News Archives: September, 2018
The Investment Company Institute released its latest weekly "Money Market Fund Assets" and its latest monthly "Trends in Mutual Fund Investing" reports yesterday. The former shows MMF assets rebounding in the latest week, while the latter shows a $31.6 billion increase in money market fund assets in August to $2.867 trillion. This follows a $14.9 billion increase in July, a $30.1 billion drop in June, and a $58.3 billion jump in May. In the 12 months through August 31, money fund assets have increased by $148.2 billion, or 5.4%. (Month-to-date in Sept. through 9/26, assets have increased by $7.6 billion, $7.2 billion of which is from Prime MMFs, according to our MFI Daily.) ICI also released its latest Portfolio Holdings totals, which show a drop in Agencies and a jump in Treasuries in August. We review ICI's Assets, Trends and latest Portfolio Composition statistics below.
The "Assets" report shows money fund totals again hitting their highest levels since April 2010. Prime assets paused after a string of recent gains. Overall assets are now up $46 billion, or 1.6%, YTD, and they've increased by $143 billion, or 5.2%, over 52 weeks. ICI writes, "Total money market fund assets increased by $17.92 billion to $2.88 trillion for the week ended Wednesday, September 26, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $20.44 billion and prime funds decreased by $2.59 billion. Tax-exempt money market funds increased by $70 million." Total Government MMF assets, which include Treasury funds too, stand at $2.216 trillion (76.8% of all money funds), while Total Prime MMFs stand at $536.2 billion (18.6%). Tax Exempt MMFs total $131.4 billion, or 4.6%.
They explain, "Assets of retail money market funds increased by $1.44 billion to $1.06 trillion. Among retail funds, government money market fund assets increased by $370 million to $633.79 billion, prime money market fund assets increased by $1.22 billion to $306.91 billion, and tax-exempt fund assets decreased by $155 million to $123.11 billion." Retail assets account for over a third of total assets, or 36.9%, and Government Retail assets make up 59.6% of all Retail MMFs.
ICI's release adds, "Assets of institutional money market funds increased by $16.48 billion to $1.82 trillion. Among institutional funds, government money market fund assets increased by $20.07 billion to $1.58 trillion, prime money market fund assets decreased by $3.81 billion to $229.24 billion, and tax-exempt fund assets increased by $225 million to $8.31 billion." Institutional assets account for 63.1% of all MMF assets, with Government Inst assets making up 86.9% of all Institutional MMFs.
The monthly "Trends" report states, "The combined assets of the nation's mutual funds increased by $225.62 billion, or 1.2 percent, to $19.47 trillion in August, according to the Investment Company Institute's official survey of the mutual fund industry. In the survey, mutual fund companies report actual assets, sales, and redemptions to ICI."
It explains, "Bond funds had an inflow of $13.05 billion in August, compared with an inflow of $17.25 billion in July.... Money market funds had an inflow of $28.87 billion in August, compared with an inflow of $12.02 billion in July. In August funds offered primarily to institutions had an inflow of $12.01 billion and funds offered primarily to individuals had an inflow of $16.86 billion."
The latest "Trends" shows that Taxable MMFs gained assets and Tax Exempt MMFs lost assets last month. Taxable MMFs increased by $32.0 billion in August to $2.736 trillion, after increasing by $19.3 billion in July, decreasing by $27.1 billion in June, and increasing by $51.6 billion in May. Tax-Exempt MMFs decreased $0.4 billion in August to $130.8 billion. Over the past year through 8/31/18, Taxable MMF assets increased by $145.8 billion (5.6%) while Tax-Exempt funds rose by $2.3 billion over the past year (1.8%). Bond fund assets increased by $21.7 billion in August to $4.166 trillion; they've risen by $192.0 billion (4.8%) over the past year.
Money funds now represent 14.7% of all mutual fund assets (the same level as the previous month), while bond funds represent 21.4%, according to ICI. The total number of money market funds was unchanged at 383 in August, but this total is down from 410 a year ago. Taxable money funds were unchanged at 299 funds, while tax-exempt money funds were unchanged at 84 funds over the last month.
ICI also released its latest "Month-End Portfolio Holdings of Taxable Money Funds," which showed a drop in Agencies and an increase in Treasuries in August. Repurchase Agreements remained in first place among composition segments; they decreased by $6.8 billion, or -0.7%, to $923.8 billion, or 33.8% of holdings. Repo holdings have fallen by $7.3 billion, or -0.8%, over the past year. (For more, see our September 13 News, "September MF Portfolio Holdings: Treasuries Up; Agency, Repo Down.")
Treasuries rose by $16.9 billion, or 2.2%, to $774.8 billion or 28.3% of holdings. Treasury securities have increased by $152.6 billion over the past 12 months, or 24.5%. U.S. Government Agency securities were the third largest segment; they fell by $30.8 billion, or -4.6%, to $633.6 billion, or 23.2% of holdings. Agency holdings have fallen by $30.5 billion, or -4.6%, over the past 12 months.
Certificates of Deposit (CDs) stood in fourth place; they increased $1.2 billion, or 0.6%, to $192.8 billion (7.0% of assets). CDs held by money funds have fallen by $15.1 billion, or -7.3%, over 12 months. Commercial Paper remained in fifth place, increasing $241 million, or 0.1%, to $190.2 billion (7.0% of assets). CP has increased by $47.5 billion, or 33.3%, over one year. Notes (including Corporate and Bank) were down by $714 million, or -10.1%, to $6.4 billion (0.2% of assets), and Other holdings decreased to $12.0 billion.
The Number of Accounts Outstanding in ICI's series for taxable money funds decreased by 7.2 thousand to 32.360 million, while the Number of Funds remained at 299. Over the past 12 months, the number of accounts rose by 6.179 million and the number of funds decreased by 15. The Average Maturity of Portfolios was 30 days in August, up 1 day from July. Over the past 12 months, WAMs of Taxable money funds have shortened by 2 days.
The Securities and Exchange Commission released its latest "Money Market Fund Statistics" summary Wednesday. It shows that total money fund assets rose by $29.9 billion in August to $3.144 trillion. Prime MMFs jumped $31.2 billion to $732.6 billion, while Govt & Treasury funds dipped $1.8 billion to $2.276 trillion. Tax Exempt funds rose $0.6 billion to $135.1 billion. Gross yields rose for all Prime, Government, and Tax Exempt Funds in the latest month. 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 $29.9 billion in August, after increasing $15.2 billion in July, decreasing by $51.8 billion in June, and increasing by $45.6 billion in May. Total MMFs increased by $31.0 billion in April, decreased $48.2 billion in March, increased $40.7 billion in February and decreased by $44.3 billion in January. Over the 12 months through 8/31/18, total MMF assets increased $155.4 billion, or 5.2%. (Note that the SEC's series includes a number of private and internal money funds not reported to ICI or others, though Crane Data tracks most of these.)
Of the $3.144 trillion in assets, $732.6 billion was in Prime funds, which increased by $31.2 billion in August. Prime MMFs increased by $24.3 billion in July, decreased by $8.9 billion in June, and increased by $0.7 billion in May. Prime funds represented 23.3% of total assets at the end of August, their highest level since 9/30/16. They've increased by $90.8 billion, or 14.2%, over the past 12 months. But they've decreased by $300.5 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 $2.276 trillion, or 72.4% of assets. They were down $1.8 billion in August, $4.4 billion in July, and $39.4 billion in June. But they were up $38.1 billion in May, and up $10.0 billion in April. Govt MMFs were down $41.7 billion in March, but up $44.9 billion in February. Govt & Treas MMFs are up $62.5 billion over 12 months, or 2.8%. Tax Exempt Funds increased $0.6B to $135.1 billion, or 4.3% of all assets. The number of money funds was 383 in August, up 1 from last month.
Yields on Taxable MMFs moved higher again in August, their 11th month in a row of increases. The Weighted Average Gross 7-Day Yield for Prime Funds on August 31 was 2.19%, up 1 basis point from the previous month and up 0.91% from August 2017. Gross yields increased to 2.01% for Government/Treasury funds, up 0.05% from the previous month, and up 94 bps from August 2017. Tax Exempt Weighted Average Gross Yields rose 49 bps in August to 1.59%; they've increased by 73 bps since 8/31/17.
The Weighted Average Net Prime Yield was 2.01%, up 0.01% from the previous month and up 0.95% since 8/31/17. The Weighted Average Prime Expense Ratio was 0.18% in August (the same as the previous four months). Prime expense ratios are down by 4 bps over the past year. (Note: These averages are asset-weighted.)
WALs and WAMs were higher in August. The average Weighted Average Life, or WAL, was 60.0 days (up 2.1 days from last month) for Prime funds, 87.0 days (up 1.5 days) for Government/Treasury funds, and 24.3 days (up 1.5 days) for Tax Exempt funds. The Weighted Average Maturity, or WAM, was 31.2 days (up 1.2 days from the previous month) for Prime funds, 29.8 days (up 0.9 days) for Govt/Treasury funds, and 21.1 days (up 1.8 days) for Tax-Exempt funds. Total Daily Liquidity for Prime funds was 34.7% in August (up 3.8% from previous month). Total Weekly Liquidity was 49.5% (the same as in July) for Prime MMFs.
In the SEC's "Prime MMF Holdings of Bank Related Securities by Country, August 2018" table, Canada topped the list with $90.4 billion, followed by the US with $71.8 billion, Japan with $66.4B, France with $59.7B, and Sweden with $46.5B. The UK ($44.6B), Germany ($34.3B), the Netherlands ($32.1B), Australia/New Zealand ($30.6B), and Switzerland ($19.0B) rounded out the top 10 countries.
The gainers among Prime MMF bank related securities for the month included: The US (up $5.6B), Canada (up $4.4B), the UK (up $3.2B), Sweden (up $2.4B), Australia/New Zealand (up $1.7B), Japan (up $691M), Belgium (up $443M), and Other (up $37M). The biggest drops came from the Netherlands (down $4.2B), Norway (down $2.1B), Switzerland (down $951M), France (down $836M), Germany (down $617M), Singapore (down $443M), China (down $143M), and Spain (down $68M). For `Prime MMF Holdings of Bank-Related Securities by Major Region, Europe had $252.8B (down $3.0B from last month), while the Eurozone subset had $135.0B (down $5.1B). The Americas had $162.9 billion (up $10.2B), while Asia Pacific had $111.8 billion (up $1.9B).
Of the $730.4 billion in Prime MMF Portfolios as of August 31, $242.6B (33.2%) was in CDs (down from $244.0B), $188.1 B (25.7%) was in Government securities (including direct and repo) (up from $156.5B), $104.2B (14.3%) was held in Non-Financial CP and Other Short Term Securities (down from $108.4B), $150.5B (20.6%) was in Financial Company CP (down from $153.9), and $45.0B (6.2%) was in ABCP (up from $44.4B).
The Proportion of Non-Government Securities in All Taxable Funds was 18.4% at month-end, up from 18.3%. All MMF Repo with the Federal Reserve fell to $0.4B in August from $9.0B the previous month. Finally, the "Trend in Longer Maturity Securities in Prime MMFs" tables shows 35.8% were in maturities of 60 days and over (up from 34.7%), while 7.9% were in maturities of 180 days and over (up from 7.5%).
While a couple firms have launched "national" Institutional Tax Exempt Money Market Funds, BlackRock will become the first manager to convert a State Tax Exempt MMF from Retail to Institutional. A statement entitled, "BlackRock California Money Fund and New York Money Fund to be Designated Institutional Money Market Funds," tells us, "In 2016, the BlackRock California Money Fund and the BlackRock New York Money Fund … were each designated a 'Retail Money Market Fund,' under the new definition of Rule 2a-7 under the Investment Company Act of 1940, as amended. In particular, this designation allowed the Funds to maintain a constant net asset value per share ('CNAV') by adopting the amortized cost accounting method, so long as access was permitted to only 'natural persons.'"
BlackRock explains, "It is our view that money market funds benefit from scale, as funds of scale may achieve better buying power and provide benefits of increased diversification for shareholders. Upon further evaluation of these two Funds, at their July 31, 2018 meeting, the Funds' Board of Directors ... has approved the redesignation of these Funds as Institutional Money Market Funds ... to allow for additional distribution opportunities and client types. We anticipate this change will become effective on or around Monday, October 15, 2018."
They state, "An Institutional Fund designation means that the Funds will adopt a floating net asset value per share ('FNAV') through the use of market-based pricing. The Funds will continue to be subject to liquidity fees and redemption gates under certain circumstances, as they are now. Importantly, there are no restrictions on the type of investor who may hold an Institutional Fund, meaning natural persons may continue as shareholders of the Funds."
BlackRock's statement also says, "We understand that this designation could create operational complexity for certain current shareholders; however, it is our view that any additional scale that may be achieved through this change could be beneficial to all shareholders. Further, we are pleased to share that the Funds will continue to offer sameday liquidity, with a 1:00 pm ET cut-off time for orders in advance of a single 3:00 pm ET net asset value strike time."
The brief adds, "In order to understand what this change could mean to you, we recommend you consider not just your individual investment needs, but also the platform through which you invest. We are partnering with each of our distribution platforms to consider this impact." (For more on Tax Exempt MMF Changes, see these Crane Data News articles: "Fidelity Files for Inst Muni MMF (11/7/17)," "Schwab Simplifies MMF Lineup, Lowers Minimums; Federated Muni Exists (10/25/17)," "August MFI: Fleeing State Tax Exempts, American Beacon Profile, AFP (8/7/17)," and "Vanguard Liquidating OH Tax Exempt MMF; JPM: 2017 Outlook Uncertain (11/28/16).")
In other news, Bloomberg writes "Money Fund Giants Brace for $94 Billion Hit From EU Rules," which discusses European Money Market Fund Reforms. They tell us, "The world's biggest asset managers are lobbying for a last-minute reprieve from a European Union policy that could throw about 80 billion euros ($94 billion) of money funds into turmoil. BlackRock Inc., JPMorgan Chase & Co. and Goldman Sachs Group Inc. are among giants hoping to persuade EU authorities to preserve a key feature that investors have come to expect: the fixed share price. Public statements by regulators so far suggest that new rules that start on Jan. 21 will eliminate the ability of such funds to maintain the stable value, eroding the main appeal of such products."
The article explains, "Corporate treasurers around the world rely on money funds to park their cash with the assurance they’ll be able to take out every dollar -- or euro -- when they need funds for payroll or investments. The new rules leave investors with even fewer safe places to stash their money as many banks are reluctant to accept large cash balances, while deposit rates in the region are expected to stay below zero for at least another year. Floating-rate funds aren't a great alternative, especially for treasurers, because it would create tax and accounting headaches."
It continues, "If EU authorities don't reverse their stance, fund companies have warned that the policy could mean the death of stable-price euro funds, as managers are forced to offer floating-rate funds or investors turn away from the fund industry altogether and move their money to banks. Peter Crane, founder Massachusetts-based research firm Crane Data LLC, said he expects half of the roughly 80 billion euros in investments to wind up at variable net-asset value funds and the other half at banks."
The piece adds, "The latter option is especially unpalatable to fund companies, who've enjoyed steady growth in assets of constant-value products in the past decade. Euro-denominated funds account for just over 11 percent of a roughly 700 billion-euro industry for constant-value funds, with the remainder based in dollars and pounds, according to data from iMoneyNet. BlackRock, JPMorgan and Goldman Sachs operate the biggest euro-denominated money-market funds that maintain a fixed share price."
Bloomberg tells us, "Money funds traditionally accrue income and distribute it to investors in the form of additional fund shares. Each share retains the fixed price. On days when income is negative, the industry has relied on a newer tool called the reverse distribution mechanism, which works in the opposite direction by reducing the number of shares an investor has in a fund while each remaining share keeps the fixed price."
They comment, "The industry was caught by surprise last year when the European Securities and Markets Authority published technical standards for the implementation of the new rules. Buried in paragraph 186 of the 162-page document, ESMA had a bombshell: its view that the industry's share cancellation practice would be prohibited under the upcoming regulation."
Finally, Bloomberg says, "The industry's biggest lobbying groups swung into action with opposition letters, with groups representing money-market funds and asset managers telling the regulator that the practice is widely used and approved by national regulators including in Luxembourg, a major hub for the fund industry. ESMA was misguided in its approach, according to the groups whose members include the asset-management units of JPMorgan, Goldman Sachs, Morgan Stanley and others."
Note: Let us know if you'd like to see the binder from last week's European Money Fund Symposium in London, and watch for excerpts from some of the sessions in our upcoming Money Fund Intelligence newsletter. Our conference-goers placed the odds of the EU allowing the reverse distribution mechanism, or RDM, at 50-50.
This month, Bond Fund Intelligence interviews Fidelity Investments Portfolio Manager Julian Potenza, who along with Rob Galusza, runs Fidelity Conservative Income Bond Fund. Fidelity "CIB" as it's referred to, is one of the pioneers in the "Conservative" Ultra-Short Bond Fund space, and recently passed the $10 billion milestone. We discuss the fund's strategies, its success, and a number of issues in the shortest segment of the ultra-short term bond fund market. (Note: This profile is reprinted from the Sept. issue of our Bond Fund Intelligence publication. Contact us if you'd like to see the full issue, or if you'd like to see our BFI XLS performance spreadsheet, our BFI Indexes and averages, or our most recent Bond Fund Portfolio Holdings data set, which was published yesterday.)
BFI: Tell us about your history. Potenza: Fidelity has a very long history managing fixed income assets across the entire yield curve. Obviously, that includes our money market business, with which you're very familiar. We also have a long track record managing short-term bond funds.... For example, Fidelity Short Term Bond Fund, another fund that I co-manage, has been around since the mid-1980s.... The Conservative Income Bond Fund was launched in 2011.
I have been involved with Fidelity's fixed income investment efforts since about 2007. I joined as a 'financials' analyst, and cut my teeth covering banks.... Then in 2012, I moved into our macro research team, focusing on the U.S. economy and the Fed. I've been with both our bond and money market investment teams for about 10 years [and] joined the Conservative Income Bond Fund management team a little under a year ago in October of 2017.
BFI: What drove the launch of CIB? Potenza: The fund was launched in the midst of the zero-interest rate environment.... Our philosophy has always been to offer a range of products across the duration and risk spectrum.... It's also always been clear that there is a portion of clients' liquidity portfolios, where they have a little bit longer time horizon and a little bit more of a risk appetite.
The product design reflected some of the lessons learned managing money through the financial crisis.... The idea is that the fund seeks to generate a high level of current income consistent with the preservation of capital. If you look at the type of investments that we put in the fund, it sits on the more conservative end of the ultrashort bond category.
I think one of the lessons of the crisis was that overly complex or overly risky securities have the potential to cause unpleasant surprises. So, we wanted to design a product that really generated most of its returns by investing in simple, plain vanilla investment grade corporate credit products. As you know it is a bond fund. But it's a fund that's benchmarked to a 3- to 6-month Treasury bill index, meaning the duration is quite short, which is designed to limit the amount of interest rate risk that investors in the fund are exposed to.... I feel like that approach really resonates with clients.
BFI: The fund just broke $10 billion, right? Potenza: Yes, the fund hit $10 billion in assets under management in July.... That was an important milestone and clearly a vote of confidence from fund shareholders that the portfolio we have carefully assembled is really helping them with their investment challenges. Part of that story is the fund's strong performance history along with limited NAV volatility, which is really the objective that we’ve been shooting for.
I also think that really this has been a great time in the cycle for the fund. It's a fund that generates yield primarily by taking risk in the credit markets as opposed to interest rate risk. A lot of the credit exposure is in financials, given the nature of issuance in that part of the yield curve. When you think about an environment where the Fed is gradually raising short term interest rates against the backdrop of a global financial system that's really quite healthy, that's been an attractive combination for many of our investors.
You now have the potential to earn yields that are safely above inflation without taking on outsized duration or credit risk. I think that's one of the reasons that we've seen such strong interest in CIB this year. Conservative Income Bond Fund has been in a sweet spot from a yield curve perspective in terms of the balance between risk and return.
BFI: What are your big challenges? Potenza: Supply is always a focus, and we're always working hard to make sure that we have access to the widest opportunity of investments for our clients. The fund has been pretty heavily invested in floating rate corporate bonds in the last couple years. Demand for floaters has been pretty elevated. So, we are always on the lookout to make sure that we have ample opportunities to get invested.... Being part of an organization like Fidelity ... we have the ability to source opportunities from across both our bond and money market trading desks, which gives us a wider set of traders and analysts looking for ideas.
We always want to make sure that we're attracting the right type of investors for the fund. The fund is designed for the strategic cash component of a client's liquidity portfolio -- for example, someone with a 6-month plus time horizon. We've seen greater and greater interest in the product as yields have moved higher as the Fed has tightened.
BFI: What about its composition? Potenza: The fund tends to be a combination of short term bonds and money market instruments. In this interest rate environment, the bonds are mostly corporate floaters. The money market credit instruments are primarily CP and CDs, and we also hold a modest amount of Treasury securities.... The fund tends to be, [roughly] 75% in short term corporate floating rate bonds, and about 25% in money market securities.... We tend to have meaningful exposure to financials, but generally not as concentrated as you would expect to see in a money fund.
As far as investment strategies, we manage interest rate risk in the fund, although, consistent with Fidelity's broader approach to fixed income active management, we take a relatively cautious approach. We don't take huge duration swings relative to the benchmark, and we put a pretty high emphasis on limiting NAV volatility. Our benchmark has a duration of about a third of the year, and we've generally been running a little bit short relative to the index.
It is worth noting that the fund does have a bit more interest rate risk appetite than a money market fund. We have the ability to buy fixed rate securities out to about 2 years final maturity and floating rate securities out to three years. We carefully select securities working with our traders and analysts, making sure every idea that we put in the fund is a good combination of risk and return. It's also the ability to opportunistically shift across the different parts of our opportunity set, depending upon relative value conditions.
BFI: Are there other 'Conservative' funds? Potenza: Our Muni Conservative Income Bond Fund offers a similar approach as the taxable Conservative Income Bond Fund, but it is intended for investors that are also are concerned with tax-advantaged income.... We think of our "Conservative" branded products as part of a broader lineup of ... 'Liquidity Management Solutions' offered by Fidelity. [W]e also manage a number of institutional separate accounts for both corporate cash management and family office clients. Some of these tend to have a little bit more risk appetite than the conservative-branded funds, but they utilize a lot of the same investment strategies and underlying investment markets.
BFI: Tell us about the investors. Potenza: This product has really been resonating with a pretty broad segment of investors. We have a healthy allocation of retail shareholders. We also have seen interest from a variety of different types of institutional investors, as well as advisors and other types of intermediaries. Generally speaking, interest has been really across the board.... While our typical client is a cash investor looking to move out the yield curve a bit, one of the things that we're finding now is we're seeing interest come from the other direction, as well, meaning people that are looking to shorten their bond portfolio.
BFI: What about the Fed and economy? Potenza: It's a little bit cliché, but the phrase 'Goldilocks environment' comes to mind ... because we have growth that clearly has inflected upwards, but inflationary pressures are only building modestly.... The Fed is suggesting probably 2 more interest rate hikes this year along with several more next year.... Markets are pricing this year pretty well. In 2019, you only have about one and a half hikes priced in currently, and that might be a little bit shallow. The fund has tried to maintain a duration slightly short relative to its benchmark. In my view, that type of a positioning tends to work well in a rising interest rate environment.
BFI: How do you feel about the future? Potenza: I feel very good about the way that the product has been growing and about our ability to continue to get the fund invested on the behalf of our shareholders. Cyclically, the wind has seemed to be at the fund's back. But I also think more structurally, a fund like this that offers incremental pick-up over money funds without getting involved in overly complex securities or taking on inappropriate credit risk, is likely to have a pretty lasting appeal for many investors throughout the cycle.
The San Francisco Chronicle asks, "What are the best places to stash your cash?" The article answers, "Surviving a panic like the one that started 10 years ago -- when Lehman Bros. went under and nearly took the financial system with it -- requires courage, patience, and a comfortable cushion of cash. 'Having that cash cushion allows you to ride out a financial storm, like having a few days of canned goods helps you live out a physical storm,' said Peter Crane of Crane Data, which tracks money market funds." We quote from this article, and also review ICI's latest Money Market Fund Holdings summary, below.
Columnist Kathleen Pender writes, "With the stock market hitting record highs, readers have been asking about the best places to stash their cash. The good news is that after hovering near zero for the better part of a decade, yields on short-term securities are now in the 2 percent range, if you know where to look."
She tells us, "A rule of thumb calls for having six months of living expenses in cash, in case you lose your job. Having cash also lets you weather the market's ups and downs, and pick up stocks on the cheap when others are panic selling. Berkshire Hathaway CEO Warren Buffett is renowned for building up a cash stockpile, and deploying it when there's 'blood in the streets,' Crane said."
The Chronicle piece explains, "Cash is shorthand for safe, liquid assets such as checking and savings accounts and money market funds. Some would include certificates of deposit and Treasury bills maturing in one year or less. If you're worried about a potential catastrophe, actual currency 'may be something to consider,' Crane said."
It states, "The trouble with currency is finding a safe place to store it and earning exactly zero. Here are some other options for your cash: Savings and money market deposit accounts. These are insured accounts at banks and credit unions. The accounts are very similar, except money market accounts may offer limited check-writing. But neither should be used as a checking account."
The article continues, "Money market mutual funds. These are run by mutual fund companies and invest in low-risk, short-term debt securities. They are not guaranteed by the government. Their yields tend to follow the federal funds rate -- now at 1.75 to 2 percent. If the Federal Reserve, as expected, raises the fed funds rate twice this year and two more times next year, your yield should follow shortly. The highest yielding money market funds are a little over 2 percent, according to Crane Data."
It also says, "These funds are often linked to a brokerage or mutual fund account. In the past, when you received dividends or proceeds from a stock sale, it was 'swept' into a money market fund. Today, almost all brokerage firms are sweeping these funds into a low-yielding, albeit insured bank account. This makes more money for the firm, and less for the customer. You can always move cash from your bank sweep account to a higher-yielding money fund."
The piece adds, "Money market funds got a bad name during the financial crisis, when the Reserve Primary Fund became the second one in history to 'break the buck,' or trade below $1 per share. 'During the crisis, it froze up, and was priced at 97 cents,' Crane said. If you sold at that price, you would have lost 3 cents on the dollar. This contributed to chaos in the financial markets. In the end, investors ended up getting 99 cents on the dollar. 'When all was said and done, the loss was minuscule.'"
They also mention, "Certificates of deposit," saying, "CDs are insured savings accounts offered by banks that mature in a certain number of months or years. (Credit unions call them share certificates.) If you cash in a CD before maturity, you'll pay a penalty, usually some months worth of interest."
In other news, the Investment Company Institute released its latest monthly "Money Market Fund Holdings" summary Friday. Their 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 our Sept. 13 News, "September MF Portfolio Holdings: Treasuries Up; Agency, Repo Down.")
ICI's MMF Holdings release says, "The Investment Company Institute (ICI) reports that, as of the final Friday in August, prime money market funds held 30.9 percent of their portfolios in daily liquid assets and 43.6 percent in weekly liquid assets, while government money market funds held 61.5 percent of their portfolios in daily liquid assets and 78.7 percent in weekly liquid assets." Prime DLA increased from 25.6% last month to 30.9%, and Prime WLA increased from 43.0% last month to 43.6%. Govt MMFs' DLA increased from 59.2% to 61.5% last month, and Govt WLA increased from 77.2% last month to 78.7%.
It explains, "At the end of August, prime funds had a weighted average maturity (WAM) of 33 days and a weighted average life (WAL) of 66 days. Average WAMs and WALs are asset-weighted. Government money market funds had a WAM of 30 days and a WAL of 88 days." Prime WAMs increased by two days from last month, and WALs were also up by two days. Govt WAMs were up by one day from July and Govt WALs were up by two days from last month.
Regarding Holdings By Region of Issuer, ICI tells us, "Prime money market funds' holdings attributable to the Americas increased from $199.8 billion in July to $213.4 billion in August. Government money market funds' holdings attributable to the Americas declined from $1,716.62 billion in July to $1,675.69 billion in August."
The Prime Money Market Funds by Region of Issuer table shows Americas-related holdings at $213.4 billion, or 40.3%; Asia and Pacific at $99.6 billion, or 18.8%; Europe at $210.4 billion, or 39.8%; and, Other (including Supranational) at $5.5 billion, or 1.1%. The Government Money Market Funds by Region of Issuer table shows Americas at $1.676 trillion, or 76.0%; Asia and Pacific at $130.3 billion, or 5.9%; and Europe at $393.9 billion, or 17.9%.
The Federal Reserve released its latest quarterly "Z.1 Financial Accounts of the United States" statistical survey (formerly the "Flow of Funds") yesterday. Among the 4 tables it includes on money market mutual funds, the Second Quarter, 2018 edition shows that Total MMF Assets increased by $28 billion to $2.821 trillion in Q2. The Household Sector saw assets inch higher and remained the largest investor segment with $1.585 trillion. The next largest segment, Nonfinancial Corporate Businesses also saw assets increase in the second quarter, as did Property-Casualty Insurance and Life Insurance Companies holdings of money funds. We review the latest Z.1 stats below. (Note that the Federal Reserve changed its numbers related to money market funds substantially in the latest quarter; see their comment below.)
A statement entitled, "Release Highlights Second Quarter 2018," tells us, "New source data for money market funds from the U.S. Securities and Exchange Commission’s (SEC) form N-MFP have been incorporated into the sector’s asset holdings (tables F.121 and L.121). Money market funds not available to the public, which are included in the SEC data, are excluded from Financial Accounts’ estimates. Data revisions begin 2013:Q1. Holdings of money market fund shares by households and nonprofit organizations, state and local governments, and funding corporations (tables F.206 and L.206) have been revised due to a change in methodology based on detail from the Investment Company Institute. Data revisions begin 1976:Q1."
The Fed's latest Z.1 numbers, which contain one of the few looks at money fund investor segments available, also show assets inching higher for the Nonfinancial Noncorporate Business and Rest of the World categories in Q2 2018. Funding Corporations, State & Local Govt Retirements, and Private Pension Funds saw assets fall slightly in Q2. Over the past 12 months, the Household Sector, Funding Corporations and Nonfinancial Corporate Businesses showed increases in assets, while the State and Local Government Retirement and Private Pension Funds categories showed decreases.
The Fed's "Table L.206," "Money Market Mutual Fund Shares," shows that total assets increased by $28 billion, or 1.0%, in the second quarter to $2.821 trillion. Over the year through June 30, 2018, assets were up $186 billion, or 7.1%. The largest segment, the Household sector, totals $1.585 trillion, or 56.2% of assets. The Household Sector increased by $15 billion, or 1.0%, in the quarter, after decreasing $38 billion in Q1'18. Over the past 12 months through Q2'18, Household assets were up $105 billion, or 7.1%.
Nonfinancial Corporate Businesses, the second largest segment according to the Fed's data series, held $471 billion, or 16.7% of the total. Assets here rose by $5 billion in the quarter, or 1.0%, and they've increased by $27 billion, or 6.1%, over the past year. Funding Corporations were the third largest investor segment with $254 billion, or 9.0% of money fund shares. They fell by $6 billion, or -2.3%, in the latest quarter. Funding Corporations have increased by $37 billion, or 16.9%, over the previous 12 months.
The fourth largest segment, Private Pension Funds held 5.5% of money fund assets ($154 billion) -- down $1 billion, or -0.5%, for the quarter, and down $3 billion, or -1.7%, for the year. Nonfinancial Noncorporate Businesses, which held $109 billion (3.9%), were in 5th place. The Rest Of The World category remained in sixth place in market share among investor segments with 3.4%, or $96 billion, while Life Insurance Companies held $51 billion (1.8%), State and Local Government Retirement Funds held $50 billion (1.8%), Property-Casualty Insurance held $28 billion (1.0%), and State and Local Governments held $23 billion (0.8%), according to the Fed's Z.1 breakout.
The Fed's "Flow of Funds" Table L.121 shows "Money Market Mutual Funds" largely invested in "Debt Securities," or Credit Market Instruments, with $1.710 trillion, or 60.6% of the total. Debt securities includes: Open market paper ($174 billion, or 6.2%; we assume this is CP), Treasury securities ($729 billion, or 25.8%), Agency and GSE backed securities ($663 billion, or 23.5%), Municipal securities ($136 billion, or 4.8%), and Corporate and foreign bonds ($8 billion, or 0.3%).
Other large holdings positions in the Fed's series include Security repurchase agreements ($909 billion, or 32.2%) and Time and savings deposits ($177 billion, or 6.3%). Money funds also hold minor positions in Foreign deposits ($3 billion, or 0.1%), Miscellaneous assets ($7 billion, or 0.3%), and Checkable deposits and currency ($16 billion, 0.6%). Note: The Fed also lists "Variable Annuity Money Funds;" they currently total $32 billion in the quarter.
During Q2, Debt Securities were down $113 billion. This subtotal included: Open Market Paper (up $15 billion), Treasury Securities (down $152 billion), Agency- and GSE-backed Securities (up $20 billion), Municipal Securities (up $4 billion), and Corporate and Foreign Bonds (unchanged). In the second quarter of 2018, Security Repurchase Agreements were up $127 billion, Foreign Deposits were up $2 billion, Checkable Deposits and Currency were up $6 billion, Time and Savings Deposits were up $5 billion, and Miscellaneous Assets were up $1 billion.
Over the 12 months through 6/30/18, Debt Securities were up $170B, which included Open Market Paper up $45B, Treasury Securities up $104B, Agencies up $20B, Municipal Securities (up $3B), and Corporate and Foreign Bonds (down $1B). Foreign Deposits were flat, Checkable Deposits and Currency were up $1B, Time and Savings Deposits were down $1B, Securities repurchase agreements were up $16B, and Miscellaneous Assets were flat.
Finally, thank you to those who attended and supported our 6th annual European Money Fund Symposium, which finishes Friday afternoon in London. Stop by the Hilton London Tower Bridge if you're in town, watch for coverage of the sessions in coming days, and mark your calendars for next year's show in Dublin (Sept. 23-24, 2019)!
This month, Money Fund Intelligence speaks with Kim Hochfeld, the new Chair of IMMFA, the London-based Institutional Money Market Funds Association (www.immfa.org). Hochfeld, who is also Managing Director at Morgan Stanley Investment Management, gives us the latest on European Money Market Fund Reforms and talks about what's next for money funds in Europe. Our Q&A follows. (Note: Hochfeld and IMMFA MD Jane Lowe will keynote our European Money Fund Symposium, which starts Thursday morning in London. For those in attendance, welcome to London! Note too that this article is reprinted from the September issue of our Money Fund Intelligence newsletter. Contact us at inquiry@cranedata.com to request the full issue.)
MFI: When did you become Chair? Hochfeld: I was elected Chair for a three year term at the beginning of July by members at our Annual General Meeting. Our former Chair, Reyer Kooy, was re-elected to the Board, which is a positive for IMMFA as it allows a level of continuity. Kathleen Hughes from GSAM and Ian Lloyd from LGIM are still on the Board too, and we have been joined by Beccy Milchem from BlackRock. So it's a team with plenty of experience.
MFI: What's been IMMFA's main focus? Hochfeld: European Money Market Reform has absolutely been a key focus for us, especially over the last 18 months. It has been a long time coming. We have been focused on defining our LVNAV structure and working with clients to make sure they understand how LVNAV works, and then obviously there are challenges for our members as to how they position their Euro funds. There's still much work to do, by the vendors, the money fund managers, the transfer agents, the fund administrators, the portal providers, their trading systems, etc., in order to be ready for the coming changes.
One of the challenges is the clarity around Euro MMFs. For example, there is still an element of uncertainty as to whether share cancellation as a mechanism for handling negative yield will be permitted under new Regulations. This is the so-called RDM [reverse distribution mechanism]. It seems that most providers have built for different outcomes, although the market has different viewpoints as to which scenario will prevail.
MFI: What happens after reforms? Hochfeld: I think where IMMFA can really add value is around education and marketing, particularly if RDM does not continue … and managers have to make choices about what they will offer instead. IMMFA's expectation is that over time the membership will offer most types of short-term money funds, both VNAV and CNAV.
It will therefore be important to educate our existing and any prospective investors about the difference in running short-term VNAV Euro funds vs. how some of the existing short-term Euro VNAV funds are managed. There will be big differences in the old IMMFA-style universe of short-term money funds that are all AAA-rated, compared to some of the VNAV funds that are out there at the moment, which generally don’t have a rating and have a lot more flexibility to take more risk to generate a higher return.
Over the next year, the IMMFA will be focused on broadening our investor base globally and tackling challenges related to accounting treatment, to see if we can achieve more consistency and certainty on the accounting treatment of short-term money funds in the European Regulation, much as the S.E.C. offered for U.S. 2a-7 money funds.
MFI: Does IMMFA only deal with short-term money market funds? Hochfeld: Not any more. Historically IMMFA only represented CNAV short-term money funds. Yes, we had accumulating share classes, but they still use amortized cost accounting. However the Association always viewed the European Regulation as a game changer, because it codified the regime for money funds across the whole of the European Union. So IMMFA responded to it by changing its constitution effective 1 January 2018 to cover all types of money market fund permitted under the Regulation. It means that now we cover CNAV and VNAV short term MMFs, and also VNAV standard MMFs. To put it in context, the VNAV standard MMFs in Europe are essentially the same product as U.S. ultra-short bond funds.
Also, once the Regulation came into force, the need for the IMMFA Code of Practice diminished, as much of what is in the Code now appears in the Regulation. The Code still applies to members, but from January 2019 it will be replaced entirely by the IMMFA Principles of Best Practice. Details are available on the IMMFA website. All IMMFA members are bound by the Principles of Best Practice. In replacing the Code, IMMFA sets out what the Principles would do instead.
To quote: "The Principles have two purposes, both of which are intended to support investor confidence in the industry: To describe in plain English the key requirements that apply to money market funds and that operate to protect investors and markets; and to describe additional practices beyond the applicable regulatory requirements where these are considered necessary for the good governance of the funds."
MFI: Accumulating funds are different than VNAV, right? Hochfeld: They're very different. Today's accumulating share classes are share classes whereby the accrued interest is rolled up into the NAV every day. The capital portion, the part which would otherwise be 1.00 in a CNAV share class, does not change in an accumulating share class. That is stable, because accumulating share classes today still use amortized cost accounting to value the underlying assets. So, the change in the price is merely reflective of the accrued income. For a VNAV fund, the change in the price is reflective of both the accrued income and the mark-to-market on the underlying assets.
MFI: What are some of the main differences with U.S. reforms? Hochfeld: There are aspects of European reforms which are more complex than the U.S. 2a-7 reforms, although the new product types are arguably better aligned to existing funds. The LVNAV product is a new fund type, so the market is having to come to grips with its complexities. It is much easier to understand the public debt CNAV product, as this is ... like today's government funds.
Another difference is that we do not have trigger-based fees and gates on our VNAV funds but we do have them on our treasury fund equivalent. For VNAV, we still have the provision for fees and gates at board discretion under UCITS rules, which is what we have at the moment on our existing CNAV funds.
MFI: Can you talk about investors? Hochfeld: I speak to investors all the time, and from a relative value perspective `our euro funds still offer great value to clients that are holding cash in euros. From a risk-return perspective, the funds still represent the gold standard.
There is a wide variety of different investors types in our European funds, including corporations and financial institutions, [and] it is specific to different currencies. [For example], local authorities in the U.K. are able to use money funds, as are pension funds in the Netherlands. It's not that money funds are more attractive to one market or another, it's that they're more attractive to one investor type specific to one market or another.... A big chunk of investment also comes from financial institutions, whether they're funds or third-party, sweep money or insurers. [Recent IMMFA statistics show corporates, funds, third parties, financials, insurers, and the public sector as the largest investor segments.]
I'd say a major theme that the industry is working on through IMMFA, as well as on a fund by fund basis, is getting money funds accepted as collateral at clearing houses. Money market funds do qualify for holding client monies in Europe, but it has to be implemented on a country by country basis (because of the link into insolvency law). So at the moment we have mostly focused on the U.K. Getting a wider acceptance of the use of money funds for that cash would be a great boon in assets for the industry.
MFI: Is there fee pressure? What about MMF competitors? Hochfeld: Fee pressures come from within the industry and from competing products.... In terms of our competitors, bank deposits are clearly a big competitor, but it's not just depo. It's repo, ultra-short or short duration strategies, whether those are pooled funds or separately managed accounts. Structured deposits are also competing for short term cash, as are other funds, for example, that invest in supply-chain receivables. There are a lot of options out there.
MFI: What's your outlook overall? Hochfeld: I'm optimistic about the future. These reforms will bring substantial change to our industry and we will work with investors to ensure they understand the implications. But longer-term, we think they're a real positive for money funds. They're designed to make the product more robust and more transparent, and that in turn should incentivize cash rich investors to use money funds to manage excess liquidity rather than using a bank account or a repo.
We think that along with new markets and new technology platforms that are being developed, money funds are going to become more attractive and more prolific for cash investors. I don't think that Basel III and bank appetite for short-dated deposits are going to go away any time soon. So along with a more attractive yield environment in dollars and sterling, and hopefully euro in the not too distant future, IMMFA and its member firms firmly believe that money funds remain an attractive yield and risk diversification play for short-term cash investors.
Boutique cash investment manager Capital Advisors Group published a brief entitled, "How Are Your Peers Managing Their Cash?" It provides a little more evidence that corporate cash investors are beginning to inch their way out of their government money fund shells. They tell us, "Following the collapse of Lehman Brothers in 2008, the rapidly deteriorating economic environment in the U.S. and abroad caused most treasurers to reevaluate their cash investment strategies, with a specific focus on restricting investment in certain asset types. Some companies implemented these restrictions by changing their investment policies, while others simply gave instructions to their investment advisors to limit investment activity to the most conservative corner of their existing guidelines. Across the board, we witnessed our clients 'hunkering down' in government-issued and government-backed debt during the height of the credit crisis. However, with a substantial improvement in the credit markets over the past ten years, we have observed a considerable shift in clients' desire to pursue more yield by allowing for investments in non-government securities."
CAG explains, "When considering changes to their investment strategies, many treasurers are interested in understanding the decisions being made by their peers. This context not only helps to validate the recommendation that a treasurer may receive from an investment manager, but it also provides a reality check before a new cash management strategy is presented to an Audit Committee or Board of Directors. In 2012 we published a white paper using Capital Advisors Group's client data to compare how investment strategies changed over the three years from March 31, 2009 to March 31, 2012. With another 6 years having elapsed, we hope that some fresh data will assist treasurers in evaluating their current investment strategies and whether to pursue additional yield in their cash portfolios."
Author Siobhan Monaghan writes, "As the credit markets deteriorated in 2007 and 2008, we sharply reduced our clients' exposure to potentially unstable issuers of industrial and financial corporate debt. Following the collapse of Lehman Brothers in September of 2008, we advised that clients invest solely in government-guaranteed securities. As a result, on March 31, 2009 none of our clients in the sample permitted investments in securities not guaranteed by the U.S. Government."
She continues, "However, as credit conditions improved, Capital Advisors Group gradually resumed investment in corporates, first purchasing select industrial credits in July 2009 and select financial credits in October 2009. By March 31, 2012, Capital Advisors Group was comfortable with the credit profiles of many industrial and financial issuers, and approximately half of the sample permitted investment in both industrials and financials.... By August 31, 2018, an additional 14% had grown comfortable with financial credits and an additional 11% with industrial exposures."
Capital Advisors Group concludes, "Worries about new crises and fears of resulting contagion obscure the fact that the U.S. economy and world economy have recovered from the depths of the credit crisis. On March 31, 2009, none of the clients in the sample permitted investment in corporates, or foreign sovereign and foreign sovereign agency debt. On March 31, 2012, 62% of the clients permitted investment in industrials, 54% permitted investment in financials, and 24% permitted investment in foreign sovereign and foreign sovereign agency debt. By August 31, 2018, those figures had grown to 73%, 68% and 30%, respectively."
In other news, mutual fund reporter ignites writes about money market funds this week with a piece entitled, "Money Funds Weather Decade of Massive Change." (See our Sept. 14 Link of the Day, "Crane on Crisis in ignites Video.") Their recent article explains, "When the $62.4 billion Reserve Primary Fund's net asset value dropped to $0.97 per share on Sept. 16, 2008, it set in motion a chain of events that radically changed the structure of these products and the industry overall. Although the fund's investors eventually recovered about $0.991 on the dollar, the fund's travails during the crisis landed money funds a spot at the top of regulators' agendas."
The article comments, "In response to the SEC's second set of reforms, about $1 trillion in assets moved out of prime funds and into government products ahead of the October 2016 compliance date. Near-zero short-term interest rates during this period also had a huge impact on money funds.... Now, with about $2.86 trillion in assets, the money fund industry is smaller in assets than it was immediately before the financial crisis. But industry executives say that money funds are now safer."
It continues, "With the regulatory changes came higher costs for running the funds, accelerating a wave of consolidation already underway before the financial crisis. In 2008, there were 138 money fund sponsors that reported to iMoneyNet, and now there are 66, notes Fidelity CIO of money markets Tim Huyck.... Ten years ago, the top 10 sponsors by assets represented 65% of total industry assets, whereas the top 10 today represent 79%, he adds. That industry consolidation has benefited investors, argues John Hollyer, global head of fixed income at Vanguard. 'In the end, I think shareholders are better served by well-resourced providers who are committed to the business,' he says."
The ignites article adds, "The post-financial-crisis money fund reforms have led investors -- particularly institutional ones -- to refine how they evaluate products. 'The level of due diligence is higher,' says John Tobin, head of portfolio management for J.P. Morgan Asset Management's global liquidity business. Investors' questions about credit quality analysis are more sophisticated than they were 10 years ago, he says. JPMAM's money fund client base is predominantly institutional. In addition, many institutional investors are now 'segmenting' their cash according to the time frame within which they want to use it -- a more nuanced approach than most previously took, executives say. '[C]ash is the lifeblood of a corporation,' Tobin says. 'It's not something they play games with.'"
Finally, Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics and summary Tuesday. Our weekly holdings track a shifting subset of our monthly Portfolio Holdings collection, and the latest cut (with data as of Sept. 14) includes Holdings information from 76 money funds (up from 60 on August 24), representing $1.445 trillion (up from $1.037 billion on August 24) of the $2.937 (49.2%) in total money fund assets tracked by Crane Data. (For our latest monthly Money Fund Portfolio Holdings numbers, see our Sept. 13 News, "September MF Portfolio Holdings: Treasuries Up; Agency, Repo Down.")
Our latest Weekly MFPH Composition summary shows Government assets dominating the holdings list with Repurchase Agreements (Repo) totaling $519.9 billion (up from $358.6 billion on August 24), or 36.0%, Treasury debt totaling $454.6 billion (up from $290.4 billion) or 31.5%, and Government Agency securities totaling $287.6 billion (up from $242.9 billion), or 19.9%. Certificates of Deposit (CDs) totaled $55.1 billion (up from $46.9 billion), or 3.8%, and Commercial Paper (CP) totaled $61.4 billion (up from $45.0 billion), or 4.2%. A total of $33.4 billion or 2.3%, was listed in VRDNs and the Other category (primarily Time Deposits), accounted for $31.8 billion, or 2.2%.
The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $454.6 billion (31.5% of total holdings), Federal Home Loan Bank with $224.7B (15.6%), BNP Paribas with $76.6 billion (5.3%), RBC with $43.1B (3.0%), Federal Farm Credit Bank with $40.0B (2.8%), Wells Fargo with $35.2B (2.4%), Credit Agricole with $30.5B (2.1%), Societe Generale with $27.4B (1.9%), Natixis with $25.7B (1.8%) and Nomura with $24.9B (1.9%).
The Ten Largest Funds tracked in our latest Weekly Holdings update include: JP Morgan US Govt ($129.4B), Fidelity Inv MM: Govt Port ($110.5B), Goldman Sachs FS Govt ($102.0B), BlackRock Lq FedFund ($88.9B), Wells Fargo Govt MMkt ($72.8B), BlackRock Lq T-Fund ($67.4B), Dreyfus Govt Cash Mgmt ($61.7B), Goldman Sachs FS Trs Instruments ($56.6B), Morgan Stanley Inst Liq Govt ($53.7B), and State Street Inst US Govt ($50.2B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary.)
Crane Data's Money Fund Intelligence Daily shows that money fund assets plunged Friday ahead of the Sept. 15 quarterly corporate tax payment date. Assets declined by $31.2 billion to $2.978 trillion on Friday, Sept. 14, and they've declined by $26.8 billion in the week through Friday. While we can only guess as to what is driving flows, it's a good bet that outsized tax bills related to the taxation of overseas cash is the culprit. If dollars were indeed being repatriated, we should be seeing outflows from offshore money funds and inflows into U.S. domestic money funds. In fact, we're seeing the opposite. (See yesterday's Wall Street Journal article, "After Tax Rewrite, Profits from Abroad Return Slowly.") We look at assets and summarize the latest "offshore" money fund asset totals and Money Fund Intelligence International Portfolio Holdings totals below.
Yesterday's MFI Daily showed that Friday's huge outflows came out of Government Institutional money fund, which dropped by $26.2 billion (to $970.6 billion), while Treasury Inst MMFs fell another $3.9 billion (to $582.1 billion). Prime Inst MMFs declined by $2.2 billion to $394.8 billion, while Retail MMF categories all inched higher. Tax Exempt MMFs, which are mostly retail, also inched higher on Sept. 14.
Our latest MFI International shows total assets in "offshore" money market mutual funds, U.S.-style funds domiciled in Ireland or Luxemburg and denominated in USD, Euro and GBP (sterling), down year-to-date in 2018 but USD funds are higher. Through 9/14/18, MFII assets are down $27 billion to $804 billion. U.S. Dollar (USD) money funds (158) account for over half ($435 billion, or 54.1%) of this "European" money fund total, while Euro (EUR) money funds (98) total E82 billion and Pound Sterling (GBP) funds (110) total L207 billion.
USD funds are up $10 billion, YTD, continuing to defy predictions of repatriation-related outflows. Euro funds, however, are feeling the pain of pending European MMF reforms; they're down E16 billion YTD. GBP funds are down L12B. We review out latest MFII statistics and "offshore" MF Portfolio Holdings, below. (Note: We hope to see some of you later this week in London for our 6th annual European Money Fund Symposium, Sept. 20-21 at the London Tower Bridge Hilton.)
USD MMFs yield 1.87% (7-Day) on average (as of 9/14/18), up from 1.19% at the end of 2017 and 0.56% at the end of 2016. EUR MMFs yield -0.47 on average, up from -0.55% on 12/29/17 and -0.49% on 12/30/16, while GBP MMFs yield 0.55%, up from 0.24% at the end of 2017 and 0.19% at the end of 2016. (See our latest MFI International for more on the "offshore" money fund marketplace.)
Crane's latest MFI International Money Fund Portfolio Holdings, with data (as of 8/31/18), shows that European-domiciled US Dollar MMFs, on average, consist of 29% in Commercial Paper (CP), 21% in Certificates of Deposit (CDs), 18% in Treasury securities, 17% in Repurchase Agreements (Repo), 13% in Other securities (primarily Time Deposits), and 2% in Government Agency securities. USD funds have on average 33.3% of their portfolios maturing Overnight, 8.5% maturing in 2-7 Days, 20.6% maturing in 8-30 Days, 14.3% maturing in 31-60 Days, 10.8% maturing in 61-90 Days, 9.9% maturing in 91-180 Days, and 2.6% maturing beyond 181 Days. USD holdings are affiliated with the following countries: US (26.7%), France (17.1%), Japan (10.1%), Canada (9.7%), United Kingdom (6.4%), The Netherlands (5.7%), Germany (5.2%), Sweden (4.4%), Australia (3.3%), China (2.8%), Singapore (2.0%), and Belgium (1.9%).
The 10 Largest Issuers to "offshore" USD money funds include: the US Treasury with $83.4 billion (17.4% of total assets), BNP Paribas with $28.6B (6.0%), Credit Agricole with $16.8B (3.5%), Mitsubishi UFJ Financial Group Inc with $12.6B (2.6%), Wells Fargo with $12.4B (2.6%), Barclays PLC with $12.2B (2.6%), Mizuho Corporate Bank Ltd with $11.2B (2.3%), Toronto-Dominion Bank with $10.9B (2.3%), ING Bank with $9.6B (2.0%), and Societe Generale with $9.6B (2.0%).
Euro MMFs tracked by Crane Data contain, on average 49% in CP, 24% in CDs, 19% in Other (primarily Time Deposits), 7% in Repo, 1% in Agency securities, and 0% in Treasuries. EUR funds have on average 24.3% of their portfolios maturing Overnight, 6.3% maturing in 2-7 Days, 19.8% maturing in 8-30 Days, 15.6% maturing in 31-60 Days, 14.2% maturing in 61-90 Days, 17.5% maturing in 91-180 Days and 2.4% maturing beyond 181 Days. EUR MMF holdings are affiliated with the following countries: France (31.1%), Japan (15.6%), the US (10.0%), the Netherlands (7.0%), Sweden (6.5%), Germany (6.4%), Switzerland (3.9%), Canada (3.8%), China (3.6%), and the U.K. (3.5%).
The 10 Largest Issuers to "offshore" EUR money funds include: BNP Paribas with E5.0B (6.0%), Credit Agricole with E4.3B (5.1%), ING Bank with E3.0B (3.6%), Mitsubishi UFJ Financial Group Inc with E2.9B (3.5%), Mizuho Corporate Bank Ltd with E2.8B (3.4%), Svenska Handelsbanken with E2.8B (3.3%), Credit Mutuel with E2.7B (3.2%), BPCE with E2.5B (3.0%), Agence Central de Organismes de Securite Sociale with E2.5B (3.0%), and Toronto-Dominion Bank with E2.4B (2.9%).
The GBP funds tracked by MFI International contain, on average (as of 8/31/18): 40% in CDs, 27% in Other (Time Deposits), 20% in CP, 10% in Repo, 3% in Treasury, and 0% in Agency. Sterling funds have on average 29.7% of their portfolios maturing Overnight, 5.4% maturing in 2-7 Days, 16.8% maturing in 8-30 Days, 14.7% maturing in 31-60 Days, 15.5% maturing in 61-90 Days, 13.2% maturing in 91-180 Days, and 4.6% maturing beyond 181 Days. GBP MMF holdings are affiliated with the following countries: France (18.4%), Japan (16.8%), United Kingdom (13.4%), The Netherlands (10.4%), Canada (7.0%), Australia (6.1%), United States (5.1%), Sweden (4.6%), Germany (4.0%), and Singapore (3.0%).
The 10 Largest Issuers to "offshore" GBP money funds include: UK Treasury with L10.5B (6.8%), Mizuho Corporate Bank Ltd with E6.5B (4.2%), Mitsubishi UFJ Financial Group Inc with L6.3B (4.1%), BPCE SA with L6.1B (3.9%), Rabobank with E6.0B (3.8%), ING Bank with L5.8B (3.7%), Toronto-Dominion Bank with L5.7B (3.7%), Credit Agricole with L5.5B (3.6%), Sumitomo Mitsui Trust Bank with L5.2B (3.3%), and BNP Paribas with L5.1B (3.3%).
The September issue of our Bond Fund Intelligence, which was sent out to subscribers Monday morning, features the lead story, "Ultra-Short Bond Funds Getting Flows, More Attention," which reviews a recent uptick in coverage of ultra-short bond funds, and the profile, "Fidelity Conservative Income Bond Fund Breaks $10 Bil.," which interviews Fidelity Investments Portfolio Manager Julian Potenza. BFI also recaps the latest Bond Fund News and includes our Crane BFI Indexes, which show that bond fund yields fell while returns moved higher in August. We excerpt from the latest issue below. (Contact us if you'd like to see a copy of Bond Fund Intelligence and our BFI XLS spreadsheet "complement," and watch for details soon on our 3rd annual Bond Fund Symposium, which will take place March 25-26, 2019 in Philadelphia.)
Our lead BFI story says, "Ultra-short bond funds continue to be the fastest-growing portion of the $4.7 trillion bond fund marketplace. While bond funds are still seeing inflows, the "conservative" or ultra, ultra-short segment of the market appears to be in the sweet spot. (See our table below of YTD asset changes by category.) Gradually rising rates and positive returns are making these funds more attractive, while losses in the huge intermediate-term space are beginning to impact flows here. Below, we review some of the most recent coverage on this hot segment."
It continues, "Barrons' recently wrote "Bond Funds Are Thriving as Short-Term Yields Top 3%. Here's Why." They explain, 'Investors are selling stocks and buying bonds. That might seem odd given that bond returns have been anemic, at best, while stocks keep chugging along, hitting record highs. Nonetheless, investors can't seem to get enough of bonds. Taxable fixed-income mutual funds and exchange-traded funds have raked in $166 billion in net inflows this year, including more than $6.1 billion in the week that ended Aug. 8, according to the Investment Company Institute. Bond funds and ETF assets now total $4.7 trillion, with ETFs accounting for 12.5% of the total bond-fund market, according to Bond Fund Intelligence, an industry newsletter.'"
Barron's adds, "Bond funds may be benefiting from an exodus out of stocks that has been building for months. Domestic equity funds have seen net withdrawals of $87 billion this year and $192 billion overall since January 2016, according to ICI data. Taxable bond funds, meanwhile, have recorded net inflows of $706 billion since then, while muni funds have raked in $75 billion. Yet bonds are under their own pressures, as rising interest rates drag on prices across the board. The Bloomberg Barclays U.S. Aggregate Index is down 0.9% this year."
Our "profile" on article reads, "This month, Bond Fund Intelligence interviews Fidelity Investments Portfolio Manager Julian Potenza, who along with Rob Galusza, runs Fidelity Conservative Income Bond Fund. Fidelity 'CIB' as it's referred to, is one of the pioneers in the 'Conservative' Ultra-Short Bond Fund space, and recently passed the $10 billion milestone. We discuss the fund's strategies, its success, and a number of issues in the shortest segment of the ultra-short term bond fund space."
BFI asks, "Tell us about your history." Potenza tells us, "Fidelity has a very long history managing fixed income assets across the entire yield curve. Obviously, that includes our money market business, with which you're very familiar. We also have a long track record managing short-term bond funds.... For example, Fidelity Short Term Bond Fund, another fund that I co-manage, has been around since the mid-1980s.... The Conservative Income Bond Fund was launched in 2011."
He continues, "I have been involved with Fidelity's fixed income investment efforts since about 2007. I joined as a 'financials' analyst, and cut my teeth covering banks.... Then in 2012, I moved into our macro research team, focusing on the U.S. economy and the Fed. I've with both our bond and money market investment teams for about 10 years [and] joined the Conservative Income Bond Fund management team a little under a year ago in October of 2017."
BFI also asks, "What drove the launch of CIB?" Potenza responds, "The fund was launched in the midst of the zero-interest rate environment.... Our philosophy has always been to offer a range of products across the duration and risk spectrum.... It's also always been clear that there is a portion of clients' liquidity portfolios, where they have a little bit longer time horizon and a little bit more of a risk appetite." (Watch for more excerpts from this article later this month, or see the latest issue of BFI.)
A Bond Fund News brief, entitled, "Yields Fall and Returns Rise in August," tells us, "Bond fund yields fell over the past month as returns moved higher across all categories but Global. The BFI Total Index averaged a 1-month return of 0.24% and the 12-month gain was 0.36%. The BFI 100 returned 0.37% in August and 0.28% over 1 year. The BFI Conservative Ultra-Short Index returned 0.13% over 1 month and 1.56% over 1-year; the BFI Ultra-Short Index averaged 0.16% in August and 1.28% over 12 mos. Our BFI Short-Term Index returned 0.30% and 0.47%, and our BFI Intm-Term Index returned 0.46% and -0.70% for the 1-mo and year. BFI's Long-Term Index returned 0.46% in August and -0.89% for 1yr; BFI's High Yield Index returned 0.55% in Aug. and 2.74% over 1-yr."
Another brief, entitled, "P&I on Gross," explains, 'Gross' unconstrained bond fund ... strained,' in Pensions & Investments tells us, 'Janus Henderson's Global Unconstrained Bond Fund saw about $802 million in net outflows ... through July 31. The fund, managed by William H. Gross, lost 6.86% over that period, after annual gains of 5.26% and 2.43% in 2016 and 2017, respectively. 2018's outflows nearly wiped out net inflows during the past two years as investors fled the fund, which ranked at the bottom of its peer group.'"
A third News brief, "FA on USB and ESG," cites a Fund Action piece, "UBS sees opportunities in 'untapped' fixed income ESG space." They write, "UBS Asset Management is looking to capitalize on a lack of products with measurable environmental, social and governance impact -- particularly in the fixed income space -- despite growing demand." (See too Crane Data's Sept. 6 News, "DWS ESG Liquidity Goes Live.")
Finally, a sidebar entitled, "Morningstar on Ultrashorts," explains, "Morningstar continues its newfound emphasis on bond funds with the article, '2 Ultrashort Bond Fund Picks for a Rising Rate Environment.' It tells us, 'With two Federal Reserve rate rises so far this year, and the broader markets anticipating continued lifts in the federal funds rate in the near future, the landscape for ultrashort bond funds is at a dynamic point. Ultrashort bond funds blend the higher quality and more liquid bias of money market funds with a sector flexibility that is more similar to short-term bond funds, investing across geographies and in corporate debt and municipals.'"
The Investment Company Institute released its latest weekly "Money Market Fund Assets" report, which shows MMF assets inching higher to again hit their highest levels since April 2010. It also shows that Prime assets continue their solid and steady rebound. Overall assets are now up $43 billion, or 1.5%, YTD, and they've increased by $154 billion, or 5.7%, over 52 weeks. Prime assets, though, have risen for 10 weeks in a row, and they've increased by $74.7 billion (16.3%) YTD and $91.7 billion (20.7%) over the past 52 weeks. We review the latest asset flows, and we also quote from Wells Fargo's latest PM Commentary and a Citi update on EU Reforms, below.
ICI writes, "Total money market fund assets increased by $288 million to $2.88 trillion for the week ended Wednesday, September 12, the Investment Company Institute reported today. Among taxable money market funds, government funds decreased by $2.16 billion and prime funds increased by $2.68 billion. Tax-exempt money market funds decreased by $233 million." Total Government MMF assets, which include Treasury funds too, stand at $2.216 trillion (76.9% of all money funds), while Total Prime MMFs stand at $534.2 billion (18.5%). Tax Exempt MMFs total $131.1 billion, or 4.5%.
They explain, "Assets of retail money market funds increased by $2.50 billion to $1.06 trillion. Among retail funds, government money market fund assets increased by $1.23 billion to $633.45 billion, prime money market fund assets increased by $1.75 billion to $304.13 billion, and tax-exempt fund assets decreased by $481 million to $123.08 billion." Retail assets account for over a third of total assets, or 36.8%, and Government Retail assets make up 59.7% of all Retail MMFs.
ICI's release adds, "Assets of institutional money market funds decreased by $2.21 billion to $1.82 trillion. Among institutional funds, government money market fund assets decreased by $3.39 billion to $1.58 trillion, prime money market fund assets increased by $928 million to $230.11 billion, and tax-exempt fund assets increased by $248 million to $7.97 billion." Institutional assets account for 63.2% of all MMF assets, with Government Inst assets making up 86.9% of all Institutional MMFs.
In related news, Wells Fargo Money Market Funds' latest "Portfolio Manager Commentary" tells us, "The month of August is notoriously slow in this business. A number of firms in our industry still require that employees take two consecutive weeks off at some point during the year, and while many of those vacations occur throughout the summer, they seem to be especially back-loaded into the month of August. Not surprisingly, market practices are also accommodative of this phenomenon.... At the same time, however, prime fund assets grew by over $26 billion in August, evenly divided between retail and institutional funds, reaching a new post-reform high of $688 billion (as reported by Crane Data)."
Wells also comments, "The path of money market rates has generally followed the anticipated gradual pace of removing policy accommodation set by the Fed, and those rates continue to have a positively sloping yield curve. However, the reduction in money market supply in August has kept a fairly strong bid to investments with short maturity dates, causing rates to be a little slow to react to upcoming rate increases. This strong bid can be observed in the dramatic tightening of the London Interbank Offered Rate-Overnight Investment Swap (LIBOR-OIS) spread since its widest spread in April."
They continue, "As you may recall, the LIBOR-OIS spread represents the difference between an interest rate with some credit risk built in (LIBOR) and one that is relatively risk-free (OIS). The spread elevated to +59 basis points (bps; 100 bps equal 1.00%) through the first week of April before retracting off the highs at the end of tax season. Unlike previous episodes, this spread widening was due to supply and demand imbalances, not to credit stress in the markets. The current spread of +21 bps is a new low for the year."
Wells also discusses, "In the midst of the summer slowness, something occurred that we have not seen in many years: A new type of security came to the market. The structure itself was not new, it was a floating-rate note, but the index off which it reset was new: SOFR.... The inaugural issue of a floating-rate note with SOFR as the index came as somewhat of a surprise from Fannie Mae in the form of a $6 billion multi-tranche deal.... After this transaction, a few additional issuers tested the market—including a corporate issuer—and we expect more issuance of this type of security will become a trend as we progress toward year-end."
Finally, a new article on European Money Fund Reforms, written by Citi and published in Euromoney, and entitled, "EU MMF reforms: Preparing for a new regulatory environment," tells us, "The European Union's money market funds (MMFs) are set to change in the coming months as fund providers start to implement reforms in advance of a deadline of January 21, 2019. Europe's MMF sector is worth around €1.3 trillion and plays an important part in institutional investors' (IIs') liquidity management and investment strategy; MMFs are a valuable element in a portfolio of investment and deposit instruments."
The piece explains, "Similar to recent MMF reforms in the US, the EU's reforms aim to address concerns about the market's stability that arose a decade ago during the financial crisis. For MMF investors, the increased transparency and resilience that should result from the EU's reforms is welcome. Nevertheless, the scale of the changes mean that IIs need to start thinking about the implications of EU MMF reforms right now."
It quotes Crane Data President Peter Crane, "While European money fund reforms have so far impacted fund managers much more than investors, both groups have much work to do before the January 21, 2019 deadline to convert existing funds.... Though most market observers expect the bulk of existing CNAV fund assets to convert to new LVNAV structures, it's probably a good idea to start paying closer attention to the European money fund markets in coming months."
Finally, Citi adds, "The significant differences between CNAV, LVNAV and VNAV funds in terms of yield, liquidity and preservation of capital mean that IIs need to refer to fund prospectuses, keep abreast of updates from fund providers, and keep a close eye on the decision taken by individual MMFs.... In particular, investors should monitor fund conversion dates and build a buffer into their plans should they need access to funds on conversion day." (Note: Citi co-author Sabrina Hartzog will be speaking on "Money Fund Portals & Distribution in Europe" at next week's European Money Fund Symposium, Sept. 20-21, in London.)
Crane Data released its September Money Fund Portfolio Holdings Wednesday, and our most recent collection of taxable money market securities, with data as of August 31, 2018, shows an increase Treasuries but declines in other sectors, especially Agencies and Repo. Money market securities held by Taxable U.S. money funds (tracked by Crane Data) decreased by $24 billion to $2.937 trillion last month, after increasing by $90.0 billion in July, decreasing by $53.8 billion in June, and increasing by $16.7 billion in May. Repo continued to be the largest portfolio segment, followed by Treasury securities, then Agencies. CP remained fourth 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 to see our latest Portfolio Holdings reports.)
Among taxable money funds, Repurchase Agreements (repo) fell $11.3 billion (-1.2%) to $949.6 billion, or 32.3% of holdings, after rising $8.0 billion in July and falling $31.4 billion in June. Treasury securities rose $22.1 billion (2.7%) to $837.5 billion, or 28.5% of holdings, after rising $42.4 billion in July and falling $6.3 billion in June. Government Agency Debt fell by $24.9 billion (-3.7%) to $650.2 billion, or 22.1% of all holdings, after rising by $0.9 billion in July and falling $9.3 billion in June. Repo, Treasuries and Agencies total $2.437 trillion, representing a massive 83.0% of all taxable holdings.
Money funds' holdings of CP and CDs fell, but Other (mainly Time Deposits) holding inched higher in August. Commercial Paper (CP) was down $3.2 billion (-1.4%) to $233.3 billion, or 7.9% of holdings, after rising $22.5 billion in July and falling $10.0 billion in June. Certificates of Deposits (CDs) fell by $7.6 billion (-4.2%) to $173.8 billion, or 5.9% of taxable assets (after rising $12.0 billion in July and rising $1.6 billion in June). Other holdings, primarily Time Deposits, rose by $1.0 billion (1.2%) to $84.4 billion, or 2.9% of holdings. VRDNs fell by $0.3B (-3.4%) to $8.0 billion, or 0.3% of assets. (Note: This total is VRDNs for taxable funds only. We will publish Tax Exempt MMF holdings separately later today.)
Prime money fund assets tracked by Crane Data jumped to $711 billion (up from $687 billion last month), or 24.2% (up from 23.2%) of taxable money fund total taxable holdings of $2.937 trillion. Among Prime money funds, CDs represent almost a quarter of holdings at 24.4% (down from 26.4% a month ago), while Commercial Paper accounted for 32.8% (down from 34.5%). The CP totals are comprised of: Financial Company CP, which makes up 20.4% of total holdings, Asset-Backed CP, which accounts for 6.5%, and Non-Financial Company CP, which makes up 5.9%. Prime funds also hold 4.6% in US Govt Agency/ Debt, 11.8% in US Treasury Debt, 4.2% in US Treasury Repo, 1.3% in Other Instruments, 8.8% in Non-Negotiable Time Deposits, 4.8% in Other Repo, 4.9% in US Government Agency Repo, and 0.9% in VRDNs.
Government money fund portfolios totaled $1.544 trillion (52.6% of all MMF assets), down from $1.568 trillion in July, while Treasury money fund assets totaled another $682 billion (23.2%), down from $706 billion the prior month. Government money fund portfolios were made up of 40.0% US Govt Agency Debt, 20.9% US Government Agency Repo, 18.2% US Treasury debt, and 20.6% in US Treasury Repo. Treasury money funds were comprised of 69.4% US Treasury debt, 30.5% in US Treasury Repo, and 0.1% in Government agency repo, Other Instrument, and Investment Company shares. Government and Treasury funds combined now total $2.226 trillion, or 75.8% of all taxable money fund assets.
European-affiliated holdings fell $11.8 billion in August to $669.2 billion among all taxable funds (and including repos); their share of holdings fell to 22.8% from 23.0% the previous month. Eurozone-affiliated holdings fell $18.5 billion to $421.7 billion in August; they account for 14.4% of overall taxable money fund holdings. Asia & Pacific related holdings increased by $5.5 billion to $259.1 billion (8.8% of the total). Americas related holdings fell $1.8 billion to $2.006 trillion and now represent 68.3% of holdings.
The overall taxable fund Repo totals were made up of: US Treasury Repurchase Agreements (down $20.2 billion, or -3.5%, to $556.0 billion, or 18.9% of assets); US Government Agency Repurchase Agreements (up $12.0 billion, or 3.5%, to $358.8 billion, or 12.2% of total holdings), and Other Repurchase Agreements (down $3.0 billion from last month to $34.8 billion, or 1.2% of holdings). The Commercial Paper totals were comprised of Financial Company Commercial Paper (down $1.3 billion to $144.9 billion, or 4.9% of assets), Asset Backed Commercial Paper (up $1.7 billion to $46.2 billion, or 1.6%), and Non-Financial Company Commercial Paper (down $3.6 billion to $42.3 billion, or 1.4%).
The 20 largest Issuers to taxable money market funds as of August 31, 2018, include: the US Treasury ($837.5 billion, or 28.5%), Federal Home Loan Bank ($520.6B, 17.7%), BNP Paribas ($139.8B, 4.8%), RBC ($86.5B, 2.9%), Federal Farm Credit Bank ($74.1B, 2.5%), Barclays ($69.9B, 2.4%), Wells Fargo ($63.3B, 2.2%), Credit Agricole ($59.0B, 2.0%), JP Morgan ($55.4B, 1.9%), Mitsubishi UFJ Financial Group Inc ($49.8B, 1.7%), HSBC ($48.0B, 1.6%), Nomura ($41.2B, 1.4%), Sumito Mitsui Banking Co ($40.9B, 1.4%), Societe Generale ($40.6B, 1.4%), ING Bank ($39.8B, 1.4%), Natixis ($39.7B, 1.4%), Fixed Income Clearing Co ($37.4B, 1.3%), Bank of America ($37.4B, 1.3%), Federal Home Loan Mortgage Co ($35.5B, 1.2%), and Mizuho Corporate Bank Ltd ($35.0B, 1.2%).
In the repo space, the 10 largest Repo counterparties (dealers) with the amount of repo outstanding and market share (among the money funds we track) include: BNP Paribas ($131.4B, 13.8%), RBC ($67.8B, 7.1%), Barclays PLC ($57.6B, 6.1%), Wells Fargo ($52.0B, 5.5%), Credit Agricole ($45.3B, 4.8%), JP Morgan ($45.2B, 4.8%), Nomura ($41.2B, 4.3%), HSBC ($39.8B, 4.2%), Fixed Income Clearing Co ($37.4B, 3.9%), and Societe Generale ($34.8B, 3.7%). Fed Repo positions among MMFs on 8/31/18 include a record low of just two funds: Columbia Short-Term Cash Fund ($0.4B) and Western Asset Inst Govt ($0.0B).
The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: Toronto-Dominion Bank ($20.5B, 5.0%), RBC ($18.7B, 4.5%), Mitsubishi UFJ Financial Group Inc. ($16.5B, 4.0%), Credit Agricole ($13.7B, 3.3%), Sumitomo Mitsui Banking Co ($13.6B, 3.3%), ING Bank ($13.0B, 3.1%), Mizuho Corporate Bank Ltd ($12.8B, 3.1%), Bank of Montreal ($12.8B, 3.1%), Canadian Imperial Bank of Commerce ($12.7B, 3.1%), and Sumitomo Mitsui Trust Bank ($12.6, 3.0%).
The 10 largest CD issuers include: Bank of Montreal ($12.4B, 7.2%), RBC ($11.2B, 6.5%), Wells Fargo ($11.2B, 6.4%), Mitsubishi UFJ Financial Group Inc ($10.9B, 6.3%), Svenska Handelsbanken ($10.3B, 6.0%), Sumitomo Mitsui Banking Co ($8.9B, 5.2%), Sumitomo Mitsui Trust Bank ($8.4B, 4.9%), Mizuho Corporate Bank Ltd ($8.4B, 4.8%), Toronto-Dominion Bank ($6.9B, 4.0%), and Landesbank Baden-Wurttemberg ($6.6B, 3.8%).
The 10 largest CP issuers (we include affiliated ABCP programs) include: Toronto-Dominion Bank ($12.4B, 6.4%), JPMorgan ($10.2B, 5.2%), UBS AG ($7.3B, 3.8%), Toyota ($6.2B, 3.2%), Barclays PLC ($5.9B, 3.0%), RBC ($5.8B, 3.0%), ING Bank ($5.8B, 3.0%), Bank of Nova Scotia ($5.7B, 2.9%), Mitsubishi UFJ Financial Group Inc ($5.6B, 2.9%), and Canadian Imperial Bank of Commerce ($5.5B, 2.8%).
The largest increases among Issuers include: the US Treasury (up $22.1B to $837.5B), Barclays PLC (up $12.4B to $69.9B), JP Morgan (up $9.5B to $55.4B), Mizuho Corporate Bank Ltd (up $6.6B to $35.0B), Bank of Nova Scotia (up $4.0B to $27.2B), ING Bank (up $3.6B to $39.8B), Nordea Bank (up $3.3B to $10.8B), Toronto-Dominion Bank (up $2.7B to $32.4B), Nomura (up $2.1B to $41.2B), and National Australia Bank Ltd (up $1.4B to $8.8B).
The largest decreases among Issuers of money market securities (including Repo) in August were shown by: Federal Home Loan Bank (down $21.1B to $520.6B), BNP Paribas (down $7.8B to $139.8B), Fixed Income Clearing Co (down $6.9B to $37.4B), Wells Fargo (down $5.6B to $63.3B), Citi (down $4.8B to $27.1B), Sumitomo Mitsui Banking Co (down $4.5B to $40.9B), Credit Suisse (down $4.0B to $23.5B), Credit Agricole (down $3.7B to $59.0B), DNB ASA (down $3.3B to $8.2B), and Bank of Montreal (down $2.7B to $33.1B).
The United States remained the largest segment of country-affiliations; it represents 60.9% of holdings, or $1.787 trillion. France (10.0%, $293.1B) remained in the No. 2 spot and Canada (7.4%, $218.1B) remained No. 3. Japan (7.2%, $212.5B) stayed in fourth place, while the United Kingdom (5.1%, $151.1B) remained in fifth place. The Netherlands (2.1%, $61.3B) stayed ahead of Germany (2.0%, $58.5B), while Sweden (1.6%, $46.3B) remained in 8th place. Switzerland (1.4%, $39.6B) stayed ahead of Australia (1.1%, $33.2B) in 9th and 10th 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 August 31, 2018, Taxable money funds held 33.6% (up from 31.2%) of their assets in securities maturing Overnight, and another 14.1% maturing in 2-7 days (down from 16.2% last month). Thus, 47.7% in total matures in 1-7 days. Another 24.8% matures in 8-30 days, while 10.0% matures in 31-60 days. Note that over three-quarters, or 82.5% of securities, mature in 60 days or less (down slightly from last month), the dividing line for use of amortized cost accounting under SEC regulations. The next bucket, 61-90 days, holds 8.9% of taxable securities, while 7.0% matures in 91-180 days, and just 1.6% matures beyond 181 days.
Crane Data's latest monthly Money Fund Portfolio Holdings statistics will be published Wednesday, and we'll be writing our normal monthly update on the August 31 data in Thursday's News. But we've also been generating a separate and broader Portfolio Holdings data set based on the SEC's Form N-MFP filings. (We continue to merge the two series, and the N-MFP version is now available via Holdings file listings to Money Fund Wisdom subscribers.) Our summary, with data as of August 31, includes holdings information from 1,225 money funds (down from 1,275 on July 31), representing $3.138 trillion (down from $3.169 trillion on July 31). We review the latest data below, and we also quote from a recent J.P. Morgan Securities piece on the 10-year anniversary of the global financial crisis.
Our latest Form N-MFP Summary for All Funds (taxable and tax-exempt) shows that Repurchase Agreement (Repo) holdings in money market funds total $966.4 billion (down from $983.1 billion on July 31), or 30.8% of all assets. Treasury holdings total $854.9 billion (up from $830.0 billion) or 27.2%, and Government Agency securities total $668.8 billion (down from $704.3 billion), or 21.3%. Commercial Paper (CP) totals $241.2 billion (down from $248.1 billion), or 7.7%, and Certificates of Deposit (CDs) total $180.5 billion (up from $176.3 billion), or 5.8%. The Other category (primarily Time Deposits) totals $125.2 billion or 4.0%, and VRDNs account for $101.0 billion, or 3.2%.
Broken out into the SEC's more detailed categories, the CP totals were comprised of: $148.1 billion, or 4.7%, in Financial Company Commercial Paper; $45.4 billion or 1.4%, in Asset Backed Commercial Paper; and, $47.7 billion, or 1.5%, in Non-Financial Company Commercial Paper. The Repo totals were made up of: U.S. Treasury Repo ($570.8B, or 18.2%), U.S. Govt Agency Repo ($360.3B, or 11.5%), and Other Repo ($35.3B, or 1.1%).
The N-MFP Holdings summary for the just the 223 Prime Money Market Funds shows: CP holdings of $235.2 billion (down from $243.6 billion July 31), or 32.2%; CD holdings of $179.0B (up from $176.2B) or 24.5%; Repo holdings of $101.8B (up from $84.8B), or 13.9%; Treasury holdings of $90.4B (up from $67.4B), or 12.4%; Other (primarily Time Deposits) holdings of $83.9B (down from $88.0B), or 11.5%; Government Agency holdings of $33.0B or 4.5%; and VRDN holdings of $7.1B, or 1.0%.
The SEC's more detailed categories show CP in Prime MMFs made up of: $147.9 billion, or 20.3%, in Financial Company Commercial Paper; $44.4 billion, or 6.1%, in Asset Backed Commercial Paper; and, $42.8 billion, or 5.9%, in Non-Financial Company Commercial Paper. The Repo totals include: U.S. Treasury Repo ($32.5B, or 4.4%), U.S. Govt Agency Repo ($35.0B, or 4.8%), and Other Repo ($34.3B, or 4.7%).
In other news, J.P. Morgan published a paper entitled, "Money markets: The forgotten epicenter of the global financial crisis," which is excerpted from "J.P. Morgan Perspectives – Ten Years After the Global Financial Crisis: A Changed World." Authors Alex Roever, Teresa Ho, and Ryan Lessing tell us, "The cash that funded the debt issued in the U.S. money markets came from a variety of sources including money market funds (MMFs) governed by SEC Rule 2a-7, other similar short-term liquidity funds (non-2a-7), bank securities lending operations, and other investors. Of these, MMFs were the largest and potentially the most problematic. As a product, MMFs were historically structured as mutual funds with stable NAVs, giving the impression that they functioned more like checking account deposits, where liquidity could be accessed daily. But where bank deposits were protected by bank capital and in some cases deposit insurance, MMFs have neither."
They explain, "While MMFs were managed prudently according to the requirements of Rule 2a-7 (very highly rated assets with maturities ranging from overnight to 397 days and limits on average maturity), their capital structure was such that shareholders could withdraw all of their funds on any business day without warning. In extreme circumstances, shareholder demand for liquidity could outstrip a fund's supply of liquid assets and leave it insolvent. While an insolvency ultimately did occur to one prime MMF immediately following the Lehman bankruptcy in September 2008, that risk had loomed over prime MMFs for over a year. The steps the MMF managers took to protect their shareholders played a major role in fueling the financial crisis."
J.P. Morgan writes, "In late 2007, AUM of taxable MMFs totaled nearly US$3 trillion, of which roughly US$2 trillion was in prime MMFs. Prime funds extended credit to a variety of financial and non-financial issuers but had material exposures to banks on both an unsecured (CP/CDs) and secured (ABCP, repo) basis. In mid-2007, Moody's estimated that the 15 largest MMFs held nearly 40% of their assets in various forms of securitized products."
They state, "By the time Bear Stearns collapsed in March 2008, the global money markets had been under extraordinary stress for over six months, and money market funds and other investors had long since grown extremely risk averse. Beginning in August 2007 through March 2008, these normally ultra-conservative investors experienced a marked decay in market depth and liquidity related to the still-building fear of subprime credit contagion. This was an especially problematic issue for prime MMFs and similar investment funds given their exposures to ABCP conduits that might be seen by shareholders as having hidden subprime exposures."
The paper comments, "The suddenness of Lehman's bankruptcy left the few MMFs still holding short-term unsecured Lehman debt in a bind. Indeed, it prompted the NAV of a particular MMF to fall below US$0.995, otherwise known as 'breaking the buck.' In response, MMF shareholders began redeeming their shares en masse in fear of losing their money. It did not help that memories of private institutional MMF (cash-plus fund) insolvencies were still fresh. Over the next month, over US$500 billion were withdrawn from prime MMFs and moved into government MMFs.... Like banks, MMFs were facing their own liquidity crisis."
It adds, "To stem this MMF crisis, U.S. Treasury quickly established the Temporary Guarantee Program for MMFs, designed to guarantee the NAV of eligible MMFs such that they would not 'break the buck'.... More significantly, the Fed interceded on behalf of certain non-banks intertwined in the banking system, even though it had long served as the 'lender of last resort' for banks only."
Finally, Roever, et. al. write, "The Fed responded on a number of fronts. It established multiple facilities to provide liquidity directly to borrowers and investors in the money markets. The Primary Dealer Credit Facility and the Term Securities Lending Facility provided funding to dealers, the Commercial Paper Funding Facility to financial and non-financial CP borrowers, and the ABCP MMF Liquidity Facility and the Money Market Investor Funding Facility to MMFs.... With the exception of MMIFF, the severity of the crisis led to significant usage of these facilities and months of use before the money markets began to stabilize, though this also expanded the Fed's balance sheet and temporarily created a significant amount of reserves in the banking system. Although MMIFF was never used, its presence helped calm markets."
Crane Data's latest Money Fund Market Share rankings show assets were higher for the majority of U.S. money fund complexes in August. Money fund assets overall rose by $27.9 billion, or 0.9%, last month to $3.070 trillion, and assets have risen by $12.1 billion, or 0.4%, over the past 3 months. They have increased by $172.4 billion, or 5.9%, over the past 12 months through August 31, 2018. The biggest increases among the 25 largest managers last month were seen by Goldman Sachs, Fidelity, Federated, Dreyfus, Wells Fargo and Vanguard, who increased assets by $13.3 billion, $12.1B, $8.0B, $4.4B, $4.3B and $3.2B, respectively. We review the latest market share totals below, and we also look at money fund yields in August.
Big declines in assets among the largest complexes in August were seen by Morgan Stanley, whose MMFs fell by $10.5 billion, or -9.5%, BlackRock, whose MMFs fell by $5.0 billion, or -1.7%, Northern, whose MMFs fell by $4.1 billion, or -3.7%, Invesco, whose MMFs fell by $2.2 billion, or -3.6%, and JP Morgan, whose MMFs fell by $1.3 billion, or -0.5%. Our domestic U.S. "Family" rankings are available in our MFI XLS product, our global rankings are available in our MFI International product. The combined "Family & Global Rankings" are available to Money Fund Wisdom subscribers.
Over the past year through August 31, 2018, Fidelity (up $52.1B, or 9.4%), Vanguard (up $37.4B, or 13.6%), Goldman Sachs (up $30.1B, or 17.7%), JP Morgan (up $21.6B, or 8.7%), BlackRock (up $20.5B, or 7.6%), Wells Fargo (up $13.3B, or 13.4%), and Federated (up $13.2B, or 6.9%) were the largest gainers. These complexes were followed by UBS (up $12.1B, or 28.5%), DWS (up $8.5B, or 42.5%), First American (up $5.9B, or 12.1%), and Northern (up $5.1B, or 5.0%).
Fidelity, Goldman Sachs, Federated, UBS, Dreyfus, and Northern had the largest money fund asset increases over the past 3 months, rising by $18.4B, $14.5B, $11.7B, $9.5B, $8.3B, and $6.9B respectively. The biggest decliners over 3 months include: Morgan Stanley (down $19.2B, or -16.0%), JP Morgan (down $13.8B, or -4.9%), Schwab (down $8.7B, or -6.3%), BlackRock (down $8.5B, or -2.8%), and SSgA (down $7.1B, or -7.8%).
Our latest domestic U.S. Money Fund Family Rankings show that Fidelity Investments remains the largest money fund manager with $605.6 billion, or 19.7% of all assets. It was up $12.1 billion in August, up $18.4 billion over 3 mos., and up $52.1B over 12 months. Vanguard ranked second with $312.1 billion, or 10.2% market share (up $3.2, up $1.5B, and up $37.4B for the past 1-month, 3-mos. and 12-mos., respectively). BlackRock was third with $290.6 billion, or 9.5% market share (down $5.0B, down $8.5B, and up $20.5B). JP Morgan ranked fourth with $269.8 billion, or 8.8% of assets (down $1.3B, down $13.8B, and up $21.6B for the past 1-month, 3-mos. and 12-mos., respectively), while Federated remains at fifth with $203.5 billion, or 6.6% of assets (up $8.0B, up $11.7B, and up $13.2B).
Goldman Sachs also remained in sixth place with $199.9 billion, or 6.5% of assets (up $13.3B, up $14.5B, and up $30.1B), while Dreyfus held seventh place with $173.6 billion, or 5.7% (up $4.4B, up $8.3B, and down $1.6B). Schwab ($128.4B, or 4.2%) was in eighth place (up $626M, down $8.7B and down $27.6B), followed by Wells Fargo in ninth place ($112.6B, or 3.7%, up $4.3B, up $3.1B, and up $13.3B) and Northern in tenth place ($106.1B, or 3.5%, down $4.1B, up $6.9B, and up $5.1B).
The eleventh through twentieth largest U.S. money fund managers (in order) include: Morgan Stanley ($100.7B, or 3.3%), SSgA ($84.2B, or 2.7%), Invesco ($59.7B, or 1.9%), First American ($54.8B, or 1.8%), UBS ($54.7B, or 1.8%), T Rowe Price ($36.0B, or 1.2%), DWS ($28.5B, or 0.9%), Western ($24.0B, or 0.8%), Franklin ($23.2B, or 0.8%), and DFA ($22.8, or 0.7%). Crane Data currently tracks 68 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 BlackRock and JPMorgan move ahead of Vanguard, Goldman moves ahead of Federated, and Morgan Stanley and Northern move ahead of Schwab and Wells Fargo. Our Global Money Fund Manager Rankings include the combined market share assets of our MFI XLS (domestic U.S.) and our MFI International ("offshore") products.
The largest Global money market fund families include: Fidelity ($615.0 billion), BlackRock ($430.5B), J.P. Morgan ($424.0B), Vanguard ($312.1B), and Goldman Sachs ($304.6B). Federated ($212.1B) was sixth and Dreyfus/BNY Mellon ($191.1B) was in seventh, followed by Morgan Stanley ($136.9B), Northern ($131.9B), and Schwab ($128.4B), 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 September issue of our Money Fund Intelligence and MFI XLS, with data as of 8/31/18, shows that yields were up again in August across all of our Crane Money Fund Indexes. The Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 770), was up 3 bps to 1.61% for the 7-Day Yield (annualized, net) Average, and the 30-Day Yield was up 2 bps to 1.59%. The MFA's Gross 7-Day Yield increased 3 bps to 2.06%, while the Gross 30-Day Yield rose 8 bps to 2.04%.
Our Crane 100 Money Fund Index shows an average 7-Day (Net) Yield of 1.80% (up 4 bps) and an average 30-Day Yield of 1.78% (up 2 bps). The Crane 100 shows a Gross 7-Day Yield of 2.07% (up 4 bps), and a Gross 30-Day Yield of 2.05% (up 7 bps). For the 12 month return through 8/31/18, our Crane MF Average returned 1.12% and our Crane 100 returned 1.30%. The total number of funds, including taxable and tax-exempt, was down 1 fund to 970. There are currently 770 taxable and 200 tax-exempt money funds.
Our Prime Institutional MF Index (7-day) yielded 1.82% (the same as last month) as of August 31, while the Crane Govt Inst Index was 1.70% (up 5 bps) and the Treasury Inst Index was 1.69% (up 5 bps). Thus, the spread between Prime funds and Treasury funds is 13 basis points, down 5 bps from last month, while the spread between Prime funds and Govt funds is 12 basis points, down 5 bps from last month. The Crane Prime Retail Index yielded 1.67% (unchanged), while the Govt Retail Index yielded 1.36% (up 2 bps) and the Treasury Retail Index was 1.42% (up 6 bps). The Crane Tax Exempt MF Index yield jumped in August to 1.05% (up 47 bps).
Gross 7-Day Yields for these indexes in August were: Prime Inst 2.21% (unchanged), Govt Inst 2.00% (up 5 bps), Treasury Inst 2.00% (up 5 bps), Prime Retail 2.20% (unchanged), Govt Retail 1.97% (up 2 bps), and Treasury Retail 2.01% (up 6 bps). The Crane Tax Exempt Index increased 47 basis points to 1.55%. The Crane 100 MF Index returned on average 0.15% over 1-month, 0.43% over 3-months, 0.98% YTD, 1.30% over the past 1-year, 0.66% over 3-years (annualized), 0.40% over 5-years, and 0.30% over 10-years. (Contact us if you'd like to see our latest MFI XLS, Crane Indexes or Market Share report.)
The September issue of our flagship Money Fund Intelligence newsletter, which was sent out to subscribers Monday morning, features the articles: "Ten Years After: Reserve Fund ‘Breaks the Buck’," which discusses the anniversary of the Financial Crisis; "New IMMFA Chair Hochfeld on European MMF Reforms," which profiles Morgan Stanley's Kim Hochfeld; and, "DWS Launches ESG Liquidity, Socially Responsible MMF," which reviews a new fund conversion from DWS. We've also updated our Money Fund Wisdom database with Aug. 31, 2018, 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 September Money Fund Portfolio Holdings are scheduled to ship on Wednesday, September 12, and our Sept. Bond Fund Intelligence is scheduled to go out Monday, September 17.
MFI's "Ten Years After" article says, "It was ten years ago this month that the bankruptcy of Lehman Brothers caused Reserve Primary Fund, the first and one of the largest money funds, to "break the buck," or drop below $1.00 per share. The event, following a year of subprime mortgage related tremors and runs on segments of the asset-backed and enhanced cash markets, triggered a full-scale financial meltdown. The week of Sept. 15, 2008, started with the Lehman Brothers bankruptcy, and ended with President George W. Bush stepping in to guarantee money funds and the broader banking system in its entirety. Below, we excerpt from some of our News during that fateful month, and we look back at the events that shook the money fund world."
Our lead piece continues, "On Wed., Sept. 17, 2008, we wrote the story, 'Reserve Primary Fund 'Breaks the Buck' Following Run on Assets.' It says, 'In just the second case of a money market mutual fund 'breaking the buck,' or dropping below the $1.00 a share level, in history, The Reserve Primary Fund cuts its NAV to $0.97 cents on Tuesday. The top-ranked fund, which held $785 million in Lehman Brothers CP and MTNs, was besieged by redemptions over the past two days. Assets of the total portfolio, which is largely institutional but which includes some retail assets, declined a massive $27.3 billion Monday and Tuesday to $35.3 billion.'"
It added, "As we wrote Monday, several other firms have protected their investors from fallout from the Lehman Brothers bankruptcy.... A total of 21 money funds to date have taken action to protect shareholders, but the privately-held Reserve was unable to arrange credit supports in time to prevent a run.... The combination of high yields, hot money and a lack of deep pockets likely will prove fatal to the first, and oldest money market mutual fund. As happened in 1994 with the liquidation of Community Bankers U.S. Government Money Market Fund at $0.96 a share [the only other money fund to ever 'break the buck'], we expect money market funds to soldier on with just a single case of a fund 'breaking the buck.'"
Our IMMFA Profile reads, "This month, Money Fund Intelligence speaks with Kim Hochfeld, the new Chair of IMMFA, the London-based Institutional Money Market Funds Association (www.immfa.org). Hochfeld, who is also Managing Director at Morgan Stanley Investment Management, gives us the latest on European Money Market Fund Reforms and talks about what's next for money funds in Europe. Our Q&A follows. (Note: Hochfeld and IMMFA MD Jane Lowe will keynote our upcoming European Money Fund Symposium in London, Sept. 20-21.)"
MFI asks, "MFI: When did you become Chair? Hochfeld responds, "I was elected chair for a three year term at the beginning of July by members at our Annual General Meeting. Our former Chair, Reyer Kooy, was re-elected to the Board, which is a positive for IMMFA as it allows a level of continuity. Kathleen Hughes from GSAM and Ian Lloyd from LGIM are still on the Board too, and we have been joined by Beccy Milchem from BlackRock, so it’s a team with plenty of experience."
We also query, "What has been IMMFA’s main focus?" Hochfeld tells MFI, "European Money Market Reform has absolutely been a key focus for us, especially over the last 18 months. It has been a long time coming, just trying to build for LVNAV and understand it, and then obviously there are challenges for our members as to how they position their Euro funds. There’s still much work to do, by the vendors, the money fund managers, the transfer agents, the fund administrators, the portal providers, their trading systems, etc., in order to be ready for the coming changes." (Watch for more excerpts in coming weeks, or see the latest issue of MFI for the full "profile".)
MFI's "DWS Launches ESG" piece says, "As we mentioned in our August 13 News, 'DWS Converts Variable NAV to DWS ESG Money Fund, First ESG Offering,' the manager formerly known as Deutsche just converted an existing fund into an “ESG” money market fund. Their press release, entitled, “DWS launches first ESG money market fund in the U.S.,” tells us “DWS Group today announced the launch of DWS ESG Liquidity Fund (ESGXX), the first money market fund available in the U.S. to apply ESG (Environmental, Social and Governance) criteria. The fund will invest in high-quality, short-term, U.S. dollar-denominated money market instruments paying a fixed, variable or floating interest rate while also filtering for various ESG factors using DWS’s proprietary software -- the ESG Engine.”
We quote DWS's Sonelius Kendrick-Smith, Head of Liquidity Solutions, Americas, “As a global asset manager, it is crucial for DWS to enable our clients to invest in a sustainable future by incorporating ESG factors into their global investment process across asset classes. Through the DWS ESG Liquidity Fund, investors will now be able to take advantage of our proprietary ESG Engine software while effectively managing their liquidity.”
Finally, we write in a sidebar, "More Brokerage Sweep Hits," "The hits keep coming for brokerage sweep accounts. Last month, ignites published, 'Rising Rates Give Brokerage Sweep Programs a Run for Their Money,' which discusses the huge rate differential between FDIC-insured sweeps and money funds. They write, 'The fatter margins that bank deposits offer pushed many large brokerages to dump money funds as sweep vehicles in favor of bank products…. But as interest rates rise, money funds are regaining appeal, and the amount brokerages must pay out on deposits … is inching up.'"
Our September MFI XLS, with August 31, 2018, data, shows total assets increased $29.2 billion in August to $3.071 trillion, after increasing $36.3 billion in July, decreasing $49.9 billion in June, and increasing $53.7 billion in May. Our broad Crane Money Fund Average 7-Day Yield rose 3 bps to 1.61% during the month, while our Crane 100 Money Fund Index (the 100 largest taxable funds) was up 4 bps to 1.80% (its highest levels since Oct. 2008).
On a Gross Yield Basis (7-Day) (before expenses are taken out), the Crane MFA rose 3 bps to 2.06% and the Crane 100 rose to 2.07%. Charged Expenses averaged 0.44% (unchanged) and 0.27% (unch.), respectively for the Crane MFA and Crane 100. The average WAM (weighted average maturity) for the Crane MFA and Crane 100 was 28 and 29 days, respectively (the former unchanged and the latter up 1 day). (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
As we mentioned in our August 13 News, "DWS Converts Variable NAV to DWS ESG Money Fund, First ESG Offering," the manager formerly known as Deutsche just converted an existing fund into an "ESG" money market fund. A press release put out yesterday, entitled, "DWS launches first ESG money market fund in the U.S.," tells us "DWS Group today announced the launch of DWS ESG Liquidity Fund (ESGXX), the first money market fund available in the U.S. to apply ESG (Environmental, Social and Governance) criteria. The fund will invest in high-quality, short-term, U.S. dollar-denominated money market instruments paying a fixed, variable or floating interest rate while also filtering for various ESG factors using DWS's proprietary software -- the ESG Engine."
Sonelius Kendrick-Smith, Head of Liquidity Solutions, Americas, comments, "As a global asset manager, it is crucial for DWS to enable our clients to invest in a sustainable future by incorporating ESG factors into their global investment process across asset classes. Through the DWS ESG Liquidity Fund, investors will now be able to take advantage of our proprietary ESG Engine software while effectively managing their liquidity."
Fiona Bassett, Global Co-Head of Products, tells us, "DWS has more than 20 years of experience as a leader and innovator in the field of sustainable, responsible and impact investing. The launch of the DWS ESG Liquidity Fund, the first ESG money market fund available for investors in the U.S., offers investors the opportunity to gain best-in-class ESG exposure for their liquidity needs and help invest in a sustainable future."
The press release adds, "The DWS ESG Liquidity Fund buys U.S. government debt obligations, money market instruments and other debt obligations that present minimal credit risks. In addition to considering financial information, the security selection process also evaluates a company based on ESG criteria which considers multiple factors, including: Level of involvement in controversial sectors and weapons; Adherence to corporate governance principles; ESG performance relative to a peer group of companies; and Efforts to meet the United Nations' Sustainable Development Goals." (See also our May 24 News, "Deutsche Funds Changing Back to DWS; Fed Minutes Hint at Rate Tweaks.")
In other news, Federated Investors hosted a webinar on Wednesday that focused on the manager's Prime Private Liquidity Fund. Federated Senior VP & National Sales Manager Brian Ronayne explains, "This product is designed to offer investors a higher net yield than a Treasury or Government money market fund, yet uniquely positioned to still maintain a $1.00 constant NAV with liquidity until 5:00pm Eastern every single day. It does so by investing in a portfolio of high quality, dollar-denominated securities issued by banks, corporations, and the U.S. government that all mature in 397 days or less. In fact, the private fund only invests in eligible money market instruments."
He continues, "This fund maintains the same 10% daily liquid and 30% weekly liquid buckets and the same maximum weighted average maturity of 60 days or less as a traditional 2a-7 money fund. And, yes, Federated's Private Prime Liquidity Fund is AAA-rated both by S&P and Fitch. The yield today on the private fund is 2.10%, which certainly compares favorably to institutional government funds and candidly many institutional bank deposit products, which are trading closer to the 1.85 to 1.90% [level]. It's noteworthy that the spread of the private fund has consistently been 20 to 25 bps over government funds throughout 2018."
Ronayne tells us, "What we have found is that our clients have segmented their cash into three categories: deposits, funds, and direct purchases. [T]his second category, funds, is where we are referring to professionally managed asset pools such as money market funds, private funds, short duration bond funds, and ETFs. Following the implementation of the 2016 Money Market Fund Reform rules, only a small subset of these funds are able to maintain a $1 constant NAV. Namely, various types of government money market funds.... As a result, we've found most, if not all, of the transactional dollars of our institutional accounts migrated to government funds."
He comments, "However, with prime funds now yielding above 2.0%, and a consistent ... spread of 20 to 25 bps over government funds and in some cases over institutional bank deposits, we are seeing money move back into prime funds. We think that makes sense. Yet with that said, we've also found there are pools of money resulting from securitizations, escrows, the repatriation of offshore profits, or from corporate tax relief that is ... being relegated into government funds or lower yielding bank deposits. The plain truth is, many government fund investors have selected that product solely for the $1 NAV and the "no fees and gates" provisions. `Yet those same investors are now realizing that there are alternatives like Federated's Private Prime Liquidity Fund that offer those same exact features, i.e., a $1.00 NAV, no fees and gates, daily liquidity until 5 o'clock, [and] a cash and cash equivalents status."
Federated Money Market CIO Deborah Cunningham states, "Simply put ... the Private Prime Liquidity Fund is just like our Prime Obligations Fund, but without the fluctuating net asset value, without the gates and fees, and therefore without the 2a-7 designation packaging difference. From a composition standpoint, it's currently about 46% in CP, 16% in CDs, and ... about 38% in overnight securities.... We find a huge amount of value currently in the asset-backed commercial paper sector. We have an allocation that's substantial to that. We also like variable rate instruments and non-traditional repo.... The portfolio has about 25% of its composition in variable rate instruments."
Cunningham says, "That is [managing lumpy flows] something that we've learned how to do quite successfully over the course of many decades of managing this type of cash in what has typically been our 2a-7 products. We're just extending that same sort of knowledge into this 3c-7 product and it's working in exactly the same way. We get a lot of information ahead of time from clients upon setup, and we know when this type of cyclicality or monthly cycle is happening, and we are absolutely equipped from a portfolio management team and investments perspective with meeting the needs of this type of client."
Finally, she adds on transparency and disclosure, "It is a different website, so we wanted to make sure that the SEC did not have any problems with us providing the same transparency, but [we're] also trying not to confuse investors by putting it on the same website as our money fund.... You'll find portfolio composition on a bi-monthly basis, you'll find the daily shadow NAV, you'll find daily purchases and redemptions, you will find the daily WAM and WAL calculations, you will find the daily information on daily liquid assets and weekly liquid assets.... In addition, we also provide an update for clients on the underlying shareholders.... So transparency is all that money market funds [do] plus a little bit more."
For more on "private" funds, see Federated's Prime Private Liquidity Fund page (for qualified investors), and see these Crane Data News stories: SEC Shows Private Liquidity Funds Up in Q4; HSBC's European MF Plans (08/14/18) and Federated Says Private, Prime, Ultrashort Still Growing on Q1 Call (04/30/18).
Online money market trading portal software provider Cachematrix, a subsidiary of BlackRock, released CacheMonitor, a new module that allows portals to offer a set of investment guidelines for clients. A press release entitled, "CacheMonitor: A new way to manage risk," explains, "Corporate treasurers often use investment policies as a tool to help navigate today's risk-adverse financial climate. We believe that with the help of CacheMonitor, a suite of functionality aimed at empowering your clients with risk management tools and information, we can digitize some of the application of a carefully constructed investment policy."
It tells us, "CacheMonitor seeks to put the control into the hands of your clients' Administrators, or SuperTraders, by allowing them to create rules specific to their investment policy that serve as digital "guard rails" for portfolios. CacheMonitor allows for several rule types including defining: Assets under management levels; Weighted average maturity levels; and, Investment parameters for specific funds and fund families."
The release adds, "CacheMonitor also includes alerting functionality, which provides customizable delivery of portfolio information based on personalized parameters across Cachematrix Platform functionalities. If an established rule is violated by a proposed trade, Super Traders can choose to notify the user and/or block the trade. Alerts can be sent to you and/or your clients via: Email, SMS or the Cachematrix Platform."
It says, "Before a trade order is sent, CacheMonitor runs the trade order through the investment policy rules and generates an alert if the order will cause a violation. This functionality aims to reduce risk and help your clients trade more confidently by providing the opportunity to take corrective actions on trade orders before potential violations of established rules.... We are excited about the digital revolution of risk management and this new functionality, which we believe will empower your clients to better adhere to their investment policies."
In other news, The Wall Street Journal published the piece, "Bank Sues New York Fed Over Lack of Account," which describes a longshot potential new competitor, or investment, for money market funds." They explain, "A new bank is suing the Federal Reserve Bank of New York, saying it is unfairly preventing the firm from pursuing a novel business strategy."
The Journal continues, "TNB USA Inc. -- run by a former top New York Fed staffer -- said its primary business activity will be to enable large institutional money-market investors to earn higher interest rates from the Federal Reserve than they could otherwise, according a complaint filed in federal court Friday. Such investors include pension funds, companies and other entities managing large sums of money."
They tell us, "But first TNB, based in Connecticut, needs to open an interest-bearing account at the New York Fed, like those held by many large banks. The Fed hasn't granted or rejected TNB's request. TNB's chairman and chief executive, James McAndrews, worked at the New York Fed for 28 years, including his last six as its head of research until 2016."
The article says, "TNB has obtained temporary approval to operate as a bank from Connecticut's banking authority, but doesn't plan to make loans or provide any retail banking services for individuals. Instead, its 'sole business will be to accept deposits from the most financially secure institutions' and place that money in an interest-bearing Fed account, 'permitting depositors to earn higher rates of interest than are currently available to nonfinancial companies and consumers,' the filing said."
It add, "TNB's customers will primarily be institutional money-market investors, but it would also accept deposits from foreign central banks, the filing said. If TNB could open a Fed account, its deposits there would earn a rate currently set at 1.95%. This is the rate paid on money, called reserves, parked at the central bank by deposit-taking private-sector banks. Fed officials expect to raise this rate along with other short-term interest rates in coming years to keep the economy expanding on an even keel."
Finally, they write, "Under the Fed's current system for setting rates, institutional money-market funds cannot earn this rate on reserves. Instead, they can participate in a Fed program that now pays an interest rate of 1.75%. TNB's business model would enable the money-market investors to earn the higher rate on reserves, minus a profit for the firm. Its name stands for 'the narrow bank,' a riff on its narrow business model, according to the suit."
Also, Asian newsletter The Asset writes "MNCs seek out asset managers for money market funds." They tell us, "[R]ecently ... corporations have turned to asset managers for these products as the banks comply with the requirements of Basel III. The intriguing aspect to this trend is that the asset managers that provide money market funds for MNCs are sister companies of the corporate banks. For DWS, the asset management unit of the Deutsche Bank Group, the focus is on building its money market funds business for MNCs in Asia by deploying a full-time liquidity manager, based in Hong Kong, to service clients in this region."
The article explains, "DWS became a subsidiary of the DB Group in March 2018 following a successful IPO that raised 1.4 billion euros and made the asset manager a separate legal entity from the DB Group. Before the IPO, the bank's asset management unit also offered money market funds for Asian MNCs from its London office. At that time the DB's corporate banking unit, which has an established presence in Asia, promoted the same products for MNCs. But Basel III changed the operating landscape. Basel III's raison d'être is to improve the stability of banks by increasing the ratio of their deposits that are placed in long funds vis-a-vis short funds."
It adds, "Banks, therefore, are compelled to encourage clients to move their deposits from short-term current accounts to longer time deposits. Despite these laudable aspirations, many MNCs shy away from long-term commitments, and would rather not lock their funds in long-term time deposits because they need liquidity.... Unlike time deposits, where the funds have to be locked up for 30 days, 60 days, or 90 days, money market funds can also be locked up but for shorter periods than time deposits."
JP Morgan Securities published a paper entitled, "European Money Market Reform: CNAV, LVNAV and VNAV," that "summarise[s] the main elements of the pending European Money Market Reform which will mostly impact short term European money market funds." It says, "The European Money Market reform (Regulation (EU) 2017/1131) is a set of regulations for Money Market Funds (MMFs) established, managed or marketed in the European Union. The reform applies to collective investment undertakings that 1) require or are authorised as UCITS or AIF, 2) invest in short term assets 3) preserve the value of the investment or offer returns in line with money market rates. It has become effective for new funds on 21st July 2018 and will apply to existing funds on 21st January 2019." We excerpt from this update below, and we also quote the first European money fund manager to be fully compliant with the new reforms, Aviva Investors. (Note: This week is last call to register for our European Money Fund Symposium, which is Sept. 20-21 at the London Tower Bridge Hilton. We hope to see you in London in 2 weeks!)
The JPM paper explains, "The purpose of this new set of rules is to preserve the resiliency of the money market funds to preserve the principal of the investment and the liquidity characteristics, thereby increasing the stability of these funds.... Short Term Money Market Funds are the ones that are going to be mostly impacted by the reform. At the moment most of the European MMFs are funds with Constant Net Asset Value (CNAV) while only a smaller proportion is with Variable Net Asset Value (VNAV). The new structure for Short Term Money Market Funds will include Constant Net Asset Value (CNAV), Low Volatility Net Asset Value (LVNAV) and Variable Net Asset Value (VNAV)."
It continues, "Standard Money Market Funds have a more relaxed mandate relative to Short Term Money Market Funds in terms of instruments and maturity spectrum of investments (up to 2 years), are already funds with a Variable Net Asset Value (VNAV) and are expected to keep the same VNAV feature after the reform."
Authors Fabio Bassi, et. al., write, "ECB aggregated data indicate that the overall size of money market funds in the Euro area is about €1.1tn (or $1.26tn), of which about 55% is in short term funds and 45% in standard money market funds. To estimate the size of the European money market fund we rely on the offshore data of money market funds from private sources (iMoneyNet). The AUMs of offshore funds in USD are $391bn (split $298bn in prime and $92bn in government funds), in GBP are $239bn (split $236bn in prime and $3bn in government funds) and in EUR are $91bn (split $91bn in prime and $0bn in government funds)."
The paper states, "Given the large size of European money market funds invested in USD or GBP assets it is worthwhile considering the potential impact of the reform on these funds. We note that USD offshore government money market funds are about 25% of the total USD money market funds and these are likely to be converted into public debt CNAV, whereas the current CNAV prime funds will most likely migrate into LVNAV funds, with an expected muted impact in terms of investment strategies and risk profile. The same dynamic is expected to apply to GBP money market funds, where the portion in government bond funds is much smaller."
On negative rates, JPM tells us, "Short term money market funds in the Euro area had to deal with negative rates since the ECB decided to put policy rates into negative territory around mid-2014. Money market funds under a CNAV framework are currently able to pass through the negative rates via the Reverse Distribution Mechanism (also known as share cancellation), by which investors are able to keep the value unit of the fund unchanged at €1, but the negative interest rate in the distribution mechanism takes place via a reduction in the number of shares or units in the funds."
Finally, they add, "The money market reform in US had a large impact on short rates and short term spreads, mostly because of the reallocation of money from Prime into Government funds.... [In Europe] we believe that the shift from prime to government is unlikely with flows expected to shift further out the curve and down the credit spectrum.... We have little visibility whether this reserve distribution mechanism will still be allowed in LVNAV. The European Securities and Markets Authority (ESMA) has written to the European Commission asking for more clarity on the reverse distribution mechanism (RDM) in the contest of the Money Market Reform, and more clarity is expected in the next few weeks."
In related news, U.K.-based Aviva Investors released a statement that says, "We are pleased to announce that as of September 3rd, 2018 the Aviva Investors Liquidity Funds range are fully compliant with the new EU Money Market Fund Reform Regulations." Aviva is the 7th largest manager of "offshore" money market funds with one of the largest pound sterling money funds, Aviva GBP Liquidity Fund.
Their announcement explains, "The decision was made to convert ahead of the January 21st, 2019 deadline as we have been running our AAA rated same day offshore Money Market Funds as a Variable NAV (VNAV) structure for nearly 10 years. We believe this puts us in a good position to convert to the newly created Low Volatility NAV (LVNAV) fund category ahead of our peers."
Aviva tells us, "Sterling Liquidity Fund has converted from VNAV to LVNAV; Sterling Government Liquidity Fund has converted from VNAV to LVNAV; and, EUR Liquidity Fund will remain VNAV for the foreseeable future." They add, "We do not operate share cancellations in this fund."
Lastly, they add, "In addition, while out of scope for the new regulations, we would also like to take this opportunity to announce the name change for our Sterling Strategic Fund, which as of September 3rd, 2018 will be called the Aviva Investors Sterling Liquidity Plus Fund." (See Aviva Investors' previous update on European MMF Reforms here, and see our March 1, 2018 News, "Aviva on EU MMF Reforms," and our March 14, 2018 News, "Aviva Investors Joins IMMFA.")
For more on European Money Market Fund Reforms, see these recent Crane Data News stories: SSGA Podcast on European Money Fund Reforms Discusses PM Strategies (8/29), Goldman on Repatriation, European Reforms; Federated Plans; Assets (8/24), BlackRock Details European Money Fund Reform Plans; Love the LVNAV (8/17), SEC Shows Private Liquidity Funds Up in Q4; HSBC's European MF Plans (8/14), Morgan Stanley European MMF Reform Plans; Offshore Port Composition (7/17), JPMAM European MMFs Plan for Nov 2018 Conversion; MF Assets Plunge (3/16), and JP Morgan To Offer All European Fund Options; ICI MMF Holdings Update (11/16/17).
Research firm Finandium published a report entitled, "Beyond the Bulge: Foreign Banks and Smaller Dealers in US Repo" recently. The Executive Summary tells us, "The focus on balance sheet and return on capital constraints faced in the repo business by bulge bracket US banks has often drowned out the vitality of foreign and non-bank players. This Finadium research report focuses on the challenges and opportunities faced by foreign and non-bank US repo market participants. Foreign banks have always been a fixture in the US repo markets, but the emergence of highly levered non-banks is fairly recent. Foreign banks and nonbank independent dealers have taken advantage of wider spreads in the market as bulge bracket banks stepped back. But there is evidence that this trend may have runs its course as larger banks dedicate more balance sheet to securities financing, pushing down spreads in the process."
The report continues, "The DTCC's Fixed Income Clearing Corporation (FICC) is driving one of the most important new developments, the Capped Contingency Liquidity Facility (CCLF), which will alter market structure and the flow of liquidity and collateral in US markets. All market participants will feel the impact of the CCLF, but smaller non-bank dealers may be most affected on a daily basis. CCLF requirements are expected to go live in November 2018."
It explains, "This report should be read by repo market participants across the sell-side and buy-side and by financial market participants more broadly. Our discussion of foreign and smaller non-bank dealers is relevant for directly impacted firms, competitors, clients, and anyone interested in US repo market liquidity. While this used to be a small audience, the introduction of the Secured Overnight Financing Rate (SOFR) means that repo liquidity now has implications for pricing and stability in other financial markets."
Finadium writes, "The repo business in the US is often seen as monolithic, but this view hides the diversity of players and objectives of dealers in the market. US repo dealers are sorted into three primary groups: bulge bracket US and UK banks, other foreign banks, and smaller non-bank dealers who have, more often than not, entered the market post-financial crisis. The three groups have different business models, often different regulatory constraints and in certain cases very different clientele."
They also say, "The new realities of the balance sheet and capital police looking over the shoulders of big bank financing businesses were daunting but not insurmountable. These constraints, however, fed the growth of foreign banks and small independent dealers. By taking advantage of being under different regulatory regimes, foreign banks and small independent dealers as non-banks (under the aegis of their home regulators and the SEC, respectively) had flexibility to grow their books in a way that the bulge bracket players did not."
The paper explains, "This report has been written to uncover the drivers of different segments of the US repo market. As US Treasury repo is now critical for the calculation of the Secured Overnight Financing Rate (SOFR), changes to market structure can also impact this benchmark. This report should be read by US repo market participants and financial market participants in general."
The paper states, "It is well known that most foreign banks operating in US repo markets play by a different set of rules than US banks. The most popular example is French banks that have for years been large suppliers of repo collateral to US cash investors. At the end of April 2018, French banks accounted for 34% of US Treasury repo market transactions with money funds, according to the US Office of Financial Research."
It comments, "In US repo, the combination of large bank balance sheet contraction and new demand from money market funds produced a unique trend not seen on Wall Street for decades: small independent repo dealers and prime brokers were created, often with the backing of venture capital or a deep pocketed financial backer. These smaller dealers were able to prosper in part due to prime brokers parsing their customer bases.... At the same time, asset managers were keen to establish multiple prime relationships to ensure stability and access. The new dealer startups were able to pick up smaller clients who had no place else to go as well as larger relationships looking to diversify their sources of financing."
In a section entitled, "Where the Market Goes from Here," Finadium writes, "Many of the reasons that prompted the growth of foreign banks and non-bank dealer books may fade in an environment of tighter repo spreads and greater balance sheet availability. Market participants report that there is more balance sheet available from large banks for securities financing trades today than in recent years. Will the pendulum of competitive advantage swing back in favor of the bulge bracket firms?"
They answer, "The theory behind more engagement by large banks is that the increased profitability in US repo that came with wider spreads was proof that markets can be efficient, providing a proper risk adjusted return. Management likes the revenue and has loosened up on balance sheet limits to capture even more. An intense focus on balance sheet efficiencies has also paid off, providing some room for repo dealers to seek new trading opportunities. Netting trades whenever possible is made easier by FICC's work."
Finally, the piece concludes, "Competition in the repo markets brought by foreign banks and independent nonbanks is good to see. A market driven response to bottlenecks that would have otherwise severely constrained supply is a testament to the creativity of the finance community. Whether these participants are taking advantage of regulatory loopholes will depend on the point of view of the reader. But one thing is certain: in this era of big data, there is no excuse not to collect data on securities financing trades and ensure information is centralized so we can know just how big the market is, who owns what risk, and where liquidity is coming from and going to."
