for a period of time. The expense waiver, by reducing the fund's expense ratio, boosts the fund's net yield."
It adds, "These expense waivers are costly for fund advisers, reducing their revenues and profits. From 2009 to 2015, advisers waived an estimated $36 billion in money market fund expenses.... It was expected that if short-term interest rates were to rise, pushing up gross yields on money market funds, advisers might reduce or eliminate expense waivers, which would cause the expense ratios of money market funds to rise somewhat." Annual waiver amounts peaked in 2014 at $6.3 billion in 2014 and totaled $2.5 billion in 2016. (Waivers no doubt will continue lower in 2017 given the rate hike in March and possible further hikes in June and later in 2017.)
ICI writes, "That, ultimately, is what happened. In December 2015, the Federal Reserve raised the federal funds rate by 0.25 percent, signifying a strengthening economy. In December 2016, the Federal Reserve hiked the federal funds rate another 0.25 percent. Both Federal Reserve actions were reflected in short-term interest rates and hence the gross yields on money market funds. With gross yields rising, there was less chance that the net yields of money market funds might fall below zero."
They add, "Consequently, in 2016, advisers pared somewhat the expense waivers they had provided to their money market funds. For example, at the end of 2014, 99 percent of the share classes of money market funds had expense waivers. That dropped to 88 percent by the end of 2016 and expenses waived dropped sharply from an estimated $5.5 billion in 2015 to an estimated $2.5 billion in 2016."
Last week, the New England AFP (Association for Financial Professionals) hosted their Annual Conference in Boston, and no fewer than 8 of the sessions focused on cash investing and money market mutual funds. Crane Data attended and exhibited, as did most of the major institutional money fund providers. (The spring conference season of regional Treasury management shows continues next week in Chicago with the Windy City Summit and the following week with the New York Cash Exchange, respectively.) The main topics involved in many of the presentations we saw (and people will see over the next few weeks) included whether investors will return to Prime money funds in force, which of the alternatives to Prime are gaining traction or poised to bring in assets, and a number of other cash management and investing topics. We review some of the sessions below, and we also remind people to register ASAP for next month's Money Fund Symposium (June 21-23 in Atlanta).
In the first NEAFP session, "Managing Short Term Investments in the New Cash Paradigm," RBC Global's Brandon Swenson said that "Prime funds have lost critical scale." He discussed the benefits of SMA's and warned attendees about ratings and fixed income ETFs. He cited SMA benefits: Potential higher returns, portfolio transparency, greater portfolio control, diversification, scheduled and flexible liquidity, and infrastructure to simplify accounting and custody.
Swenson said when asked about investors' time horizons, "If it's unknown and you may need it, it has to be in that first [Govt MMF] bucket." He added, "The future of cash investing is evolving.... Government funds will maintain market share gains. Prime funds will be a niche, and innovation is difficult under existing rules." Swenson also mentioned that on fees and gates, there could be further reform. "We could see some relief there."
The second session, with Fitch Ratings' Ian Ramusson & Treasury Strategies Tony Carfang, was entitled, "Cash Management Tune-Up." Carfand said, "There may be an opportunity for a rollback" of money fund regulations. He also expressed dismay at those calling the building of corporate cash "hoarding." The bill to roll back the floating NAV in Prime Institutional money funds was recently re-introduced in the Senate (SIII7) and in the House (HR2319). "Until the corporate voice is heard, these bills may be stuck." But, he added, "This bill could get some traction," given its support among PA, OH, MI and WI representatives.
Another session, "Where Do We Go From Here? Liquidity Management in a Post Reform Environment," which featured Goldman Sachs' Pat O'Callaghan and Larry Walsh and Dell's Jamie Cortas, asked "Is it time to go back into Prime?" O'Callaghan commented that Prime fund "NAV's have moved higher, but they can move lower." He discussed the new "Trilemma" of "Stability, Liquidity, and Yield," saying, "You can get 2 out of 3, its very hard to get all 3."
Finally, he added, "When you look at cash [last year], [it was] driven by absolute change. A lot of those drivers were around the gates and fees." Now, however, "It's more about fund size and NAV's and not about the gates; fees." Watch for more coverage of the NEAFP in coming days.
In other news, we're making final preparations for next month's Crane's Money Fund Symposium, which will take place June 21-23, 2017 at The Hyatt Regency Atlanta, in Atlanta, Ga. Money Fund Symposium is the largest gathering of money market fund managers and cash investors in the world. Last summer's event in Philadelphia attracted a record 575 attendees, and we expect a similar turnout for our upcoming show. Symposium participants include money fund managers, marketers and servicers, cash investors, money market securities dealers, issuers, and regulators. Visit www.moneyfundsymposium.com) for more details. Registration for attendees is $750, and hotel reservations are still available. We review the agenda and conference details below. (Click here to see the full brochure.)
Money Fund Symposium's agenda kicks off with the keynote, "The Elevation of Money Market Funds," featuring Martin Flanagan, President & CEO of Atlanta-based Invesco. The rest of the Day One agenda includes: "Private Money Funds, SMAs and ETFs," with Deborah Cunningham of Federated Investors and Rich Mejzak of BlackRock; "Corporate Investment & Issuance Issues," with Treasury Strategies' Tony Carfang, and AFP's Tom Hunt; and, "Major Money Fund Issues 2017," featuring Jeff Weaver of Wells Fargo, Tracy Hopkins of Dreyfus/BNY Mellon CIS, and Pat O'Callaghan of Goldman Sachs A.M.. (The opening evening's reception will be sponsored by Bank of America Merrill Lynch.)
Day 2 of Money Fund Symposium 2017 begins with "The State of the Money Fund Industry, with Peter Crane of Crane Data, Rick Holland of Charles Schwab, and Alex Roever of J.P. Morgan Securities. The rest of Day Two features: "Senior Portfolio Manager Perspectives," including John Tobin of J.P. Morgan A.M., Jeff Plotnik of First American Funds, and Rob Sabatino of UBS Asset Management; "Government and Treasury Money Fund Issues," with Mike Bird of Wells Fargo Funds and Marques Mercier of Invesco; "Muni & Tax Exempt Money Fund Issues" with Fidelity's John Vetter and Dreyfus' Colleen Meehan.
The Afternoon of Day 2 (after a Dreyfus-sponsored lunch) features: "Dealer & Issuer Panel: Looking at Supply," moderated by Laurie Brignac of Invesco, with Stewart Cutler of Barclays, Ron Flynn of J.P. Morgan Securities, and Rob Crowe of Citi Global Markets; "Ratings Agency Roundtable: Criteria, Risks, NAVs," with Robert Callagy of Moody's Investors Service, Greg Favilevich of Fitch Ratings, and Guyna Johnson of S&P Ratings; "MMFs in Ireland, France & China," with Reyer Kooy of IMMFA, Alastair Sewell of Fitch Ratings, and Jonathan Curry of HSBC Global AM; and, "Brokerage Sweep Options & Issues" with Ted Hamilton of Promontory Interfinancial Network and Sunil Kothapalli of the Wells Fargo Advisors. (The Day 2 reception is sponsored by Barclays.)
The third day of Symposium features: "Strategists Speak '17: Rising Rates & Fed RRP" with Rob Zambarano of Guggenheim Securities, Mark Cabana of Bank of America Merrill Lynch, and Garrett Sloan of Wells Fargo Securities; "Treasury & Agency Supply Outlook," with John Dolan of the U.S. Dept. of Treasury, Dave Messerly of the FHLBanks Office of Finance, and Dan Davis of CastleOak Securities; and, the "Pros & Cons of Ultra-Short Bond Funds" with Kerry Pope of Fidelity and Morten Olsen of Northern Trust AM. Finally, the last session is entitled, "Money Fund Trading, Technology & Data," with Peter Crane presenting on the latest money fund information tools, and featuring Sabrina Hartzog of Citi on the portal marketplace, and Jason Anderson of Investortools on money fund trading and compliance software.
We hope you'll join us in Atlanta next month! We'd like to encourage attendees, speakers and sponsors to register and make hotel reservations ASAP. (Note that the conference attendee list will only be given out to those staying at the conference hotel.)
Also, we'll be hosting Crane's 5th annual "offshore" money fund event, European Money Fund Symposium, in Paris, Sept. 25-26, 2017. This website (www.euromfs.com) is now live. (Contact us to inquire about sponsoring or speaking.) Finally, our next Money Fund University "basic training" event is tentatively scheduled for Jan. 18-19, 2018, in Boston. Watch www.cranedata.com in coming months for more details on these events, or visit the bottom of our "Content" page for past and future conference materials.
This month, Bond Fund Intelligence speaks with Steven Brown and Kris Dorr, Portfolio Managers for Guggenheim Limited Duration Fund (GILHX) and Guggenheim Enhanced Short Duration ETF (GSY). We discuss issues in the ultra-short space, as well as Guggenheim's recent growth. Our Q&A follows. (Note: This "profile" is reprinted from the May issue of BFI. Contact us if you'd like to see the full issue or if you'd like to see our new Bond Fund Portfolio Holdings "beta" product, which ships to subscribers Monday.)
BFI: Tell us about your history. Dorr: Guggenheim has been in the short-term market for close to a decade. We began with BulletShares, which is a suite of targeted maturity corporate and high-yield corporate bond ETFs. Then we entered in the ultra-short market in 2011 with GSY, which was originally a Claymore fund. Regarding my history, I spent most of my career in the short duration space, beginning with institutional and retail money market funds and ultimately focusing on separately managed accounts in the 1-to-3, 1-to-5 year space. I joined Guggenheim in 2011 specifically to work on GSY and also to focus on short duration and cash management.
Brown: I joined Guggenheim in 2010.... There are four distinct investment teams within Guggenheim, that's how we’ve broken down the investment management function. I originally started on the team that effectively does the credit underwriting and trading of the individual securities, then I moved into portfolio management a few years later and been working on GSY since 2012. [I've been] listed on the Limited Duration prospectus from the fund's inception in December 2013.
BFI: Tell us about the short-term lineup. Brown: If you think about the ultra-short, we have our ETF, GSY. We also have a number of internally managed cash management vehicles that are not publically marketed that I also work on. GSY's benchmark is the T-bill index, so we're generally trying to keep about a 0.25 year duration or so in the portfolio. Then we can get into portfolio construction and positioning. But suffice to say, we are firmly in the ultra-short category and we take limited credit risk in that product.
All of the products really focus on the firm's view of looking at client objectives and constraints, then tailoring a product, not just in line with the benchmark or making minor shifts to a benchmark, but really starting from scratch and thinking about what types of securities make sense for a given strategy. Often times, securities that fall outside of the index that will even make their way into the ultra-short bond ETF, GSY.
When you go a little bit further out the curve, from a duration standpoint at least, we have our mutual fund, the Limited Duration fund. The benchmark is the 1-to-3 year 'Agg', so if you want to compare the Limited Duration fund to GSY it is going to take a little bit more duration and a little bit more credit risk, [with] a little higher allocation to ... structured credit. But really corporate credit and structured credit are the hallmarks of the firm, and the asset classes that we feel have the best expertise in.... It just so happens that structured credit in particular continues to be the asset class that we think, really across the capital structure, has the best relative value, and risk-adjusted future returns given where spreads are in the market and our outlook for the Fed and for interest rates. Further out the curve, we have an intermediate-term bond fund (Total Return Bond, GIBIX) that I also work with that's benchmarked to the Agg in that 4-6 year duration range.
BFI: How's the reception been as of late? Brown: Limited Duration launched in December 2013. As is typical with a new product launch, it takes a little while to make traction in the market. We had three sister mutual funds with completely different strategies that we had launched two years prior to that and tried to complete our fixed-income suite of mutual funds really across the credit continuum and across the duration spectrum. Limited Duration has had positive net flows in each of the 41 months since its inception. We went over $1 billion in January of this year, and we’ve seen substantial growth. We've had about more than $600 million of inflows year-to-date which brings the fund to more than $1.5 billion. We think we have a lot of opportunity to expand the product and to take the inflows given the opportunities that we see within primarily within senior investment-grade structure credit and, to a lesser extent, investment-grade corporates.
We think the short-duration space is going to continue to gain traction as a whole within the market, as an interesting place for people to park their money with somewhat limited mark-to-market risk but potential upside and now actual yield given where LIBOR and the overnight rate have gone. So we think the space as a whole is prime to grow over the next couple of years as we get further into the Fed tightening cycle. Dorr <b:>`_: I that's applicable to GSY as well. In the ETF space, we're the third largest actively managed ultra-short ETF. So we've experienced some nice growth in this fund as well, having gone over $1 billion.
BFI: What can and can't you buy? Dorr: We do not do any options or futures. But like a money market fund, GSY is a '40-Act' fund, so we adhere to the same diversification requirements. Unlike a money market fund, we have greater flexibility with respect to security type, security maturity, and security selection, allowing for diversification across a broader spectrum of sectors. We also differ from a money market fund in terms of liquidity and credit requirements. While GSY maintains an abundant level of liquidity, and we do purchase Tier 2 commercial paper in addition to other short-term vehicles to maintain a very high level of liquidity, so we have the ability to hold a diversified portfolio of varying maturities while keeping an average duration of less than one year. As far as credit is concerned, the other differential is that we have the ability to do 10% of this portfolio in high-yield securities. At this time, we're not really invested there because we feel high yield is fully valued. But we do have that ability to invest in those types of securities.
BFI: Did you take advantage of the LIBOR spike in the fall? Brown: As LIBOR has increased, and will continue to increase throughout this tightening cycle, that is going to be quite positive for floating rate asset classes.... We continue to expect that spreads will tighten.... We think that the technical flows behind wanting to be in shorter-duration or wanting to be in floating rate products will continue throughout this cycle, which is positive for the direction of spreads. Dorr: We did take advantage of the spike in SIFMA by adding some short municipal dailies and weeklies.
BFI: Tell us about your investor base. Dorr: We see a number of investment advisors coming into the fund. They may use the fund as an alternative to low yielding money market funds to enhance income or when they have a shift in investment strategy. As an example, a manager may be concerned about longer-term bond funds selling off, or shift out of equities when they're overvalued. Brown <b:>`_: We are [seeing institutional interest too] <b:>`_. We're being added to platforms and being asked to take meetings with research analysts.... For Limited Duration, obviously their interest is in the space as a whole <b:>`_.
BFI: How about the outlook for the Fed? Brown: Our precision around the number of hikes this year and next year is somewhat less meaningful for these products, because broadly speaking we think these products will benefit ... given their credit quality and being substantially floating rate securities.... Our specific projections for what the Fed is going to do for the remainder of the year is likely two more interest rate hikes.... Our base case is a little bit higher than the market, but either scenario ... should be good for both of these products and for the space.
BFI: Any thoughts on the future? Dorr: Right now in the money market space the bulk of the assets are in government funds, yet investors want to attain more yield, while staying in very high quality and very short products. A fund such as GSY, that is strategically constructed to balance yield, credit and duration risk, can help investors achieve those goals. That is why I think that the ultra-short space has a lot of room to grow.
Brown: Particularly within Limited Duration and just looking at this peer group, away from broader fund flows in and out of the category, the fund has had very good performance. It's just passed its 3-year track record and has 5 stars from Morningstar. So we have a lot of the marketing points behind us.... We think that will continue to lead to flows. We've seen almost 100% growth in the fund really in the last 9 months or so.
As we mentioned in yesterday's "Link of the Day," the European Union has formally approved changes to money market fund regulations which will impact funds domiciled in Ireland, France and Luxembourg when they go into effect at the end of 2018. Today, we excerpt from a couple of articles on the changes, and quote from the latest version of the rules. The Wall Street Journal explains in "Corporate Treasurers Assess Impact of European Money Market Fund Reform," "Corporate treasurers are taking stock of their cash holdings in preparation for new European Union money market fund rules. The European Council, one of the main EU decision-making bodies, on Tuesday approved reforms that impose stricter liquidity requirements and limit redemptions on money-market funds."
The article continues, "Investors and corporations view these funds as an alternative to cash because, like a bank deposit, they can be quickly converted to cash. Around E1.2 trillion ($1.33 trillion) is currently invested in European money market funds, according to the Institutional Money Market Funds Association." (See our March 23 News, "​ European MMF Regs Moving.")
The Journal quotes Fiona Rose, Group Treasurer at Burberry Group PLC, which has "hundreds of millions of pounds" invested in money market funds, "We are at the moment looking at it and are preparing the board," quoting her at "a conference of the Association of Corporate Treasurers in Manchester, U.K."
The piece explains, "The legislation is expected to be published in the EU's statute book towards the end of the second quarter, and would go into effect in 2018 or 2019. Similar reforms in the U.S. triggered hundreds of billions of dollars in outflows from certain types of funds as finance chiefs and corporate treasurers overhauled how they invested their cash."
It adds, "Burberry has not yet decided whether to make changes to its money market fund investments, Ms. Rose said. The firm has used these funds 'for many years', she said, but could also opt to invest some of that money in other products. 'We will have to look at where to deposit our cash,' she added."
Finally, the Journal says, "The new rules prescribe mandatory liquidity fees as well as redemption hurdles, or so called gates. These additional fees, in combination with the European Central Bank's negative interest rate policy, are expected to make so-called constant net asset value funds less attractive.... Companies that want to keep their cash in constant net asset value funds despite the new fees and structural changes will need to seek board approval to alter their investment mandates, said Jane Lowe, Secretary General of the Institutional Money Market Funds Association." (See more on MMF Reform on IMMFA's web site and a recent presentation on European MMF Reforms.)
Website MondoVisione's Exchange News Direct writes, "Council Of The European Union: Money Market Market Fund Rules Adopted." It tells us, "EU rules are to be introduced on money market funds, aimed at supporting the role that the E1 trillion market plays in financing the economy. On 16 May 2017, the Council adopted a regulation to ensure the smooth operation of the short-term financing market. This follows initiatives by the G20 and the Financial Stability Board."
They too quote Edward Scicluna, minister for finance of Malta and current EU president, "These rules will go a long way in improving supervision and regulation of a largely unregulated sector. Whilst money market funds are vital to investors and issuers alike, the crisis showed us that they can also be vulnerable to shocks."
The piece explains, "The regulation lays down rules and common standards to: ensure stability in the structure of money market funds; guarantee that they invest in well-diversified assets of a goodcredit quality; and, increase the liquidity of money market funds, to ensure that they can face sudden redemption requests."
They add, "It was adopted at a meeting of the General Affairs Council, without discussion. The European Parliament approved the text on 5 April 2017, following an agreement between Council and Parliament representatives on 7 December 2016. Most provisions will apply 12 months after entry into force."
The full 100-page "Regulation of the European Parliament and of the Council on Money Market Funds" posted April 26, 2017, says, "This Regulation lays down rules for money market funds (MMFs) established, managed or marketed in the Union, concerning the financial instruments eligible for investment by a MMF, the portfolio of an MMF, the valuation of the assets of an MMF, and the reporting requirements in relation to an MMF. This Regulation applies to collective investment undertakings that: (a) require authorisation as UCITS or are authorised as UCITS under Directive 2009/65/EC or are AIFs under Directive 2011/61/EU; (b) invest in short-term assets; and (c) have distinct or cumulative objectives offering returns in line with money market rates or preserving the value of the investment. 2. Member States shall not add any additional requirements in the field covered by this Regulation."
This month, our Money Fund Intelligence newsletter speaks with Denise Latchford, Senior Portfolio Manager and Director of Money Markets for American Century. We discuss the return to "normalcy" in the money markets, as well as a number of other money fund related issues. Our Q&A follows. (This interview is reprinted from the May issue of our flagship Money Fund Intelligence newsletter; e-mail info@cranedata.com to request the full issue.)
MFI: How long have you run MMFs? Latchford: American Century has been investing money for almost 60 years. The company was founded by James Stowers Jr. in 1958 as Twentieth Century, which later merged with the California-based Benham Group in 1994. We then became American Century Investments.... As far as money market funds go, though, the firm has been involved in these since 1972. That was inception date of Capital Preservation, which I think makes it the oldest money market fund. I've been with the firm over 25 years now."
MFI: What is your biggest priority? Latchford: Right now, we're just really focused on the markets and our funds. We spent a lot of time over the last two years with reform, so it's kind of nice having that behind us.... We have ZIRP behind us as well, and finally have interest rates going up. So, it certainly makes it more fun investing when [gross] rates are above 1.0%. I am tired of zero interest rates. With things like this tax reform proposal coming out right now and the new Administration, and possibly a whole new Fed maybe next year ... we have a lot of actual investment-related [topics to focus on].
MFI: What's your biggest challenge? Latchford: It's nice that the credit markets are quiet at the moment.... It feels positive. We buy a lot of bank names, either directly in the form of CDs, indirectly as Letter of Credits on VRDNs, or as indirect exposure through asset-backed commercial paper. So we, credit analysts and portfolio managers, pay close attention to the banking sector. We have a few French banks on our approved list, and our analyst in London keeps us informed on what is happening internationally. So that is a huge advantage. Currently the French elections and how they are playing out has been our topic.
Another challenge is figuring out what the Fed is going to do going forward. What are they going to do with the balance sheet, and how is that going to impact us? Also, right now our big challenge is supply.... That's definitely been a challenge in the commercial paper market. It's also been a challenge in the VRDN market. (We use VRDNs to meet our daily and weekly liquidity needs.) The supply in this area is down as well. Many muni issuers have termed out their debt, decreasing the VRDN supply."
Latchford continues, "The MMF reforms, in general, have made investing more challenging. We have to combine affiliated issuers and combine credits for our issuer test, and that, [plus] the fact that banks and certain areas are not issuing as much paper [presents a challenge]. What is being issued, we pretty much have to count together. Banks that sponsor ABCP programs have to be tracked as a guarantor.... We were pretty big buyers in asset-backed commercial paper [but] now all the administrators, any J.P. Morgan program or any Citibank program, have to be combined at the guarantor. So it limits the amount that you can purchase in them. Our exposure has gone down from before the reforms.
MFI: What about your fund lineup? Latchford: We had two prime funds, but we converted one into a government fund, pretty much like everybody in the industry. So now we have: one prime fund, one government fund, one Treasury only fund, and then two tax-exempt funds, a national and a California.... As far as the cash for our equity and bond funds, it's probably at about $1.8 billion. We also have asset allocation funds, and there are little cash slices in those that we probably have another $500 million in."
MFI: What are you buying? Latchford: For the prime fund, we're definitely looking at floaters, a lot of CD floaters. We buy a lot of Canadian banks' CD floaters. That seems to be our 'go-to'. We still use VRDNs for our liquidity requirements, and Treasuries. We still invest in ABCP and add industrial commercial paper names when we can. Unfortunately, we're too small for the Fed RRP program.... We do a moderate amount of repo when managing the cash for the equity and bond funds, but it is not in a centralized money fund. We have a limited amounts of repo lines [now], because we aren't huge players in that market because of our size.
Our Capital Preservation fund at one point was close to $3 billion and I think we're $2.3B now. That fund probably has one of the most stable asset bases ever. I think we have some of the same shareholders from 1972.... We use the Treasury 2-year floaters when we can for Capital Preservation, but it is limited because of the WAL.
MFI: Has the removal of First Tier and Second Tier changed things? Latchford: For us, for the most part, it has been business as usual. I think the industry might have migrated a little bit into that area. The nice part of the removal of that is: our credit analysts don't have [as much] concern over an unexpected rating action.... So in that respect, it gives us a little bit more breathing room. But it doesn't really change the way we look at credits, as far as drifting down into A2/P2 paper.... It just gives us a little relief [so] we don't have to be concerned about [this cliff].
MFI: Any customer concerns these days? Latchford: As we start to see spreads start to widen ... suddenly yields will become a concern. If we get two more interest rate hikes, the environment will look different between a government fund and a prime fund.... Some of our customers now are suddenly now [asking for] a lot more control saying, "We want this as a separate account. We don't want fees and gates."
MFI: What about fee waivers? Latchford: We actually came out of waivers early. For the Prime fund, we were out [relatively] early just managing our way out of them. But the three hikes have helped a great deal. Overall for the company as a whole, money market funds [are only] around 3% of our total assets.... So the fee waivers didn't impact American Century perhaps as hard as they impacted other fund companies, where they are a lot heavier in money market funds. But I'm not going to say that the management company wasn't happy once we stopped them.
MFI: Any last comments on the MMF reforms? Latchford: I think I have one word for those reforms, and it's 'huge' <b:>`_. The thing that I noticed the most with reform was that unless people were directly involved I just don't think they realized how large of an undertaking it was, how many areas it impacted, and how many people actually needed to be involved. 'Money market reform' sounded kind of neat and clean and easy, until you had to spend two years with it. It impacted every area of a mutual fund company.
MFI: Do you guys manage ultra-short bond funds? Latchford: With the ultra-short bond funds or ultra-, ultra-short just outside of money markets, some of our clients are looking at those. So I have a feeling we will be opening [some of] those up in separate accounts as one-offs.... Another thing that I think might be coming in the future is a lot more automation, because with the way that these reforms worked out and then people having to shift around and we're starting to see more separate accounts. American Century as a whole manages a fair amount in separate accounts for those types of clients. We didn't have as many in the money market area, because that normally wasn't a sector to bring over separate account money to. But it's starting to be, so that is now flowing into the money market world.
MFI: Any thoughts on the future? Latchford: When I started, interest rates were around 8%. I remember when they dropped to 6%, saying, 'Woah, look how low that is'.... In general, it feels positive at the moment for money market funds. Our flows are pretty steady right now. We are getting geared up for still some movements and anticipating at some point to see money move back into prime funds as spreads widen between agencies and prime as we continue to get these hikes.
The Investment Company Institute released its latest monthly "Money Market Fund Holdings" summary (with data as of April 30, 2017) yesterday. This release reviews the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds. The MMF Holdings release says, "The Investment Company Institute (ICI) reports that, as of the final Friday in April, prime money market funds held 25.2 percent of their portfolios in daily liquid assets and 43.6 percent in weekly liquid assets, while government money market funds held 58.9 percent of their portfolios in daily liquid assets and 77.1 percent in weekly liquid assets." Prime DLA fell from 29.5% last month and Prime WLA fell from 44.3% last month. We review the ICI's latest Holdings update, along with J.P. Morgan's Taxable money market fund holdings update, below, and we also cite a new white paper from Treasury Strategies on Money Fund Regulations' Winners and Losers.
ICI explains, "At the end of April, prime funds had a weighted average maturity (WAM) of 31 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 35 days and a WAL of 87 days." Prime WAMs were up one day from the prior month, and WALs were unchanged. Govt WAMs decreased by 4 days and WALs decreased by 4 days as well.
Regarding Holdings By Region of Issuer, ICI's release tells us, "Prime money market funds' holdings attributable to the Americas declined from $172.80 billion in March to $160.48 billion in April. Government money market funds' holdings attributable to the Americas declined from $1,863.92 billion in March to $1,696.58 billion in April." (See too our May 10 News, "May Money Fund Portfolio Holdings: Repo, CD, CP Up; Treasuries Plunge.")
The Prime Money Market Funds by Region of Issuer table shows Americas-related holdings at $160.5 billion, or 40.2%; Asia and Pacific at $81.0 billion, or 20.3%; Europe at $154.5 billion, or 38.7%; and, Other (including Supranational) at $3.1 billion, or 0.9%. The Government Money Market Funds by Region of Issuer table shows Americas at $1.697 trillion, or 81.1%; Asia and Pacific at $88.7 billion, or 4.2%; and Europe at $305.5 billion, or 14.6%.
J.P. Morgan's latest Holdings update adds, "Prime fund exposures to banks increased by $16bn post quarter-end. Holdings of CP/CD rose by $6bn, scattered across regions. YTD, prime exposures to CP/CD have increased by $51bn or 33%. Recall that prime fund demand for bank CP/CD has historically maintained a strong negative correlation with the 3mL – OIS spread. This relationship has weakened significantly post MMF reform with prime AuMs $1tn smaller."
They explain, "Taking that into consideration, this year's modest revival in MMF demand for bank CP/CD is probably not responsible for more than a basis point or two of the recent collapse in the 3mL – OIS spread. Away from banks, prime allocations across asset classes went relatively unchanged with two exceptions.... First, RRP usage decreased as banks came back to market in repo and time deposits. Additionally, holdings of Treasuries fell by $10bn."
In other news, Treasury Strategies published a paper entitled, "Money Market Fund Regulation Winners, Losers and Long-Term Consequences." It explains, "New Money Market Fund regulations which went into effect October 14, 2016 were intended to prevent future bailouts and enhance market stability. Instead, they have disrupted financial markets, hurt business and municipal borrowers, and increased U.S. taxpayer bailout exposure in future market stress events. While there are winners and losers with any regulatory change, the magnitude of the shifts in this case are massive. Private sector and municipal sector borrowers lost $1.2 trillion of available funding while the Federal government and its agencies reaped the gains."
The paper continues, "These are not the outcomes Congress or the SEC intended. There was never an objective to advantage the Federal government at the expense of the private sector and municipal entities. In retrospect, we can see which aspects of the new regulations caused the negative consequences and suggest corrections to address them. In this paper, we examine the Money Market Fund (MMF) regulation changes and the $1.2+ trillion in fund flows that resulted from them since 2014. We look at the very negative impact they have had on U.S. private sector businesses and state and local governments, and highlight winners and losers."
Treasury Strategies says the Winners include: the "U.S. Government MMFs which hold securities of government agencies such as Fannie Mae, Freddie Mac and the Federal Home Loan Bank [and the] U.S. Treasury MMFs which hold U.S. Treasury debt securities – more than $158 billion of investments went into U.S. Treasury Funds." Meanwhile, the Losers include: Prime MMFs which invest in the short-term debt of corporations and banks [and] Tax Exempt MMFs which invest in the short-term debt of state and local governments, hospitals, universities and public works."
They explain, "The bottom line is that the attempt to solve a perceived problem with regulation has decimated an entire swath of the financial markets, at a level far more onerous than even the original worse-case scenario. The new rules have essentially devastated the part of the market they tried to improve."
The piece adds, "Considerable but reversible damage has already been done. The specter of additional damage looms over two major upcoming U.S. government initiatives: Repatriation of overseas corporate cash.... Unfortunately, because of these new MMF regulations, the cash will be stranded in government and treasury MMFs rather than employed in the private sector via Prime and Tax Exempt MMFs; and, Investments in infrastructure.... Success in this area requires that state and local governments have ready access to working capital. The most efficient way for these entities to obtain short-term working capital is via Tax Exempt MMFs."
Finally, they write, "We conclude the paper with recommendations for the SEC and Congress to rollback several provisions of the new MMF regulations immediately."
A number of strategists wrote last week on the tightening of the LIBOR-OIS spread, the difference between the London Interbank Offered Rate (LIBOR) and the Overnight Indexed Swap (OIS) rate, which normally indicates falling risk in money market securities. Bank of America Merrill Lynch, in a piece entitled, "LIBOR-OIS has rapidly tightened," explains, "The 3-month LIBOR-OIS spread has sharply tightened by over 22bp since early-February to levels last seen since prior to the Fed's December 2015 rate hike.... The recent narrowing is due to a reduced supply of 3m unsecured funding, stabilization in investor demand, and underlying issues with LIBOR." We excerpt from BofA Merrill's piece, as well as briefs from Citi and J.P. Morgan Securities below.
BofA's Mark Cabana writes, "We expect the tightening in 3M LIBOR-OIS should soon stabilize and remain at relatively tight levels. However, the balance of risks is likely skewed for further near-term tightening especially should expectations for a June hike continue to solidify. Catalysts to reverse the recent tightening could come through international tax reform that results in a repatriation of offshore USD holdings or any type of geopolitical risk. The Fed's balance sheet reduction should also increase demand for USD funding, though this would likely follow increases in Treasury supply and higher fed funds prints."
Regarding "Drivers of 3m LIBOR-OIS narrowing," he says, "Three-month LIBOR-OIS has narrowed due to a relative supply/demand imbalance for wholesale funding at the US front end, especially amid relatively limited fixed-rate CP issuance. This imbalance has caused a compression of 90 day AA financial commercial paper rates to OIS and a tightening of spreads on longer-dated floating rate issuance.... This narrowing is attributable to a reduction in short-dated front-end supply, stabilization in investor demand, and exacerbated by only a small number of transactions used to comprise LIBOR submissions."
Citi, in a new "Short-End Notes," writes, "We need to talk about LIBOR." They tell us, "The 3M LIBOR basis (against fed funds OIS and 1M LIBOR) continued to compress this week, going all the way back to the lowest point since the first rate hike in 2015. We are close to the floor for the basis, in our view. However, we don't see clear widening catalysts ahead and expect range-bound LIBOR basis in the near-term. We have a widening bias for Q4 2017."
Their piece explains, "Therefore, the funding needs for the 3M sector for banks is driven by actual funding needs [rather] than arbitrage. However, the funding needs at the 3M tenor have been reduced, due to the number of factors noted below. 1. MMF Reform: The money market reform in October 2016 took $1tn of liquidity away that was available for the CD/CP/TD market, which was a large funding vehicle for the foreign banks.... This caused 3M LIBOR-OIS to exceed over 40bp going into the reform. After the reform, unsecured short-term bank issuance dropped (Foreign bank's CP issuance dropped 20% Y/Y), as they found other sources of funding, causing the basis to drop."
It continues, "2. Regulation: Liquidity Coverage Requirements (LCR) requires banks to hold High Quality Liquid Assets against liabilities maturing under 30 days. Net Stable Funding Ratio (NSFR) requires banks to fund risky assets with [over] 1Y safe liabilities. G-SIB capital surcharges penalize short-term funding for larger banks.... All of these hallowed out wholesale unsecured debt issuance by banks over the years. 3. Excess liquidity: A large increase in the quantity of reserves in the banking system resulted less need for interbank lending/borrowing."
Other factors include: "4. Deleveraging: More recently, we have been seeing foreign banks cutting their dollar lending books, reducing the need for the borrowing. 5. Less credit risk: Post French election, we have been seeing reduction of perceived credit risk of European LIBOR banks, which tend to translate to lower premium for LIBOR."
Citi adds, "As these factors weighed on 3M LIBOR, the continued Fed hike worked as a catalyst for LIBOR-OIS tightening, in our view. We don't expect material change in these fundamentals in the near term ... which would imply lagging of LIBOR vs OIS. The important question now is, how low they can go and what are the catalysts to look out going forward."
Finally, J.P. Morgan Securities writes in their "Short Duration Strategy Weekly <b:>`_," "Two discussions competed for attention in the US money markets this past week. The first was the continuing tightening between Libor and Fed funds. The second was Moody's ratings downgrade of several Canadian banks. As it turns out, the two are not entirely unrelated."
They explain, "We'll address Libor-OIS first. In both 3m and 6m tenors, Libor levels have been remarkably sticky, not rising as quickly as equivalent term OIS, either in the spot market (3m ICE Libor less 3m OIS) or forward space (June 17 IMM FRA-OIS).... In both markets we believe the contraction to multi-year tights is a reflection of improved credit and liquidity conditions following last year's MMF reforms. Additionally, in the swap markets, we think positioning has played a magnifying role."
The piece adds, "Breaking it down into its parts, we've previously noted that Libor levels are a function of rate expectations (the average Fed funds effective rate over the tenor) and credit/liquidity premium that reflects the borrowing costs of large international banks active in the USD credit markets. The rate component is reasonably straight forward, it's a reflection of the market's near-term expectations for Fed policy, and can be readily divined from the Fed funds futures or OIS markets."
The May issue of Crane Data's Bond Fund Intelligence, which was sent out to subscribers Friday, features the lead story, "ICI 2017 Fact Book Reviews Bond Fund Trends: Good Year," which reviews the bond fund-related portions from ICI's annual report on mutual funds. BFI also includes the "profile" article, "Guggenheim's Brown & Dorr on the Short Duration Sector," an interview with Steven Brown and Kris Dorr, Portfolio Managers of Guggenheim Enhanced Short Duration (GSY) and Guggenheim Limited Duration (GILHX), respectively. In addition, we recap the latest Bond Fund News, including the brief, "Yields Down; Returns Up in April." BFI also includes our Crane BFI Indexes, averages and summaries of major bond fund categories. We excerpt from the latest issue below. (Contact us if you'd like to see a copy of our latest Bond Fund Intelligence and BFI XLS data spreadsheet, and watch for our latest Bond Fund Portfolio Holdings "beta" product later this month.)
Our lead Bond Fund Intelligence story says, "The Investment Company Institute recently published its "2017 Investment Company Fact Book" which contains an update on the bond fund marketplace in 2016 and a wealth of statistics on bond mutual funds. ICI says, "Bond fund flows typically are correlated with the performance of bonds [see the chart on page 2] which, in turn, is largely driven by the US interest rate environment."
They explain, "In the first half of 2016, long-term interest rates declined about 80 basis points, likely reflecting weaker than expected economic activity and diminished prospects of tighter monetary policy. As economic activity picked up in the third quarter, long-term interest rates started to rise, then jumped after the US presidential election and continued to drift higher, ending the year at about 20 basis points more than at the beginning of 2016."
The story continues, "These developments created a seesaw pattern (up first, then down) in the total return on bonds for the year. Bond mutual funds had net inflows of $107 billion in 2016, a significant reversal from $25 billion in net outflows in 2015.... Demand for taxable bond mutual funds remained relatively strong throughout 2016, despite the Increase in long-term interest rates in the second half of the year."
Our "Guggenheim's Dorr & Brown" profile says, "This month, Bond Fund Intelligence speaks with Guggenheim Investments' Steven Brown and Kris Dorr, Portfolio Managers for Guggenheim Limited Duration Fund (GILHX) and Guggenheim Enhanced Short Duration ETF (GSY), respectively. We discuss issues in the ultra-short space, as well as Guggenheim's recent growth. Our Q&A follows."
BFI asks, "How long has Guggenheim been running short term products?" Dorr responds, "Guggenheim has been in the short term market for close to a decade. We began with BulletShares, which is a suite of targeted maturity corporate and high-yield corporate bond ETFs. Then we entered in the ultra-short market in 2011 with GSY, which was originally a Claymore fund. It was converted to an actively managed ETF and was re-named Guggenheim Enhanced Short Duration ETF. Limited Duration, a mutual fund, followed in December 2013."
She continues, "Regarding my history, I spent most of my career in the short duration space, beginning with institutional and retail money market funds and ultimately focusing on separately managed accounts in the 1-to-3, 1-to-5 year space. I joined Guggenheim in 2011 specifically to work on GSY and also to focus on short duration and cash management."
Brown tells us, "I joined Guggenheim in 2010.... There are four distinct investment teams within Guggenheim, that's how we've broken down the investment management function. I originally started on the team that effectively does the credit underwriting and trading of the individual securities, then I moved into portfolio management a few years later and been working on GSY since 2012. [I've been] listed on the Limited Duration prospectus from the fund’s inception in December 2013."
BFI then says, "Tell us about the short-term lineup. Brown responds, "If you think about the ultra-short, we have our ETF, GSY. We also have a number of internally managed cash management vehicles that are not publically marketed that I also work on. GSY's benchmark is the T-bill index, so we're generally trying to keep about a 0.25 year duration or so in the portfolio. Then we can get into portfolio construction and positioning. But suffice to say, we are firmly in the ultra-short category and we take limited credit risk in that product."
Our Bond Fund News brief on "Yields Down; Returns Up" explains, "Returns rose across all of the Crane BFI Indexes last month, and yields moved lower for all but our ultra-short averages. The BFI Total Index averaged a 1-month return of 0.61% and gained 2.67% over 12 months. The BFI 100 had a return of 0.64% in April and rose 3.30% over 1 year. The BFI Conservative Ultra-Short Index returned 0.11% and was up 1.06% over 1-year; the BFI Ultra-Short Index had a 1-month return of 0.11% and 1.54% for 12 mos. Our BFI Short-Term Index returned 0.30% and 2.03% for the month and past year. The BFI High Yield Index increased 0.84% in April but is up 10.05% over 1 year."
BNY Mellon CIS posted the second entry its new "Dreyfus Podcast Series" this week. The latest "Invested in cash" interview, entitled, "Money Market Trends Post Reform," features our very own Peter Crane. The session's description says, "Peter Crane talks about trends his firm is noticing with cash managers so far this year, the level of NAV volatility on FNAV funds, fee or gate potentials, alternatives to money funds and the implications the political landscape has on money market funds." We review Dreyfus' latest Q&A below
The podcast says, "Welcome to our second Dreyfus Podcast: Invested in Cash. Today we're talking about money market trends post reform in 2016. My name is Sue Anne Cormack. As director of sales at Dreyfus, I'm really grateful to be joined today by Pete Crane, Founder, President & CEO of Crane Data, which is money market and mutual fund information firm."
Cormack continues, "Peter is recognized as an incredible industry expert in the institutional money market fund space, and has more than 23 years of experience. Pete, thank you so much for joining us today. As you know we're fielding more and more questions about prime funds and flows and people getting in the ready position. Can you please share your observations with us about how prime funds have behaved post-reform. In other words, how might investors might think about the use of Prime funds in their investment plan?"
Crane answers, "Sure, thanks so much for having me today, Sue Ann. I think the important thing about looking at Prime funds currently is that they have begun recovering since the October 2016 reforms went in to effect. People are arguing over how much they've risen since then; it's $20, $30 billion, about 5 or 6%. The important thing is that assets have been clawing their way higher. They’ve been recovering, and you've barely seen any down weeks or months during that time. So money is slowly but surely moving back to Prime. Whether you as an investor want to join that slow trend is a decision you have to look at, but the spreads are growing, prime is slowly recovering, and going forward we do expect prime assets to continue this recovery."
When asked, "Will assets in prime funds ever equal what they once were before reform?" Crane responds, "That would be a bold prediction and a contrarian prediction. It will be a long time.... I think eventually assets may rival the trillion and a half that they were. But at this pace it would take decades. And it all depends on spreads, it all depends on if investors get comfortable with the new emergency gates and fees, which I think we'll talk about at the moment here. So prime is recovering. It's about to break back over $400 billion, it had dipped to the lowest [n years] which is $375 billion. Whether we ever reach a trillion and a half? It will be a very long time <b:>`_."
Cormack also asks, "Have you seen much movement in the NAVs within the floating NAV funds? Have any funds that you're watching been close to triggering a fee or a gate? Crane tells her, "No is the short answer. That's an equally important thing to note: in addition to the slow asset recovery, the NAV's have been stable. The average NAV for prime and institutional funds is over 1.0000, its 1.0003. So there's a little bit of leeway there. The daily liquid assets are 30%, the weekly liquid assets are about 50%, well above that 30% weekly threshold that they would first have to trigger to even consider a gate and fee. So it's clear that funds are running more conservative, they're running with more liquidity, they're trying to inch out and get a little investment yield here. But I think investors have been watching and are growing more comfortable with the concept that the floating NAV money fund will float very little."
Next, Cormack asks Crane, "We also noticed that some investors are looking at alternatives to money market funds.... What are some of your observations? Do you see investors doing anything different with the concept of segmenting their cash or operating cash in various buckets?" He explains, "Yeah, I mean there's a lot of smoke, and a little fire. But there is growing [interest]. There are a number of experiments going on in the ultra-, ultra-short bond segment [and] with private funds, [and interest with] separately managed accounts. Money is moving into those alternate sectors, but at a slow pace. They're gradually building the volume that they would need to take larger batches of assets."
Crane continues, "Investors are looking at segmenting and starting to look at running transactions through government money funds to allocate a little bit to prime, a little bit more to yield. In the past, you got your safety liquidity and yield all in one place. In the future, you're going to have to get your safety and liquidity in one place and your yield someplace else.... I think that prime money funds are still the best alternative for these secondary cash segmentation slices that are going on out there. But a lot of people are looking at ultra-shorts and looking at other options and whether they succeed or hit or not remains to be seen."
Dreyfus also asks, "What about the political landscape or other regulatory [developments] like Basel III?" Crane comments, "Some of the money fund managers out there have been just thrilled that the regulations for money funds are passed [over with] now. There's an outside chance that you could have the SEC or Congress or someone come in and tweak that again. But that's a long-shot. In general [with] the banking regulations, a lot of people expect bank assets to be pressured back into money market funds. We're not seeing that to a large degree yet. But I think yield's going to be the dominant force there. As money fund yields continue pushing towards 1.0%, as the Fed keeps hiking rates here as we go through the year, the yield attraction of money funds should begin to bring some of those banking assets in."
Cormack adds, "That's really consistent with what we're hearing as well. So with all of this in mind are there other high-level observations that you would like to share?" Finally, Crane comments, "I think my advice and comments are always the same. You really want to stay diversified. You want to keep your options open. Back during the massive shift to Government, shutting down your prime fund or banning different investments just doesn't make sense with the landscape that we are in. You can see these [potential] big shifts, where if the debt ceiling all of a sudden becomes an issue ... you may have to shift assets from a Government fund. So keeping your options open and of course watching the market develop here as it recovers from reforms is your best bet going forward."
Crane Data released its May Money Fund Portfolio Holdings yesterday, and our latest collection of taxable money market securities, with data as of April 30, 2017, shows an increase in Repo, CP and CDs, and a sharp decline in Treasuries. Money market securities held by Taxable U.S. money funds overall (tracked by Crane Data) decreased by $3.2 billion to $2.632 trillion last month, after decreasing $11.8 billion in March and $18.1 billion in Feb. (but increasing by $7.2 billion in Jan.). Repo remained the largest portfolio segment, followed by Treasuries and Agencies. CDs were higher but remained in fourth place, followed by Commercial Paper, Other/Time Deposits and VRDNs. Below, we review our latest Money Fund Portfolio Holdings statistics. (Visit our Content center to download the latest files, or contact us if you'd like to see a sample of our latest Portfolio Holdings Reports. Note: We're also "beta" testing a new Bond Fund Portfolio Holdings data collection.)
Among all taxable money funds, Repurchase Agreements (repo) rose $24.6 billion (3.0%) to $858.3 billion, or 32.6% of holdings, after rising $41.6 billion in March, $3.3 billion in February, but falling $43.6 billion in January. Treasury securities fell $53.5 billion (-7.1%) to $700.5 billion, or 26.6% of holdings, after falling $1.6 billion in March, $29.3 billion in February, and $37.8 billion in January. Government Agency Debt increased $4.0 billion (0.6%) to $631.7 billion, or 24.0% of all holdings, after decreasing $49.3 billion in March and $10.7 billion in February, but rising $35.3 billion in January. Repo, Treasuries and Agencies in total continued to gradually retreat from December's record levels, but they still represent a massive 83.2% of all taxable holdings. Govt and Treasury MMFs lost assets and Prime MMFs increased slightly yet again last month.
CDs and CP increased last month, as did Other (Time Deposits) securities. Certificates of Deposit (CDs) were up $8.1 billion (4.7%) to $180.3 billion, or 6.9% of taxable assets, after decreasing $3.3 billion in March, and rising $5.5 billion in February and $22.4 in January. Commercial Paper (CP) was up $10.4 billion (7.0%) to $160.1 billion, or 6.1% of holdings (after declining $1.3 billion in March, but rising $10.4 billion in February and $16.9 billion in January). Other holdings, primarily Time Deposits, rose $3.7 billion (5.1%) to $75.0 billion, or 2.9% of holdings. VRDNs held by taxable funds decreased by $0.5 billion (-2.1%) to $25.9 billion (1.0% of assets).
Prime money fund assets tracked by Crane Data rose to $548 billion (up from $543 billion last month), or 20.8% (up from 20.6%) of taxable money fund holdings' total of $2.632 trillion. Among Prime money funds, CDs represent just under a third of holdings at 32.9% (up from 31.7% a month ago), followed by Commercial Paper at 29.2% (up from 27.5%). The CP totals are comprised of: Financial Company CP, which makes up 18.2% of total holdings, Asset-Backed CP, which accounts for 6.0%, and Non-Financial Company CP, which makes up 5.0%. Prime funds also hold 2.0% in US Govt Agency Debt, 1.6% in US Treasury Debt, 6.8% in US Treasury Repo, 0.4% in Other Instruments, 11.4% in Non-Negotiable Time Deposits, 5.7% in Other Repo, 1.6% in US Government Agency Repo, and 3.0% in VRDNs.
Government money fund portfolios totaled $1.481 trillion (56.3% of all MMF assets), down from $1.486 trillion in March, while Treasury money fund assets totaled another $603 billion (22.9%), down from $606 billion the prior month. Government money fund portfolios were made up of 41.9% US Govt Agency Debt, 18.3% US Government Agency Repo, 15.9% US Treasury debt, and 23.1% in US Treasury Repo. Treasury money funds were comprised of 72.0% US Treasury debt, 27.8% in US Treasury Repo, and 0.1% in Government agency repo, Other Instrument, and Investment Company shares. Government and Treasury funds combined now total $2.084 trillion, or 79.2% of all taxable money fund assets, down from 79.4% last month.
European-affiliated holdings increased $156.8 billion in April to $519.8 billion among all taxable funds (and including repos); their share of holdings increased to 19.8% from 13.8% the previous month. Eurozone-affiliated holdings increased $96.5 billion to $343.6 billion in April; they now account for 13.1% of overall taxable money fund holdings. Asia & Pacific related holdings increased by $13.5 billion to $198.3 billion (7.5% of the total). Americas related holdings decreased $174 billion to $1.913 trillion and now represent 72.7% of holdings.
The overall taxable fund Repo totals were made up of: US Treasury Repurchase Agreements, which decreased $8.4 billion, or -1.5%, to $547.2 billion, or 20.8% of assets; US Government Agency Repurchase Agreements (up $34.1 billion to $280.0 billion, or 10.6% of total holdings), and Other Repurchase Agreements ($31.1 billion, or 1.2% of holdings, down $1.1 billion from last month). The Commercial Paper totals were comprised of Financial Company Commercial Paper (up $4.8 billion to $99.6 billion, or 3.8% of assets), Asset Backed Commercial Paper (up $2.8 billion to $33.1 billion, or 1.3%), and Non-Financial Company Commercial Paper (up $2.8 billion to $27.4 billion, or 1.0%).
The 20 largest Issuers to taxable money market funds as of April 30, 2017, include: the US Treasury ($700.5 billion, or 26.6%), Federal Home Loan Bank ($473.1B, 18.0%), Federal Reserve Bank of New York ($161.1B, 6.1%), BNP Paribas ($99.9B, 3.8%), Federal Farm Credit Bank ($66.1B, 2.5%), RBC ($61.4B, 2.3%), Credit Agricole ($59.9B, 2.3%), Federal Home Loan Mortgage Co. ($55.8B, 2.1%), Wells Fargo ($51.7B, 2.0%), Societe Generale ($50.9B, 1.9%), Nomura ($43.6B, 1.7%), Mitsubishi UFJ Financial Group Inc. ($40.7B, 1.5%), Bank of America ($38.2B, 1.5%), JP Morgan ($34.7B, 1.3%), Barclays PLC ($34.7B, 1.3%), Federal National Mortgage Association ($34.4B, 1.3%), Citi ($33.9B, 1.3%), HSBC ($33.9B, 1.3%), Bank of Montreal ($30.6B, 1.2%), and Bank of Nova Scotia ($30.4B, 1.2%).
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 ($161.1B, 18.8%), BNP Paribas ($87.8B, 10.2%), RBC ($48.8B, 5.7%), Credit Agricole ($45.8B, 5.3%), Nomura ($43.6B, 5.1%), Societe Generale ($43.4B, 5.1%), Wells Fargo ($41.1B, 4.8%), Bank of America ($33.0B, 3.8%), HSBC ($28.4B, 3.3%), and Barclays PLC ($28.2B, 3.3%). The 10 largest Fed Repo positions among MMFs on 4/30 include: JP Morgan US Govt ($75.6B), Fidelity Govt Cash Reserves ($54.1B), Goldman Sachs FS Gvt ($54.8B), BlackRock Lq FedFund ($44.2B), Fidelity Govt Money Market ($42.1B), Dreyfus Govt Cash Mgmt ($40.6B), Fidelity Inv MM: Govt Port ($35.1B), BlackRock Lq T-Fund ($30.6B), Federated Gvt Oblg ($29.3B), and Morgan Stanley Inst Lq Gvt ($23.1B).
The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: Mitsubishi UFJ Financial Group Inc. ($17.2B, 4.7%), Credit Agricole ($14.1B, 3.9%), Toronto-Dominion Bank ($13.6B, 3.7%), Svenska Handelsbanken ($12.9B, 3.6%), DnB NOR Bank ASA ($12.6B, 3.5%), RBC ($12.6B, 3.5%), Bank of Montreal ($12.2B, 3.3%), BNP Paribas ($12.1B, 3.3%), Wells Fargo ($10.6B, 2.9%), and Commonwealth Bank of Australia ($10.5B, 2.9%).
The 10 largest CD issuers include: Toronto-Dominion Bank ($12.7B, 7.1%), Mitsubishi UFJ Financial Group Inc. ($12.5B, 7.0%), Bank of Montreal ($11.7B, 6.6%), Wells Fargo ($10.4B, 5.8%), Sumitomo Mitsui Banking Co ($8.5B, 4.7%), RBC ($8.1B, 4.6%), Svenska Handelsbanken ($7.1B, 4.0%), Sumitomo Mitsui Trust Bank ($7.1B, 4.0%), KBC Group NV ($6.2B, 3.5%), and Mizuho Corporate Bank Ltd ($5.9B, 3.3%).
The 10 largest CP issuers (we include affiliated ABCP programs) include: Commonwealth Bank of Australia ($7.8B, 5.6%), Societe Generale ($7.2B, 5.1%), Credit Agricole ($6.8B, 4.9%), Bank of Nova Scotia ($6.7B, 4.8%), JP Morgan ($6.1B, 4.3%), Westpac Banking Co ($6.1B, 4.3%), Canadian Imperial Bank of Commerce ($6.0B, 4.3%), National Australia Bank Ltd ($5.8B, 4.1%), General Electric ($4.6B, 3.3%), and BNP Paribas ($4.3B, 3.1%).
The largest increases among Issuers include: Credit Agricole (up $39.2B to $59.9B), Barclays PLC (up $24.5B to $34.7B), Societe Generale (up $22.8B to $50.9B), Credit Suisse (up $19.9B to $26.4B), BNP Paribas (up $18.7B to $99.9B), Federal Home Loan Bank (up $16.9B to $473.1B), Goldman Sachs (up $10.3B to $23.4B), JP Morgan (up $10.2B to $34.7B), Mizuho Corporate Bank Ltd (up $8.9B to $23.3B) and HSBC (up $6.7B to $33.9B).
The largest decreases among Issuers of money market securities (including Repo) in April were shown by: Federal Reserve Bank of New York (down $152.5B to $161.1B), US Treasury (down $53.5 to $700.5B), Federal Home Loan Mortgage Co (down $11.8B to $55.8B), Canadian Imperial Bank of Commerce (down $4.5B to $16.2B), Swedbank AB (down $3.0B to $10.2B), Bank of Montreal (down $2.2B to $30.6B), Federal Farm Credit Bank (down $1.4B to $66.1B), Toyota (down $1.0B to $5.1B) and Skandinaviska Enskilda Banken AB (down $1.0B to $9.7B).
The United States remained the largest segment of country-affiliations; it represents 66.0% of holdings, or $1.736 trillion. France (9.5%, $249.2B) moved back into second place ahead of Canada (6.7%, $176.4B) in 3rd. Japan (5.6%, $148.5B) stayed in fourth, while the United Kingdom (3.3%, $86.2B) remained in fifth place. Germany (1.6%, $41.7B) moved ahead of Sweden (1.6%, $40.9B) and Australia (1.5%, $39.1B). The Netherlands (1.5%, $40.1B) and Switzerland (1.3%, $33.3B) ranked ninth and tenth, respectively. (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 April 30, 2017, Taxable money funds held 31.2% (down from 32.7%) of their assets in securities maturing Overnight, and another 17.0% maturing in 2-7 days (up from 12.8%). Thus, 48.2% in total matures in 1-7 days. Another 19.3% matures in 8-30 days, while 12.9% matures in 31-60 days. Note that over three-quarters, or 80.4% of securities, mature in 60 days or less (up 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 8.2% of taxable securities, while 8.5% matures in 91-180 days, and just 2.9% matures beyond 180 days.
SIFMA's Asset Management Account Roundtable began yesterday in Boca Raton, Florida, and Crane Data's Peter Crane spoke and hosted a panel of brokerage sweep providers on money fund and FDIC-insured sweep product issues. The big news among the brokerage cash sector was that FDIC-insured sweep assets now total over $1 trillion, and that rates on sweep accounts are inching higher after almost a decade stuck at virtually zero. Crane Data's Brokerage Sweep Intelligence product shows the average rate on FDIC-insured sweep vehicles ticked up earlier this year, rising from 0.01%, where it had been stuck for years, to 0.02%. But several brokerages, including Schwab, Raymond James, and Fidelity, have increased rates on selected sweep tiers recently, and we expect more to follow in the coming weeks as the last of retail money funds lift off from zero. (Watch for more coverage of sweeps and the conference in coming days, and let us know if you'd like to see a copy of our most recent Brokerage Sweep Intelligence.) Below, we excerpt from a new paper from StoneCastle Cash Management, a recent entrant into the FDIC brokerage sweep market, entitled, "Single Provider FDIC Insured Sweep Platforms Leaving Investors Out, Revenue on the Table, and Pressuring Brokerages to Re-evaluate Enterprise Risk Policies."
The piece, subtitled, "Making the case for multi-provider FDIC insured sweep programs," tell us, "Since the introduction of the first FDIC insured sweep offering from Merrill Lynch in 2001, insured sweep platforms have become the de facto sweep choice for most brokerages and other financial intermediaries. And while FDIC insured sweep programs are not new to the market, the groundswell in their popularity has created some potential risks to brokerages and financial institutions that maintain a single sweep provider."
It explains, "This paper identifies and explores enterprise risk that brokerages and other financial intermediaries may be encountering regarding their FDIC sweep program and how a multi-provider solution can substantially mitigate these risks while realizing the full benefit of an insured sweep program for the firm, its advisors, and importantly, its clients."
StoneCastle explains, "There are many reasons for brokerages/financial intermediaries to consider a multi-provider FDIC insured cash sweep program. This paper addresses scenarios that larger broker-dealers and smaller intermediary firms managing large deposit bases through single-provider programs should consider regarding: Capacity constraints or sub-optimal bank rates - As cash flows into insured sweep programs, a single provider may be limited in delivering attractively priced capacity to support both current and new clients; Potential headline risk of a single provider; Increasing competition as a lever to maximize client value and firm-wide economics; and, Revenue left on the table with excess cash sweeping into - U.S. government funds ... and Single deposit accounts."
Their "Introduction" says, "Insured cash sweep programs represent the predominant default sweep option for brokerages and other financial institutions because they are easy to understand and better position a firm to attract all of their clients' cash. They also provide absolute safety and security with a fixed one dollar value, enable the sponsor brokerage firm to offer tiered/relationship pricing, and the potential to earn significantly greater revenue as compared to money fund sweep programs. Brokerages have identified and capitalized on these value points and have grown their programs accordingly. However many of these same brokerages are now identifying and experiencing pain points that have emerged as a direct result of this growth."
It continues, "When extended FDIC insured sweep programs first came to market more than a decade ago, (and not including proprietary bank programs affiliated with a broker-dealer), there were only a few third party providers and little in the way of program deposits. Since then, the number of providers has barely budged, yet deposits in insured sweep programs (proprietary and provider/administrator) have exploded to more than $1 trillion with the vast majority of brokerages offering some type of insured program."
StoneCastle explains, "The issue lies not in the efficacy of FDIC sweep programs in general, which have proven themselves as a smart alternative to money funds for many years. Rather, it lies in the inability of one provider, as the few players have grown in size, to adequately accommodate increasing investor demand, particularly for mid-sized or larger institutions.... As a matter of record, some large/national clearing firms/platforms have made available multiple insured sweep providers to their introducing broker-dealers and registered investment advisors for many years. The choice has enabled brokerages to diversify their risk, offer a broader array of products and services to best meet the needs of their clients, and deliver higher levels of FDIC insurance per tax ID."
They tell us, "Third party FDIC insured sweep providers allocate deposits into program banks that are willing to take funding for a negotiated fee. The important note here is that a large amount of deposit capacity at a good price is not limitless. It comes down to a provider's ability to source these banks and appropriately negotiate the funding deals that makes sense for the program. In fact, banks typically have a limit on the amount of deposits they are willing to take from any one broker-dealer (conduit). And beyond that, they typically have restrictions on how many deposits they will take from any one sweep provider purely from a risk management perspective."
The paper also says, "Open architecture, or offering more than one investment option for advisors and clients has proven to be a good thing over time. It enables both advisors and clients to decide what programs are best suited for the way they conduct business or invest. And at a firm level, it provides program checks and balances that create a sustainable value lever. Sole providers can get complacent, focus energy and resources on giving the best deals to new clients, and may lack the motivation to just plain try harder."
It continues, "Additionally, and regardless of the advertised FDIC limits of your sweep program, there is likely a subset of clients that maintain cash balances in excess of current program limits. These deposits are either going to be uninsured in a bank account (i.e. over the $250,000 limit) or in a money market mutual fund. A multi-provider platform can quickly find a home for these deposits, support client retention efforts, and obviate the need to maintain any money funds remaining on the platform, which can become a significant revenue drain issue in a rising rate environment. As the rate environment changes and moves higher than the fixed expense of money funds, brokerages are essentially capping what they can earn."
StoneCastle concludes, "Cash is the one asset class in which every client has exposure and is typically one of the largest revenue producers for most brokerages. At the macro level, the fundamental goal of providing high levels of FDIC insurance for investors is more or less the same from all program providers. How they each accomplish it however, varies widely. Given the enterprise value of cash, brokerages should gain a deeper understanding of the differences in programs, exploit complementary synergies, and identify potential or real headline risks of each company."
Finally, they write, "Brokerages need to be aware of the marked advances that have been made with sweep technology that are keeping pace or staying ahead of their evolving needs. Combining these advances with the ability to tailor it to a brokerage's specific business model is what creates a more inclusive client experience.... By utilizing a multi-provider approach, brokerages can potentially decrease enterprise level risk and better fulfill their obligations to more clients in providing them with the best possible product solutions. It will also help to maintain or elevate their cash sweep programs as a leading revenue source for their firms and do so with little to no disruption to their current business."
Crane Data's latest Money Fund Market Share rankings show assets in U.S. money fund complexes were mixed and overall relatively flat in April. Total assets increased $52.7 billion, or 1.9%, last month, but note that we added $67 billion in new funds. Overall assets increased by $93.0 billion, or 3.4%, over the past 3 months, and they've increased by $172.1 billion, or 6.5% over the past 12 months through April 30. (Note that our numbers are inflated by the addition of a number of internal and other funds over the past 5 months.) The biggest gainers in April were T Rowe Price, whose MMFs rose by $22.9 billion, or 140.9%, Fidelity, whose MMFs rose by $20.9 billion, or 4.1%, BlackRock, whose MMFs rose by $15.0 billion, or 6.3%, and Prudential, whose MMFs rose by $14.3 billion. (We added very large new funds for all of these but BlackRock; see our MFI XLS for details.)
Dreyfus, SSgA, American Funds and Vanguard also saw assets increase in April, rising by $2.3B, $1.0B, $876M, and $870M, respectively. The biggest declines were seen by Wells Fargo, Deutsche, Schwab, Morgan Stanley and Federated. (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 moved higher again.
Over the past year through April 30, 2017, Fidelity (up $87.4B), Vanguard (up $87.1B), T. Rowe Price (up $23.7B), and Prudential (up $14.3B) were the largest gainers, but JP Morgan (up $20.4B, or 8.8%) and Dreyfus (up $10.7B, or 7.2%) would have been the largest gainers had we adjusted for recently added internal fund assets. These were followed by Northern (up $5.2B, or 5.9%), First American (up $4.8B, or 11.6%) and PNC (up $4.3B, or 63.6%).
Fidelity, T Rowe Price, Prudential, Vanguard, and BlackRock had the largest money fund asset increases over the past 3 months, rising by $32.4B, $23.2B, $14.3B, $11.5B and $10.9B, respectively. The biggest decliners over 12 months include: Federated (down $23.0B, or -11.2%), Wells Fargo (down $19.0B, or -17.6%), Goldman Sachs (down $18.9B, or -9.7%), Morgan Stanley (down $14.6B, or -11.4%), SSgA (down $14.1B, or -15.0%), and Deutsche (down $10.2B, or -39.0%).
Our latest domestic U.S. Money Fund Family Rankings show that Fidelity Investments remains the largest money fund manager with $531.9 billion, or 18.9% of all assets (up $20.9 billion in April, up $32.4 billion over 3 mos., and up $87.4B over 12 months). Vanguard is second with $270.6 billion, or 9.6% market share <b:>`_ (up $870M, up $11.5B, an up $87.1B), BlackRock is third with $253.2 billion, or 9.0% market share <b:>`_ (up $15.0B, up $10.9B, and down $3.6B for the past 1-month, 3-mos. and 12-mos., respectively).`JP Morgan ranked fourth with $251.5 billion, or 9.0% of assets <b:>`_ (down $2.8B, up $10.7B, and up $20.4B for the past 1-month, 3-mos. and 12-mos., respectively). Federated is in fifth with $183.3 billion, or 6.5% of assets (down $3.0B, down $4.1B, and down $23.0B).
Goldman Sachs was in sixth place with $175.7 billion, or 6.3% of assets (down $963M, down $16.0B, and down $18.9B), while Dreyfus was in seventh place with $160.1 billion, or 5.7% (up $2.4B, up $10.5B, and up $10.7B). Schwab ($156.3B, or 5.6%) was in eighth place, followed by Morgan Stanley in ninth place ($113.9B, or 4.1%), and Northern in tenth place ($94.4B, or 3.4%).
The eleventh through twentieth largest U.S. money fund managers (in order) include: Wells Fargo ($89.1B, or 3.2%), SSGA ($79.4B, or 2.8%), Invesco ($55.0B, or 2.0%), First American ($46.0B, or 1.6%), UBS ($41.2B, or 1.5%), T Rowe Price ($39.2B, or 1.4%), Western ($32.4B, or 1.2%), DFA ($28.8B, or 1.0%), Franklin ($24.1B, or 0.9%), and American Funds ($17.9B, or 0.6%). The 11th through 20th ranked managers are the same as last month, except Northern moved ahead of Wells Fargo. Crane Data currently tracks 66 U.S. MMF managers, the same number as last month.
When European and "offshore" money fund assets -- those domiciled in places like Ireland, Luxembourg, and the Cayman Islands -- are included, the top 10 managers match the U.S. list, except for JPMorgan moving ahead of Vanguard and BlackRock, BlackRock moving ahead of Vanguard, Goldman Sachs moving ahead of Federated, and Dreyfus/BNY Mellon moving ahead of Schwab.
Looking at our 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 include: Fidelity ($541.3 billion), JP Morgan ($413.8B), BlackRock ($375.3B), Vanguard ($270.6B), and Goldman Sachs ($269.6B). Federated ($191.9B) was sixth and Dreyfus/BNY Mellon ($182.2B) was seventh, followed by Schwab ($156.3B), Morgan Stanley ($147.5B), and Northern ($110.3B), which round out the top 10. These totals include "offshore" US Dollar money funds, as well as Euro and Pound Sterling (GBP) funds converted into US dollar totals.
The May issue of our Money Fund Intelligence and MFI XLS, with data as of 4/30/17, shows that yields moved higher again in April across our Taxable Crane Money Fund Indexes. The Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 747), was at 0.46% for the 7-Day Yield (annualized, net) Average, and the 30-Day Yield was up 9 bps to 0.44%. The MFA's Gross 7-Day Yield increased to 0.88%, while the Gross 30-Day Yield was up 11 bps to 0.87%.
Our Crane 100 Money Fund Index shows an average 7-Day (Net) Yield of 0.65% (up 4 bps) and an average 30-Day Yield of 0.63% (up 8 bps). The Crane 100 shows a Gross 7-Day Yield of 0.93% (up 5 bps), and a Gross 30-Day Yield of 0.91% (up 9 bps). For the 12 month return through 4/30/17, our Crane MF Average returned 0.21% and our Crane 100 returned 0.35%. The total number of funds, including taxable and tax-exempt, increased to 992, up 10 from last month. There are currently 747 taxable and 245 tax-exempt money funds.
Our Prime Institutional MF Index (7-day) yielded 0.73% (up 3 bps) as of April 30, while the Crane Govt Inst Index was 0.50% (up 5 bps) and the Treasury Inst Index was 0.47% (up 4 bps). Thus, the spread between Prime funds and Treasury funds is 26 basis points, down 1 bps from last month. The Crane Prime Retail Index yielded 0.56% (up 6 bps), while the Govt Retail Index yielded 0.19% (up 5 bps) and the Treasury Retail Index was 0.23% (up 3 bps). The Crane Tax Exempt MF Index yield increased to 0.40% (up 5 bps).
The Gross 7-Day Yields for these indexes in April were: Prime Inst 1.10% (up 2 bps), Govt Inst 0.79% (up 5 bps), Treasury Inst 0.77% (up 6 bps), Prime Retail 1.11% (up 7 bps), Govt Retail 0.78% (up 11 bps), and Treasury Retail 0.77% (up 11 bps). The Crane Tax Exempt Index increased 8 basis points to 0.92%. The Crane 100 MF Index returned on average 0.05% for 1-month, 0.13% for 3-month, 0.17% for YTD, 0.35% for 1-year, 0.15% for 3-years (annualized), 0.11% for 5-years, and 0.63% for 10-years. (Contact us if you'd like to see our latest MFI XLS, Crane Indexes or Market Share report.)
The May issue of our flagship Money Fund Intelligence newsletter, which was sent to subscribers Friday morning, features the articles: "Crane Data Turns 11; Money Fund Comeback; Bond Push," which talks about Crane Data's 11th Birthday this month, "Still Preserving Capital: American Century's Latchford," which "profiles" ACI's Senior Portfolio Manager and Director of Money Markets, and, "ICI 2017 Fact Book Shows Money Fund Trends in '16," which reviews ICI's latest annual statistics. We have also updated our Money Fund Wisdom database with April 30, 2017, statistics, and sent out our MFI XLS spreadsheet Friday a.m. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our May Money Fund Portfolio Holdings are scheduled to ship Tuesday, May 9, and our May Bond Fund Intelligence is scheduled to go out Friday, May 12.
MFI's "Crane Data Turns 11" article says, "Crane Data & Money Fund Intelligence celebrate their 11th birthday this month. As we've done in years past, we'd like to take a moment to take a look back and to update you on our efforts. We continue to gradually expand our collections and product lineup, most recently pushing further into the bond fund space with the launch of our Bond Fund Symposium conference. We'll also soon release a Bond Fund Portfolio Holdings data set."
The piece continues, "Our company, run by money fund expert Peter Crane and technology guru Shaun Cutts, was launched in May 2006 to bring faster, cheaper and cleaner information to the money fund space. We began by publishing our flagship Money Fund Intelligence newsletter, and we've grown to offer a full range of daily and monthly spreadsheets, news, database query systems and reports on U.S. and "offshore" money funds."
Our American Century profile reads, "This month, Money Fund Intelligence profiles American Century Senior Portfolio Manager and Director of Money Markets Denise Latchford, who runs almost $5.7 billion in money funds and even more separately managed cash for the company’s stock and bond funds. We discuss the return to "normalcy" in the money markets, as well as a number of other money fund related issues. Our Q&A follows."
MFI asks, "How long have you managed money funds? Latchford comments, "American Century has been investing money for almost 60 years. The company was founded by James Stowers Jr. in 1958 as Twentieth Century, which later merged with the California-based Benham Group in 1994. We then became American Century Investments.... As far as money market funds go, though, the firm has been involved in these since 1972. That was inception date of Capital Preservation, which I think makes it the oldest money market fund. I've been with the firm over 25 years now."
We also ask, "What is your biggest priority?" Latchford answers, "Right now, we're just really focused on the markets and our funds. We spent a lot of time over the last two years with reform, so it's kind of nice having that behind us.... We have ZIRP behind us as well, and finally have interest rates going up. So, it certainly makes it more fun investing when rates are above 1.0%. I am tired of zero interest rates. With things like this tax reform proposal coming out right now and the new Administration, and possibly a whole new Fed maybe next year ... we have a lot of actual investment-related [topics to focus on]."
Our "ICI 2017 Fact Book Shows" update explains, "ICI's new "2017 Investment Company Fact Book" looks at institutional and retail MMF demand and recent reforms and the shift to Government MMFs. Overall, money funds assets were $2.728 trillion at year-end 2016, making up 16.7% of the $16.3 trillion in overall mutual fund assets. Retail investors held $986 billion, while institutional investors held $1.742 trillion. ICI tells us, "Businesses and other institutional investors also rely on funds. Many institutions use money market funds to manage some of their cash and other short-term assets. Nonfinancial businesses held 22 percent of their short-term assets in money market funds at year-end 2016."
It continues, "On "Demand for Money Market Funds," the Fact Book says, "In 2016, investors redeemed, on net, $30 billion from money market funds. This modest topline net outflow for the year, however, masks significant shifts in flows for different types of money market funds that was spurred by the final implementation of new rules governing money market funds. In 2016, government money market funds received $851 billion in net inflows, while prime and tax-exempt money market funds saw net redemptions of $765 billion and $116 billion."
In a sidebar, we discuss, "Lower Waivers in Q1 Earnings," saying, "Northern Trust, Schwab, and BNY Mellon all mentioned money funds in their Q1 earnings reports earlier this month. Northern Trust's Q1'17 earnings said, "Trust, investment and other servicing fees increased primarily due to favorable equity markets, new business, and lower money market mutual fund fee waivers." Fee waivers here decreased from $1.7 million a year ago to nothing in Q1'17."
Our May MFI XLS, with April 30, 2017, data, shows total assets increased $68.9 billion in April to $2.676 trillion after decreasing $25.2 billion in March, and increasing $51.5 billion in February. (Note that we added $67.3 billion in new funds, though, so assets were roughly flat on the month.) Our broad Crane Money Fund Average 7-Day Yield was up 5 bps to 0.46% for the month, while our Crane 100 Money Fund Index (the 100 largest taxable funds) was up 4 bps to 0.65% (7-day).
On a Gross Yield Basis (7-Day) (before expenses were taken out), the Crane MFA rose 0.07% to 0.88% and the Crane 100 rose 5 bps to 0.93%. Charged Expenses averaged 0.43% and 0.28% for the Crane MFA and Crane 100, respectively. The average WAM (weighted average maturity) for the Crane MFA was 32 days (down 1 day from last month) and for the Crane 100 was 33 days (down 2 days from last month). (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
The SEC released it latest "Private Funds Statistics" report, which summarizes Form PF statistics, including Liquidity Funds. The quarterly publication shows a decline in overall Liquidity fund assets in the latest quarter to $537 billion. A press release entitled, "SEC Staff Supplements Quarterly Private Funds Statistics" tells us, "The U.S. Securities and Exchange Commission staff today published a suite of new data and analyses of private fund statistics and trends. The Private Funds Statistics, released quarterly since October 2015 by the Division of Investment Management's Risk and Examinations Office, offers investors and other market participants valuable insights by aggregating data reported by private fund advisers on Form ADV and Form PF. New analyses include information about the use of financial and economic leverage by hedge funds, and characteristics of private liquidity funds." (See also our March 15 News, "CAG's Pan on Pros and Cons of Private Liquidity Funds, SEC Paper, Stats.") We review the latest SEC report below, and we also discuss changes in the DTCC's Repo Clearing Services.
SEC Acting Chairman Michael Piwowar comments, "We believe publishing these statistics provides the public with more transparency into and understanding of the private funds industry. The additional statistical analyses represent a continued focus on using data to inform policy and provide public information and will continue to facilitate feedback and analysis that could be used by the Commission and others."
The SEC report, which primarily tracks hedge funds and private equity funds, also includes statistics on liquidity funds. (They do not disclose any individual fund information or names, but we believe the biggest component is securities lending reinvestment pools.) The release explains, "Form PF is filed by SEC-registered investment advisers with at least $150 million in private funds assets under management to report information about the private funds that they manage."
The tables in the SEC's "Private Funds Statistics: Third Calendar Quarter 2016," the most recent data available, show 103 Liquidity Funds (including "Section 3 Liquidity Funds" which are Liquidity Funds from advisors with over $1 billion total in cash), the same number as the prior quarter and four fewer than a year ago. (There are 67 Liquidity Funds and 36 Section 3 Liquidity Funds.) The SEC receives Form PF reports from 37 Liquidity Fund advisers and 19 Section 3 Liquidity Fund advisers, or 56 advisers in total, the same number as last quarter (and one more than a year ago).
The SEC's table on "Aggregate Private Fund Net Asset Value" shows total Liquidity Fund assets at $537 billion, down $4 billion from Q2'16 and down $4 billion from a year ago (Q3'15). Of this total, $290 billion is normal Liquidity Funds while $247 billion is in Section 3 (large manager) Liquidity Funds. Regarding Ownership of Liquidity Funds, the SEC's cryptic tables show that $80 billion is held by Private Funds, $60 billion is held by Unknown Non-U.S. Investors, $40 billion is held by Other, $18 billion is held by SEC-Registered Investment Companies, $8 billion is held by Insurance Companies, and $4 billion is held by Non-U.S. Individuals <b:>`_.
The tables also show that 80.1% of Liquidity Funds have a liquidation period of one day, 232 funds may suspend redemptions, and 199 funds may have gates. The Portfolio Characteristics show that these funds are very close to money market funds. WAMs average a short 20 days (45 days when weighted by assets), WALs are a very short 49 days (83 days when asset-weighted), and 7-Day Gross Yields average about 0.33% (0.50% asset-weighted). Daily Liquid Assets average about 50% while Weekly Liquid Assets average about 60%. Overall, these portfolios appear shorter with a much heavier Treasury exposure than money market funds in general; half of them are fully compliant with Rule 2a-7.
In other news, a statement entitled, "DTCC Repo Clearing Services Gain Regulatory Approval" tells us, "The Depository Trust & Clearing Corporation (DTCC), the premier post-trade market infrastructure for the global financial services industry, today announced that the Securities and Exchange Commission (SEC) has approved rule changes allowing its Fixed Income Clearing Corporation (FICC) subsidiary to expand the availability of central clearing in the repo market, strengthening both the safety and efficiency of the marketplace. The rule approvals will allow institutional investors to participate in FICC either directly in the new Centrally Cleared Institutional Triparty (CCIT) Service or indirectly through a sponsoring member bank."
It says of the CCIT Service, "FICC is the only central counterparty (CCP) platform in the U.S. that clears tri-party repo and debt transactions. Since 1998, FICC's GCF Repo Service has enabled its dealer members to trade FICC-cleared general collateral tri-party repos with each other based on rate, term and underlying product throughout the day without requiring intra-day, trade-for-trade settlement on a Delivery-versus-Payment (DVP) basis. As an expansion of the GCF Repo Service, the CCIT Service will extend FICC's CCP services and guaranty of the completion of eligible trades to tri-party repo transactions between its dealer members and eligible tri-party cash lenders."
On the Sponsored DVP Repo Service, they comment, "Since 2005, FICC has also offered a service that allows well-capitalized bank members to sponsor their Registered Investment Company clients into FICC. With the expansion of the sponsored membership program, FICC will now permit additional Qualified Institutional Buyer clients to lend cash and U.S. treasuries via their sponsoring member banks throughout the day."
The DTCC adds, "Enabling new market participants to join FICC reduces counterparty risk, a key benefit because of the guaranteed completion of settlement in the event of a member default. In such a stress scenario, the CCP guaranty can lower the risk of liquidity drain from a large scale exit by institutional investors. A centralized liquidation of a failed counterparty by FICC would reduce the risk of fire sales that drive down asset prices and spread stress across the financial system. Centrally clearing these transactions at FICC also offers members opportunities for potential balance sheet netting and capital relief, which, in turn, may afford institutional investors increased lending capacity and income."
Murray Pozmanter, DTCC Managing Director and Head of Clearing Agency Services, comments, "The repo market is a critical source of funding for broker-dealers and an important cash management tool for institutional counterparties. We believe the larger group of market participants able to use central clearing through the CCIT Service and sponsored membership program strengthens the entire marketplace. We applaud the SEC actions, and look forward to delivering increased central clearing capabilities to our expanded community."
J.P. Morgan Securities writes in its "Mid-Week US Short Duration Update," "Last night, DTCC announced that the SEC has approved the proposal to allow FICC to expand the availability of central clearing in the repo market. In particular, the proposal would allow DTCC to leverage existing FICC infrastructure for GCF repo to facilitate centrally cleared tri-party trades for non-dealer counterparties. Under this platform, non-Registered Investment Companies (RICs) such as securities lenders and corporations may access collateral via the Centrally Cleared Institutional Triparty (CCIT) service, while RICs may access collateral via the Sponsored DVP repo service."
They add, "While the expansion of centrally clearing in the repo market is a positive (as it should provide Basel III netting benefits and therefore increased repo supply in the marketplace), just how much is unclear. Importantly, even with this expansion, it's unclear how much MMFs (which are RICs) would realistically access this program under the Sponsored DVP repo service. Based on our understanding, there is an additional cost to access collateral via a sponsor. Against this backdrop, Treasury repo supply has already expanded in recent months as a result of MMF reform. As a result, the FICC program should eventually expand the market, all else remaining equal, implying easier credit condition in repo. That being said, it's hard to know the magnitude at this point."
Fitch Ratings released a statement on Prime MMF inflows, and S&P Global Ratings is taking steps to revise their bond fund ratings criteria. This follows recent news that Fitch is tweaking its MMF Ratings criteria. (See our May 1 Link of the Day, "Fitch Updates MMF Rating Criteria.") Fitch's latest statement, entitled, "Fed Hikes Help Reverse Money Fund Reform Flows," says, "The increase in target range for the federal funds rate has been a welcome change for money fund managers, allowing for higher yields and the unwinding of voluntary fee waivers, according to a new dashboard from Fitch Ratings." (Note: The original version of this News story incorrectly referred to S&P's release involving money market funds; their update involves bond fund ratings only.)
Fitch Senior Director Greg Fayvilevich comments, "Prime money market funds in particular have benefited from the change in U.S. monetary policy with the past two interest rate hikes helping to widen the yield spread between prime and government funds.... Further spread widening will further incentivize inflows into prime funds, but the rate at which money can return will be constrained by the small size of many existing institutional prime funds."
Fitch explains, "Wider spreads have caused investors to move some assets back to prime after over $1 trillion left the space leading up to reform implementation in October. The prime to government spread widened to 0.33% as of March 31. This is more than double the spread of 0.16% seen on Sept. 30 and significantly higher than the post-crisis average of 0.09%. Stability in net asset value (NAV) as well as conservative liquidity management practices has also helped draw investors back to prime."
They add, "Since adopting the floating NAV structure in October, 95% of observations in daily changes in institutional prime fund NAVs have shown no movement. Additionally, weekly liquidity targets for prime institutional funds continue to be above the 30% regulatory threshold that would trigger the fees and gates features imposed last year."
As we wrote on Monday, a release entitled, "Fitch Updates Global Money Market Fund Rating Criteria," says, "Fitch Ratings has updated its global criteria for rating money market funds (MMFs) and other cash management vehicles. The review is part of our normal criteria review process. No rating changes are expected. Previous versions of the criteria have been retired."
They tell us, "The criteria remain 'principles-based' focusing on the ability of MMFs and other liquidity management products to preserve principle and maintain liquidity through managing credit, market and liquidity risks. Since the focus is on key portfolio risk attributes, the criteria is applicable to constant net asset value (CNAV) funds, variable NAV (VNAV) funds, as well as the European Union's recently proposed Low Volatility NAV (LVNAV) funds, provided the portfolio risk attributes align with Fitch's criteria." (See Fitch's new "Global Money Market Fund Rating Criteria" here.)
The release explains, "Changes to the criteria include: Clarification with respect to agency exposures, i.e. Federal Home Loan Banks et. al. Specifically, all exposures above the 35% concentration threshold should have a maximum maturity of 90 days or less; Reference to Fitch's Derivative Counterparty Ratings assigned to banks, where relevant; More detailed language on Fitch's approach for unrated repo counterparties; The addition of French, U.K. and Dutch sovereign bonds as eligible repo collateral, subject to normal counterparty ratings and overcollateralization criteria; Agency securities must be denominated in the fund's base currency to be eligible to portfolio weekly liquidity, on top of previously-defined features; Clarifications on derivatives usage, defining maximum aggregate derivative risk exposure and subject to unhedged weighted average maturity (WAM) being in line with maximum WAM levels set in the criteria; Addition of a section detailing the approach for determining whether public sector entities qualify as government agencies under the criteria; and, Consolidation of national scale MMF rating criteria into the global MMF rating criteria."
The other release, entitled, "S&P Global Ratings Outlines The Next Steps For Revising Its Fund Credit Quality And Fund Volatility Ratings Criteria," explains, "S&P Global Ratings is updating the market about its plans for finalizing its fund credit quality and fund volatility ratings methodologies. On Sept. 26, 2016, we published requests for comments on proposed changes to our methodologies for assigning fund credit quality ratings (FCQRs) and fund volatility ratings (FVRs) on fixed-income funds globally."
The S&P piece says, "We would like to thank fund sponsors and other market participants who provided feedback during the six-week comment period that followed the publication of the proposed criteria. We are currently assessing the comments we have received to determine whether any potential revisions to the proposed criteria published in the requests for comments are warranted. The feedback includes comments on the following proposals: updated factors and thresholds in the fund credit quality matrix, introduction of a portfolio risk assessment, how we determine rating inputs, and the analysis and application of the qualitative and quantitative assessments."
They explain, "We expect to publish the final FCQR and FVR criteria toward the end of second-quarter 2017. If our timeline changes, we will update the market about our expectations for finalizing and publishing the criteria. When the revised FCQR and FVR criteria are published, we will assign a UCO (under criteria observation) identifier to all ratings in scope of the criteria that are under review. The UCO designation indicates that the ratings are being reassessed due to the introduction of revised criteria.... We expect to complete the review within six months after the publication. Only a rating committee may determine a rating action, and a UCO designation does not constitute a rating action."
Finally, they add, "In addition to publishing the comments, we will also publish an article summarizing the feedback received and indicating how the final criteria differ from the criteria proposed in the request for comment." Related Research includes: Request For Comment: Fund Credit Quality Ratings Methodology, Sept. 26, 2016, and Request For Comment: Fund Volatility Ratings Methodology, Sept. 26, 2016.
As we mentioned last week, the Investment Company Institute published its "2017 Investment Company Fact Book," an annual compilation of statistics and commentary on the mutual fund industry. (See our April 27 News, "ICI 2017 Fact Book Reviews MMF Demand, Reforms, Composition in '16.") We reviewed the sections on "Demand for Money Funds," and "Recent Reforms to Money Funds," in our last piece, but today we revisit the "Fact Book," focusing this time on its numerous "Data Tables" involving "Money Market Mutual Funds, which start on page 204. ICI lists annual statistics on shareholder accounts, the number of funds, net assets, net new cash flows, paid and reinvested dividends, composition of prime and government funds, and net assets of institutional investors by type of institution.
ICI's annual statistics show that there's been a steady decline in the number of money market mutual funds over the last 15 years. (See Table 35 on page 204.) In 2016, according to the Fact Book, there were a total of 421 money funds, down from 481 in 2015, 847 in 2006, and down from 1,039 in 2000. The number of share classes stood at 1,282 in 2016, down from 1,427 in 2015 and 2,031 in 2006. securities and cash reserves). The average maturity was 34 days.
Table 36 on page 205, "Total Net Assets of Money Market Funds by Type of Funds," shows us that total net assets in taxable U.S. money market funds decreased $26.6 billion to $2.728 trillion in 2016. At year-end 2016, $1.742 trillion (63.8%) was in institutional money market funds, while $986.2 billion (36.2%) was in retail money market funds. Breaking the numbers down by fund type, $376.0 billion (13.8%) were in prime funds, $2.222 trillion (81.5%) in government money market funds, and $130.3 billion (4.8%) in tax-exempt accounts.
Also, Table 37 on page 206, "Net New Cash Flow of Money Market Funds by Type of Fund," show that there was $30.2 billion in net new cash flow out of money market funds last year, the first decline since 2012. A closer look at the data shows $40.1 billion in net new cash flow into institutional funds and a $70.4 billion cash outflow from retail funds. There were also $850.6 billion in net inflows into Government funds, and $764.8 billion in net outflows from Prime funds.
Table 39 (page 208), "Money Market Funds: Paid and Reinvested Dividends by Type of Fund," shows dividends paid by money funds reached their highest level since 2009 with $8.618 billion, $5.367 billion of which was reinvested (62.3%). Dividends have been as high as $127.9 billion in 2007 (when rates were over 5%), and as low as $5.2 billion in 2011 (when rates were 0.05%). Reinvestment rates were 64.4% in 2007 and 62.3% in 2011, so they've remained relatively stable over the past decade.
ICI's Tables 40 and 41 on pages 209 and 210, "Asset Composition of Taxable Government Money Market Funds as a Percentage of Total Net Assets" and "Asset Composition of Taxable Prime Money Market Funds," show that of the $2.222 trillion in taxable government money market funds, 30.5% were in U.S. government agency issues, 33.0% were in Repurchase agreements, 17.8% were in U.S. Treasury bills, 16.8% were in Other Treasury securities, and 1.7% was in "Other" assets. The average maturity was 46 days.
The second table shows that of the $376.0 billion in Prime funds at year-end 2016, 38.6% was in Certificates of Deposit, 26.8% was in commercial paper, 18.0% was in Repurchase agreements, 0.2% was in U.S. government agency issues, 2.0% was in Other Treasury securities, 1.1% was in Corporate notes, 0.3% percent was in Bank notes, 5.1% was in U.S. Treasury bills, 0.5% was in Eurodollar CDs, and 7.4% was in Other assets (which includes Banker's acceptances, municipal
Table 60 on page 229, "Total Net Assets of Mutual Funds Held in Individual and Institutional Accounts," shows that there was $1.060 trillion of assets with institutional investors and $1.668 in assets in Individual accounts in 2016.
Finally, Table 62, "Total Net Assets of Institutional Investors in Taxable Money Market Funds by Type of Institution and Type of Fund," shows of the total of $1.055 trillion in Total Institutional assets ($990.1 billion in Institutional funds and another $64.8 billion in Retail funds), $487.5 billion were held by business corporations (46.2%), $416.2 billion were held by financial institutions (39.5%), $91.1 billion were held by nonprofit organizations (8.6%), and $60.7 billion were held by Other (5.8%). Business corporations' use of MMFs fell in 2016 (by $55.7 billion), while all other sectors rose.
The Fact Book also mentions money funds in a couple of other places, saying in Chapter 1, "Historically, mutual funds have been one of the largest investors in the US commercial paper market -- an important source of short-term funding for major corporations around the world. Mutual fund demand for commercial paper arose primarily from prime money market funds. In 2016, however, the assets of prime money market funds fell 70 percent (nearly $900 billion) as these funds adapted to the 2014 SEC rule amendments that required the money market fund industry to make substantial changes by October 2016 (see chapter 2). Consequently, prime money market funds sharply reduced their holdings of commercial paper. From yearend 2015 to year-end 2016, mutual funds' share of the commercial paper market fell from 40 percent to 19 percent."
On "Bond Mutual Funds," ICI writes, "Bond fund flows typically are correlated with the performance of bonds (Figure 2.8), which, in turn, is largely driven by the US interest rate environment. In the first half of 2016, long-term interest rates declined about 80 basis points, likely reflecting weaker than expected economic activity and diminished prospects of tighter monetary policy. As economic activity picked up in the third quarter, long-term interest rates started to rise, then jumped after the US presidential election and continued to drift higher, ending the year at about 20 basis points more than at the beginning of 2016. These developments created a seesaw pattern (up first, then down) in the total return on bonds for the year. Bond mutual funds had net inflows of $107 billion in 2016, a significant reversal from $25 billion in net outflows in 2015."
They add, "Despite several periods of market turmoil, bond mutual funds have experienced net inflows through most of the past decade. Bond funds received $2.0 trillion in net inflows and reinvested dividends from 2007 through 2016.... A number of factors have helped sustain this long-term demand for bond mutual funds.... Older investors tend to have higher account balances because they have had more time to accumulate savings and take advantage of compounding. At the same time, as investors age, they tend to shift toward fixed-income products. Over the past decade, the aging of Baby Boomers has boosted flows to bond funds. Although net outflows from bond funds would have been expected when long-term interest rates rose over the second half of 2016, they were likely mitigated, in part, by the demographic factors that have supported bond fund flows over the past decade."
Federated Investors reported First Quarter 2017 Earnings late last week and, as usual, discussed a number of money market fund-related issues in its release and on its earnings call. (See the Federated earnings call transcript here.) The release says, "Federated Investors, Inc. (NYSE: FII), one of the nation's largest investment managers, today reported earnings per diluted share (EPS) of $0.49 for Q1 2017, compared to $0.44 for the same quarter last year on net income of $49.6 million for Q1 2017, compared to $45.4 million for Q1 2016. Federated's total managed assets were $361.7 billion at March 31, 2017. Total managed assets were down $8.0 billion or 2 percent from $369.7 billion at March 31, 2016 and down $4.2 billion or 1 percent from $365.9 billion at Dec. 31, 2016. Lower money market assets were partially offset by higher equity and fixed-income assets at the end of Q1 2017 compared to both the end of Q1 2016 and Q4 2016."
It explains, "Money market assets were $245.2 billion at March 31, 2017, down $16.8 billion or 6 percent from $262.0 billion at March 31, 2016 and down $7.0 billion or 3 percent from $252.2 billion at Dec. 31, 2016. Money market fund assets were $175.2 billion at March 31, 2017, down $49.5 billion or 22 percent from $224.7 billion at March 31, 2016 and down $31.2 billion or 15 percent from $206.4 billion at Dec. 31, 2016. Since March 31, 2016 approximately $25 billion in money market assets has transitioned from Federated funds to Federated separate accounts, including $21 billion that transitioned in Q1 2017 primarily due to a change in a customer relationship. Federated's money market separate account assets were a record $70.0 billion at March 31, 2017, up $32.7 billion or 88 percent from $37.3 billion at March 31, 2016 and up $24.2 billion or 53 percent from $45.8 billion at Dec. 31, 2016." (See our March 10, 2016 News, "Federated, Edward Jones Restructure Money Fund Deal; New 10-K Filing.")
Federated says, "Revenue increased by $1.4 million or 1 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 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 fund assets and a decrease in revenue resulting from a change in a customer relationship.... During Q1 2017, Federated derived 58 percent of its revenue from equity and fixed-income assets (41 percent from equity assets and 17 percent from fixed-income assets) and 42 percent from money market assets."
They explain, "Revenue decreased by $16.4 million or 6 percent primarily due to a decrease in revenue resulting from a change in a customer relationship, having two fewer days in Q1 2017 vs. Q4 2016 and a decrease in revenue from lower average money market fund assets. The decrease in revenue was partially offset by a decrease in voluntary yield-related fee waivers and an increase in revenue from higher average equity assets. Operating expenses decreased by $9.4 million or 5 percent primarily due to a decrease in distribution expenses as a result of a change in a customer relationship, lower average money market fund assets and having two fewer days in Q1 2017 vs. Q4 2016, partially offset by a decrease in voluntary yield-related fee waivers.
President & CEO J. Christopher Donahue commented on Friday's earnings call, "Now looking at money markets, total assets in the funds in separate accounts decreased by $7 billion from Q4. The previous discussed transition of a $21 billion money market fund to a sub advised separate account impacted the reported assets by product type. Excluding this transaction, money market mutual fund assets decreased by about $10 billion from Q4 and separate accounts added about $3 billion. Our money market mutual fund market share at the end of Q1 was 7.5%, about the same at the end of 2016."
He continues, "Money fund assets remain concentrated in Government funds. We believe that as spreads widen, investors who exited prime funds will over time consider and reconsider their options including our recently launched private prime fund and our collective prime fund. We also believe that a rising rate environment will be positive for money market funds and will encourage investors to shift some money from bank deposits. Our prime collective and prime private funds had about $460 million in assets at the end of Q1."
During the Q&A, Donahue tells us, "In terms of the ... the prime funds and the collective funds ... on the relative economics of the prime and the collective funds, it's basically the same as the other money market funds. But obviously these funds are smaller ... together they are $460 million. But we're trying to grow them, and working hard.... You know getting a money market fund up to a size where people are willing to take a big position is part of the challenge. And that's why I mentioned that both higher rates gross and higher spreads net are going to be important ingredients as we present those products to the marketplace. But basically it's the same drill whether you're in one of our other money funds or in those."
President Ray Hanley answered a question on pricing of separate accounts vs. money funds, "Without commenting on the specific separate accounts, just generally ... in the first quarter if you take our total money market fund business on a net revenue basis, net of the distribution expenses it comes out to roughly around 10 basis points, a little above 10 basis points. And on the institutional separate account side, that's more like around a four basis point rate, which is dominated by a handful of very, very large accounts. But in terms of individual separate accounts they are essentially priced on an individual basis."
When asked about fee competition, Donahue explains, "Well, obviously there is a huge change in the amount of money that went into 'Govies,' and there were some participants who over that time frame reduced their pricing.... In terms of the Prime, because some people shut their primes down and because of the [reforms] implemented October 16, it's difficult.... I'm not aware of people doing a lot of shenanigans on the prime side with those assets but I would ask Debbie to give you an up to date version."
MM CIO Deborah Cunningham adds, "Certainly, on the government side, as Chris mentioned, there have been a few in the market that have chosen strategically to lower fees and capture some of the assets that were flowing out of prime and into government. I would say year-to-date 2017, that has been less of an issue.... From a Prime standpoint, we're not seeing that. I think those funds are now at this point enjoying a yield curve that is fairly steep and has a lot of spread associated with it, versus Treasury and Government agency yield curves. And at this point at least, it's more a battle of how do you get asset size not from a fee waiver perspective but just getting clients comfortable with the new product, with the structural changes that went into those products. It's not being done through a fee waiver standpoint."
One questioner asked, "Historically, there's always been I guess a lag between when short rates start to rise and you start to see a greater demand for money fund assets. But given we've had a couple of increases -- I know it takes some time to filter through -- are you seeing any change in the competitive landscape versus bank deposits? Maybe banks re-pricing deposits up more aggressively? [H]ow long [does] it take institutions to start becoming more attractive to money funds as rates go up?"
Cunningham responds, "Well, it's interesting, from a historical perspective, generally in a rising rate environment money funds lose assets to the direct market whether it's you know repo or deposit instruments. We're not seeing that so much in this case. But we're not seeing a whole lot flow back in. In fact, we're trying to emphasize that at this point, the attractiveness of funds versus bank deposits. The average bank deposit rate, which is a difficult thing to come up with, and it is a varied range, but the average that we can find at this point is right around 53 basis points. Our government funds are yielding 80 plus basis points, our prime funds are yielding about 20 [more]. There's easily 30 to 70 basis points in spread over bank deposits and I think it's just an awareness [issue and] comfort with the new product set.... That's our challenge at this point."
