News Archives: January, 2018
The Investment Company Institute released its latest monthly "Trends in Mutual Fund Investing" reports yesterday. Their numbers confirm a jump in money fund assets in December, following a jump in November and a dip in October. ICI's "December 2017 - Trends" shows a $51.8 billion increase in money market fund assets in December to $2.847 trillion. This follows a $57.9 billion increase in November, a $8.8 billion decrease in October, a $28.8 billion increase in Sept., a $71.8 billion increase in August, and a $13.6 billion increase in July. In the 12 months through December 31, money fund assets have increased by $119.2 billion, or 4.4%. We review ICI's latest reports below, and we also quote from a filing for a new money market fund, Semper U.S. Treasury Money Fund.
ICI's monthly report states, "The combined assets of the nation's mutual funds increased by $149.60 billion, or 0.8 percent, to $18.75 trillion in December, according to the Investment Company Institute’s official survey of the mutual fund industry. In the survey, mutual fund companies report actual assets, sales, and redemptions to ICI."
It explains, "Bond funds had an inflow of $13.40 billion in December, compared with an inflow of $14.97 billion in November…. Money market funds had an inflow of $49.40 billion in December, compared with an inflow of $55.44 billion in November. In December funds offered primarily to institutions had an inflow of $33.80 billion and funds offered primarily to individuals had an inflow of $15.59 billion."
The latest "Trends" shows that both Taxable and Tax Exempt MMFs gained assets again last month. Taxable MMFs increased by $49.3 billion in December, after increasing by $57.4 billion in November and decreasing $9.4 billion in October, but increasing $30.1 billion in September, $73.5 billion in August and $11.9 billion in July. Tax-Exempt MMFs increased $2.5 billion in December, after increasing $0.5 billion in November and $0.9 billion in October, but decreasing $1.3 billion in September and $1.7 billion in August. Over the past year through 12/31/17, Taxable MMF assets increased by $118.3 billion (4.6%) while Tax-Exempt funds rose by $0.8 billion over the past year (0.6%).
Money funds now represent 15.2% (up from 15.0% the previous month) of all mutual fund assets, while bond funds represent 21.7%, according to ICI. The total number of money market funds decreased by 9 to 382 in December, down from 421 a year ago. (Taxable money funds fell by 9 to 299 and Tax-exempt money funds were unchanged over the last month.)
ICI also released its latest "Month-End Portfolio Holdings of Taxable Money Funds," which confirmed a surge in Repo and a sharp drop in CDs in December. Repo remained the largest portfolio segment; it was up $51.9 billion, or 5.7%, to $956.4 billion or 35.2% of holdings. Repo has increased by $156.2 billion over the past 12 months, or 19.5%. (See our Jan. 11 News, "Jan. Money Fund Portfolio Holdings: Repo Jumps, Breaks 1.0 Trillion.")
Treasury Bills & Securities remained in second place among composition segments; they rose by $354 million, or 0.1%, to $702.2 billion, or 25.9% of holdings. Treasury holdings have fallen by $94.1 billion, or -11.8%, over the past year. U.S. Government Agency Securities remained in third place; they rose by $6.0 billion, or 0.9%, to $682.5 billion, or 25.1% of holdings. Agency holdings have risen by $4.7 billion, or 0.7%, over the past 12 months.
Certificates of Deposit (CDs) stood in fourth place; they decreased $35.5 billion, or -16.3%, to $182.4 billion (6.7% of assets). CDs held by money funds have risen by $34.6 billion, or 23.4%, over 12 months. Commercial Paper remained in fifth place, increasing $1.9B, or 1.3%, to $148.2 billion (5.5% of assets). CP has increased by $44.4 billion, or 42.7%, over one year. Notes (including Corporate and Bank) were down by $404 million, or -5.2%, to $7.4 billion (0.3% of assets), and Other holdings increased to $15.0 billion.
The Number of Accounts Outstanding in ICI's series for taxable money funds increased by 306.4 thousand to 26.885 million, while the Number of Funds declined by 9 to 299. Over the past 12 months, the number of accounts rose by 1.650 million and the number of funds decreased by 12. The Average Maturity of Portfolios was 32 days in December, up 2 days from November. Over the past 12 months, WAMs of Taxable money funds have shortened by 12 days.
In other news, a filing for the new Semper U.S. Treasury Money Fund tells us, "The Semper U.S. Treasury Money Market Fund (the “Fund”) seeks to provide current income while maintaining liquidity and a stable share price of $1.00." Run by Semper Capital Management, the fund will have an expense ratio of 0.30% (after a 0.12% waiver).
It adds, "The Semper U.S. Treasury Money Market Fund (the "Fund") is a series of Forum Funds II (the "Trust"), an open-end, management investment company (mutual fund).... The Advisor receives an advisory fee from the Fund at an annual rate equal to 0.20% of the Fund's average annual daily net assets under the terms of the Advisory Agreement.... Thomas Mandel, CFA, has been the portfolio manager of the Fund since its inception in 2018 and is responsible for the day-to-day management of the Fund."
Crane's Money Fund Symposium, the largest gathering of money market fund managers and cash investors in the world, will take place June 25-27, 2018 at The Westin Convention Center, in Pittsburgh, Pa. The preliminary agenda, which we review below, is now available and registrations are being taken. Our previous MFS in Atlanta attracted over 550 attendees, and we expect another robust turnout for our 10th annual event in Pittsburgh this summer. Money Fund Symposium attracts money fund managers, marketers and servicers, cash investors, money market securities dealers, issuers, and regulators. Visit the MF Symposium website at www.moneyfundsymposium.com) for more details. Registration is $750, and discounted hotel reservations are also now available. We also review the rest of Crane Data's 2018 conference calendar, including next month's Bond Fund Symposium in Los Angeles (March 22-23).
Our June 25 Opening (afternoon) Agenda kicks off with a "Welcome to Money Fund Symposium 2018" from Peter Crane, President of Crane Data. Then our keynote talk features Federated Investors' President & Chief Executive Officer Chris Donahue, who will discuss "Money Funds Getting Back to Business." The rest of the Day One agenda includes: "Global & European Money Market Funds," with Reyer Kooy of IMMFA and Alastair Sewell of Fitch Ratings; "Ultra-Short Bond Funds, SMAs & Alt-Cash," with Dave Martucci of J.P. Morgan Asset Management, Michael Morin of Fidelity Investments, and Peter Yi of Northern Trust AM; and, a "Major Money Fund Issues 2018" panel moderated by Peter Crane and featuring Jason Granet of Goldman Sachs A.M., Tracy Hopkins of BNY Mellon Cash Investment Strategies, and Jeff Weaver of Wells Fargo Funds. (The opening day's refreshments will be sponsored by Fidelity and the opening evening's reception will be sponsored by Bank of America Merrill Lynch.)
Day 2 of Money Fund Symposium 2018 begins with "Strategists Speak '18: Rates, Repo & Alt-Cash," which features Mark Cabana of Bank of America Merrill Lynch, Joseph Abate of Barclays, and Alex Roever of J.P. Morgan Securities. This session is followed by: a panel entitled, "Senior Portfolio Manager Perspectives," including Laurie Brignac of Invesco, Dave Walczak of UBS Asset Mgmt, and John Tobin of J.P. Morgan A.M.; a session on "Government and Treasury Money Fund Issues," featuring Geoff Gibbs of Deutsche Funds and Sue Hill of Federated; and, a "Muni & Tax Exempt Money Fund Update" with Justin Schwartz of Vanguard, John Vetter of Fidelity, and Sean Saroya of J.P. Morgan Securities. (Day 2's breakfast is sponsored by J.P. Morgan Securities and the coffee break is sponsored by Wells Fargo.)
The Afternoon of Day 2 (after a Dreyfus-sponsored lunch) features the segments: "Dealer's Choice: Supply & Alternate Buyers," including Stewart Cutler of Barclays, Joseph Johnson of Goldman Sachs and Rob Crowe of Citi Global Markets; "Treasury, Agency & Fed Repo Issuance, with a Speaker from the U.S. Dept. of Treasury, Dave Messerly of the FHLBanks - Office of Finance, and Josh Frost of the Federal Reserve Bank of NY; a presentation on "FDIC Insured Options & Sweep Issues" with Kevin Bannerton of Total Bank Solutions and Eric Lansky of StoneCastle Cash Management; and, a segment on "Portals, Info & Tech Update: Data, Software," with ` Fred Berretta <p:>`_ of Cachematrix, Greg Fortuna of State Street Fund Connect, and Tory Hazard of ICD. (The Day 2 break is sponsored by Invesco and the reception is sponsored by Barclays.)
The third day of Symposium (after a Federated-sponsored breakfast) features the sessions: "State of the Money Fund Industry" with Peter Crane of Crane Data, Deborah Cunningham of Federated Investors, and Rick Holland of Charles Schwab Investment Mgmt.; "Regulatory Issues: Repo, SEC Sweeps, European," with Steve Cohen of Dechert and Sarah ten Siethoff of the SEC; and, "Corporate Investment & Washington Issues," with Tony Carfang from Treasury Strategies and Tom Hunt from AFP. Finally, the last session, entitled, "Ratings Agency Roundtable: Criteria, Risks," with Robert Callagy from Moody's Investors Service, Greg Fayvilevich from Fitch Ratings, and Guyna Johnson from S&P Global Ratings. (The coffee break is sponsored by First American Funds.)
We hope you'll join us in Pittsburgh this June! We'd like to encourage attendees, speakers and sponsors to register and make hotel reservations early. Note that a couple of our speakers have yet to confirm their participation, and the agenda is still in the process of being finalized. E-mail us at info@cranedata.com to request the full brochure, or click here to see the latest.
In other conference news, final preparations are being made for the inaugural Crane's Bond Fund Symposium, which will be held March 22-23 in Los Angeles. (Click here to see the PDF agenda.) Bond Fund Symposium, the first conference devoted entirely to bond mutual funds, will bring together bond fund managers, marketers, and professionals with fixed-income issuers, investors and service providers. The majority of the content will be aimed at the growing ultra-short and conservative ultra-short bond fund marketplace. (As a reminder, please register for BFS and make hotel reservations for BFS soon if you plan on attending!)
Crane Data, which recently celebrated the third anniversary of its Bond Fund Intelligence publication and BFI XLS bond fund information service and benchmarks, continues to expand its fixed income fund offerings with the recent launch of Bond Fund Wisdom product and Bond Fund Portfolio Holdings dataset. Bond Fund Symposium offers attendees a concentrated and affordable educational experience, as well as an excellent networking venue. Registration for Bond Fund Symposium is $750; exhibit space is $2,000 (includes 2 tickets); and sponsorship opportunities are $3K, $4K, $5K and $6K. Our mission is to deliver the best possible conference content at an affordable price to bond fund professionals and investors.
Finally, mark your calendars for Crane's 6th annual "offshore" money fund event, European Money Fund Symposium, which will be held in London, England, September 20-21, 2018. This website (www.euromfs.com) will be updated with the 2018 information soon. (Contact us to inquire about sponsoring or speaking.) Our next Money Fund University "basic training" event is also tentatively scheduled for Jan. 24-25, 2019, in Stamford, Conn. Watch www.cranedata.com for more details on these events, and please let us know if you have any questions or feedback on our growing conference business.
Note: Crane Data Subscribers have access to all our conference binder materials, including Powerpoints, recordings and attendee lists. See the bottom of our "Content Center" for a listing of available conference materials.
On Friday, Federated Investors hosted its Q4 2017 Earnings Conference Call (see the Seeking Alpha transcript here), which discussed a number of issues involving money market funds, including asset flows, sweep accounts, repatriation and H.R. 2319. CEO & President Chris Donahue commented, "Total money market assets increased by $21 billion from the third quarter. Separate account money market assets were up nearly $14 billion, reflecting about $6 billion from a new public entity mandate and growth in existing accounts from seasonality and other factors. Money market mutual fund assets grew by nearly $8 billion reflecting seasonality and other factors. Our money market mutual fund market share ... was 7.4%, up slightly from the prior quarter of 7.3%."
He explained, "Prime money fund assets increased about 1% in Q4, up to $28.7 billion. Assets in our Prime Private Liquidity Fund increased over $500 million in Q4. This product and our Prime Collective Fund had about $850 million in combined assets at year-end, up from $600 million at the end of 2016. These products preserve the use of amortized cost accounting and do not have the burden of redemption fees and gate provisions. Taking a look at our most recent asset totals as of January 24, managed assets were approximately $403 billion, including $268 billion in money markets, $70 billion in equities, $65 billion in fixed income. Money market mutual fund assets were at $181 billion, which is about the same as the average so far here in January."
CFO Tom Donahue added, "Total revenue was about the same from the prior quarter. Higher advisory and administrative service fee revenue due to higher average assets was offset by lower other service fee revenue due to lower money market distribution fee revenue. The lower money market distribution fee revenue was offset by related lower distribution expense. Revenue was down 4% compared to Q4 of last year due to the previously discussed change in a customer relationship in January 2017 and lower money market fund assets. These decreases were partially offset by an increase in revenue due to lower money fund yield-related waivers and higher equity and fixed income-related revenues from higher assets. Operating expenses decreased 1% compared to the prior quarter.... The decrease from the prior quarter was due mainly to lower money market distribution expenses related to asset mix changes. The decrease from Q4 2016 was driven by the impact of the customer relationship change and lower money market fund assets, partially offset by higher distribution expense as money market funds' yield-related waivers decreased."
During the Q&A, President Ray Hanley said, "In terms of the revenue ... it's affected by equity and fixed income as well as money markets. So it's the same kind of mix shift that we talked about last quarter. We had lower assets coming from the more retail sweep type of applications, which have higher distribution fee revenue and related distribution fee expenses. And so those two things move proportionally underneath, but again, there are other things in both of those line items."
Money markets CIO Deborah Cunningham explained, "For first quarter, I think we'll probably continue to [see funds'] regular seasonality. It's aided this year though by the fact that the interest rate environment that we're in is no longer at zero. One-percent and 2% type securities in the market for money markets are actually prevalent at this point, and the funds are returning something that is producing income for their clients.... So our expectation is optimistic for what the first quarter will produce."
Responding to a question on flows, Chris Donahue answered, "But what I like is the possibilities of our bill that we have supported, H.R. 2319, which basically says, 'Let's go back to the thrilling days of yesteryear on amortized cost, institutional prime and institutional muni funds,' wherein $1 trillion is left. So there could certainly be a $1 trillion comeback. And when you throw all the money up in the air, that's usually a good thing, especially for those who are in favor of doing this. Why? For the benefit of the clients who have all lost their 30 basis point spread by having to be stuck into a government fund, where they don't get the 30 basis points ... that's associated with a prime fund. So if this thing marches through Congress, this would be a big effort for us."
Cunningham added, "From a theme standpoint, I think what we're looking at for 2018 is the performance of money market funds in a rising rate environment versus deposit products. So deposit products currently stand at over $11 trillion, whereas the money fund industry is slightly under $3 trillion at this point. If you go back to the financial crisis in 2008, both products stood right around $4 trillion at that point. In a rising rate environment, however, because deposit products are administered rates, whereas money funds follow market rates, typically, money market funds perform quite well versus the deposit products. So that's basically where we see a lot of growth coming from."
She continued, "In fact, on a one year basis, if you look at the growth rate in deposits and the growth rate in the fund industry, it's the first year in the last 10 years where the fund industry grew at over 4% and the deposit industry only grew by 3.3%. So not a whole lot of difference, but there was a difference, and we exceeded at that point. So that's our theme for 2018, and we think that there's a lot of cash to move from that specific area."
On which channels may see better growth, Cunningham responded, "Well, it certainly seems as though some of the corporate side of the equation, especially from a repatriation perspective, has a lot of opportunity associated with that cash. Dollars might be flowing back into the United States because of the tax bill.... Also, when you look at some of the sweep products that went into government money market funds, as Chris was mentioning, some portion of that [has] become comfortable again with prime money market funds. Those will likely grow also in 2018. So there's probably not a channel where we feel at all constrained or as if their growth might be stagnant. It's all looking pretty positive at this point."
Cunningham also said, "Going back to sort of the repatriation side, certainly, there's been a lot of announcements by various firms -- Apple, in particular, last week, and some other technology firms, Starbucks. Different ones have announced some, at least, initial plans for where some of ... that cash flow will be placed. We think that will be a substantial area of growth in 2018. And generally speaking, I think winning back clients that, for purposes of, initially, the financial crisis and concern about the fund industry versus the banking industry, went into deposit products, again, will be something that we continue to focus on in 2018 and, we think, has a lot of upside potential associated with it."
She told the call, "From a money market fund standpoint, we do think that the growth that we're anticipating there is substantial. Certainly, it seems as though there are quite a few clients who are dipping their toe back into the prime world, the prime institutional world in particular. We have funds that were decimated in size from a regulatory environment. But at this point -- in the fourth quarter and second half of 2017 -- grew more than 50%. Now it's 50% off of a small base, so it doesn't create the same amount of dollars sometimes as what you might be thinking of in the context of 50% growth. Having said that, that seems to be a swell that's growing. Our expectations would be it will continue in 2018 and probably pick up speed just simply because of the additional return that's ... expected as the Fed continues on its path toward normalization and what I'd say is probably a 2% rate environment."
On sweep accounts and the shift into FDIC products, Cunningham commented, "That is a dynamic that ... has been in play for the last six or seven years. Initially, there was a large movement of sweep products into deposit products. And then, most recently, in the last two years, it's been a movement from prime funds into government funds, mostly having to do with the gates and fees and the concern from a sweep product perspective about those aspects of the prime institutional fund. And again, we're starting to see both of those things reverse. And although there have been some conversions still into the bank deposit market, it's been fewer and far between."
She explained, "And again, we think that rates ultimately will drive that equation. And even from a government money market fund standpoint versus those deposit rates, there's a lot of interest.... The comparison is very good coming in ... with the government money market fund on top.... We've had a handful of customers that have gone back and readdressed the whole gates and fees idea within the sweep product aspect and have gotten comfortable with it and have updated their systems to be able to handle that aspect, even though it's unlikely and remote. And as such, we're beginning to see a very small flow back into [Prime]. We think that will grow as 2018 continues."
Asked if flows would return to Prime if the Stable NAV Bill passes, Donahue responded, "I think it would be more or less a lag, but I wouldn't have used the word substantial. And the reason is that you got to burp out all the new products, and so that's going to take a certain amount of time to get them around. Then the products have to be big enough where the clients can feel comfortable with their normal position. So you're going to have to grow your way back to nirvana where they were before. So that's how I would see it. But it is so clear that the customers, the issuers and the marketplace prefer that product. I mean, that's why they moved $1 trillion from Prime to Govie. So I have a lot of confidence that, that money will come back. As to making book on it, I throw around the idea that once you've been marked up, it's a coin flip. But the thing is you can come up with anything you want as to what is going to happen in Congress, and I'm not going to dispute it with you, argue it with you or come up with a different view."
Cunningham answered a question on seasonality, "Generally speaking, the first half of the year, the first quarter of the year are low in flows and are more on the negative side than on the positive side. Then that completely reverses in the second half of the year and particularly building towards the largest quarter, which is generally the fourth quarter. And again, I think this year the second half of the year will be amplified and probably maybe even bleed into the first half of the year from an uptick perspective, just given where interest rates are at this point. Two percent versus 0% is a heck of a difference, and nobody is real concerned about regulatory reform anymore at this point."
Finally, she added, "Maybe there's some shift in their asset mix that they're looking to make. Maybe they're looking to diversify a little bit where their assets are. But for the most part, those that have assets in the liquidity space, actually, those are likely to grow again. Repatriation [is also] something that we have out there as an unknown, but likely a positive. We'll be trending, we believe, towards the sector that makes the most amount of sense in the current rate environment, which is the money fund side."
Bank of America Merrill Lynch published a brief entitled, "Year end contraction in MMF repo again pronounced," which discusses the drop in non-Fed repo at year-end. Authors Mark Cabana and Olivia Lima explain, "Total MMF repo ex-Fed has been increasing since 2015 and continued to rise in Q4 2017.... At the end of November, total MMF repo activity reached a high of $900bn according to the Treasury Office of Financial Research. This was driven by a steady increase in Treasury and Agency repo, while MMF repo across other collateral types remains subdued following 2a-7 reform." We review their latest research, and also cover ICI's most recent money fund asset totals, below.
BofA writes, "Repo provided to MMF continues to show material contraction around year-end reporting dates especially from US & EU dealers. Total MMF repo ex-Fed decreased by $175bn at the end of 2017. This is most pronounced with Treasury repo, although it has leveled off as a percentage of total MMF repo outstanding." (For Crane Data's latest on 12/31 repo totals, see our Jan. 11 News, "Jan. Money Fund Portfolio Holdings: Repo Jumps, Breaks $1.0 Trillion.")
They continue, "The largest declines in dealer repo availability typically come from European firms on quarter-end dates, as they report SLRs as a snapshot on the last day of the quarter. The contraction on year-end dates tends to be the most pronounced as these dates are also used to calculate GSIB surcharge scores. There was a $150bn decrease in Treasury repo provided by EU firms in the US market at the end of 2017, though the decline as a percentage of total EU repo was similar to last year.... Together, BNP and Credit Agricole made up 64% of this reduction."
Cabana and Lima tell us, "Large US firms have also started to contract their repo availability to MMF on quarter- and year-end reporting dates.... Treasury repo activity declined by $20bn in comparison to a $6bn decrease at the end of 2016, the first year of the GSIB surcharge phase in. The extent of future repo balance sheet contraction on year-end dates will likely depend on the extent to which US GSIBs manage down their total balance sheet exposures to fall into a lower GSIB surcharge bucket."
The "US Rates Watch" update says, "FICC Treasury repo activity increased by $21bn in December, from 13bn to 34bn - the highest level to date.... The biggest counterparties to the FICC are Goldman, Federated and Invesco. Each firm increased its repo activity, with Federated and Invesco more than tripling. Sponsored members of the FICC are likely to participate in the program to achieve a higher rate on their overnight repo investment or expand their repo across a range of participants. Using weighted averages, these counterparties achieve higher O/N Treasury repo rates by 9 bps vs investments with dealers."
It states, "Repo provided to MMF by Canadian dealers also continues to show pronounced growth. December saw a jump of $28bn, of which $25.8bn was in Agency repo.... Royal Bank of Canada and Canadian Imperial Bancorp made up almost all of this change. It is uncertain why Canadian Agency repo activity increased sharply, though some Canadian dealers may have stepped in to absorb year-end repo contractions elsewhere."
Finally, BofA adds, "Given the current trend, we expect to see continued increase in repo activity, especially from non-traditional sources such as EU and Canadian providers and the FICC. In addition, we anticipate on-going contractions on quarter- and year-end dates will continue to necessitate the existence of the Fed's ON RRP facility especially on quarter-end dates despite the recent drop in overall usage."
In other news, money fund assets increased for the first time in 2018, after falling for three weeks in a row, according to the Investment Company Institute's latest "Money Market Fund Assets" report. After rising by $113 billion, or 4.1%, in 2017, money fund assets have declined by $18 billion, or -0.6%, year-to-date in 2018 (through 1/24).
ICI writes, "Total money market fund assets increased by $8.38 billion to $2.82 trillion for the week ended Wednesday, January 24, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $6.71 billion and prime funds increased by $1.04 billion. Tax-exempt money market funds increased by $625 million." Total Government MMF assets, which include Treasury funds too, stand at $2.223 trillion (78.7% of all money funds), while Total Prime MMFs stand at $463.3 billion (16.4%). Tax Exempt MMFs total $137.8 billion, or 4.9%.
They explain, "Assets of retail money market funds decreased by $1.68 billion to $1.00 trillion. Among retail funds, government money market fund assets decreased by $879 million to $606.34 billion, prime money market fund assets decreased by $1.13 billion to $263.98 billion, and tax-exempt fund assets increased by $332 million to $131.23 billion." Retail assets account for over a third of total assets, or 35.5%, and Government Retail assets make up 60.5% of all Retail MMFs.
The release adds, "Assets of institutional money market funds increased by $10.06 billion to $1.82 trillion. Among institutional funds, government money market fund assets increased by $7.59 billion to $1.62 trillion, prime money market fund assets increased by $2.17 billion to $199.29 billion, and tax-exempt fund assets increased by $293 million to $6.54 billion." Institutional assets account for 64.5% of all MMF assets, with Government Inst assets making up 88.7% of all Institutional MMFs.
We learned from website Law360 that the U.K.'s Financial Conduct Authority, which regulates conducts for U.K. financial service firms, has issued a consultation paper entitled, "CP18/4: The European Money Market Funds (MMF) Regulation." It says, "We are consulting on changes to our Handbook in relation to the European Money Market Funds Regulation, and on our approach to FCA fees to meet the cost of authorising and supervising funds under the Regulation." Law360's article, "FCA Seeks Fee System For Regulated Money Market Funds," explains, "The Financial Conduct Authority outlined plans Wednesday to impose fees on money market funds so that it can supervise the industry as required by new European rules designed to make sure the funds remain stable during another financial crisis." We review the FCA paper, as well as a MarketWatch article, "Time for cash?" below.
The FCA paper's summary tells us, "This CP sets out our proposed Handbook changes and approach to FCA fees in relation to the European Money Market Funds Regulation (the MMF Regulation, or the Regulation).... The MMF Regulation is directly applicable under European Union (EU) law and does not require implementation by individual Member States. However, the FCA and the Treasury have identified areas of the UK regulatory framework that require changes so that the MMF Regulation can work properly in the UK. The Treasury intends to give us certain powers to ensure that we can supervise firms' adherence to the requirements of the Regulation."
It continues, "This CP on the MMF Regulation will be of interest to: UK fund managers which already manage and/or market funds as money market funds (MMFs), or funds that are substantially similar to MMFs as defined in the MMF Regulation, in the UK or another Member State, or intend to do so; European Economic Area (EEA) fund managers which already manage and/or market MMFs in the UK or intend to do so; MMF depositaries; intermediaries advising on and distributing MMFs; and, investors in MMFs."
The FCA paper explains, "[O]n 4 September 2013, the Commission adopted a proposal for a Regulation on MMFs. Following negotiation between the Council of the EU (the Council) and the European Parliament (EP), the final text of the Regulation was published in the EU Official Journal on 30 June 2017. The Regulation will subject MMFs -- and any funds which are substantially similar in character -- to authorisation and supervision. It aims to preserve the internal market's integrity and ... aims to ensure that MMFs are able to meet redemption requests from investors, especially under stressed market conditions.... Taken together, these changes will support the operation of the short-term funding market for financial institutions, corporate issuers of short-term debt and governments."
It states, "The Regulation came into force directly in every EU Member State on 21 July 2017, and will take effect on 21 July 2018. From that date, new MMFs will need to be authorised as an MMF by their National Competent Authority (NCA). In practice, this means that new MMFs will need to seek authorisation before that date. Existing funds that are already branded as MMFs and operating under the regime set out in European Securities and Markets Authority (ESMA) guidance, and any existing funds that are substantially similar to MMFs as defined in the MMF Regulation, will have to comply with the new Regulation by 21 January 2019."
The FCA comments, "The Regulation establishes a framework of requirements to improve the liquidity and stability of MMFs. Most existing MMFs operate under the Undertakings for Collective Investment in Transferable Securities (UCITS) Directive.... The key provisions of the Regulation: Define three types of MMF (see Annex 3), each of which may be a short term MMF or a standard MMF: Variable NAV (VNAV) MMF, Public Debt Constant NAV (CNAV) MMF, and, Low Volatility NAV (LVNAV) MMF. Each type of MMF has a different set of risk characteristics."
They also "Set out the eligible assets that MMFs can hold; Set minimum liquidity requirements; ... Require MMFs to conduct regular stress tests....; Ban external support for MMFs by third parties, such as cash injections or buying assets at inflated prices; and, Ensure market transparency.... All MMFs must make key information about their portfolios available each week, and Require MMFs to report to the relevant NCA quarterly.... NCAs are required to provide ESMA with regular reports based on their authorisation activities and the reports they receive from MMFs." Finally, they add, "`You are invited to respond to this paper by 23 March 2018. We will consider the responses received and publish the final rules as soon as possible after the end of this consultation."
In other news, MarketWatch recently wrote the piece, "Stocks look pricey, bonds look pricey. Is it time for investors to consider cash?" Subtitled, "Will cash be king in 2018?," it tells us, "The best investment idea of 2018 may also be the market's least exciting. Cash, long ignored by investors amid a multiyear bull market in stocks, as well as a decade-long rotation into bonds, has found some supporters who view it as one of the few risk-free options in a market that otherwise seems to offer nothing but risk and lofty prices."
The article explains, "The views come at a time when valuation concerns are growing around both stocks and bonds. Equities have been on a tear for years, and last year major indexes hit a record number of all-time highs amid a backdrop bereft of volatility or significant pullbacks. Although few are forecasting a bull-market-killing recession, the current environment suggests less upside potential in stocks, along with the potential for more downside. At the same time, bond prices are expected to extend their downtrend, pushing yields which move inversely higher, as the Federal Reserve raises interest rates."
MarketWatch says, "[INTL FCStone's Vincent] Deluard called 2018 'the year of cash' and said 'from a strategic allocation perspective, the most important decision for investors in 2018 may be to overweight cash, at the expense of fixed income.'" They also quote Morgan Stanley Wealth Management's Lisa Shalett, "It's increasingly important for investors to build hedges into their portfolios that could cushion a normalization of volatility.... Aside from the obvious advantage of cash in providing instant liquidity, an ability to take advantage of correction and portfolio ballast against rising volatility, we note that after a long and frustrating decade, cash yields are more attractive in an absolute sense."
They add, "So far, investors don't seem to be taking these views to heart. According to the latest BofA Merrill Lynch fund manager survey, the average cash position in portfolios fell to a five-year low of 4.4%. Equity allocation hit a two-year high of 55%. Such positioning has been echoed across Wall Street: TD Ameritrade recently reported that its clients ended 2017 with market exposure 'at all-time highs,' while cash balances for Charles Schwab clients reached their lowest level on record in the third quarter, according to Morgan Stanley, which wrote that retail investors 'can't stay away' from stocks."
The SEC released it latest quarterly "Private Funds Statistics" report recently, which summarizes Form PF reporting and includes some data on "Liquidity Funds." The publication shows a minimal increase in overall Liquidity fund assets in the latest quarter to $547 billion. A previous press release, entitled, "SEC Staff Supplements Quarterly Private Funds Statistics" tells us, "The U.S. Securities and Exchange Commission staff ... published a suite of new data and analyses of private fund statistics and trends. The Private Funds Statistics ... 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 ... characteristics of private liquidity funds." We review the latest SEC report, as well as a recent commentary on "repatriation" from J.P. Morgan Securities, below.
The SEC's "Introduction" explains, "This report provides a summary of recent private fund industry statistics and trends, reflecting data collected through Form PF and Form ADV filings. Form PF information provided in this report is aggregated, rounded, and/or masked to avoid potential disclosure of proprietary information of individual Form PF filers. This report reflects data from First Calendar Quarter 2015 through Second Calendar Quarter 2017 as reported by Form PF filers." (Note: Crane Data believes these are primarily securities lending reinvestment pools and other short-term investment funds; these are not the new breed of "3c-7" private liquidity funds being marketed by Federated, JPMorgan and a few others.)
The tables in the SEC's "Private Funds Statistics: Second Calendar Quarter 2017," the most recent data available, now show 116 Liquidity Funds (including "Section 3 Liquidity Funds," which are Liquidity Funds from advisors with over $1 billion total in cash), up 1 fund from the prior quarter and up 13 from a year ago. (There are 69 Liquidity Funds and 47 Section 3 Liquidity Funds.) The SEC receives Form PF reports from 38 Liquidity Fund advisers and 24 Section 3 Liquidity Fund advisers, or 62 advisers in total, one fewer than last quarter (and six more than a year ago).
The SEC's table on "Aggregate Private Fund Net Asset Value" shows total Liquidity Fund assets at $547 billion, up $1 billion from Q1'17 and up $6 billion from a year ago (Q2'16). Of this total, $275 billion is in normal Liquidity Funds while $272 billion is in Section 3 (large manager) Liquidity Funds. The SEC's table on "Aggregate Private Fund Gross Asset Value" shows total Liquidity Fund assets at $549 billion, the same total as Q1'17 and up $4 billion from a year ago (Q2'16). Of this total, $276 billion is in normal Liquidity Funds while $273 billion is in Section 3 (large manager) Liquidity Funds.
A table on "Beneficial Ownership for Section 3 Liquidity Funds" shows $89 billion is held by Private Funds, $52 billion is held by Unknown Non-U.S. Investors, $51 billion is held by Other, $21 billion is held by SEC-Registered Investment Companies, $12 billion is held by Banking/Thrift Inst, $9 billion is held by Insurance Companies, $5 billion is held by Pension Plans, and $4 billion is held by Non-U.S. Individuals. State/Muni Govt Pension Plans held $1 billion, while Non-Profits held $2 billion.
The tables also show that 79.6% of Section 3 Liquidity Funds have a liquidation period of one day, $255 billion of these funds may suspend redemptions, and $224 billion of these funds may have gates (out of a total of $272 billion). The Portfolio Characteristics show that these funds are very close to money market funds. WAMs average a short 30 days (41 days when weighted by assets), WALs are a short 58 days (74 days when asset-weighted), and 7-Day Gross Yields average about 0.94% (1.00% asset-weighted). Daily Liquid Assets average about 43% 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 (48.9%) are fully compliant with Rule 2a-7.
In other news, J.P. Morgan's latest "Short Duration Strategy" contains a section entitled, "Tax repatriation and its impact on the short-end." It explains, "Another topic that has attracted some attention this week is tax repatriation. In a recent report, analysts at Moody's estimated [that] tech firms account for about half of the $1.9tn in corporate cash held by non-financial companies. Of these they reckon that the 5 largest (AAPL, MSFT, GOOG, CSCO, and ORCL) account for about 35% of the total. Moody's further estimated about $1.4tn of this cash would be offshore at YE17 and that the top 5 comprise about $594bn (42%) of this."
They write, "The repatriation story has led to questions about how offshore MMFs as well as short corporate bonds will be affected by repatriation. With respect to the former, if we compare a history of the growth of offshore cash by US non-financial firms and prime O/S MMFs (prime is where most of the money resides) we see that in spite of offshore cash growth, MMF balances were relatively stable in the $550-600bn range up until late-2016. We believe the lack of growth in O/S MMF during this time implies that a significant fraction of the cash went into separately managed accounts (SMAs) instead. While SMAs are used for many different strategies, they are generally invested in longer maturity and somewhat less liquid securities than the instruments MMFs invest in."
JPM's piece continues, "Knowing this, some firms apparently began to plan for tax reform in following the 2016 election. After years of relatively stable AUM, balances at offshore prime MMFs jumped over 27% (about $150bn) from Election Day 2018 to today. We suspect the source of this growth continues to be growth in offshore earnings, with more cash being directed to liquid MMF rather than less-liquid SMAs. Just how this offshore MMF cash is ultimately used remains to be seen. While it could be used to partly pay repatriation taxes, MMF holdings often are used as working capital to support business needs, and this may be pertinent here with regard to the non-USD MMF balances. Even so, the growth in AUM over the past year shows some US firms have been biased toward building liquidity."
They add, "With respect to short corporate bonds, public disclosures of the 5 largest tech companies show that close to 40% of their cash holdings are invested in USD corporate bonds typically with a 1y-5y duration. While the topic of tax repatriation is often associated with the idea that corporations would sell their offshore holdings and bring it back onshore, this is somewhat of a misconception. In reality, most of the holdings are only "overseas" for tax purposes, and are in fact held in US based custodial banks. As such, there would be no need to actively sell their short corporate holdings to bring the money back onshore and it may be simply an accounting book entry to transfer the assets."
Finally, they tell us, "Instead, we think the impact on short corporate bonds will be dependent on what companies end up doing with the newly available cash and how they intend to pay for the tax related to the repatriation. Many will return a portion to shareholders, as well as deploy it for investment, for M&A, for higher compensation, etc.... [C]ompanies also hold a large percentage of assets in Treasuries where greater liquidity allows for easier liquidation, if needed."
Note: Crane Data's Money Fund Intelligence International, which tracks "offshore" (aka European) money market mutual funds, shows $451 billion of the total $845 billion in offshore assets denominated in U.S. dollars. (The remainder are in GBP, or pound sterling, and Euro; these funds are domiciled in Ireland or Luxembourg.) The USD total, presumably the portion held in part by U.S. multinational corporations, has risen by $25 billion YTD in 2018 (through 1/22), after rising by $25 billion in 2017. We believe these rising totals indicate that corporations are slowly liquidating longer-term bond holdings and moving them into "cash" in anticipation of distribution later this year.
This month, BFI interviews Stephen Cohen, a Partner at Dechert LLP, on regulations impacting bond funds. Cohen has been focused on a number of topics involving fixed-income funds, such as liquidity, reporting, and issues involving ultra-short bond funds. (He will also be presenting the "Regulatory Update" at our upcoming Bond Fund Symposium in Los Angeles, March 22-23.) Our Q&A with Cohen follows. (Note: This "profile" is reprinted from the January issue of our Bond Fund Intelligence publication. Contact us if you'd like to see the full issue, our new Bond Fund Portfolio Holdings product.)
BFI: Tell us about your background. Cohen: We have a very long history representing bond mutual funds as well as closed end bond funds and bond ETFs as well. We organized some of the earliest municipal bond funds for E.F. Hutton in the early 1980s.... We also helped launch bond funds for Templeton in the 1980s and 1990s. Currently, we represent a number of the largest bond fund groups in the industry.... So we have a pretty rich history representing bond funds.... Personally, I've been working with bond funds since I started at Dechert in 2005. Almost every client I work with offers bond mutual funds, or bond ETFs or closed end bond funds.... As you know, I work with a number of money market fund groups and most of those by extension have ultra short bond funds or other bond funds.
BFI: What are the big regulatory issues? Cohen: I think that the two major issues that bond funds are dealing with now are liquidity risk management and the reporting modernization rules.... These two new rules particularly impact bond funds. With respect to liquidity risk management, I think it's clear that, at the time that the rule was adopted, the SEC was very concerned about the growth of bond funds and the perceived liquidity mismatch between daily redemptions offered by those funds and the ability to liquidate their bond holdings in order to meet those redemptions. So I think liquidity risk management is very much aimed at bond funds.
Reporting modernization is very similar to liquidity risk management in terms of its particular impact on bond funds, because bond funds typically hold more securities. Form N-PORT actually asks very detailed questions about the overall portfolio of bond funds, their risk metrics, as well as each underlying security that a bond fund holds. Because bond funds hold so many securities and those securities often have unique features, there is a lot more to think about and more answers that have to be provided to complete their Form N-PORT filings.... In many ways, Form N-PORT is very similar to Form N-MFP in the sense that funds have to provide information about each security. If a fund holds thousands of securities that means the fund has to provide information about each of those thousands of securities, which can be operationally challenging.
BFI: What's the current status of these? Cohen: As of now, the liquidity risk management regulations go into effect for large fund groups -- defined by the SEC as those that have $1 billion or more in assets -- on Dec. 1, 2018. For fund groups with less than $1 billion, the compliance date is Dec. 1, 2019. [But] there have been several requests and developments that might convince the SEC to modify those compliance dates. First, in July, the ICI submitted a letter to SEC Chairman Jay Clayton.... The ICI requested that the SEC amend the rule to allow funds to formulate their own policies and procedures to determine how to classify investments.... `The ICI also asked that, even if there are no amendments to the rule itself, the SEC at least delay the compliance date for the liquidity classification requirement, which we often refer to as the 'bucketing' requirement, by at least one year.
Next, in October, the U.S. Treasury issued a report and recommended postponing and modifying the bucketing requirement, and also rejected the "highly prescriptive" approach of the bucketing requirement and argued for a "principles based" approach. That report became another arrow in the quiver for a delay. Most recently, in November, the ICI again urged the SEC to delay the compliance date by at least one year. In that letter, the ICI provided a formal survey data of its members with respect to their readiness, as well as the perceived readiness of the vendors that those fund groups are going to use for bucketing, to show that there would be difficulty meeting the December 1, 2018 compliance date. So stay tuned.... You could see something coming out any time, or not at all. We just don't know.
BFI: Tell us about the delay in N-PORT. Cohen: On Dec. 8, 2017, the SEC issued a temporary final rule that provides a 9-month delay to the dates by which funds must (and the keyword here is) 'file' new Form N-PORT on the EDGAR system. Under that temporary rule, those funds that are subject to the original June 1, 2018 compliance date will still need to gather and maintain all the data required by Form N-PORT as of the original compliance and reporting date and that the required information will be subject to examination by the SEC. Put another way, there is a delay with respect to the filing on the EDGAR system but not a delay with respect to actually compiling all that data.... The key reason was the cyber security concerns. The ICI had been raising that issue since the proposal stage of the data reporting rules. BFI: So the public won't see the holdings information until the end of 2019, right? Cohen: Yes, because, on top of the 9-month delay, there is a 6-month lag on the information being publicly released.
BFI: Remind us about Third Avenue. Cohen: The SEC had to issue a temporary order to Third Avenue Focused Credit Fund to permit the fund to suspend the right of redemption in connection with the fund's orderly liquidation. This is a very rare type of order that allows an open end fund, which allows for daily redemptions, to suspend the right of redemption. The background here is that the board of the fund sought to liquidate the fund following significant outflows while the fund was holding illiquid securities. What they did was announce that the fund would provide a liquidation payment and then the fund would establish a liquidation trust to pay out the remaining assets over time.... The SEC essentially pushed back on that plan and required the fund to work with the SEC and seek the exemptive relief, which, among other things, allowed the SEC to be more involved in the liquidation process. Overall, I think the takeaway on Third Avenue is that it happened at a point in time that gave support to the SEC's push for the liquidity risk management rules.
BFI: Are there any new issues with ultra-short bond funds? Cohen: So-called "sh-money funds" [ultra-short funds that look like money market funds] have been a focus of the SEC staff, especially in light of a money market fund reforms. The SEC disclosure staff, which is responsible for reviewing new products, has been, and continues to be, very focused on new short term bond fund disclosures. They want to make sure that the funds are not trying to market themselves as money market funds, without the need to value at a floating NAV out to four decimal places and without fees and gates. The message from the staff is that if you try to offer a short term bond fund that tries to say, 'We do everything in Rule 2a-7 but without the basis point pricing and fees and gates,' that's a problem.... Taking a step back, there is always the concern about how these types of funds are marketed. Ultra-short bond funds have the difficult task of walking that tight line of offering an alternative to money market funds, but at the same time making sure it is clear to investors that the fund is not a money market fund, that the NAV can fluctuate and that investors can lose money.
BFI: What about cash-like ETFs? Cohen: What we’ve seen is significant growth in the ultra-short bond market. I think every manager, again, who has money market funds, as well as traditional bond managers, has looked at offering ultrashort funds or some hybrid off of an ultra short, such as an ETF.... It's been a very hot area.... You hear so much about active versus passive and the flight to passive index funds, but the actively managed ultra-short space is one that's actually seen a lot of growth and one that is still able to offer a better return than the indexes.
BFI: Do you have any comments on the new Administration? Cohen: I would say the regulatory environment is completely different than it was a year ago. If you recall, a year and a half ago, Chair White, who was the chair of the SEC at the time, had a very aggressive regulatory agenda aimed at the investment management industry. The FSOC and Treasury were also very focused on the industry. That's just not the case anymore. The SEC recently issued its regulatory agenda and the SEC does not seem to be as focused on the fund industry. Overall, I think the Administration is completely different than the prior Administration in terms of its regulatory focus, and, in particular, its focus on the fund industry.
BFI: What about any predictions or advice for the New Year? Cohen: We've got a full Commission now. We've got all five Commissioners who have been appointed and approved by the Senate, so we'll have to see how the two new Commissioners impact the Commission and its agenda, if at all.... At the SEC, the Chair really does drive the agenda so the two new Commissioners may not impact the agenda very much. But we'll see.... Separately, we've got a new Director of the Division of Investment Management, Dalia Blass. We'll have to see where she leads the Division, which is primarily responsible for overseeing funds.
I think what you can say is, 'Now we've got all the pieces in place,' at least from a regulatory perspective, which we didn't have in 2017. We'll see where it goes.... Like I said, I don't expect a lot of new regulation in our industry. And hopefully, the things that the industry has wanted, like a delay of liquidity risk management, perhaps internet delivery of shareholder reports that was initially part of the reporting modernization, and maybe some other industry-friendly regulations are adopted.
The Securities and Exchange Commission released its latest "Money Market Fund Statistics" summary late last week. It shows that total money fund assets rose $45.2 billion in December to $3.126 trillion, but Prime funds broke their 11-month run of increases. Prime MMF assets fell by $13.6 billion to $666.2 billion (after gaining $14.3 billion in November, $1.0 billion in October, and $22.8 billion in September). Government money funds increased by $57.3 billion, while Tax Exempt MMFs rose by $1.5 billion. Gross yields jumped for Prime, Government & Treasury, and Tax Exempt funds. 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 their latest numbers below.
Overall assets increased by $45.2 billion in December, after increasing by $55.4 billion in November and decreasing by $9.5 billion in October. Total MMFs increased by $46.2 billion in September, $71.2 billion in August, and $19.9 billion in July, but decreased by $23.7 in June. Over the 12 months through 12/31/17, total MMF assets increased $167.1 billion, or 5.6%. (Note that the SEC's series includes a number of private and internal money funds not reported to ICI or others, which Crane Data also now tracks.)
Of the $3.125 trillion in assets, $666.2 billion was in Prime funds, which decreased by $13.6 billion in December. Prime MMFs increased by $14.3 billion in November, $1.0 billion in October, $22.8 billion in September, $16.8 billion in August, and $9.5 billion in July. Prime funds represented 21.3% of total assets at the end of December. They increased by $115.8 billion, or 21.0%, in 2017. But they've decreased by $905.9 billion over the past 2 years. (Over $1.1 trillion shifted from Prime to Government money market funds in the year leading up to October 2016's Money Fund Reforms.)
Government & Treasury funds totaled $2.325 billion, or 74.4% of assets,. They were up $57.3 billion in December and $40.8 billion in November, but they were down $11.2 billion in October. Govt MMFs increased by $24.5 billion in September, $56.8 billion in August and $8.0 billion in July, but were down $26.9 in June. Govt & Treas MMFs are up $51.4 billion over 12 months (2.3%). Tax Exempt Funds increased $1.5B to $134.4 billion, or 4.3% of all assets. The number of money funds is 379, down 3 funds from last month and down 34 from 12/31/16.
Yields jumped in December for Taxable and Tax Exempt MMFs as the Fed moved rates higher. The Weighted Average Gross 7-Day Yield for Prime Funds on December 31 was 1.52%, up 20 basis points from the previous month and up 0.65% from December 2016. Gross yields increased to 1.33% for Government/Treasury funds, up 0.19% from the previous month, and up from 0.56% in December 2016. Tax Exempt Weighted Average Gross Yields skyrocketed 59 bps in December to 1.59%; they've increased by 82 bps since 12/31/16.
The Weighted Average Net Prime Yield was 1.31%, up 0.19% from the previous month and up 0.69% since 12/31/16. The Weighted Average Prime Expense Ratio was 0.21% in December (up one bps from the previous month). Prime expense ratios are down by four bps over the past year. (Note: These averages are asset-weighted.)
WALs were mixed but WAMs were higher across all categories in December. The average Weighted Average Life, or WAL, was 62.7 days (down 1.8 days from last month) for Prime funds, 88.7 days (up 3.5 days) for Government/Treasury funds, and 30.0 days (up 2.9 days) for Tax Exempt funds. The Weighted Average Maturity, or WAM, was 29.3 days (up 1.3 days from the previous month) for Prime funds, 32.7 days (up 2.2 days) for Govt/Treasury funds, and 27.9 days (up 3.1 days) for Tax-Exempt funds. Total Daily Liquidity for Prime funds was 34.3% in December (up 2.0% from previous month). Total Weekly Liquidity was 50.4% (down 0.3%) for Prime MMFs.
In the SEC's "Prime MMF Holdings of Bank Related Securities by Country" table, Canada topped the list with $101.9 billion, followed by the US with $67.4 billion, Japan with $51.9B and Australia/New Zealand with $47.1B, then France ($39.1B), the UK ($30.5B), Sweden ($28.1B), and Germany ($24.5B). Switzerland ($16.4B) and the Netherlands ($14.5B) rounded out the top 10 countries.
The gainers among Prime MMF bank related securities for the month included: Canada (up $8.8B), Aust/NZ (up $4.7B), the US (up $2.4B), Other (up $2.1B), Singapore (up $1.9B), Switzerland (up $565M), and Spain (up $108M). The biggest drops came from France (down $26.6B), the Netherlands (down $14.7B), Sweden (down $14.4B), Germany (down $8.6B), Belgium (down $5.3B), the UK (down $2.4B), Japan (down $2.2B), Norway (down $1.8B) and China (down $272 million). For Prime MMF Holdings of Bank-Related Securities by Major Region, Europe had $172.1B (down $71.3B from last month), while the Eurozone subset had $86.7B billion (down $54.9B). The Americas had $170.1 billion (up $11.4B), while Asian and Pacific had $114.2 billion (up $4.3B).
Of the $658.0 billion in Prime MMF Portfolios as of Dec. 31, $229.6B (34.9%) was in CDs (up from $283.6B), $162.5B (24.7%) was in Government securities (including direct and repo), down from $132.1B, $98.8B (15.0%) was held in Non-Financial CP and Other Short Term Securities (up from $95.7B), $125.7B (19.1%) was in Financial Company CP (up from $126.7B), and $41.4B (6.3%) was in ABCP (up from $40.2B).
The Proportion of Non-Government Securities in All Taxable Funds was 16.9% at month-end, down from 18.7% the previous month. All MMF Repo with Federal Reserve surged at quarter-end to $288.1B in December from $96.2B the previous month. Finally, the "Trend in Longer Maturity Securities in Prime MMFs" tables shows 37.4% were in maturities of 60 days and over (down from 39.1%), while 8.6% were in maturities of 180 days and over (down from 10.4%).
This month Money Fund Intelligence interviews Public Trust Advisors LLC Chief Investment Officer Randy Palomba and Head of Portfolio Management Neil Waud. Public Trust manages approximately $25 billion, including more than $18 billion of the estimated $200-300 billion local government investment pool marketplace. LGIPs are run similarly to money market funds and are used by local governments to manage cash. Our Q&A follows. (Note: This interview is reprinted from the January issue of our flagship Money Fund Intelligence newsletter; contact us at inquiry@cranedata.com to request the full issue. Note too: Our Money Fund University wraps up this morning at the Hyatt Regency in Boston. Feel free to stop by for the morning sessions if you're in the area, and thanks to those who attended!)
MFI: Give us some history. Palomba: Public Trust opened its doors in November of 2011 and assumed management of COLOTRUST, a local government investment pool for Colorado, shortly thereafter. With COLOTRUST, my history dates back to 1989.... I assumed the duties of portfolio manager in 1995 and continued through a change in administrator and investment advisor in 1998 (when COLOTRUST selected MBIA as its service provider). I eventually left Cutwater Asset Management (previously MBIA) in July of 2011 ... to co-found Public Trust.... COLOTRUST wanted to explore other service providers in the market place. We were fortunate enough to be awarded the contract and have been managing those assets ever since. Fast forward to today, and we have grown to manage several more clients, so it has been a very positive story.
MFI: What is your biggest priority? Palomba: Our mantra, and we live by it through any kind of market cycle, is "safety, liquidity, and then yield." At Public Trust, we have developed a true investment team environment.... We work on these portfolios with a collaborative effort, where there is constant communication and a flow of ideas being generated.... This gives us the opportunity to bounce ideas off one another, thoroughly analyzing all aspects of our investment process. We meet frequently to set overall strategy, then Neil and I determine the assets to purchase for the various portfolios.
Our primary focus is safely managing cash for local governments in eight different states, all with differing tax cycles, cash flow requirements, and, in some instances, different funds within an LGIP. In both Colorado and Texas, we manage two LGIP funds per state, one government style and the other prime. We manage an LGIP in New York that is a U.S. Treasury only pool, and we serve a prime-style LGIP in Michigan that has seen exciting growth.... Additionally, we are contracted to manage a state-sponsored LGIP in Indiana, where we work closely with the state treasurer and her staff. In Florida, we manage a start-up, prime style LGIP that recently crossed the $2 billion mark.... Lastly, we manage two LGIP funds in Virginia: a liquidity portfolio ... and a longer term, 1-3-year portfolio.
MFI: What is your biggest challenge? Palomba: It is a combination of several things. It is finding supply as well as value.... We see different things occur over different market and economic cycles. When money market reform was phasing in during 2016, we saw a rather dramatic shift in the marketplace. With the changes in regulation along with the evolution of the Federal Reserve’s monetary policy, it has been a challenge to stay one step ahead while prudently managing our clients' funds.
We have expanded our credit team to five, having recently added two more senior analysts. [This] has allowed us to work diligently on analyzing our credit exposures, constantly reviewing issuers and weighing the risks against the opportunities. The issuers we approve are high-quality, liquid names. We also guard against credit migration, a critical consideration when managing LGIPs that are rated 'AAAm' by S&P Global Ratings.... We often manage to a stricter mandate than typical state statutes or an individual investment policy may require. Waud: As Randy mentioned, we have significant history not only with Public Trust but with managing these specific LGIPs. We first address the issues of safety and liquidity. But to maximize yield after the first two initiatives have been met, you really need to know your clients and their historical cash flows. There must be commitment from our team to communicate that with the fund participants to ensure we always have sufficient liquidity. On the flip side, though, not too much liquidity, which generally hurts returns.
MFI: Do you run mostly government? Waud: We run the spectrum. As mentioned earlier, the LGIPS in both Colorado and Texas have prime and government funds whereas the LGIP in New York is mainly a Treasury only fund. Really, each portfolio has its own identity, like the LGIP in Indiana, which has specific state guidelines mandating that half of the money must be deposited in state approved banks. Many of the pools are very similar in their mandates, but of course, there are nuances to each fund. We have internal guidelines that are broadly applied regarding the use of credit and exposures, and S&P layers guidelines on top of that. There is consistency with names that we buy across the funds, but seasonality of cash flows makes for variations on how we employ various strategies during the year. By and large, we manage these funds in a similar manner.
Palomba: We are buying relatively large blocks of commercial paper programs.... We do not want to have an outsized position in any commercial paper name, so if we choose to sell the paper, it would not be into a limited market space. We always look for programs with multiple seller groups so that we can get three or four bids if we do want to sell a piece of paper out of a portfolio.
MFI: What are customer saying now? Palomba: We have a top-down approach when it comes to how we communicate with our clients and the LGIP participants.... Most have elected boards that are representative of the types of entities in the program. Public Trust hosts quarterly board meetings where we talk to them about what is going on in the portfolios and in the markets.... We have implemented technology and procedures to provide a high-degree of transparency, based on real-time, secure account access and transaction capabilities [and] we publish a great deal of information that goes beyond daily yields and WAMs.
I think it is a welcome relief for these local governments to see a little additional income start to come back into their funds. Interest income used to be a significant line item in their budget when entities had reserves earning 5 or 6 percent. Waud: I would say the participants have certainly noticed the higher rates, and are paying closer attention as rates continue to push higher.
MFI: Did LGIP regulations change too? Palomba: In October 2016, the Securities & Exchange Commission made several changes that impacted prime style funds. However, most LGIPs were able to maintain their stable NAV. In Colorado, for instance, the Colorado State Regulator came out with a GASB ruling regarding liquidity. However, we operate under FASB instead of GASB for the funds in Colorado. We worked with the Regulator's office to permit both accounting methods, allowing COLOTRUST to continue to operate as it has since inception. For the funds we manage at Public Trust, it was more of a matter of seeing how each state was going to react to money market reform.
MFI: Do you run any ultra-short funds? Waud: We do. As we mentioned, we have one fund in Virginia that is managed to the Merrill Lynch 1-3 double-A gov-corporate index, and then we have another $6-7 billion in separately managed accounts on a discretionary and nondiscretionary basis. That certainly is an area of focus for us, as we have sizable assets in that space, as well.
MFI: What is your outlook for 2018? Waud: The Fed is indicating three rate hikes and taking a leap of faith on its medium-term inflation outlook. I think the big X-factor for us is tax reform. With corporate taxes getting cut back, that should in theory be a stimulus for growth. But what do corporations actually do with those funds? Do they pay back shareholders? Do they invest to boost productivity? We will have to wait and see. We are also looking at global central banks. We know that the ECB and the Bank of Japan are operating in a highly accommodative manner, purchasing assets and producing negative interest rates. As those economies improve, do they ease off the throttle or even reverse course? What is the overall impact? What happens to the Treasury curve? To Public Trust? If the global economy continues to improve in 2018, we need to be careful as we work our way back to a "normalized" rate environment.
Palomba: LGIPs have become such a common investment for local governments that they are going to continue to play a viable role in helping with liquidity. Last year, Public Trust had four LGIPs that hit record highs in assets.... The LGIP in Colorado hit nearly $8.5 billion at the end of the tax collection cycle last year. We have seen exceptional growth in the LGIPs in Texas and Florida, both of which recently crossed the $2 billion mark.
The ease at which they can either send us or request money really goes into helping them manage their cash on a short-term basis. A lot of the people that are responsible for managing these funds wear multiple hats. If we can provide a product for them that strives for safety, liquidity, and is easy to use and understand, I think that plays a very valuable role in providing a necessary service. I think we are likely to see continued growth in the public sector and use of the services offered here at Public Trust.
Since our Jan. 12 News update, "Stable NAV MMF Bill Stalls," we've seen two more mentions of H.R. 2319, the bill to bring back the $1.00 NAV for Prime Institutional money funds. In the first, Politico Pro writes "Investment Companies Fight Effort to Undo Fund Rules." They comment, "ICI is lobbying to preserve money market fund regulations enacted in 2014, as the House Financial Services Committee prepares to vote on bipartisan legislation that would roll back the regulations. ICI told senior lawmakers in a letter Friday that it opposes the House bill, citing "substantial and costly operational changes" that had been undertaken and its view that markets had adjusted to the regulatory overhaul." (Welcome to Boston for those attending our Money Fund University! Feel free to stop by the Hyatt to "audit" a course, and subscribers can see the materials in our MFU 2018 Download Center.)
They continue, "Further, ICI had heard from companies worried that the rollback would spur regulators and financial reform activists to target them in the future. ICI President and CEO Paul Schott Stevens cited concerns by some unnamed ICI members that undoing the rules could rekindle Obama-era efforts to label major asset managers as "systemically important financial institutions."
The piece adds, "Although the threat has waned under President Donald Trump, Stevens said that "some ICI members have raised concerns that overturning the SEC's reforms by legislation may reenergize bank regulators and financial reform activists." He continued, "These members wish to avoid spurring FSOC -- under a future administration -- to return to its examination of the industry and possibly to seek to apply ill-suited bank-oriented measures to money market funds, other regulated funds, or fund advisers."
Another comment, featured in American Banker, is entitled, "Preserve money market rules to avoid rerun of crisis." The piece by Better Markets, says, "One of the most consequential threats the American economy has ever faced arose during the week of Sept. 15, 2008, when the reserve primary fund "broke the buck" as its share price fell below a dollar. Up until that week, the fund had marketed itself to investors as one of the safest places for Americans to keep their hard-earned money. Yet this "breaking of the buck" panicked large investors into redeeming $40 billion from the fund, forcing the fund to sell tens of billions of dollars in assets immediately. This fire sale in turn depressed asset values, further weakening the fund. This investor run in this one fund quickly became generalized and spread to much of the MMF industry. Investors quickly withdrew approximately $310 billion (or 15% of the $3.7 trillion industry) from prime money market mutual funds."
They continue, "The dramatic run on the reserve primary fund stopped only after the Treasury Department established the Temporary Guarantee Program to guarantee money market funds. This backstopped the entire $3.7 trillion industry, putting taxpayers on the hook for any losses. This was the single largest taxpayer-backed rescue program during the 2008 crisis and the largest the financial industry has ever received."
The editoral explains, "In response to the events of September 2008, federal regulators -- after a deliberative rulemaking process -- implemented much needed reforms to reduce the risk of such catastrophic runs in the future. Specifically, in 2014, the Securities and Exchange Commission finalized a rule requiring certain large MMFs to calculate their share price, the net asset value, so that it "floats," accurately reflecting its true market value, not the artificially fixed amount of one dollar. The SEC also gave funds additional tools for mitigating run risk, including the authority to impose fees on those seeking to redeem quickly in times of stress and even the authority to halt redemptions entirely for a period of time (so-called gates and fees)."
It adds, "While some are still actively pushing to repeal or substantially weaken these critically important reforms, the good news is that industry's main trade group just announced its opposition to these repeal efforts. It is worth recalling the importance of these reforms, and the need to maintain them.... Compounding the resulting fragility, MMFs are also highly interconnected with other financial institutions, the payment systems and the economy as a whole because they are widely used by individuals, institutions, businesses, and state and local governments as cash management vehicles or as sources of credit."
Better Markets tells us, "The SEC's reforms aimed to solve these issues. First, investors would no longer think that MMFs were like a stable bank checking account that can't lose money. Instead, they would see that these are indeed investment products that go up and down in value on a daily basis. Investors accustomed to seeing share prices fluctuate are less likely to panic when the prices fluctuate. Second, investors will have little incentive to pull their money out (i.e., run) during times of stress, since they will no longer be able to liquidate at an artificially inflated price. And those who decide to exit the fund hastily will pay a fee, thus taking away the incentive to be a first mover and ensuring that those who remain in the fund are not subsidizing the early runner's exit when a market is declining or volatility is high."
They state, "These (and other) SEC actions, taken together, are better protecting investors, markets, the financial system, our economy and taxpayers by requiring the disclosure of accurate market price information and by increasing the transparency of MMF risks. It has also reduced the potential for systemic contagion by taking away the incentive to be a first mover, reducing the likelihood and intensity of future runs, another financial crisis, and the need for more taxpayer-backed bailouts."
The piece adds, "But, as mentioned above, some are still seeking to roll back these critical protections, and it is worth rebutting them here. These suggestions -- which are opposed by some prominent sponsors of MMFs, including the industry's main trade group -- would replace substantive reforms with certain additional disclosure requirements in fund prospectuses or sales literature. However, disclosure alone simply will not eliminate the first-mover advantage born of the artificially fixed NAV. Nor can disclosure alter investors' inflated and misplaced confidence in the stability of MMFs.... Furthermore, the money market fund industry has now adapted to the SEC's rule, institutional investors have also adjusted, and the impact on municipal financing overall has been negligible. The rules have bestowed enormous benefits on the markets, investors and the public at large: greater stability, increased investor confidence, transparency and fairness, and above all, less likelihood of triggering or inflaming another financial crisis."
Finally, they comment, "Fortunately, SEC Chairman Jay Clayton agrees and believes that repealing the floating-NAV approach would be premature. Last week, Better Markets wrote to him, urging him to stay the course. We are also encouraged that the MMF industry at large has decided to support those reforms as well. We hope that others in Washington won't be shortsighted, and won't succeed in sacrificing the many benefits of these reforms to appease a small but vocal segment of the financial services industry."
For more on the topic, see the Journal's previous article, "Bringing Back the Money-Fund Buck. See also our Dec. 15 News, "WSJ on NAV Bill," our Dec. 12 Link of the Day, "BofA's Cabana on Bill H.R.2319" and our Nov. 17 News, "AFP Comments on Stable NAV Bill."
Crane Data's MFI International shows assets in "offshore" money market mutual funds, U.S.-style funds domiciled in Ireland or Luxemburg and denominated in USD, Euro and GBP (sterling), up sharply in 2017 (up $100 billion, or 13.7%) to $831 billion. Year-to-date in 2018 (through 1/11/18), MFII assets are up another $26 billion to $857 billion, which many believe is a result of pending "repatriation" of US dollar assets held in Europe. U.S. Dollar (USD) funds (152) account for over half ($449 billion, or 52.4%) of the total, while Euro (EUR) money funds (93) total E94 billion and Pound Sterling (GBP) funds (106) total L224 billion. USD funds are up $24 billion, YTD, and were up $27B in 2017. Euro funds remain relatively flat (down E4 billion YTD and up E3B in 2017), while GBP funds are up L5B YTD and L29B in 2017. USD MMFs yield 1.22% (7-Day) on average (as of 1/11/18), up from 1.19% at the end of 2017 and 0.56% at the end of 2016. EUR MMFs yield -0.51% on average, up from -0.55% on 12/29/17 and -0.49% on 12/30/16, while GBP MMFs yield 0.28%, up from 0.24% at the end of 2017 and 0.19% at the end of 2016. We review our latest MFI International Portfolio Holdings statistics, and also review ICI's latest MMF Holdings report, below.
Crane's latest MFI International Money Fund Portfolio Holdings, with data (as of 12/31/17), shows that European-domiciled US Dollar MMFs, on average, consist of 18% in Treasury securities, 25% in Commercial Paper (CP), 22% in Certificates of Deposit (CDs), 16% in Other securities (primarily Time Deposits), 16% in Repurchase Agreements (Repo), and 3% in Government Agency securities. USD funds have on average 31.9% of their portfolios maturing Overnight, 11.2% maturing in 2-7 Days, 22.6% maturing in 8-30 Days, 11.7% maturing in 31-60 Days, 10.9% maturing in 61-90 Days, 7.4% maturing in 91-180 Days, and 4.3% maturing beyond 181 Days. USD holdings are affiliated with the following countries: US (29.1%), France (12.8%), Canada (12.3%), Japan (10.6%), Australia (5.8%), Germany (5.1%), United Kingdom (5.0%), Singapore (3.7%), The Netherlands (3.5%), Sweden (3.4%), China (2.0%) and Belgium (1.9%).
The 20 Largest Issuers to "offshore" USD money funds include: the US Treasury with $83.1 billion (17.8% of total assets), BNP Paribas with $16.7B (3.6%), Mitsubishi UFJ Financial Group Inc with $14.2B (3.0%), RBC with $13.9B (3.0%), Societe Generale with $12.5B (2.7%), Toronto-Dominion Bank with $12.0B (2.6%), Bank of Nova Scotia with $11.0B (2.4%), Wells Fargo with $11.0B (2.4%), Federal Reserve Bank of New York with $9.7B (2.1%), Canadian Imperial Bank of Commerce with $9.5B (2.0%), Sumitomo Mitsui Banking Co with $8.2B (1.8%), Mizuho Corporate Bank Ltd with $7.9B (1.7%), Australia & New Zealand Banking Group with $7.8B (1.7%), Barclays PLC with $7.3B (1.6%), National Australia Bank with $7.2B (1.5%), Credit Agricole with $7.1B (1.5%), Agence Central de Organismes de Securite Sociale with $7.0B (1.5%), Commonwealth Bank of Australia with $6.9B (1.5%), Overseas-China Banking Co with $6.9B (1.5%), and DBS Bank Ltd with $6.2B (1.3%).
Euro MMFs tracked by Crane Data contain, on average 39% in CP, 29% in CDs, 23% in Other (primarily Time Deposits), 8% in Repo, 0% in Treasuries and 1% in Agency securities. EUR funds have on average 19.9% of their portfolios maturing Overnight, 8.0% maturing in 2-7 Days, 19.5% maturing in 8-30 Days, 21.8% maturing in 31-60 Days, 12.4% maturing in 61-90 Days, 17.0% maturing in 91-180 Days and 1.5% maturing beyond 181 Days. EUR MMF holdings are affiliated with the following countries: France (24.0%), Japan (16.3%), US (11.4%), Sweden (7.8%), The Netherlands (7.5%), Belgium (7.0%), Switzerland (6.4%), Germany (5.4%), the United Kingdom (3.8%), and Canada (3.3%).
The 15 Largest Issuers to "offshore" EUR money funds include: BNP Paribas with E4.1B (4.4%), Svenska Handelsbanken with E3.8B (4.0%), Mitsubishi UFJ Financial Group Inc with E3.5B (3.7%), Sumitomo Mitsui Banking Co with E3.5B (3.7%), Rabobank with E3.4B (3.7%), Credit Agricole with E3.4B (3.6%), KBC Group NV with E3.4B (3.6%), Credit Mutuel with E3.2B (3.4%), Nordea Bank with E3.2B (3.4%), Mizuho Corporate Bank Ltd with E3.2B (3.4%), BPCE SA with E3.1B (3.3%), UBS AG with E2.8B (3.0%), Societe Generale with E2.5B (2.7%), Norinchukin Bank with E2.4B (2.6%), and Dexia Group with E2.4B (2.6%).
The GBP funds tracked by MFI International contain, on average (as of 12/31/17): 42% in CDs, 22% in Other (Time Deposits), 24% in CP, 7% in Repo, 4% in Treasury, and 1% in Agency. Sterling funds have on average 21.3% of their portfolios maturing Overnight, 6.7% maturing in 2-7 Days, 17.8% maturing in 8-30 Days, 23.1% maturing in 31-60 Days, 12.7% maturing in 61-90 Days, 14.9% maturing in 91-180 Days, and 3.6% maturing beyond 181 Days. GBP MMF holdings are affiliated with the following countries: France (20.0%), Japan (17.6%), United Kingdom (15.5%), The Netherlands (6.8%), Canada (5.9%), the US (5.8%), Germany (5.2%), Sweden (5.2%), China (2.9%), and Australia (2.8%).
The 15 Largest Issuers to "offshore" GBP money funds include: UK Treasury with L11.5B (6.8%), Mitsubishi UFJ Financial Group Inc. with L8.2B (4.8%), Sumitomo Mitsui Banking Co. with L7.3B (4.3%), BPCE SA with L7.1B (4.2%), Sumitomo Mitsui Trust Bank with L6.6B (3.9%), Credit Agricole with L5.7B (3.3%), Toronto Dominion Bank with L5.6B (3.3%), Credit Mutuel with L5.5B (3.3%), BNP Paribas with L5.2B (3.1%), Bank of America with L4.6B (2.7%), Nordea Bank with L4.5B (2.6%), Rabobank with L4.3B (2.5%), ING Bank with L4.1B (2.4%), DZ Bank AG with L4.0B (2.3%), and Standard Chartered Bank with L3.5B (2.1%).
In other news, the Investment Company Institute released its latest monthly "Money Market Fund Holdings" summary (with data as of Dec. 29, 2017) Tuesday. This monthly update reviews the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds. (See also Crane Data's Jan. 11 News, "Jan. Money Fund Portfolio Holdings: Repo Jumps, Breaks 1.0 Trillion.")
The MMF Holdings release says, "The Investment Company Institute (ICI) reports that, as of the final Friday in December, prime money market funds held 30.0 percent of their portfolios in daily liquid assets and 44.6 percent in weekly liquid assets, while government money market funds held 60.5 percent of their portfolios in daily liquid assets and 75.0 percent in weekly liquid assets." Prime DLA increased from 26.1% last month and Prime WLA decreased from 45.6% last month. Govt MMFs' DLA increased from 55.7% last month and Govt WLA increased from 74.8% last month.
ICI explains, "At the end of December, prime funds had a weighted average maturity (WAM) of 30 days and a weighted average life (WAL) of 68 days. Average WAMs and WALs are asset-weighted. Government money market funds had a WAM of 33 days and a WAL of 89 days." Prime WAMs remained the same from the prior month, and WALs were down 5 days. Govt WAMs were up 3 days from November and Govt WALs increased by 3 days from last month.
Regarding Holdings By Region of Issuer, ICI's release tells us, "Prime money market funds’ holdings attributable to the Americas rose from $177.94 billion in November to $212.41 billion in December. Government money market funds’ holdings attributable to the Americas rose from $1,697.26 billion in November to $1,899.22 billion in December."
The Prime Money Market Funds by Region of Issuer table shows Americas-related holdings at $212.4 billion, or 46.8%; Asia and Pacific at $97.7 billion, or 21.5%; Europe at $138.8 billion, or 30.6%; and, Other (including Supranational) at $4.5 billion, or 1.1%. The Government Money Market Funds by Region of Issuer table shows Americas at $1.899 trillion, or 84.7%; Asia and Pacific at $105.6 billion, or 4.7%; and Europe at $232.3 billion, or 10.4%.
The January issue of Crane Data's Bond Fund Intelligence, which will be sent out to subscribers Tuesday, features the lead story, "Top Stories & Funds in '17; Outlook for '18; BFI Turns 3," which reviews the top stories and funds of 2017, and it features the profile, "Dechert's Cohen on Regulations Impacting Bond Funds," an interview with Partner Stephen Cohen on major regulatory issues. Also, we recap the latest Bond Fund News, including yield declines in December and the latest Worldwide bond fund totals. BFI also includes our Crane BFI Indexes, which showed increases in December. We excerpt from the latest BFI below. (Watch for more excerpts from our Dechert profile later this month on www.cranedata.com, and contact us if you'd like to see a copy of our latest Bond Fund Intelligence and BFI XLS. Note: We've also uploaded the Powerpoints and Binder for our upcoming Money Fund University, which is Jan. 18-19 in Boston. Subscribers and Attendees may now access these via the bottom of our "Content" page or our MFU 2018 Download Center, and clients are welcome to "crash" some sessions or our cocktail party!)
Our lead Bond Fund Intelligence story says, "Bond funds had one of their best years ever in 2017, with record inflows, solid returns, and minimal issues. As with the prior year, assets jumped sharply and concerns over a bear market were unfounded. We briefly review last year, including the top stories from BFI, which celebrates its 3rd birthday this month, and we list the top-performing funds in 2017, below. We also take a look at how 2018 is shaping up."
It continues, "Bond fund assets broke above $4 trillion and bond ETFs broke above $500 billion late in 2017. According to ICI, bond fund assets stood at $4.037 trillion as of Nov. 30, 2017, up $396.6 billion, or 10.9%, from a year earlier. Bond ETFs totaled $547.7 billion on 11/30, up $126.6 billion, or 30.0%, over the past year."
BFI's Dechert Profile says, "This month, BFI interviews Stephen Cohen, a Partner at Dechert LLP, on regulations impacting bond funds. Cohen has been focused on a number of topics involving fixed-income funds, such as liquidity, reporting, and issues involving ultra-short bond funds. (He will also be presenting the "Regulatory Update" at our upcoming Bond Fund Symposium in Los Angeles, March 22-23.) Our Q&A with Cohen follows."
BFI says, "Tell us about your background. Cohen answers, "We have a very long history representing bond mutual funds as well as closed end bond funds and bond ETFs as well. We organized some of the earliest municipal bond funds for E.F. Hutton in the early 1980s.... We also helped launch bond funds for Templeton in the 1980s and 1990s. Currently, we represent a number of the largest bond fund groups in the industry.... So we have a pretty rich history representing bond funds."
He adds, "Personally, I've been working with bond funds since I started at Dechert in 2005. Almost every client I work with offers bond mutual funds, or bond ETFs or closed end bond funds.... As you know, I work with a number of money market fund groups and most of those by extension have ultra short bond funds or other bond funds."
A Bond Fund News brief entitled, "Yields Mixed, Returns Up in Dec.," explains, "Yields fell for most bond funds, but were up for shorter-term funds. Returns were higher across our Crane BFI Indexes last month. The BFI Total Index averaged a 1-month return of 0.42% and a gain of 4.03% over 12 months. The BFI 100 returned 0.35% in Dec. and 4.09% over 1 year. The BFI Conservative Ultra-Short Index returned 0.10% over 1 month and 1.31% over 1-year; the BFI Ultra-Short Index averaged 0.07% in December and 1.53% over 12 mos. Our BFI Short-Term Index returned 0.09% and 1.81%, and our BFI Intm-Term Index returned 0.41% and 3.78% for the month and year. The BFI High Yield Index rose 0.39% in Dec. and rose 6.11% for 1 year."
Another brief, entitled, "Barron's Writes, "2017 Cash Magnets: Actively Run Intermediate Bond Funds," says, "Active funds again had negative net cash flows in 2017, though less than in 2016. But there was one winner in the bunch: taxable intermediate-term bond funds. Despite ... fear of a looming bond bear market, they were last year's most popular active mutual funds.... But part of the interest reflects the meager yields in short-term bond funds and on cash that have pushed investors further afield in their quest for income." (See our "Link of the Day" for more.)
Yet another brief comments, "P&I Says, "Active bond funds had a good 2017." The piece explains, "Institutional active bond funds brought in about $171.5 billion in 2017 at an average rate of $42.9 billion per month. Over the same period, active institutional equity funds ... lost about $155.5 billion in net outflows. 2017 was relatively better than 2016, when ... bond funds brought in about $49 billion. American Funds led all managers in inflows, bringing in $84.2 billion, followed by Dimensional Fund Advisors ($30.4 billion) and PIMCO ($29 billion)."
A sidebar entitled, "World Bond Funds Break $10 Trillion," tells us, "Bond fund assets worldwide broke the $10 trillion level for the first time ever in the latest quarter. The largest bond fund markets -- the U.S., Luxembourg, Brazil, Ireland and Germany -- all showed gains in the latest quarter (Q3'17) according to the Investment Company Institute's "Worldwide Open-End Fund Assets and Flows, Third Quarter 2017." ICI's report shows worldwide bond fund assets increased $400.2 billion, or 4.1%, to $10.176 trillion in the third quarter. Bond funds represent 21.5% of the $47.37 trillion in worldwide mutual fund assets. Globally, bond funds posted inflow of $226 billion in Q3 of 2017, after an inflow of $220B in Q2."
It adds, "According to Crane Data's analysis of ICI data, the U.S. had $4.526 trillion in bond fund assets as of Sept. 30, 2017, representing 44.5% of the worldwide market. US bond fund assets were up $139.3 billion in the quarter, or 3.2%. Luxembourg remained the second largest bond fund market with $1.436 trillion, or 14.1%, after a $76.2 billion, or 5.6% jump. Brazil remained in third place with $732.8 billion, or 7.2% of worldwide bond fund assets. Ireland moved up to fourth earlier in 2017 with $603.0 billion, or 5.9%. Germany fell to 5th place with $448.7 billion, or 5.4%. (Luxembourg and Ireland are the most popular domiciles for funds marketed across Europe.)"
Bond Fund Intelligence also features a "Top Performers for 2017" table, which lists the No.-1 performing bond funds based on total return for through 12/31/17 in each of our 7 bond fund categories. PIMCO Short Asset Inv Fund Inst (PAIDX) was the top-performing fund in our Conservative Ultra-Short category, PIMCO Emerging Local Bond Inst (PELBX) won in the Global category, Fidelity Capital & Income (FAGIX) returned the most in our High Yield category, PIMCO Income Inst (PIMIX) was No. 1 among IntmTerm BFs, PIMCO Long-Term Credit Inst (PTCIX) was No. 1 among Long Term Bond Funds, Nuveen High Yield Muni I (NHMRX) was No. 1 among Muni Bond Funds, Putnam Diversified Inc Y (PDVYX) was No. 1 among Short Term BFs, and BBH Limited Duration I (BBBIX) placed first among Ultra-Short Bond Funds. Congratulations to the winners!
Finally, we note that our BFI celebrates its 3rd birthday, writing, "Bond Fund Intelligence officially launched 3 years ago. BFI's mission is to bring affordable and comprehensive news and statistics coverage to the bond fund investment community. In our first issue, we began tracking 200 bond funds, but by December 2015 we were tracking 359 funds, totaling $1.663 trillion in assets -- about half the market. In December 2016, we were tracking 489 funds with $2.096 trillion in assets, and over the past year, we've grown our collection to 597 funds with $2.492 trillion in assets. We'll continue to add funds and expand our data collection (we're now publishing Bond Fund Portfolio Holdings), and we plan to launch a BFI Daily and a database query system for our Bond Fund Wisdom product suite in 2018. Thank you for your support, and please let us know if you have any feedback!
Money fund assets declined slightly for the second week in a row and the first full week of 2018, though Prime MMFs continued to see inflows, according to the Investment Company Institute's latest "Money Market Fund Assets" report. ICI writes, "Total money market fund assets1 decreased by $1.85 billion to $2.84 trillion for the week ended Wednesday, January 10, the Investment Company Institute reported today. Among taxable money market funds, government funds decreased by $6.42 billion and prime funds increased by $2.83 billion. Tax-exempt money market funds increased by $1.74 billion." Total Government MMF assets, which include Treasury funds too, stand at $2.238 trillion (78.9% of all money funds), while Total Prime MMFs stand at $462.3 billion (16.3%). Tax Exempt MMFs total $135.7 billion, or 4.8%. We review the latest asset totals, as well as another WSJ update on H.R.2319, below.
ICI explains, "Assets of retail money market funds decreased by $7.46 billion to $1.01 trillion. Among retail funds, government money market fund assets decreased by $5.24 billion to $610.69 billion, prime money market fund assets decreased by $3.51 billion to $266.16 billion, and tax-exempt fund assets increased by $1.30 billion to $129.37 billion." Retail assets account for over a third of total assets, or 35.5%, and Government Retail assets make up 60.7% of all Retail MMFs.
Their release adds, "Assets of institutional money market funds increased by $5.60 billion to $1.83 trillion. Among institutional funds, government money market fund assets decreased by $1.18 billion to $1.63 trillion, prime money market fund assets increased by $6.34 billion to $196.19 billion, and tax-exempt fund assets increased by $440 million to $6.38 billion." Institutional assets account for 64.5% of all MMF assets, with Government Inst assets making up 88.9% of all Institutional MMFs.
In other news, an article on The Wall Street Journal's WSJ Pro service, entitled, "Effort to Unwind Money-Fund Rule Hits Hurdle," says that the ICI is opposed to the effort to overturn parts of the SEC's 2014 Money Fund Reforms. Written by Andrew Ackerman, it comments, "Bipartisan House legislation aimed at undoing sweeping changes to certain money-market mutual funds suffered a major blow this week: The fund industry's top trade group came out in opposition to the bill, a move that could make it much tougher to advance through the chamber. The Investment Company Institute now opposes the legislation in question after months of being neutral."
The piece explains, "The decision by ICI is a victory for some of its biggest members, including BlackRock Inc. and Fidelity Investments, which have privately argued the industry has already spent millions of dollars to comply with the SEC's requirement -- a view now adopted publicly by ICI.... Most of the industry has learned to live with the SEC rule. But Federated Investors Inc., with nearly 70% of its assets in money funds, and state and local treasurers teamed up to undo the rule, which they say has increased borrowing costs and limited investment options. Some 60 lawmakers signed on to the bill, introduced by Rep. Keith Rothfus (R., Pa.)."
It adds, "Supporters of the bill played down the significance of ICI's opposition." Ackerman quotes Rothfus, "State and local governments, universities, hospitals, and businesses continue to bear the unfair and highly disproportionate costs of the SEC's questionable rule. That is why this bill continues to have strong bipartisan support."
The piece adds, "The bill was scheduled to be debated by the House Financial Services Committee last month, but didn't come to a vote amid behind-the-scenes pushback from firms opposed to the legislation. Even with ICI now opposing the bill, it may come up again for a committee vote, though it's unlikely to advance in its current form, according to people familiar with the process."
ICI's statement, partially quoted by the article, says, "Money market funds were subject to intense scrutiny after the financial crisis, resulting in prolonged, intense debate and two rounds of sweeping reforms, in 2010 and 2014. While ICI and its members did not support many of the measures adopted in 2014, we were pleased that the reforms preserved money market funds as a key cash management product for fund investors and a source of financing for businesses and governments. ICI's members spent thousands of hours and millions of dollars implementing these changes, and the cash management market has adjusted to the new regulatory regime. The consensus of our member leadership is that ICI should oppose this legislative effort to reopen those reforms."
Wells Fargo Money Market Funds' latest Commentary, which is our "Link of the Day" today, also commented on H.R. 2319. They write, "With the threat of the debt-ceiling binding on the horizon, it's not much of a stretch to predict that politics will affect the money markets again this year. But one bill of particular interest that market participants may want to keep an eye on is HR2319: the Consumer Financial Choice and Capital Markets Protection Act of 2017. As we briefly noted in our June commentary, this bill aims to reverse much of the money market reform that was implemented in October 2016. At that time, we had pointed out that while it hadn't really gotten much traction up to that point, we felt it had a better chance than previous versions of getting to a vote due to the large number of bipartisan sponsors. Since then, the bill has garnered even more sponsors -- currently standing at 37 Republicans and 24 Democrats -- but more important was the subject of a November 3 hearing by the House Financial Services Subcommittee on Capital Markets and Government Sponsored Enterprises prior to referral to the committee. So it has made some progress, unlike its predecessors."
They add, "Not everyone, though, is on board with the idea of repealing this latest round of money market fund reform. A major difference from the environment prior to the SEC's 2014 publication of its new money market regulations is that the industry itself is fractured in its support and is not virtually unanimously behind reversing the terms of the regulatory reform. Citing the expense and fatigue from the 2-year implementation process, the Investment Company Institute and some fund complexes are siding against the effort, in direct conflict with other fund complexes, consumer professional organizations, and securities-related and associated constituents that have declared their support. It should be interesting to follow this bill to see what happens."
For more on the topic, see the Journal's previous article, "Bringing Back the Money-Fund Buck. See also our Dec. 15 News, "WSJ on NAV Bill," our Dec. 12 Link of the Day, "BofA's Cabana on Bill H.R.2319" and our Nov. 17 News, "AFP Comments on Stable NAV Bill."
Crane Data released its January Money Fund Portfolio Holdings late yesterday, and our most recent collection of taxable money market securities, with data as of Dec. 31, 2017, shows a huge increase in Repo, a jump in Agencies, but big drops in Time Deposits (Other) and CDs. Money market securities held by Taxable U.S. money funds overall (tracked by Crane Data) increased by $37.2 billion to $2.893 trillion last month, after increasing $18.4 billion in November, $77.7 billion in October, $8.5 billion in September, and $58.6 billion in August. Repo remained the largest portfolio segment and broke over $1.0 trillion for the first time ever, followed by Treasuries and Agencies. CP remained in fourth place ahead of CDs, 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 our latest Money Fund Portfolio Holdings reports.)
Among all taxable money funds, Repurchase Agreements (repo) jumped $70.5 billion (7.5%) to $1009.7 billion, or 34.9% of holdings, after decreasing $16.4 billion in November, $3.9 billion in October and $4.4 billion in September (but increasing $65.1 billion in August). Treasury securities rose $3.8 billion (0.5%) to $740.1 billion, or 25.6% of holdings, after falling $3.0 billion in November, but rising $66.0 billion in October and $27.8 billion in September. Government Agency Debt surged $21.5 billion (3.2%) to $696.8 billion, or 24.1% of all holdings, after rising $10.5 billion in November, falling $2.2 billion in October, and rising $1.2 billion in September. Repo, Treasuries and Agencies total $2.447 trillion, representing a massive 84.6% of all taxable holdings.
CP, CDs and Other (mainly Time Deposits) securities fell in the last month of the year. Commercial Paper (CP) was down $8.1 billion (-4.1%) to $188.6 billion, or 6.5% of holdings (after increasing $14.9 billion in November and $3.3 billion in October, but decreasing $4.4 in September). Certificates of Deposits (CDs) fell by $23.4 billion (-12.1%) to $170.1 billion, or 5.9% of taxable assets (after increasing $8.9 billion in November and $14.1 billion in October, but decreasing $7.3 billion in September). Other holdings, primarily Time Deposits, fell by $31.2 billion (-29.3%) to $75.3 billion, or 2.6% of holdings. VRDNs held by taxable funds increased by $4.1 billion (49.4%) to $12.3 billion (0.4% of assets).
Prime money fund assets tracked by Crane Data fell to $637 billion (down from $655 billion last month), or 22.0% (down from 22.9%) of taxable money fund holdings' total of $2.893 trillion. Among Prime money funds, CDs represent under a third of holdings at 26.7% (up from 29.5% a month ago), followed by Commercial Paper at 29.6% (down from 29.9%). The CP totals are comprised of: Financial Company CP, which makes up 19.1% of total holdings, Asset-Backed CP, which accounts for 6.5%, and Non-Financial Company CP, which makes up 4.0%. Prime funds also hold 4.4% in US Govt Agency Debt, 10.8% in US Treasury Debt, 10.8% in US Treasury Repo, 2.3% in Other Instruments, 8.9% in Non-Negotiable Time Deposits, 6.1% in Other Repo, 2.0% in US Government Agency Repo, and 1.4% in VRDNs.
Government money fund portfolios totaled $1.583 trillion (54.7% of all MMF assets), up from $1.549 trillion in November, while Treasury money fund assets totaled another $673 billion (23.2%), up from $651 billion the prior month. Government money fund portfolios were made up of 42.3% US Govt Agency Debt, 17.9% US Government Agency Repo, 15.4% US Treasury debt, and 24.1% in US Treasury Repo. Treasury money funds were comprised of 66.7% US Treasury debt, 33.2% in US Treasury Repo, and 0.1% in Government agency repo, Other Instrument, and Investment Company shares. Government and Treasury funds combined now total $2.256 trillion, or 78.0% of all taxable money fund assets, up from 77.0% last month.
European-affiliated holdings plunged $238.3 billion in December to $415.8 billion among all taxable funds (and including repos); their share of holdings crashed to 14.4% from 22.9% the previous month. Eurozone-affiliated holdings fell $199.3 billion to $248.4 billion in December; they account for 8.6% of overall taxable money fund holdings. Asia & Pacific related holdings increased by $9.8 billion to $237.7 billion (8.2% of the total). Americas related holdings jumped $265.5 billion to $2.238 trillion and now represent 77.4% of holdings.
The overall taxable fund Repo totals were made up of: US Treasury Repurchase Agreements, which increased $78.5 billion, or 13.2%, to $673.9 billion, or 23.3% of assets; US Government Agency Repurchase Agreements (down $17.1 billion to $296.6 billion, or 10.3% of total holdings), and Other Repurchase Agreements ($39.3 billion, or 1.4% of holdings, up $9.1 billion from last month). The Commercial Paper totals were comprised of Financial Company Commercial Paper (down $2.3 billion to $121.6 billion, or 4.2% of assets), Asset Backed Commercial Paper (up $1.1 billion to $41.4 billion, or 1.4%), and Non-Financial Company Commercial Paper (down $6.9 billion to $25.6 billion, or 0.9%).
The 20 largest Issuers to taxable money market funds as of Dec. 31, 2017, include: the US Treasury ($740.1 billion, or 25.6%), Federal Home Loan Bank ($541.4B, 18.7%), Federal Reserve Bank of New York ($286.0B, 9.9%), RBC ($97.7B, 3.4%), Federal Farm Credit Bank ($73.4B, 2.5%), BNP Paribas ($70.7B, 2.4%), Wells Fargo ($62.9B, 2.2%), Federal Home Loan Mortgage Co ($52.4B, 1.8%), Nomura ($45.0B, 1.6%), Barclays PLC ($43.8B, 1.5%), Bank of Nova Scotia ($39.2B, 1.4%), Mitsubishi UFJ Financial Group Inc ($38.9B, 1.3%), Toronto-Dominion Bank ($37.9B, 1.3%), Canadian Imperial Bank of Commerce ( $35.0B, 1.2%), Bank of America ($34.9B, 1.2%), HSBC ($34.2B, 1.2%), Fixed Income Clearing Co ($33.9B, 1.2%), Sumitomo Mitsui Banking Co ($31.9B, 1.1%), Societe Generale ($31.5B, 1.1%), and Citi ($31.3B, 1.1%).
In the repo space, the 10 largest Repo counterparties (dealers) with the amount of repo outstanding and market share (among the money funds we track) include: Federal Reserve Bank of New York ($286.0B, 28.3%), RBC ($74.8B, 7.4%), BNP Paribas ($62.9B, 6.2%), Wells Fargo ($49.4B, 4.9%), Nomura ($45.0B, 4.5%), Barclays PLC ($34.6B, 3.4%), Fixed Income Clearing Co ($33.9B, 3.4%), Bank of America ($29.8B, 2.9%), HSBC ($28.2B, 2.8%), and Deutsche Bank AG ($27.5B, 2.7%).
The 10 largest Fed Repo positions among MMFs on 12/31 include: JP Morgan US Govt ($18.0B in Fed Repo), Northern Trust Trs MMkt ($17.2B), BlackRock Lq T-Fund ($16.3B), Fidelity Cash Central Fund ($15.1B), Federated Govt Oblg ($13.0B), Morgan Stanley Inst Liq Govt Sec ($10.4B), Vanguard Market Liquidity Fund ($10.3B), Goldman Sachs FS Govt ($10.1B), Fidelity Inv MM: Treasury Port ($9.8B), and BlackRock Lq FedFund ($9.6B).
The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: RBC ($23.0B, 6.1%), Toronto-Dominion Bank ($17.7B, 4.7%), Canadian Imperial Bank of Commerce ($16.0B, 4.2%), Mitsubishi UFJ Financial Group Inc. ($15.9B, 4.2%), Bank of Nova Scotia ($15.8B, 4.2%), Australia & New Zealand Banking Group Ltd ($15.6, 4.1%), Wells Fargo ($13.5B, 3.6%), Bank of Montreal ($13.0, 3.4%), Sumitomo Mitsui Banking Co ($12.1B, 3.2%), and Credit Agricole ($12.0, 3.2%).
The 10 largest CD issuers include: Wells Fargo ($13.4, 7.9%B), Bank of Montreal ($12.3B, 7.3%), RBC ($11.4, 6.7%), Sumitomo Mitsui Banking Co ($10.2B, 6.0%), Mitsubishi UFJ Financial Group Inc ($9.8B, 5.8%), Toronto-Dominion Bank ($8.1B, 4.8%), Mizuho Corporate Bank Ltd ($7.9B, 4.7%), Sumitomo Mitsui Trust Bank ($7.7B, 4.6%), Svenska Handelsbanken ($6.9B, 4.1%), and Canadian Imperial Bank of Commerce ($6.8B, 4.0%).
The 10 largest CP issuers (we include affiliated ABCP programs) include: Commonwealth Bank of Australia ($9.2B, 5.6%), Toronto-Dominion Bank ($8.0B, 4.8%), Westpac Banking Co ($7.8B, 4.8%), Bank of Nova Scotia ($7.7B, 4.7%), JP Morgan ($7.5B, 4.6%), National Australia Bank Ltd ($6.5B, 3.9%), Australia & New Zealand Banking Group Ltd ($6.1B, 3.7%), RBC ($5.7B, 3.5%), Canadian Imperial Bank of Commerce ($5.7B, 3.5%), Credit Agricole ($5.7B, 3.4%).
The largest increases among Issuers include: Federal Reserve Bank of New York (up $189.8B to $286.0B, RBC (up $22.0B to $97.7B), Fixed Income Clearing Co (up $20.8B to $33.9B), Federal Home Loan Bank (up $17.1B to $541.4B), Federal Farm Credit Bank (up $5.1B to $73.4B), Canadian Imperial Bank of Commerce (up $4.2B to $35.0B), US Treasury (up $3.8B to $740.1B), Deutsche Bank AG (up $3.3B to $29.1B), Citi (up $2.9B to $31.3B), and Toronto-Dominion Bank (up $2.7B to $37.9B).
The largest decreases among Issuers of money market securities (including Repo) in December were shown by: Federal Reserve Bank of New York (down $66.0B to $96.2B), ING Bank (down $8.5B to $27.8B), Societe Generale (down $3.5B to $44.6B), US Treasury (down $3.0B to $736.3B), Skandinaviska Enskilda Banken AB (down $2.2B to 10.6B), Canadian Imperial Bank of Commerce (down $2.5B to $23.8B), Skandinaviska Enskilda Banken AB (down $2.5B to $12.8B), Goldman Sachs (down $1.5B to $17.9B), KBC Group NV (down $1.3B to $10.0B), and Federal National Mortgage Association (down $1.1B to $21.7B).
The United States remained the largest segment of country-affiliations; it represents 68.7% of holdings, or $1.987 trillion. Canada (8.6%, $249.9B) moved into the No. 2 spot and Japan (6.0%, $172.5B) moved up to No. 3. France (5.3%, $154.2B) saw holdings plunge, dropping it down to fourth place, while the United Kingdom (3.6%, $105.3B) remained in fifth place. Germany (1.8%, $51.4B) remained in sixth place ahead, but Australia (1.7%, $50.5B) moved ahead of The Netherlands (1.2%, $34.3B) to take seventh place. Sweden (1.0%, $28.0B) was still No. 9 and Switzerland (0.8%, $22.1B) remained in tenth place. (Note: Crane Data attributes Treasury and Government repo to the dealer's parent country of origin, though money funds themselves "look-through" and consider these U.S. government securities. All money market securities must be U.S. dollar-denominated.)
As of Dec. 31, 2017, Taxable money funds held 36.1% (up from 31.2%) of their assets in securities maturing Overnight, and another 12.1% maturing in 2-7 days (down from 17.3%). Thus, 48.2% in total matures in 1-7 days. Another 23.5% matures in 8-30 days, while 10.1% matures in 31-60 days. Note that over three-quarters, or 81.8% of securities, mature in 60 days or less (up slightly from last month), the dividing line for use of amortized cost accounting under SEC regulations. The next bucket, 61-90 days, holds 8.3% of taxable securities, while 7.8% matures in 91-180 days, and just 1.9% matures beyond 181 days.
Below, we reprint the article, "Top Money Funds of 2017; 9th Annual MFI Awards," from the January edition of our Money Fund Intelligence.... In this issue, we recognize the top-performing money funds, ranked by total returns, for calendar year 2017, as well as the top funds for the past 5-year and 10-year periods. We present the funds below with our annual Money Fund Intelligence Awards. These are given to the No. 1-ranked funds based on 1-year, 5-year and 10-year returns, through Dec. 31, 2017, in each of our major fund categories -- Prime Institutional, Government Institutional, Treasury Institutional, Prime Retail, Government Retail, Treasury Retail and Tax‐Exempt. (Note: We've posted the latest versions of our "Funds" and "Portfolio Holdings" data files from the SEC's Form N-MFP data series here. Our normal January Money Fund Portfolio Holdings will also be released later today.)
The Top-Performing Prime Institutional funds were Morgan Stanley Inst Liq MMP Inst (MPUXX) and UBS Select Prime Money Mkt Pref (SPPXX), which both returned 1.14%. (BlackRock Cash Inst MMF SL, BRC01, would have been No. 1, but this fund is private, only available to internal securities lending clients.) Among Prime Retail funds (and funds overall), Fidelity Inv MM: MM Port Inst (FNSXX) had the best return in 2017 (1.17%).
The Top-Performing Government Institutional funds in 2017 were Fidelity Series Govt Money Market Fund (FGNXX) and UBS Liquid Assets Govt Fund (UBS02), which returned 0.86%. TIAA CREF MMkt Fund Advisor (TMHXX) and Vanguard Federal Money Mkt Fund (VMFXX) tied for the Top Government Retail fund spot over a 1-year period with returns of 0.81%.
Deutsche Treasury Port Cap (ICGXX) ranked No. 1 in the Treasury Institutional class with a return of 0.79%. (BlackRock Cash Treas MMF SL, BRC03, was No. 1 including "restricted" funds with a return of 0.82%.) Federated Trust for US Treas Obl IS <f:ttoxx>`_(TTOXX) was again `No. 1 among Treasury Retail funds, returning 0.73%.
Top Funds over Past Five Years. For the 5-year period through Dec. 31, 2017, Deutsche Variable NAV MM Cap (VNVXX) took top honors for the best performing Prime Institutional money fund with returns of 0.50%. Fidelity Inv MM: MM Port Inst (FNSXX) ranked No. 1 among Prime Retail with an annualized return of 0.41%.
Oppenheimer Inst Govt MM E (IOEXX) ranked No. 1 among Govt Institutional funds with a return of 0.31%, while Vanguard Federal Money Mkt Fund (VMFXX) ranked No. 1 among Govt Retail funds over the past 5 years with a return of 0.24%. BlackRock Cash Treas MMF SL (BRC03) ranked No. 1 in 5-year performance among Treasury Inst money funds with a return of 0.23% (Vanguard Treasury Money Market, VUSXX, ranked first among unrestricted funds at 0.22%.) Federated Trust for US Treas Obl IS (TTOXX) ranked No. 1 among Treasury Retail funds with a return of 0.19%.
Best Money Funds of the Decade. The highest-performers of the past 10 years include: Western Asset Inst Liquid Res Inst (CILXX), which returned 0.62% (No. 1 among Prime Inst MMFs); Fidelity Inv MM: MM Port Inst (FNSXX), which returned 0.66% (best among Prime Retail); Oppenheimer Inst Govt MM E (IOEXX), which returned 0.59%, (No. 1 among Govt Inst funds); Fidelity Govt Cash Reserves (FDRXX) and Vanguard Federal Money Mkt Fund (VMFXX), ranked No. 1 among Govt Retail funds (0.42% and 0.41%, respectively). (We include VMFXX because Fidelity Govt Cash Reserves switched from a Prime to a Govt fund in late 2016.)
Invesco Treas Obligations Institutional (TSPXX) and Vanguard Treasury Money Market (VUSXX) both returned the most among Treasury Inst funds over the past 10 years at 0.35%; and, Invesco Treas Obligations Private (TXPXX) ranked No. 1 among Treasury Retail MMFs at 0.28%.
Top Tax‐Exempt Funds. We're also giving out awards for the best-performing Tax‐Exempt money funds. Federated Municipal Obligs WS (MOFXX) ranked No. 1 for the 1-year period ended Dec. 31, 2017, with a return of 0.83%. Over the last 5 years, Federated Municipal Obligs WS (MOFXX) was also the top performer with a return of 0.27%. BMO Tax Free MMF Premier (MFIXX) was the top-ranked fund for the 10-year period with a return of 0.57%.
See the MFI Award Winner listings in our January MFI, and see our latest Money Fund Intelligence XLS for more detailed rankings. The tables on page 6 of MFI show the No. 1 ranked money fund for each category based on 1-year, 5-year, and 10-year annualized total returns.
Crane Data's latest Money Fund Market Share rankings show assets were up across almost all U.S. money fund complexes in December. Overall assets increased by $57.9 billion, or 1.9%. Total assets have increased by $97.1 billion, or 3.3%, over the past 3 months. They've increased by $286.6 billion, or 10.4%, over the past 12 months through December 31, but note that our asset totals have been inflated by the addition of a number of funds. (Crane Data added batches of previously untracked funds in December 2016, and in February and April 2017. These funds, which total over $200 billion, include a number of internal funds that we hadn't been aware of prior to disclosures of the SEC's Form N-MFP.) The biggest gainers in December were BlackRock, whose MMFs rose by $16.1 billion, or 5.8%, Morgan Stanley, whose MMFs rose by $14.0 billion, or 11.9%, and Federated, whose MMFs rose by $11.7 billion, or 6.2%.
Goldman Sachs, Dreyfus, Fidelity, Vanguard, and Schwab also saw assets increase in December, rising by $10.0B, $6.8B, $5.5B, $3.1B, and $3.0B, respectively. Declines among the 25 largest managers were seen by JPMorgan, Wells Fargo, Invesco, SSgA and UBS. (Our domestic U.S. "Family" rankings are available in our MFI XLS product, our global rankings are available in our MFI International product, and the combined "Family & Global Rankings" are available to Money Fund Wisdom subscribers.) We review these market share totals below, and we also look at money fund yields the past month, which jumped in December.
Over the past year through Dec. 31, 2017, Fidelity (up $68.4B, or 13.5%), BlackRock (up $49.8B, or 20.2%), Vanguard (up $38.0B, or 15.1%), Dreyfus (up $32.9B, or 22.0%), T. Rowe Price (up $20.0B, or 128.4%) and Northern (up $15.0B, or 16.5%) were the largest gainers. These 1-year gainers were followed by Prudential (up $14.3B, or 2097.4%), Columbia (up $13.2B, or 1044.1%), JPMorgan (up $8.5B, or 3.5%) and Invesco (up $6.0B, or 10.7%).
BlackRock, Fidelity, Morgan Stanley, Goldman Sachs, and Federated had the largest money fund asset increases over the past 3 months, rising by $23.1B, $13.7B, $13.3B, $9.4B, and $8.1B, respectively. The biggest decliners over 12 months include: Goldman Sachs (down $19.8B, or -9.9%), Western (down $7.5B, or -20.4%), Morgan Stanley (down $3.7B, or -2.8%), and SSgA (down $1.6B, or -2.0%).
Our latest domestic U.S. Money Fund Family Rankings show that Fidelity Investments remains the largest money fund manager with $574.4 billion, or 18.9% of all assets. It was up $5.5 billion in Dec., up $13.7 billion over 3 mos., and up $68.4B over 12 months. BlackRock moved into second with $296.9 billion, or 9.8% market share (up $16.1B, up $23.1B, and up $49.8B for the past 1-month, 3-mos. and 12-mos., respectively), while Vanguard fell to third with $290.0 billion, or 9.5% market share (up $3.1B, up $6.2B, and up $38.0B). JP Morgan ranked fourth with $253.3 billion, or 8.3% of assets (down $3.8B, up $6.7B, and up $8.5B for the past 1-month, 3-mos. and 12-mos., respectively), while Federated was ranked fifth with $201.1 billion, or 6.6% of assets (up $11.7B, up $8.1B, and up $5.0B).
Dreyfus was in sixth place with $182.8 billion, or 6.0% of assets (up $6.8B, up $1.9B, and up $32.9B), while Goldman Sachs was in seventh place with $179.5 billion, or 5.9% (up $10.0B, up $9.4B, and down $19.8B). Schwab ($161.4B, or 5.3%) was in eighth place, followed by Morgan Stanley in ninth place ($131.1B, or 4.3%) and Wells Fargo in tenth place ($107.4B, or 3.5%).
The eleventh through twentieth largest U.S. money fund managers (in order) include: Northern ($105.7B, or 3.5%), SSgA ($81.6B, or 2.7%), Invesco ($62.3B, or 2.0%), First American ($50.0B, or 1.6%), UBS ($42.9B, or 1.4%), T Rowe Price ($35.6B, or 1.2%), Western ($29.2B, or 1.0%), DFA ($29.0B, or 1.0%), Deutsche ($25.8B, or 0.8%), and Franklin ($20.2B, or 0.7%). The 11th through 20th ranked managers are the same as last month, except DFA moved ahead of Deutsche. 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 JPMorgan moves ahead of Vanguard and BlackRock, BlackRock moves ahead of Vanguard, Goldman Sachs moves ahead of Federated and Dreyfus, and Northern moves ahead Wells Fargo.
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") products, the largest money market fund families include: Fidelity ($583.1 billion), BlackRock ($429.0B), JP Morgan ($426.2B), Vanguard ($290.0B), and Goldman Sachs ($282.8B). Federated ($210.3B) was sixth and Dreyfus/BNY Mellon ($210.0B) was in seventh, followed by Morgan Stanley ($169.0B), Schwab ($161.4B), and Northern ($133.4B), which round out the top 10. These totals include "offshore" US Dollar money funds, as well as Euro and Pound Sterling (GBP) funds converted into US dollar totals.
The January issue of our Money Fund Intelligence and MFI XLS, with data as of 12/31/17, shows that yields were up sharply in December across all of our Crane Money Fund Indexes. The Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 756), was up 16 bps to 0.92% for the 7-Day Yield (annualized, net) Average, and the 30-Day Yield was up 10 bps to 0.84%. The MFA's Gross 7-Day Yield increased 15 bps to 1.35%, while the Gross 30-Day Yield was up 10 bps to 1.28%.
Our Crane 100 Money Fund Index shows an average 7-Day (Net) Yield of 1.12% (up 19 bps) and an average 30-Day Yield of 1.04% (up 12 bps). The Crane 100 shows a Gross 7-Day Yield of 1.38% (up 18 bps), and a Gross 30-Day Yield of 1.30% (up 11 bps). For the 12 month return through 12/31/17, our Crane MF Average returned 0.55% and our Crane 100 returned 0.73%. The total number of funds, including taxable and tax-exempt, was unchanged at 956. There are currently 756 taxable and 200 tax-exempt money funds.
Our Prime Institutional MF Index (7-day) yielded 1.18% (up 19 bps) as of December 31, while the Crane Govt Inst Index was 0.99% (up 17 bps) and the Treasury Inst Index was 1.02% (up 17 bps). Thus, the spread between Prime funds and Treasury funds is 16 basis points, up 1 bp from last month, while the spread between Prime funds and Govt funds is 19 basis points, unchanged from last month. The Crane Prime Retail Index yielded 0.97% (up 18 bps), while the Govt Retail Index yielded 0.63% (up 12 bps) and the Treasury Retail Index was 0.72% (up 15 bps). The Crane Tax Exempt MF Index yield increased to 1.03% (up 53 bps).
Gross 7-Day Yields for these indexes in December were: Prime Inst 1.54% (up 18 bps), Govt Inst 1.28% (up 16 bps), Treasury Inst 1.30% (up 16 bps), Prime Retail 1.52% (up 17 bps), Govt Retail 1.23% (up 11 bps), and Treasury Retail 1.29% (up 14 bps). The Crane Tax Exempt Index increased 53 basis points to 1.52%. The Crane 100 MF Index returned on average 0.08% for 1-month, 0.23% for 3-month, 0.73% for YTD, 0.73% for 1-year, 0.33% for 3-years (annualized), 0.21% for 5-years, and 0.38% for 10-years. (Contact us if you'd like to see our latest MFI XLS, Crane Indexes or Market Share report.)
The January issue of our flagship Money Fund Intelligence newsletter, which was sent out to subscribers Monday morning, features the articles: "Money Fund Highlights of '17; Yield Jump, Assets Big Stories," which reviews the top stories of 2017 and outlook for 2018; "Public Trust Advisors' Palomba & Waud on LGIPs," which interviews PTA's Randy Palomba and Neil Waud; and, "Top Money Funds of 2017; 8th Annual MFI Awards," which reviews top-performing money market funds for the past 1-, 5- and 10-year periods. We've also updated our Money Fund Wisdom database with Dec. 31, 2017, statistics, and sent out our MFI XLS spreadsheet Monday a.m. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our January Money Fund Portfolio Holdings are scheduled to ship Wednesday, January 10, and our January Bond Fund Intelligence is scheduled to go out Monday, January 15.
MFI's "Money Fund Highlights" article says, "This past year was a welcome respite following the dramatic regulatory and portfolio changes of 2016, as slowly rising rates and assets made it money funds' best year in almost a decade. Money fund managers benefited from the end of fee waivers, the slow but steady recovery of Prime funds and the return of that endangered species -- yield. Yields (as measured by our Crane 100) rose from 0.43% to 1.12%, their highest level since the end of 2008. Below, we take a look back at the highlights of 2017, and we also give a brief outlook for 2018."
It continues, "According to Crane Data's numbers, assets rose by $287.0 billion, or 10.4%, to $3.041 trillion in 2017. (Note that our numbers were inflated slightly by the addition of previously unreported funds in 2016.) The ICI's narrower collection recently broke above the $2.8 trillion, its highest level since the end of 2010. YTD, ICI shows MMF assets increased by $113 billion, or 4.1%."
MFI's latest Profile reads, "This month Money Fund Intelligence interviews Public Trust Advisors' CIO Randy Palomba and Head of Portfolio Management Neil Waud. Public Trust manages approximately $25 billion, including more than $18 billion of the estimated $200-300 billion local government investment pool (LGIP) marketplace. LGIPs are run similarly to money market funds and are used by local governments to manage cash. Our Q&A follows."
We asked Palomba to "Give us a little history." He responds, "Public Trust opened its doors in November of 2011 and assumed management of COLOTRUST, a local government investment pool for Colorado, shortly thereafter. With COLOTRUST, my history dates back to 1989.... I assumed the duties of portfolio manager in 1995 and continued through a change in administrator and investment advisor in 1998 (when COLOTRUST selected MBIA as its service provider)."
He continues, "I eventually left Cutwater Asset Management (previously MBIA) in July of 2011 ... to co-found Public Trust.... COLOTRUST wanted to explore other service providers in the market place. We were fortunate enough to be awarded the contract and have been managing those assets ever since. Fast forward to today, and we have grown to manage several more clients, so it has been a very positive story as we moved forward."
Palomba says of their biggest priority, "Our mantra, and we live by it through any kind of market cycle, is 'safety, liquidity, and then yield.' At Public Trust, we have developed a true investment team environment.... We work on these portfolios with a collaborative effort, where there is constant communication and a flow of ideas being generated.... This gives us the opportunity to bounce ideas off one another, thoroughly analyzing all aspects of our investment process. We meet frequently to set overall strategy, then Neil and I determine the assets to purchase for the various portfolios." (Watch for more excerpts from this "profile" later this month, or ask us to see the latest MFI.)
Our "Top Money Funds of 2017" article says, "In this issue, we recognize the top-performing money funds, ranked by total returns, for calendar year 2017, as well as the top funds for the past 5-year and 10-year periods. We present the funds below with our annual Money Fund Intelligence Awards. These are given to the No. 1-ranked funds based on 1-year, 5-year and 10-year returns, through Dec. 31, 2017, in each of our major fund categories -- Prime Institutional, Government Institutional, Treasury Institutional, Prime Retail, Government Retail, Treasury Retail and Tax‐Exempt."
It continues, "The Top-Performing Prime Institutional funds were Morgan Stanley Inst Liq MMP Inst (MPUXX) and UBS Select Prime Money Mkt Pref (SPPXX), which both returned 1.14%. (BlackRock Cash Inst MMF SL, BRC01, would have been No. 1, but this fund is private, only available to internal securities lending clients.) Among Prime Retail funds (and funds overall), Fidelity Inv MM: MM Port Inst (FNSXX) had the best return in 2017 (1.17%)."
The article adds, "The Top‐Performing Government Institutional funds in 2017 were Fidelity Series Govt Money Market Fund (FGNXX) and UBS Liquid Assets Govt Fund (UBS02), which returned 0.86%. TIAA CREF MMkt Fund Advisor (TMHXX) and Vanguard Federal Money Mkt Fund (VMFXX) tied for the Top Government Retail fund spot over a 1‐year period with returns of 0.81%."
Our January MFI XLS, with Dec. 31, 2017, data, shows total assets increased $57.9 billion in December to $3.041 trillion after increasing $46.4 billion in November, decreasing $2.2 billion in October, and increasing $32.0 billion in September and $68 billion in August. Our broad Crane Money Fund Average 7-Day Yield was up 16 basis points to 0.92% during the month, while our Crane 100 Money Fund Index (the 100 largest taxable funds) was up 19 bps to 1.12%.
On a Gross Yield Basis (7-Day) (before expenses were taken out), the Crane MFA rose 15 bps to 1.35% and the Crane 100 rose 18 bps to 1.38%. Charged Expenses averaged 0.44% and 0.28% (unchanged) for the Crane MFA and Crane 100, respectively. The average WAM (weighted average maturity) for the Crane MFA was 30 days (up one day from last month) and for the Crane 100 was 30 days (up one from last month). (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
We mentioned a recent "MetLife Stable Value Study in our Dec. 14 "Link of the Day", but we didn't have time to give it more coverage at the time. Today, however (since we're stuck in the snow), we excerpt in more detail from the "2017 Stable Value Study." MetLife commissioned the study and survey "plan sponsors, stable value fund providers and advisors ... to gain strategic insight into the current marketplace for stable value, a capital preservation option offered in defined contribution (DC) plans." They explain, "In fact, stable value is the only capital preservation option designed specifically for qualified retirement plans. Today, approximately 11% of the $7.5 trillion in DC plan assets is in stable value."
The report's introduction tells us, "As we release this study, it has been just over one year since the MMF reform rules went into effect in October 2016. This year's study explores plan sponsors' familiarity with MMF reform, and the extent to which they have taken steps to evaluate their use of money market in their DC plans. The study also looks at other trends, such as the use of stable value in target date funds (TDFs), both off-the-shelf and custom. In addition to the insights we obtained by surveying DC plan sponsors, we also gained perspective on the use of stable value and other capital preservation options through in-depth interviews with stable value fund (SVF) providers and DC plan advisors whose clients use stable value funds in their plans."
Regarding the study's findings, they say, "Today, stable value is the most prevalent capital preservation option offered in DC plans, with most plan sponsors surveyed offering stable value (83%, essentially unchanged from 82% in 2015). This includes nearly half (46%) offering stable value but not money market funds (up from 38% in 2015) and another 36% offering both stable value and money market funds in their plans (down from 45% in 2015). The change in the mix of stable value (both with and without money market) is statistically significant."
MetLife's study continues, "The use of money market funds has experienced a statistically significant decline overall since 2015, with just over half of sponsors (52%, compared to 62% in 2015) offering money market as a capital preservation option, either on its own (16%, down from 18% in 2015) or in combination with stable value (36%, down from 45% in 2015). Only 2% of plan sponsors offer a capital preservation option other than stable value or money market, such as laddered short-term fixed income options. While the large majority of plan sponsors who offer stable value (91%) have been doing so for more than two years, a notable 9% added stable value in the past two years. In aggregate, the data confirm meaningful movement away from money market funds as a capital preservation option in DC plans."
It states, "Over half of plan sponsors surveyed (53%) say they are at least somewhat familiar with MMF reform, with just 10% saying they are very familiar. Among plan sponsors who are reasonably familiar with MMF reform, a clear majority (83%) feel that stable value is a more attractive capital preservation option for plan participants than money market funds. Even among plan sponsors familiar with the rules whose plans offer only a money market fund, a majority (55%) think stable value is a better option."
The study comments, "Only 31% of plan sponsors overall evaluated their use of money market funds as their plans' capital preservation option in light of MMF reform. Among those who did, most (84%) sought advice about alternatives from a consultant or advisor. Sixty percent of advisors and 63% of SVF providers surveyed said that at least some of their plan sponsor clients reviewed their use of money market in light of MMF reform. Most advisors who said their clients would consider/have considered excluding money market altogether cite low returns as a driver (83%)."
The survey says, "Four in 10 plan sponsors who evaluated their use of money market in light of the reform (41%) replaced their money market funds, with over half (55%) saying they used government money market as a replacement and 29% saying they used stable value. All advisors who reported having clients who evaluated their use of money market and replaced their money market funds as a result of the reform said that stable value was the replacement. Nearly two-thirds of SVF providers with clients who evaluated their use of money market funds and replaced them as a result of the reform (64%) say that stable value took money market's place, while 27% say government money market funds were used."
It also tells us, "Plan sponsors who replaced their money market funds with government money market over stable value gave several reasons for this selection: liquidity; the desire for an alternative to stable value (because they already had stable value in their plan); government money market's similarity to money market funds; or, they do not like some aspects of stable value. Despite the near universal choice of government money market funds as a money market fund replacement for those who did not move to stable value, nearly two-thirds of those who moved into government money market (65%) recognized that increased demand for government paper amid limited supply could keep government money market funds' nominal yields low and real yields negative."
They study concludes, "Today, with $814 billion in assets in DC plans, it is clear that stable value has earned the trust of DC plan participants who want to preserve the value of their retirement savings and insulate their assets from market volatility. The most popular capital preservation option in DC plans today, stable value is poised for considerable growth, particularly in response to MMF reform and emerging trends such as the use of stable value as the fixed income component of a TDF or model portfolio."
It reiterates, "Now that we have passed the one-year anniversary of the 2016 MMF reform, it is a suitable time to review the actions that have been taken -- or will be taken -- to comply with the new rules. The decision to retain an existing money market fund or replace the fund with another option, including stable value, will have a considerable impact on participant outcomes, and is subject to ERISA's demanding fiduciary duty standards. Some plan sponsors may be reluctant to give up money market entirely, even though those with money market recognize the appeal of stable value following MMF reform. We believe, however, that plan sponsors must ask themselves whether there is any place in a retirement plan line-up for a capital preservation option that does not keep pace with inflation."
They tell us, "While most plan sponsors believe they have solid documentation for justifying their choice of capital preservation option, fewer have hard data to support their decisions. From a fiduciary standpoint, if they have not already done so, DC plan sponsors should promptly complete a quantitative review of their plans' capital preservation option(s) and consider stable value as an alternative to money market funds. Since advisors play a significant role in plan sponsors' decisions about capital preservation options, it is important that advisors fully communicate the advantages of stable value and provide supporting data to share with plan sponsors for documentation purposes."
Finally, the study states, "As this year's findings show, many plan sponsors recognize that stable value's performance track record is better than that of money market funds. However, as noted in MetLife's 2015 Stable Value Study and reinforced in this 2017 study, there remains a need for the stable value industry to encourage a greater understanding for -- and appreciation of -- stable value's risk and return profile vis-a-vis other capital preservation options. For some plan sponsors, the perceived complexity of stable value is standing in the way of greater usage, as is a perception that DC plan participants are demanding money market funds. The stable value industry should seek to simplify, for both sponsors and participants, the ways in which it communicates about the product. Simplifying the value proposition for stable value through easy-to-understand marketing and educational materials can help to enhance its appeal, and could lead to even greater adoption by plan sponsors and higher allocations by plan participants."
We learned from mutual fund news publisher ignites that Charles Schwab Investment Management has filed to liquidate the $8 billion Schwab Money Market Fund, a move that likely indicates an acceleration in Charles Schwab & Co.'s shift of brokerage "sweep" assets from money market funds into FDIC-insured bank accounts. The Prospectus Supplement says, "At a meeting held on December 12, 2017, the Board of Trustees of The Charles Schwab Family of Funds approved the liquidation of, and the related Plan of Liquidation for, Schwab Money Market Fund (the Fund)." We review this latest liquidation filing, as well as recent rate increases on brokerage sweep accounts, below. (See our Oct. 23, 2017 "Link of the Day," "Schwab Earnings Talk MMFs.")
The Schwab Money Market Fund filing explains, "In accordance with the Plan of Liquidation, the Fund will redeem all of its outstanding shares on or about May 25, 2018 (the Liquidation Date), and distribute the proceeds to the Fund's shareholders in an amount equal to the shareholder's proportionate interest in the net assets of the Fund after the Fund has paid or provided for all of its charges, taxes, expenses and liabilities. Additionally, the Fund anticipates making a distribution of any taxable dividends and capital gains of the Fund prior to or on the Liquidation Date."
It continues, "As the Fund approaches the Liquidation Date, the Fund will wind up its business and affairs, and will cease investing its assets in accordance with its stated investment policies. On or before the Liquidation Date, all portfolio holdings of the Fund will be converted to cash, cash equivalents or other liquid assets. As a result, the Fund will not be able to achieve its investment objective and will deviate from its investment policies during the period as it approaches the Liquidation Date."
Schwab tells us, "The Fund's investment adviser will bear all expenses associated with the liquidation other than transaction costs associated with winding down the Fund's portfolio and effective April 2, 2018 through the Liquidation Date, the Fund's investment adviser will waive the Fund's management fees. The liquidation is not expected to be a taxable event for the Fund."
They add, "Once the Fund has been liquidated, all references to the Fund will be deleted from the Prospectus and Statement of Additional Information. A copy of the Fund's Prospectus and this supplement is available on the Fund's website www.schwabfunds.com/schwabfunds_prospectus, and the Fund will provide additional information, should it become available, on its website."
The filing also comments on Schwab Government Money Fund, saying, "The third paragraph in the section entitled, "Buying/Selling Shares" on Page 25 of the Prospectus is deleted and replaced in its entirety with the following: When you designate one of these funds as the sweep fund on your Schwab account, your uninvested cash balances will be invested in the fund according to the terms and conditions of your account agreement.... If you do not designate one of these funds as the sweep fund on your Schwab account, your uninvested cash balances may be automatically deposited in an interest-bearing deposit account at Charles Schwab Bank ("Bank Sweep Program"). All accounts participating in the Bank Sweep Program may be subject to a maximum deposit amount limit, which will apply to the amount that can be swept into bank deposit accounts under the Bank Sweep Program. Available balances in excess of the maximum deposit amount limit will be automatically invested in a secondary sweep option, which may be Schwab Government Money Fund."
In our October Link, we wrote, "The Charles Schwab Corporation's latest quarterly earnings release mentions money market funds and cash in a couple of places. CEO Walt Bettinger says, "Most recently, we enhanced our money fund offerings by lowering expenses, reducing and standardizing investment minimums, and streamlining share classes across our entire lineup. These changes are part of our work to ensure clients continue to have access to a range of cash solutions offering attractive yields and smart features."
It added, "CFO Peter Crawford comments, "During the third quarter, we transferred $1.7 billion in sweep balances to Schwab Bank – $1.4 billion from Schwab One and approximately $300 million from sweep money market funds. In addition, we used $5 billion in Federal Home Loan Bank advances to provide temporary funding for additional investments ahead of future bulk transfer activity. The FHLB advances, the third quarter money fund transfers, and higher client cash levels all helped our consolidated balance sheet reach $230.7 billion as of September 30th; our preliminary Tier 1 Leverage Ratio at quarter-end was 7.7%." (See Schwab's release "Announcing Lower Minimums and Expenses for Schwab Money Funds.")
Schwab is currently the 8th largest manager of money market mutual funds with $161.4 billion in assets. The firm will continue to offer Prime MMFs, including the $35.9 billion Schwab Cash Reserves, the $14.1 billion Schwab Advisor Cash Reserves, and the $27.4 billion Schwab Value Advantage Money Fund.
Though Schwab hasn't commented further on their latest moves, there has been plenty of movement in brokerage sweep rates, following years of rock-bottom 0.01% yields. Crane Data's Brokerage Sweep Intelligence product shows that rates among the $1 trillion in FDIC-insured cash held at brokerages moved higher in the latest week, rising to 0.11% (for accounts of $100K-$249K) from 0.07% the week prior and from 0.04% a year ago.
Several brokerages, including Ameriprise, Raymond James, Schwab and TD Ameritrade, increased rates on selected sweep tiers in the last week of 2017. (Schwab bumped up rates to 0.12% for all tiers on its Bank Sweep.) We expect these rates to continue inching higher in coming weeks as higher-yielding money funds begin to draw cash back out of bank products. (Let us know if you'd like to see a copy of our most recent Brokerage Sweep Intelligence report.)
For more news on brokerage sweeps, see our Oct. 12, 2017 News, "Wells Bumps Up Brokerage Sweep Rates, Raises FDIC Insurance Coverage," our May 9, 2017 News, "Signs of Life in FDIC Brokerage Sweeps; StoneCastle on Sweep Platforms," our Aug. 15, 2016 News, "Morgan Stanley Pulls Plug on Prime, Muni Sweeps; ignites on Strikes," and our June 29, 2016 News, "UBS Liquidates Sweeps, Goes Govt; Vanguard Floats Internal Money Fund."
The Wall Street Journal wrote a piece entitled, "Which Banks to Own When Savers Get Fed Up." Subtitled, "2018 will be the year that banks finally start paying decent returns to savers, but some will have to pay more than others," the article discusses the likelihood of various banks raising rates for savers in the coming year. It says, "Savings accounts, which have paid out almost nothing for the past decade, could get more interesting in 2018 as yields rise and investors scramble for the higher returns. That could be bad news for certain banks. Savings account yields haven't risen much since the Federal Reserve started raising interest rates. As the Fed keeps tightening in 2018, more banks will raise deposit rates and savers will respond by rushing to the banks that pay the most."
The Journal update tells us, "That is what happened in the last tightening cycle in the mid-2000s -- banks moved slowly at first, gradually accelerating as rates moved higher. This time banks might have to be more aggressive because it is easier than ever for savers to move cash electronically to higher yielding competitors like Capital One and American Express. Analysts at Keefe, Bruyette and Woods estimate that banks will pass along 34% of the rise in the Fed's target rate to savers in 2018, up from 15% in 2017. As a result, most banks will still be net beneficiaries of higher rates. But the impact will be uneven."
It adds, "For the first time in years, investors in bank stocks will have to look hard at the liability side of bank balance sheets. How much banks need to pay for deposits will determine banks' profitability and growth rates.... Already, banks with more ordinary consumer deposits have raised yields more slowly, compared with banks with lots of deposits from businesses or wealth management clients, which tend to chase yields. Among the biggest banks, Bank of America has the strongest consumer franchise with 72% of deposits coming from consumers, according to analysts at Goldman Sachs. Among regional lenders, Regions Financial and PNC Financial are among the most consumer-centric."
Finally, the Journal writes, "Fast-growing banks may also need to pay up for deposits to continue their loan growth. The biggest banks have the advantage here because the government has restricted their lending so they are sitting on excess deposits. In a recent note, analysts at Goldman Sachs put all these factors together into a composite score judging how resilient a bank is to rising rates. Among major national banks the clear winner was Bank of America. Among regional lenders, some of the standouts were Regions Financial, BB&T and PNC Financial. These banks should be among the best to own as rates keep marching higher."
The FDIC's "Weekly National Rates and Rate Caps" report shows the average non-jumbo (< $100K) national Savings rate at 0.06%, while the average non-jumbo Money Market Account is 0.09%. For Jumbo Savings and Deposits the averages are 0.06% and 0.15%, respectively. The average money market funds, on the other hand, is currently yielding 0.94% (Crane Money Fund Average) or 1.11% (Crane 100 MF Index).
For more news on pressure on bank deposit rates, see also our Nov. 1, 2017 "Link of the Day," "WSJ (Again) on Banks Raising Rates, our Oct. 25 Link of the Day, "Banks Pay Up on Deposits Says WSJ," and our Oct. 12, 2017 News, "Wells Bumps Up Brokerage Sweep Rates, Raises FDIC Insurance Coverage." See also our Brokerage Sweep Intelligence, which shows the average brokerage sweep account rate rising from 0.07% to 0.11% for FDIC insured accounts at the $100K level over the past month.
In other news, "Federated Investors' Deborah Cunningham writes in her "2018 Outlook: Month in Cash," about the likelihood of 2% yields in 2018. She tells us, "This time of the year, the talk is always about resolutions. For cash managers in 2018, the better word is "resolute". We think this year will continue to be a slow and steady march into 2% land, for both government rates and inflation. That's a sunny path to be sure, but there's potential for distractions. Looking unwaveringly past those as the year progresses will be important for money managers for setting investment strategy and in managing daily operations."
Cunningham writes, "The Federal Reserve is, of course, at the center of it all. Its December Federal Open Market Committee (FOMC) meeting went as expected, resulting in a rate increase (to a range of 1.25-1.50%) and projections for three more in 2018. We think the moves will be front-loaded -- happening in March, June and September -- leaving open the potential for yet another one of those Fed year-end hikes. But whenever they come, three rate increases would put the short end of the London interbank offered rate (Libor) in a range of 2-2.25%."
Federated's piece continues, "Yes, you read that correctly. The cash markets could very well have a two handle this year! In fact, we already are seeing 12-month trades in that range. If our expectations of three moves rings true, 9-month trades could soon hit that 2% level, then 6-month trades, then 3-month trades, etc. But as we all know, the Fed also can disrupt even its own plans, or at the very least create bumps in the road, and there will be opportunities this year."
Finally, it adds, "Another Fed issue is the number of empty seats on its board of governors…. But neither of these two points is likely to be a major issue, and we don’t expect much volatility as the year progresses, or much change at all from the environment of the latter half of 2017. The economy is gaining momentum, Libor remains supportive, floating-rate securities should still be attractive and prime funds industry-wide likely will see inflows because they tend to respond faster to rising rates than deposit products. So stay the course as it twists and turns, because it also likely will be rising."
Adviser Investments published a brief entitled, "Deja Vu Again - Tax-Exempt Money Yields Soar." Written by Christopher Keith, it tells us, "Here we go again! Tax-exempt money market yields are on a moonshot. Investors and savers may be getting the wrong impression about just how sumptuous their yields will be in the new year. It's something we haven't seen for years as money market yields, and particularly those in the municipal market, have been hovering around 0%. Now they've going over 1% and shooting higher." We excerpt from this article, and we extend a new "Free Friday" offer for our upcoming Money Fund University, below. We'd also like to wish all of our readers the best of luck in 2018. Happy New Year!
The Adviser Investments piece says, "You can thank the Federal Reserve for money yields having picked themselves up off the floor. But the Fed's not responsible for what's happening right now. Seasonal tax-loss swaps, a greater need for cash, tax planning and even money market reforms of a year ago are all conspiring to send yields higher as New Years approaches. Unfortunately, the spike will be short-lived because tax-exempt money market funds typically revert to normal within weeks of the turn of the calendar."
It continues, "This year's rise is also due to a heavy new issue calendar of borrowers (municipalities) rushing to get new bonds sold before sweeping tax law changes take effect in 2018 and limit some issuers' ability to tap the market. How dramatic has the yield explosion been? Take Fidelity Municipal Money Market (FTEXX). The fund began December yielding 0.63% and has climbed to 0.98% (up 35 bps) over the past few weeks. Meanwhile, the taxable Fidelity Money Market Fund (SPRXX) has only seen its yield go from 1.00% to 1.20% (up 20 bps.)"
Keith writes, "Vanguard Municipal Money Market (VMSXX) has seen its yield go from 0.86% to 1.20% (up 34 bps) while the taxable Vanguard Prime Money Market (VMMXX) has seen a 16 bps increase from 1.20% to 1.36%. The Vanguard Pennsylvania Municipal Money Market (VPTXX) has seen its yield jump 42 bps from 0.80% to 1.22%."
Finally, he adds, "These tax-exempt yields will not last. How do I know? They never do.... Yet investors watching their year-end statements or calculating whether tax-exempt money funds are better options than taxable funds are going to be misled by the increases. Today's 0.98% tax-exempt yield on Fidelity Municipal Money Market translates into as much as a 1.73% yield for someone in this year's 43.4% tax bracket or even 1.36% for someone in the 28% bracket. That's way ahead of taxable money fund yields. But, as I said, it won't last. Forewarned is forearmed."
Crane Data's Money Fund Intelligence Daily shows Tax Exempt Money Funds averaging 0.97% (as of Dec. 28, 2017), up 27 bps from a week earlier. Taxable money funds, as measured by our Crane Money Fund Average, have increased from 0.91% to 0.94% during the past week and our Crane 100 Money Fund Index, an average of the largest funds, rose from 1.07% to 1.10%. (The taxable averages jumped the prior week.) As of Nov. 30, 2017, Tax Exempt MMFs were yielding an average of 0.52%, vs. 0.77% for taxable funds (and 0.92% for the Crane 100). (See our MFI Daily, MFI XLS or Crane Indexes files for more information on the latest and historical yields.)
In other news, money market professionals new to the space should take note of next month's "basic training" event, Crane's Money Fund University. Our 8th annual MFU returns to the Boston Hyatt Regency in Boston, Mass., January 18-19, 2018. Those interested in the Boston area should note that we're now offering "free Fridays" whereby any unregistered guests are welcome to "crash" the conference on Friday morning to attend the regulatory, European, ultra-short bond fund, and/or money fund information and data product sessions. (Let us know if you're interested or just show up at the Boston Hyatt on 1/19.)
MFU is designed for those new to the money market fund industry or those in need of a concentrated refresher on the basics. The event also focuses on hot topics like money market regulations, money fund alternatives, offshore markets, and other recent industry trends. The affordable educational conference (see the agenda here or e-mail us to request our brochure) features a faculty of the money fund industry's top lawyers, strategists, and portfolio managers.
Money Fund University offers attendees a 2-day course on money market mutual funds, educating attendees on the history of money funds, the Fed, Rule 2a-7, ratings, rankings, money market instruments such as commercial paper, CDs, CP, ABC, repo, plus portfolio construction. At our upcoming Boston event, we will also take a look at ultra-short bond funds and Europeans MMF regulations. Attendee registration for Crane's Money Fund University is just $500, exhibit space is $2,000, and sponsorship opportunities are $3K, $4K, and $5K. A block of rooms has been reserved at the Hyatt Regency Boston.
We'd like to thank our MFU sponsors –- Dreyfus/BNY Mellon CIS, Federated Investors, Fidelity Investments, Fitch Ratings, J.P. Morgan Asset Management, S&P Global, First American Funds/US Bank, J.M. Lummis & Co., and Dechert -- for their support, and we look forward to seeing you in Boston in just over 2 weeks. E-mail Pete Crane (pete@cranedata.com) for the latest brochure or visit www.moneyfunduniversity.com to register or for more details.
We've also released the preliminary agendas for the next Crane's Bond Fund Symposium (March 22-23, 2018, at the Los Angeles Intercontinental), and our "big show," Crane's Money Fund Symposium, which will be held June 25-27, 2018, at the Pittsburgh Westin. Finally, we're also starting to make plans for Crane's European Money Fund Symposium, which will be Sept. 21-22, 2018 at the London Tower Bridge Hilton. Thanks to those who supported our events in 2017, and we hope to see you in Boston, LA, Pittsburgh or London in 2018!
