News Archives: March, 2019
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 that assets jumped in the latest week, after plunging the prior week, while the latter confirms that MMF assets rose strongly again last month after breaking the $3.0 trillion level in December. Assets increased by $45.5 billion in February to $3.091 trillion. This follows an increase of $8.2 billion in January, $71.8 billion in December and $80.4 billion in November. In the 12 months through Feb. 28, 2019, money fund assets have increased by $247.5 billion, or 8.7%. We review ICI's latest weekly and monthly statistics below.
They write, "Total money market fund assets increased by $36.53 billion to $3.10 trillion for the week ended Wednesday, March 27, the Investment Company Institute reported.... Among taxable money market funds, government funds increased by $41.29 billion and prime funds decreased by $3.70 billion. Tax-exempt money market funds decreased by $1.06 billion." ICI's weekly series shows Institutional MMFs surging $34.2 billion while Retail MMFs inched higher by $2.32 billion. Total Government MMF assets, including Treasury funds, stood at $2.333 trillion (75.2% of all money funds), while Total Prime MMFs fell to $629.3 billion (20.3%). Tax Exempt MMFs totaled $138.7 billion, or 4.5%.
ICI states, "Assets of retail money market funds increased by $2.32 billion to $1.21 trillion. Among retail funds, government money market fund assets increased by $2.86 billion to $697.43 billion, prime money market fund assets increased by $355 million to $382.53 billion, and tax-exempt fund assets decreased by $897 million to $129.24 billion." Retail assets account for over a third of total assets, or 39.0%, and Government Retail assets make up 57.7% of all Retail MMFs.
The release adds, "Assets of institutional money market funds increased by $34.22 billion to $1.89 trillion. Among institutional funds, government money market fund assets increased by $38.44 billion to $1.64 trillion, prime money market fund assets decreased by $4.05 billion to $246.75 billion, and tax-exempt fund assets decreased by $166 million to $9.49 billion." Institutional assets accounted for 61.0% of all MMF assets, with Government Institutional assets making up 86.5% of all Institutional MMF totals.
ICI's "Trends: February 2019" states, "The combined assets of the nation's mutual funds increased by $425.50 billion, or 2.3 percent, to $19.08 trillion in February, 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 $35.90 billion in February, compared with an inflow of $14.42 billion in January.... Money market funds had an inflow of $41.17 billion in February, compared with an inflow of $4.54 billion in January. In February funds offered primarily to institutions had an inflow of $35.02 billion and funds offered primarily to individuals had an inflow of $6.15 billion."
The latest statistics shows that Taxable MMFs gained assets, but Tax Exempt MMFs lost assets last month. Taxable MMFs increased by $47.9 billion in February to $2.952 trillion. Tax-Exempt MMFs decreased $2.4 billion in February to $138.3 billion. Taxable MMF assets increased year-over-year by $245.2 (9.1%) while Tax-Exempt funds rose by $2.3 billion over the past year (1.7%). Bond fund assets increased by $51.8 billion in February (1.2%) to $4.185 trillion; they've risen by $117.1 billion (2.9%) over the past year.
Money funds represent 16.2% of all mutual fund assets (down from 17.2% the previous month), while bond funds account for 21.9%, according to ICI. The total number of money market funds was 367, the same number as in January, and down from 381 a year ago. Taxable money funds numbered 286 funds, and tax-exempt money funds remained at 81 funds.
ICI also released its latest "Month-End Portfolio Holdings of Taxable Money Funds," which confirmed jumps in Treasuries and CDs, and increases in Repo and CP. Repurchase Agreements remained in first place among composition segments; they increased by $5.3 billion, or 0.5%, to $1.042 trillion, or 35.3% of holdings. Repo holdings have risen by $173.3 billion, or 20.0%, over the past year.
Treasury holdings in Taxable money funds jumped by $41.3 billion, or 5.2%, to $831.6 billion, or 28.2% of holdings. Treasury securities have increased by $31.8 billion, or 4.0%, over the past 12 months. U.S. Government Agency securities were the third largest segment; they decreased $3.8 billion, or -0.6%, to $642.7 billion, or 21.8% of holdings. Agency holdings have dropped by $57.7 billion, or -8.2%, over the past 12 months.
Certificates of Deposit (CDs) stood in fourth place; they grew by $10.9 billion, or 4.9%, to $233.0 billion (7.9% of assets). CDs held by money funds have grown by $38.9 billion, or 20.1%, over 12 months. Commercial Paper remained in fifth place, up $5.2 billion, or 2.5%, to $208.3 billion (7.1% of assets). CP has increased by $39.8 billion, or 23.6%, over one year. Notes (including Corporate and Bank) were up by $786 million, or 11.0%, to $8.0 billion (0.3% of assets) and Other holdings increased slightly to $11.5 billion.
The Number of Accounts Outstanding in ICI's series for taxable money funds increased by 328.3 thousand to 33.992 million, while the Number of Funds remains at 286. Over the past 12 months, the number of accounts rose by 2.938 million and the number of funds decreased by 12. The Average Maturity of Portfolios was 29 days, same as January. Over the past 12 months, WAMs of Taxable money funds have shortened by 2 days to 29 days.
The Investment Company Institute released its "Worldwide Regulated Open-Fund Assets and Flows, Fourth Quarter 2018" yesterday. The most recent data collection on mutual funds in other countries (as well as the U.S.) shows that money fund assets globally rose by $97.1 billion, or 1.6%, in Q4'18, to retake the $6.0 trillion level ($6.076T). The increase was led by big gains in U.S. and Luxembourg-based money funds. Money fund assets in China and France fell sharply. MMF assets worldwide have increased by $176.4 billion, or 3.0%, the past 12 months, and money funds in the U.S. moved up to represent 50.0% of worldwide assets. We review the latest Worldwide Money Market Fund totals, below.
ICI's release says, "Worldwide regulated open-end fund assets decreased 6.9 percent to $46.70 trillion at the end of the fourth quarter of 2018, excluding funds of funds. Worldwide net cash inflow to all funds was $88 billion in the fourth quarter, compared with $179 billion of net inflows in the third quarter of 2018. The Investment Company Institute compiles worldwide open-end fund statistics on behalf of the International Investment Funds Association, the organization of national fund associations. The collection for the fourth quarter of 2018 contains statistics from 47 jurisdictions."
It explains, "The drop in open-end fund assets reported in US dollars, in part, reflected US dollar appreciation in the fourth quarter of 2018. For example, on a US dollar–denominated basis, fund assets in Europe decreased by 6.3 percent in the fourth quarter, compared with a decrease of 5.2 percent on a euro-denominated basis."
ICI's quarterly continues, "On a US dollar–denominated basis, equity fund assets decreased by 12.4 percent to $19.92 trillion at the end of the fourth quarter of 2018. Bond fund assets decreased by 1.2 percent to $10.14 trillion in the fourth quarter. Balanced/mixed fund assets decreased by 7.1 percent to $5.84 trillion in the fourth quarter, while money market fund assets increased by 1.6 percent globally to $6.08 trillion."
The release also says, "At the end of the fourth quarter of 2018, 43 percent of worldwide regulated open-end fund assets were held in equity funds. The asset share of bond funds was 22 percent and the asset share of balanced/mixed funds was 13 percent. Money market fund assets represented 13 percent of the worldwide total."
It adds, "Net sales of regulated open-end funds worldwide were $88 billion in the fourth quarter of 2018. Flows into equity funds worldwide were $101 billion in the fourth quarter.... Globally, bond funds posted an outflow of $66 billion in the fourth quarter of 2018, after recording an inflow of $91 billion in the third quarter.... Money market funds worldwide experienced an inflow of $82 billion in the fourth quarter of 2018 after registering an outflow of $54 billion in the third quarter of 2018."
According to Crane Data's analysis of ICI's "Worldwide" fund data, the U.S. maintained its position as the largest money fund market in Q4'18 with $3.037 trillion, or 50.0% of all global MMF assets. U.S. MMF assets increased by $173.5 billion (6.1%) in Q4'18 and increased by $189.7B (6.7%) in the 12 months through Dec. 31, 2018. China remained in second place among countries overall, though assets declined substantially in the latest quarter. China saw assets decrease $92.1 billion (-7.7%) in Q4 to $1.110 trillion (18.3% of worldwide assets). But over the 12 months through Dec. 31, 2018, Chinese MMF assets have risen by $75.0 billion, or 7.2%.
Ireland remained third among country rankings, ending Q4 with $558.7 billion (9.2% of worldwide assets). Dublin-based MMFs were up $3.3B for the quarter, or 0.6%, but down $25.3B, or -4.3%, over the last 12 months. Luxembourg remained in fourth place with $383.5 billion (6.3% of worldwide assets). Assets here increased $23.5 billion, or 6.5%, in Q4, but were down $10.4 billion, or -2.6%, over one year. France was in fifth place with $373.7B, or 6.2% of the total, down $19.7 billion in Q4 (-5.0%) and down $39.1B (-9.5%) over 12 months.
Japan remained in sixth place with $100.2 billion (1.6%); assets there dropped $3.2 billion (-3.0%) in Q4 and $15.1 billion (-13.1%) over 12 months. Korea, the 7th ranked country, saw MMF assets fall $2.4 billion, or -2.9%, in Q4 to $80.6 billion (1.3% of the world's total MMF assets); they've fallen $11.2 billion (-12.2%) for the year. Brazil remained in 8th place, as assets increased $5.4 billion, or 7.5%, to $76.6 billion (1.3% of total assets) in Q4. They've decreased $2.5 billion (-3.2%) over the previous 12 months.
ICI's statistics show India moving up to 9th place with $63.6B, or 1.0% of total, up $9.1B (16.8%) in Q4 and up $18.8B (41.9%) for the year. Mexico fell to 10th place, decreasing $2.7 billion, or -4.4%, to $58.6 billion (1.0% of total assets) in Q4 but increasing $5.3 billion (9.9%) over the previous 12 months. (Note that ICI's data no longer includes money fund figures for Australia. Australia's MMF assets, which had been one of the largest markets in the world, were mysteriously shifted into the "Other" category several years ago.)
The United Kingdom ($25.2B, down $1.7B and up $2.1B over the quarter and year, respectively) ranked 11th ahead of Sweden ($23.4B, up $3.2B and up $3.5B), which moved up to 12th place. South Africa ($22.8B, down $650M and down $2.9B), Chinese Tapei ($22.5B, down $1.2B and down $4.1B), and Canada ($21.6B, up $1.0B and up $1.8B) rank 13th through 15th, respectively. Chile, Switzerland, Poland, Norway and Germany round out the 20 largest countries with money market mutual funds.
ICI's quarterly series shows money fund assets in the Americas total $3.221 trillion, up $180.6 billion in Q4, while Asia and Pacific money funds, which surpassed European money funds in Q3'18, decreased $25.1 billion to $1.449 trillion. Europe saw its money funds decline by $57.8 billion in Q4'18 to $1.384 trillion, and Africa saw its money funds decrease $650 million to $22.8 billion.
Note that Ireland and Luxembourg's totals are primarily "offshore" money funds marketed to global multinationals, while most of the other countries in the survey have mainly domestic money fund offerings. Contact us if you'd like our latest "Largest Money Market Funds Markets Worldwide" spreadsheet, based on ICI's data, or if you'd like to see our MFI International product.
Today, we excerpt from the keynote discussion at Crane's Bond Fund Symposium, which took place earlier this week in Philadelphia, Pa. The session, "Ultra-Shorts vs. SMAs: Round II," featured Rich Mejzak, Managing Director at BlackRock, and Jerome Schneider, Managing Director at PIMCO. Moderator Pete Crane commented, "We want to talk about both [SMAs and ultra-short funds], since separately managed accounts are a big chunk of the enhanced cash, beyond-money fund marketplace.... We're trying to get some representation of some other segments of that space beyond money funds." Attendees and Crane Data subscribers may access the Powerpoints, recordings and conference materials at the bottom of our "Content" page or our via our Bond Fund Symposium 2019 Download Center.
Schneider commented, "For PIMCO for much of the past 40 years, we were one of the first in the mutual fund space for short term in the ultra-short space and we've evolved that over the past few decades. I think the one thing that differentiates PIMCO is our focus not necessarily on the traditional money market fund segment, although we do a good amount of SMA's in that arena. The bulk of the $300 billion that we manage is quite honestly in the ultra-short and short term and low duration space. For us, the focal point has always been trying to find client solutions and in that over time we've developed products some are which are more focused on risk and return, the others are focused on liquidity. Some others more recently the theme has been more volatility management. In all of these, the solution is simply to try to find products that more precisely fit the demand functions that we're seeing from clients."
He explained, "In order to do that you have a pretty broad team, I think that's one of the key things that differentiates PIMCO. The team members that we have primarily based in Newport (Calif.), we have 10 portfolio managers focused on all different aspects of the market. Again, the acumen of these people is typically outside the money market space. A lot of people like to point to the fact that we've had exceedingly low turnover on the portfolio management team over the past decade since I've been managing it."
Schneider said, "It's been focused on bringing high quality risk adjusted returns to clients. The products that we've introduced over the past decade or so, including our short term ETF MINT which is the largest actively managed ETF.... It's about $12 billion now in size. [Also] our Short Asset Investment Fund, they've really been focused on providing risk adjusted returns, and more importantly a nuanced allocation. So as an example, no derivatives in MINT is something that's actually been a focal point of marketing.... I think the key thing ... is trying to find the balance between risk and return, and sometimes those are very different things to very different people."
He told the BFS crowd of 130, "We've been at the forefront of this notion that growth would be low for a while. We called it the New Neutral 4-5 years ago and that sort of stuck ... even the Fed started calling it that. And at the same time, we don't really see a lot of impetus for growth to be much higher than 2, 2 1/2 here in the U.S. More importantly, it could be a case of seasonality, where you have a very weak Q1 and Q2, and maybe a little bit better back half of the year. Just as 2018, we're probably preparing more to the downside risks and the upside risk at this point in time, preparing for what we call 'rude awakenings' or just tail risk situations -- being a little more selective in terms of corporate credit, doing our homework in those regards and trying to find other avenues to produce income. Some of that is mortgages or other things with a sprinkling of TIPS and inflation securities.... So just sort of playing it safe, keeping it keeping it sort of near the benchmark so to speak."
Schneider added, "But at the same time when we sort of look at where we think rates are headed, you could make a case for a rate cut because, hey the market's pointing to more than two rate cuts at this point in time. It seems to us at least around the investment committee table that most likely turn would be higher as opposed to lower. But you never know. These things have a way to go to sort of create evolutionary reverberations that might push it lower eventually."
BlackRock's Mejzak explained about SMAs, "[They've] changed a bit following two things. One, following Reform, clearly fees and gates were a game changer for the way a lot of clients looked at this business. And then secondly, you know at least more recently fees and fee compression has been a real driver.... Now our case has always been you know just because it's short duration doesn't mean it's simpler and should be cheaper. The reality of it is, it's more labor intensive. There's more active management, there's more frequent maturities, there's more cash to be invested. But from where we sit I think the main driver more recently has been the combination of those two. It's been money fund reform and it's been fee compression."
He continued, "Your smaller investors are normally inclined to go to a fund. We are trying to solve that problem, launching what we call a scalable separate account platform. BlackRock has a technology platform where were able to have a master structured portfolio and we can allocate trades accordingly over smaller asset base. That's a space that we're trying to enter, once again at a competitive fee structure to give a client an SMA solution. With more efficient pricing."
On what's attractive, Mejzak said, "Well that that's changing daily right now.... The only thing that hurts worst than buying a flat curve is buying an inverted curve. You need to really be a buyer of rate cuts.... These things have a way of forcing the Fed's hand, which I don't think is going to occur yet. [But] our expectation is that the second quarter will be stronger than the first and hopefully a lot of this most recent move that we've seen will move the other direction. We've been spending a lot of our time you know really it's been more about curve than it has been about really asset class, or credit. We certainly recognize the fact that we are towards the end of the credit cycle, so we're being thoughtful about that. The tighter the credit spreads are, the easier and cheaper it is to go up in quality so that seems like an easy thing to do right now and just pick sectors of the curve that you know aren't pricing in an aggressive rate cut as the market is currently doing."
He also said, "The floating rate market has been disrupted recently, a function of two things: certainly LIBOR and the outlook for where that will be in two years' time, and then secondly, the view on rates.... So there seems to be a kind of kink in the floating rate curve when you get out past there now.... I think that when you talk about something the money funds aren't buying that, if they continue not the buy gets to a point where it starts to look more and more attractive. To me that's one of those things."
Mejzak told the Philadelphia crowd, "Typically in these products, they wouldn't have traditional, Treasury agency collateral repo that you would utilize for a liquidity. We do utilize alternative collateral repo for yield, and that's starting to reprice too. That's a conversation we've been having.... We have a lot of collateral management systems where we're able to do that really well. So we have a very sizable alternative repo book, leveraged largely from our securities lending platform.... I wouldn't say that alternative term repo is a fit for a lot of these other products just based on the illiquid nature of it. But it certainly does have time and a place in some of our portfolios."
When asked about terminology, he commented, "I find the enhanced cash, ultra-short, short duration, I personally think it means more to everyone here in the room than it does to the investing public, that we certainly see the shades of gray that they don't.... Even this you know ultra-short or short duration peer group, it's even difficult in there to try to compare apples to apples with portfolios. You have a product that is very 'money market-esk', maybe a six month duration with a first tier minimum and a 3 year maturity compared to a fund that has high yield derivatives and emerging markets. And they're going to perform better at different points.... I've found that the clients are looking for us to make that decision."
Later, Schneider commented, "Your probably best trade the past six months has been on the 1-year bill.... At the same time in terms of what you're doing today it's about diversification. You know, we've been underweighting some corporate credits for a long period of time sort of waiting for idiosyncratic things to reprice as much as they did in the fourth quarter last year in favor of owning some high-quality commercial paper, non-financial mostly, with a sprinkling of agency mortgages.... I think TIPS now on a break-even basis are relatively attractive if you're going to sort of take a longer horizon view ... and there's some higher quality ABS deals.... You can get into some of the prime credit card deals that aren't sort of off the shelf there's some there's actually some spread concessions still there. So there's some good opportunities there. But again this is this is a world where our clients our investors should be looking to make three to maybe three and a half percent total return and once you have capital appreciation and that's a pretty good year and considering the volatility and everything else out there it's probably looks better than most other places in the investment world."
Finally, Mejzak added, "I think Jerome was accurate speaking about the fourth quarter. And your opportunities are typically coming in the secondary market when illiquidity or challenged liquidity is going to drive prices lower for different reasons. Currently our scale is to the point where we can take advantage of those where you know the 5's, 10's and 20-million-dollar trades still make a difference.... But you know the reality is our average SMA is probably in the two to three hundred [million] range. Those trades or are able to do something. A lot of the similar themes that he spoke to -- now we know why prices are moving lower on everything we like too -- some of the credit card stuff and the non-financial commercial paper is where we've been hiding out. We think that as I said we're not a buyer in this multi-rate cut scenario yet. And so we've been looking to just add carry and those are the two places where they've been."
Thanks to those of you who attended and supported Crane's Bond Fund Symposium, which wraps up Tuesday morning in Philadelphia, Pa. Watch for coverage in coming days and in the April issues of Money Fund Intelligence and Bond Fund Intelligence, and watch for the conference recordings to be posted later this week. Attendees and Crane Data subscribers may access the Powerpoints and conference materials at the bottom of our "Content" page or our via our Bond Fund Symposium 2019 Download Center. (Feel free to drop by Tuesday a.m. if you're in Philly!) Crane Data's next conference event is our big show, Money Fund Symposium, which will take place June 24-26, 2019 at The Renaissance Boston Waterfront Hotel, in Boston, Mass.
The latest agenda is now posted and registrations are now being taken. Our previous MFS in Pittsburgh attracted 575 attendees, and we expect another record turnout for our 11th annual event in Boston this summer. Money Fund Symposium attracts money fund managers, marketers and servicers, cash investors, money market securities dealers, issuers, and regulators. We review the agenda, as well as Crane Data's 2019 conference calendar, below.
Our June 24 Symposium Opening (afternoon) Agenda includes: "The State of the Money Fund Industry & MMFs," with Peter Crane of Crane Data, Pia McCusker of SSgA and Alex Roever of J.P. Morgan Securities; "Brokerage Sweep: Deposits vs. Money Funds" with Rick Holland of Charles Schwab Investment Management, Joe Hooker of Promontory Interfinancial Network and Tuyen Tu of Raymond James; "Risks & Ratings: Credit Liquidity, & NAV Moves," with Robert Callagy from Moody's Investors Service, Greg Fayvilevich from Fitch Ratings, and Guyna Johnson from S&P Global Ratings; and, a "Major Money Fund Issues 2019" panel with Tracy Hopkins of Dreyfus/BNY Mellon Cash Investment Strategies, Jeff Weaver of Wells Fargo Asset Management, and Peter Yi of Northern Trust Asset Management. (The evening's reception is sponsored by Bank of America Merrill Lynch.)
Day 2 of Money Fund Symposium 2019 begins with "Strategists Speak '18: Fed & Rates, Repo & SOFR," which features Mark Cabana of Bank of America, Joseph Abate of Barclays, and Chris Chadie of Credit Suisse, followed by a "Senior Portfolio Manager Perspectives" panel, including Laurie Brignac of Invesco, Deborah Cunningham of Federated Investors, and Nafis Smith of Vanguard Group. Next up is "Government & Treasury Money Fund Issues," with moderator Priya Misra of TD Securities, Adam Ackerman of J.P. Morgan Asset Management, Ed Dombrowski of AB Funds and Todd Bean of SSGA. The morning concludes with "Muni & Tax Exempt Money Fund Update," featuring Colleen Meehan of Dreyfus, Sean Saroya of J.P. Morgan Securities, and John Vetter of Fidelity.
The Afternoon of Day 2 (after a Dreyfus-sponsored lunch) features the segments: "Dealer's Choice: Supply, New Securities & CP" with Stewart Cutler of Barclays, Ron Flynn of J.P. Morgan Securities, and Nick Ro of Toyota Financial Services; "Analysts Roundtable: Concerns in Credit" with Jimmie Irby of J.P. Morgan AM, Keith Lawler of Bank of America Merrill Lynch, and Matthew Plomin of DWS; "SMA & Ultra-Short Update; Bond Fund Regs," with Dave Martucci of JPMAM, Kerry Pope of Fidelity, and Steve Cohen of Dechert. The day’s wrap-up presentation is "Corporate Liquidity & Investor Issues" involving Lance Pan of Capital Advisors and Tom Hunt from AFP. (The Day 2 reception is sponsored by Barclays.)
The third day of the Symposium features the sessions: "Treasury & NY Fed Update; Agency Issuance" with Tom Katzenbach from the U.S. Dept. of Treasury, Dave Messerly of the FHLBanks - Office of Finance, and a speaker from the Federal Reserve Bank of NY; "European Money Funds After Reforms," with Dan Morrissey of William Fry and Alastair Sewell of Fitch Ratings; and concludes with "Technology, Software & Data in Money Funds" ends the program with Peter Crane and Greg Fortuna of State Street Fund Connect.
Visit the MF Symposium website at www.moneyfundsymposium.com) for more details. Registration is $750, and discounted hotel reservations are available. We hope you'll join us in Boston this June! We'd like to encourage attendees, speakers and sponsors to register and make hotel reservations early. E-mail us at info@cranedata.com to request the full brochure, or click here to see the latest.
Also, we're making preparations for Crane's 7th annual "offshore" money fund event, European Money Fund Symposium, which will be held in Dublin, Ireland, September 23-24, 2019. European MFS offers "offshore" money fund portfolio managers, and money market investors, issuers, dealers and service providers a concentrated and affordable educational experience, as well as an excellent and informal networking venue. This website (www.euromfs.com) will be updated with the 2019 information soon. (Contact us to inquire about sponsoring or speaking.)
Finally, mark your calendars for our next "basic training" event, Money Fund University, which is scheduled for Jan. 23-24, 2020, in Providence, R.I., and our 2020 Bond Fund Symposium, which will be held in Boston on March 23-24, 2020. Let us know if you'd like more information on any of our events!
This month, BFI interviews Vishal Khanduja, Vice President at Calvert Research and Management (now part of Eaton Vance). Calvert, one of the original "ESG" or responsible investment managers, is based in Washington, D.C., with assets under management of over $14 billion (as of 12/31/18). We discuss their Short Duration Income Fund, and a number of other bond market topics, below. Note: This profile is reprinted from the March 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 Friday. (Note too: To those of you attending our 3rd annual Bond Fund Symposium, welcome to Philadelphia! Feel free to drop by the Philadelphia Loews if you're in town, or see the conference materials in our Bond Fund Symposium 2019 Download Center.)
BFI: Give us a little bit of background. Khanduja: Calvert traces its roots back to 1976. We began in the money market business, launching the first variable-rate government money market fund in the United States. In 1982, we launched one of the first responsible-investment funds, the Calvert Balanced Fund. The short-duration franchise originated in 2002, with the Calvert Short Duration Income Fund. We expanded and added the Calvert Ultra-Short Duration Income Fund in 2006.
As for me, I joined Calvert in 2012. My primary goal at the time was to strengthen our approach to portfolio construction and risk management so that our process would also appeal to larger institutional investors. We had strong success in managing a range of strategies across the yield curve and credit spectrum. This broader view expands our opportunity set in each of the strategies we manage, and our multi-sector focus ensures we capture them well. Our goal is to manage strategy-specific portfolios that address specific risk and return objectives.
An ultra-short strategy, for example, addresses a specific client need and, as such, the portfolio's risk exposure and performance should be commensurate with these expectations. We respect bespoke client requests, and that's why we provide fiercely competitive returns across a range of strategies.
BFI: Do all Calvert funds do ESG? Khanduja: Yes, all of them. Each security that goes into any of the Calvert funds, irrespective of the asset class, is evaluated fundamentally and from an ESG perspective. This integrated approach is how Calvert has always approached responsible investing. An ESG analyst rates and ranks companies based on ESG metrics that are financially material to companies within each particular subindustry. The benefit to me, as a Calvert portfolio manager and as part of the broader Eaton Vance team, is that I have access to 11 ESG research analysts and five ESG quantitative analysts, as well as the broader fixed-income team at Eaton Vance that includes more than 60 fundamental analysts across our high yield, diversified fixed income, bank loan and muni teams.
BFI: Talk about Short Duration Income. Khanduja: Though I am the one talking to you, I think it is important to remember that we employ a collaborative, team-based approach when managing the Calvert Short Duration Income Fund. I serve as lead portfolio manager and Brian Ellis co-manages the fund with me. Indeed, every analyst on our team has a handprint on the resulting portfolio. It is critical that each decision we make involves a fundamental analyst, an ESG analyst, a trader, and the portfolio manager for the specific strategy. We believe this team-based approach allows us to be as successful as possible, and the consistency we've provided shareholders over time speaks to both the team and this approach.
BFI: What is your biggest challenge? Khanduja: Many people believe when you integrate environmental, social, and governance, or ESG, factors, you sacrifice performance. That is incorrect. Our funds are competitive with the broader benchmarks and peer groups in addition to being competitive with ESG-benchmarks and peer groups. The additional ESG lens through which we evaluate investment opportunities helps us avoid risks and actually dovetails quite nicely with our philosophy of focusing on risk-adjusted performance.
The broader short duration space has become a lot more interesting in recent years. The challenge in 2014 was how to address front-end rates that were at zero or ten basis points. The strategies were delivering what they could to the investors, but we weren't providing a lot of return in that environment. Return potential has markedly improved in the zero to 5-year space; curves are flat, the Fed has increased rates nine times already, making this an interesting place to be. The front end of the curve is no longer zero, but 2.5%. Cash or money market or ultra-short strategies have become a desirable asset class rather than a placeholder in an asset allocator's tool kit.
When cash starts returning 2.5-3.0%, which is the current 10-year rate, it truly becomes a competing asset class. Investors have the opportunity to dampen interest rate volatility, dampen spread volatility, and still earn 2.5-3.0% comfortably. The market is clamoring to that space and we've seen a lot of interest from clients. We have seen record inflows in 2018 and that has continued into this year as well. Given the popularity of the space, there are many investment managers operating in this asset class, which can make it difficult for the end investor to pick the right one. We tell investors and financial advisors that long-term track record is what you want to see here because we believe that indicates the success of our process over time.
There are two variables that fixed income investors focus on the most, yield and duration. Another aspect that we believe many overlook is spread duration. In our Ultra-Short and Short Duration strategies, we focus on spread duration and interest rate duration. Spread duration is the risk that highlights the amount of credit risk taken. The Calvert Ultra-Short strategy spread duration is currently less than a year and a half.
The Calvert Short Duration strategy has a one- to five-year benchmark, which allows more risk with respect to spread duration. Spread duration is currently slightly over a year longer than our Ultra Short spread duration. It is important to adhere to the strategy prospectus, which delivers our clients the experience they prefer.
BFI: Talk more about the portfolio. Khanduja: We like to break the investable universe into three big balance sheets. There's a sovereign balance sheet, a corporate balance sheet, and the consumer balance sheet. This is the starting point of our portfolio construction process. From there, we assess the health of each balance sheet and delve further into sector concerns. The three sectors we focus on are investment grade corporates, high yield, and securitized assets, which includes asset backed securities as well as mortgage-backed securities. Our strategies are liquid, long only. The portfolios right now are tilted towards consumer balance sheets and away from corporate balance sheets due to more sound fundamentals and valuations. We focus on high quality and low spread duration.
BFI: Tell us about the investor base. Khanduja: We serve a broad range of investors. We offer '40 Act mutual funds with several share classes to meet investor and advisor needs. We also offer separate accounts that offer increased customization. We have seen increased interest from new investors in recent quarters as higher interest rates have driven a renewed focus.
BFI: What does the future look like? Khanduja: Short duration bond strategies look very attractive for the next 12-24 months. Higher starting yields and stability at the front-end of the curve bodes well for short duration strategies. It remains critical to be cognizant of spread duration risk and interest rate risk. The Fed plays a key role in an environment like this. After the Financial Crisis in 2008, the Fed advocated for investors to go out of the curve in duration. We are in a very different environment now and the Fed is focused on incentivizing investors to reduce duration risk and spread duration risk. That's exactly what is happening in the market, and investors like us are listening to that and acting accordingly.
The Investment Company Institute published a new "Research Perspective" paper entitled, "Trends in the Expenses and Fees of Funds, 2018." They summarize in their key findings that, "The average expense ratios for money market funds rose 1 basis point to 0.26 percent in 2018. As the Federal Reserve continued to raise rates in 2018, fund advisers kept their use of expense waivers low. Expense waivers had been offered widely during the period of near-zero short-term interest rates that had prevailed in the post–financial crisis era." The report shows stock fund expenses averaging 0.55% and bond funds averaging 0.48%. We review their latest expense update below, as well as new ICI data on retirement plan assets.
A section entitled, "Mutual Fund Expense Ratios Have Declined Substantially over the Past Two Decades," explains, "Fund expenses cover portfolio management, fund administration and compliance, shareholder services, recordkeeping, certain kinds of distribution charges (known as 12b-1 fees), and other operating costs. A fund's expense ratio, which is shown in the fund's prospectus and shareholder reports, is the fund's total annual expenses expressed as a percentage of its net assets. Unlike sales loads, fund expenses are paid from fund assets. Many factors affect a mutual fund's expense ratio, including its investment objective, its assets, the average account balance of its investors, the range of services it offers, fees that investors may pay directly, and whether the fund is a load or no-load fund."
It tells us, "On an asset-weighted basis, average expense ratios incurred by mutual fund investors have fallen substantially over the past two decades.... In 1997, equity mutual fund investors incurred expense ratios of 0.99 percent, on average, or $0.99 for every $100 in assets. By 2018, that average had fallen to 0.55 percent. Hybrid and bond mutual fund expense ratios also have declined since 1997. The average ... bond mutual fund expense ratio fell from 0.82 percent to 0.48 percent. The average expense ratio for money market funds dropped from 0.51 percent to 0.26 percent over this period."
ICI's overview adds, "In addition to varying from year to year, fund expense ratios can also vary by fund type.... For example, bond and money market mutual funds tend to have lower expense ratios than equity and hybrid mutual funds."
Their section on "Money Market Funds" states, "The average expense ratio of money market funds rose for the third consecutive year to 0.26 percent in 2018.... The past three years have generally been a reversal from the historical trend in which money market fund expense ratios had remained steady or fallen each year since 1997."
ICI explains, "From 2000 to 2009, a combination of two factors played a significant role in reducing the average expense ratios of money market funds. First, the market share of institutional share classes (which tend to have larger average account balances and therefore tend to have lower expense ratios) rose to two-thirds of money market fund total net assets. Second, expense ratios of retail money market fund share classes declined 21 percent over this period."
They continue, "After 2009, however, other factors pulled down the average expense ratios of these funds -- primarily developments that stemmed from the ultralow interest rate environment. Over 2008–2009, the Federal Reserve sharply reduced short-term interest rates. By 2009, the federal funds rate was hovering only a little more than zero. Gross yields on taxable money market funds (the yield before deducting the fund's expense ratio), which closely track short-term interest rates, fell to all-time lows. This situation remained in stasis from 2010 to late 2015."
The study tells us, "In this environment, most money market funds adopted expense waivers to ensure that net yields (the yield on a fund after deducting fund expenses) did not fall below zero. With an expense waiver, a fund's adviser agrees to absorb the cost of all or a portion of a fund’s fees and expenses for some time. The expense waiver, by reducing the fund's expense ratio, boosts the fund's net yield. These expense waivers are costly for fund advisers, reducing their revenues and profits. From 2009 to 2015, advisers waived an estimated $36 billion in money market fund expenses.... It was expected that when short-term interest rates rose and pushed up gross yields on money market funds, advisers would reduce or eliminate expense waivers, causing the expense ratios of money market funds to rise somewhat."
It adds, "That, ultimately, is what happened. In December 2015, the Federal Reserve raised the federal funds rate by 0.25 percent, signifying a strengthening economy. The Federal Reserve raised the federal funds rate eight more times from 2016 to 2018, each time by 0.25 percent. These actions were reflected in short-term interest rates and gross yields on money market funds. With gross yields rising, there has been less chance that the net yields of money market funds might fall below zero. Consequently, advisers have pared back the expense waivers they had provided to their money market funds. For example, at the end of 2015, 97 percent of money market fund share classes had expense waivers. That dropped to 72 percent by the end of 2018, and expenses waived dropped sharply from an estimated $5.5 billion in 2015 to an estimated $1.0 billion in 2018."
Separately, ICI also recently published a press release entitled, "Retirement Assets Total $27.1 Trillion in Fourth Quarter 2018," which shows that money market funds held in retirement accounts total $425 billion, or 14%, of the total $3.037 trillion in money funds. MMFs represent a mere 4.6% of the total $9.323 mutual funds in retirement accounts. The release says, "Total US retirement assets were $27.1 trillion as of December 31, 2018, down 7.4 percent from September 30, and down 4.7 percent for the year.. Retirement assets accounted for 32 percent of all household financial assets in the United States at the end of December 2018."
It explains, "Assets in individual retirement accounts (IRAs) totaled $8.8 trillion at the end of the fourth quarter of 2018, a decrease of 8.1 percent from the end of the third quarter of 2018. Defined contribution (DC) plan assets were $7.5 trillion at the end of the fourth quarter, down 8.0 percent from September 30, 2018. Government defined benefit (DB) plans—including federal, state, and local government plans—held $5.7 trillion in assets as of the end of December 2018, a 5.7 percent decrease from the end of September 2018. Private-sector DB plans held $2.9 trillion in assets at the end of the fourth quarter of 2018, and annuity reserves outside of retirement accounts accounted for another $2.1 trillion."
The ICI tables show money funds accounting for $266 billion, or 7%, of the $3.976 trillion in IRA mutual fund assets and $133 billion, or 3%, of the $4.191 trillion in defined contribution plan holdings.
The Federal Reserve left rates unchanged yesterday, and commented in its "FOMC Statement," "Information received since the Federal Open Market Committee met in January indicates that the labor market remains strong but that growth of economic activity has slowed from its solid rate in the fourth quarter. Payroll employment was little changed in February, but job gains have been solid, on average, in recent months, and the unemployment rate has remained low. Recent indicators point to slower growth of household spending and business fixed investment in the first quarter. On a 12-month basis, overall inflation has declined, largely as a result of lower energy prices; inflation for items other than food and energy remains near 2 percent. On balance, market-based measures of inflation compensation have remained low in recent months, and survey-based measures of longer-term inflation expectations are little changed."
They continue, "Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. In support of these goals, the Committee decided to maintain the target range for the federal funds rate at 2-1/4 to 2-1/2 percent. The Committee continues to view sustained expansion of economic activity, strong labor market conditions, and inflation near the Committee's symmetric 2 percent objective as the most likely outcomes. In light of global economic and financial developments and muted inflation pressures, the Committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes."
The Fed adds, "In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its maximum employment objective and its symmetric 2 percent inflation objective. This assessment will take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial and international developments."
A release entitled, "Federal Reserve Board and Federal Open Market Committee release economic projections from the March 19-20 FOMC meeting," containing the so-called "dot plot" shows that Fed members expect rates to be unchanged (averaging 2.4%) in 2019 and up 1/4 point in 2020 (to 2.6%). The release says, "The attached table and charts released on Wednesday summarize the economic projections and the target federal funds rate projections made by Federal Open Market Committee participants for the March 19-20 meeting."
The Wall Street Journal, in its coverage, "Fed Keeps Interest Rates Unchanged; Signals No More Increases Likely This Year," explains, "Federal Reserve officials indicated they are unlikely to raise interest rates this year and may be nearly finished with the series of increases they began more than three years ago now that U.S. economic growth is slowing."
It adds, "The Fed left its policy rate unchanged Wednesday in a range between 2.25% and 2.5%. Chairman Jerome Powell suggested the central bank was likely to leave it there for many months." The Journal quotes Powell, "It may be some time before the outlook for jobs and inflation calls clearly for a change in [interest rate] policy."
In other news, State Street Global Advisors' latest "Cash Commentary" tells us, "In February, the Federal Reserve (Fed) stayed on message and indicated that data dependency will drive its next policy decision. The markets were left to speculate on the future of the US economy. For the most part, the Fed's rhetoric has been interpreted as dovish, with policy rates expected to remain on hold for the foreseeable future. The futures market echoed this sentiment and has priced in less than a 5% chance of a rate hike for the remainder of 2019. At the time of writing (February 28, 2019) the Fed Funds futures market was pricing in a 20% chance of a rate cut in 2020."
It explains, "It has been challenging to find value on the government money market yield curve. The flatness of the curve and elevated repurchase agreement rates make overnight maturity securities a good place to sit and wait. The Secured Overnight Funding Rate (SOFR) has traded above 1-month and 3-month Treasury bill yields, although the potential for softer economic conditions warrants some term investment in case the yield curve inverts."
SSGA writes, "Credit conditions remain favorable for issuers. Yields on commercial paper and certificates of deposit have tightened versus Treasury yields and it appears that issuers have the upper hand in setting prices, although Libor floating-rate notes remain attractive versus fixed-rate notes, perhaps indicating that the path of rates is lower."
They say, "The Fed continued to unwind its balance sheet. On average, since October 2018, the Fed has let $9.4 trillion mature each week. This is certainly having an impact on short-term rates as dealers, at times, struggle to fund this additional Treasury and mortgage-backed securities supply. Primary dealer positions in US government securities have been noticeably higher over the past five months, increasing by over $130 billion since October last year."
Finally, the Cash Commentary states, "According to the Investment Company Institute (ICI), money market fund balances increased by $40 billion over the month. In addition, prime funds continue to grow, with prime fund balances up by over $50 billion since the beginning of this year. The growth has been steady. Interestingly, also according to the ICI, ultra-short bond funds have seen significant growth over the past six months, up from $49 billion to $81 billion, an increase of 40%."
Wells Fargo Securities' "Daily Short Stuff" wrote earlier this week about "FICC Sponsored Repo Rises in February." They explain, "Last week Crane released its monthly holdings data and the results showed, once again, that the FICC repo facility has increased by another $7 billion, from just over $95 billion to more than $102 billion. The increase is not the largest historical month-end balance for the FICC sponsored-repo program. That honor belongs to December month-end when the FICC program reached $138 billion. Year-over-year growth in FICC-sponsored repo has been nothing short of astounding."
Author Garret Sloan explains, "The jump in FICC-sponsored repo usage from year-end 2017 to year-end 2018 was approximately $104 billion, and there is little to suggest that this number cannot get much larger as the Treasury seeks to finance an additional $1 trillion deficit in each of the coming two years. At year-end there were 16 funds from 7 funds families utilizing the sponsored repo program. At year-end December 2018 the number grew to 55 funds from 17 fund families."
He continues, "Under S&P's Principal Stability Fund Ratings Criteria, a fund may face FICC (an A-1+ counterparty) for up to 50 percent of its overnight bucket based on counterparty diversification limits as long as the repo is backed by general collateral. In other words, the growth potential for the FICC-sponsored repo program could be multiples times its current size. Moody's Ratings Methodology is more lenient for short-term 'traditional' collateral in that it allows full look-through and does not restrict counterparty concentration if the underlying collateral falls within certain asset categories."
The Wells brief adds, "We point out the growth of FICC-sponsored repo as significant, as it will provide an outlet for the growth of dealer Treasury securities holdings and provide avenues of liquidity that are often unavailable during certain calendar periods. For instance, the significant jump in month-end and quarter-end bilateral and triparty repo rates is largely a function of the loss of direct funding access for certain counterparties on reporting dates, either for dealers themselves or third-party clients, with the rest of the market moving in sympathy. Were we to see further counterparties accessing FICC-sponsored repo, it would likely squeeze the spread between GC and triparty repo markets by lifting triparty rates and depressing GC."
In other news, Federated Investors' Susan Hill asks, "Just how patient will the Fed be?" She writes, "On the face of it, Wednesday's Federal Open Market Committee (FOMC) meeting might seem destined to be bland. A 'patient' Federal Reserve likely will be on full display, and no one expects a rate hike."
Hill tells us, "But the accompanying release of the Fed's latest Summary of Economic Projections ('dot plot') should hold intrigue for market participants. We anticipate it will reflect the downward shift of the path of tightening that policymakers have emphasized over the last few months. The press conference will be scrutinized for a more nuanced take by Chair Jerome Powell."
She adds, "The end of the taper will have implications for the Treasury and agency mortgage-backed markets depending on how the Fed chooses to alter the amount it reinvests. Tied into this plan likely will be a stated intention to decrease excess bank reserves to the trillion dollar mark, but we don't expect specifics about that at Wednesday's meeting." (Note: Hill will speak on a "Government Bond Market & Fund Discussion" at next week's Bond Fund Symposium, which is March 25-26 in Philadelphia.)
Finally, Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics and summary Tuesday, which tracks a shifting subset of our monthly Portfolio Holdings collection. The latest cut, with data as of Friday, March 15, includes Holdings information from 68 money funds (up from 59), representing $1.237 trillion, compared to $1.173 trillion on March 1. That represents 38.4% of the $3.225 trillion in total money fund assets tracked by Crane Data. (For our latest monthly Money Fund Portfolio Holdings numbers, see our March 12 News, "March Money Fund Portfolio Holdings: Treasuries Rebound; CP, CDs Up.")
Our latest Weekly MFPH Composition summary shows Government assets again dominated the holdings list with Repurchase Agreements (Repo) totaling $470.2 billion (rising from $452.5 billion on March 1), or 38.0% of holdings, Treasury debt totaling $412.9 billion (up from $375.4 billion), or 33.4%, and Government Agency securities totaling $209.8 billion (up from $206.5 billion), or 17.0%. Commercial Paper (CP) totaled $59.1 billion (up from $53.5 billion), or 4.8%, and Certificates of Deposit (CDs) totaled $49.1 billion (up from $47.0 billion), or 4.0%. A total of $19.8 billion, or 1.6%, was listed in the Other category (primarily Time Deposits) and VRDNs accounted for $16.5 billion, or 1.3%.
The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $412.9 billion (33.4% of total holdings), Federal Home Loan Bank with $147.1B (11.9%), BNP Paribas with $51.0B (4.1%), RBC with $50.8B (4.1%), Federal Farm Credit Bank with $44.3B (3.6%), JP Morgan with $27.4B (2.2%), Credit Agricole with $25.0B (2.0%), HSBC with $24.6B (2.0%), Wells Fargo with $23.6B (1.9%) and Mitsubishi UFJ Financial Group Inc. with $23.2B (1.9%). (Fixed Income Clearing Co. was 11th with $22.6B, or 1.8%.)
The Ten Largest Funds tracked in our latest Weekly Holdings update include: Fidelity Inv MM: Govt Port ($115.3 billion), Goldman Sachs FS Govt ($99.2B), BlackRock Lq FedFund ($97.6B), Wells Fargo Govt MMkt ($75.8B), BlackRock Lq T-Fund ($65.5B), Morgan Stanley Inst Liq Govt ($58.5B), Dreyfus Govt Cash Mgmt ($55.3B), Fidelity Inv MM: MMkt Port ($54.2B), Goldman Sachs FS Trs Instruments ($53.7B) and State Street Inst US Govt ($46.8B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary.)
This month, MFI interviews Marty Margolis, CIO of PFM Asset Management, and Jeffrey Rowe, Co-Head of PFM Asset Management's money market portfolio management team. We ask them about their firm, which is based in Harrisburg, Pa., and about recent developments in the money markets and the LGIP, local government investment pool, marketplace. Our Q&A follows. (Note: The following is reprinted from the March issue of Money Fund Intelligence, which was published on March 7. Contact us at info@cranedata.com to request the full issue or to subscribe.)
MFI: Give us a little history. Margolis: We began managing LGIPs in Pennsylvania in 1981, and we now manage 17 state-specific pools with total assets approaching $35 billion, as of 12/31/2018. They range in size and are across the country, and they're part of our fixed-income strategies, which total about $85 billion. Our strength over this long period has been in the short-intermediate, fixed-income market. We've always been focused on bringing value to the public sector, and more recently as we’ve grown, we found relevance and interest in the broader institutional marketplace. We are an institutional-only manager, and cash, enhanced cash, and short-intermediate duration remains the area that we have the most resources devoted to.
I started the business that eventually became PFM Asset Management in 1978. I'd been on the staff of the Governor of Pennsylvania at that point for about five or six years. His second term was running out and I needed a job.... So, I went off with a colleague and we started a public sector financial advisory business in the attic of his house in Harrisburg. When we opened the first LGIP in Pennsylvania in 1981, the first trade was a repo done at a level of 18% and change.
Rowe: My background is a bit less interesting than Marty's. I've spent my entire 14 year career here at PFM. After majoring in finance, I started out as a trader and had the privilege of learning from Marty and others. I earned the CFA designation early on in my career, and have just been growing with PFM ever since.
MFI: What's your main focus now? Margolis: The best thing I can say is, 'We're minding our business.' That may sound like a smart comment, but we've got a lot of success built around managing cash, managing short-intermediate fixed-income, and we've expanded a bit beyond the public sector. We are working really hard to serve existing clients in the public-sector space, where we have this long track record and client loyalty. We learned a lot during the Great Recession -- as observers -- not participants in the debacle. We escaped unscathed, I'm happy to say.
There are a couple of things we've done since then. As we've grown, we've really expanded our capabilities in the last 10 years; first in credit and more recently in the structured space to support our core strategies. And as these efforts matured, we expanded our client base and our investment lineup. We're now managing broad investment-grade and stable value portfolios, as well as cash and short/intermediate separate accounts.
Rowe: Before SEC money market reform, we sponsored a 2a-7 Prime fund, as well as a 2a-7 Government fund. What we found with our client base is that there wasn't a significant appetite for a money market fund with fees, gates, and floating NAVs.... So the Prime fund merged into the Government fund, and that's the 2a-7 offering we have today. Most of our clients have found better alternatives to a 2a-7 Prime fund, whether it be in liquidity SMAs that we manage, or our local government investment pools.
MFI: What's your biggest challenge? Rowe: There are always challenges in the front end; there's always something new facing us that we have to deal with. [That's] one of the things I enjoy most about being a fixed-income portfolio manager. As we sit here today in early 2019, the main challenge of managing short-term portfolios is simply the current environment we have with a very flat yield curve and tight credit spreads. There's not many compelling investment opportunities at the moment.
As an active manager, we prefer market conditions with a little bit of volatility, and the opportunities that typically come with that. Last year was characterized by an active FOMC, steep money market curve, and credit spread volatility -- this provided a ripe opportunity to actively add value. But again, the challenges are always changing. Looking back a few years, we had to deal with significant regulatory changes and a zero interest-rate environment in the post financial crisis period. We just have to be able to adapt as markets change.
MFI: What are you buying? Rowe: There are a number of key things on our mind, such as new structures that we, and other market participants, are evaluating here in early 2019. Two notable ones would be SOFR-based floaters, and opportunities related to the evolution of the repo market -- FICC-sponsored repo comes to mind. On the SOFR topic, like other investors in the front end, we're watching and selectively participating in SOFR-based instruments.... With just over $50 billion in issuance so far, there seems to be wide participation on the investor side. GSEs have really led the way here with about 80% of the issuance of SOFR-based securities thus far. We're seeing these GSE-syndicated deals being very well received, two to three times oversubscribed, and driven by strong 2a-7 Government fund demand.
It makes sense to us that a government fund would be interested in SOFR-based floaters since it's a close substitute for short-term bills, discount notes and repo. I think the challenge we and other participants may face going forward is looking at SOFR-based instruments from the perspective of a credit investor. Credit products tied to a risk-free reference rate can present a challenge. We haven't seen it thus far in the six or nine months that SOFR based bonds have been in existence. But in an environment where credit is under pressure, you could see, of course, SOFR-linked bonds significantly underperform as credit spreads widen.
MFI: What are customers asking about? Margolis: I would say in the pool space, rates above zero have been a great eye-opener for many clients. After years of assets being stable, when rates got up to 1%, 1.5% and north of 2%, investors started paying attention to cash. The result of that has been more growth in our cash-based strategies, particularly in the LGIPs, in the last two years or so. I think the second thing is for clients who were used to using Prime money market funds. Post-2016 with the money market fund reforms, they've been doing a reassessment of alternatives for investing cash.
As you know, LGIPs generally may offer a stable NAV, and that's been a real advantage. We've been very diligent about working with clients in tailoring the accounting in the LGIPs to GASB requirements, because our client base within LGIPs is basically governments. We also think that clients are really concerned about safety, particularly cyber-security safety. So we've mounted a big effort this year to enhance protections related to our investors moving money in and out of funds we administer and receiving secure investment reports.
MFI: What about fees and waivers? Margolis: We waived fees in some of the funds when rates were hovering around zero; we're not in that situation at this point. The fees for the LGIPs we manage are generally in line with the fees for large institutional money market funds that are a offered as alternatives to the LGIPs. Some of our funds have significant cash-management services that are included within the fund expense ratio. Bearing the cost of these services was challenging during the zero interest-rate environment; it's less challenging now. For insight into fees in the LGIP space, you can look at ... the S&P LGIP Index returns for gross and net yields for local government funds. We're right where I think our investor clients want us to be on that scale.
MFI: Are cash flows seasonal? Rowe: Absolutely. Each one of our LGIPs is unique, not only in permitted investments, which is primarily driven by state statute, but in the seasonal liquidity pattern. It's not uncommon to have a fund that doubles in size over the course of the year. We, of course, factor this into our strategy on the trading desk.... We have a rich history with LGIPs -- we've been managing the funds for 20+ years. So we have a keen insight into what those flows typically are, and can incorporate likely seasonal effects into our strategy.
MFI: Are clients using SMAs? Margolis: One of the things about the funds is that, for smaller investors, that's the place that they rely on. I would say there's been a fair amount of interest in SMAs for investors that are larger, public and not-for-profit investors that had been using Prime money market funds. Today our SMA business is bigger than our pool business. In the short duration SMA area, we have approximately $40 billion of assets under management. AUM has grown in the high single digits in each of the last several years, so we're pretty happy with the success of our SMA business.
MFI: What about your outlook? Rowe: Looking into 2019, investors are faced with a much different landscape. It's not only a question of, 'When will the Fed next move?' which was of course the question for the last several years, but 'In which direction?' So, our base case is the Fed is going to be patient here.... So with that, at least for the first half of the year, we think rates are going to be range-bound in the front end, and there's not going to be a whole lot of rate volatility.
Margolis: As Jeff observed we think rates are going to be confined to a pretty narrow range here no matter what the news.... We're positioned, as Jeff said, with the view that there's not going to be an imminent change in short-term rates. This has been a good market for cash and short-intermediate strategies. The cash market has experienced very solid growth going on four years now. As soon as rates got above zero, investors started paying attention to their cash and will continue to do so.
Last week, Federated Investors' President & CEO Chris Donahue presented at RBC Capital's Markets 2019 Financial Institutions Conference, where he answered questions on money fund growth, the shift from deposits and whether money funds will reclaim their previous record level of $4 trillion. He commented, "Some of the factors are things that continue from last year. If you look at the overall rate picture, with rates of about 2.4-2.5 in a money market fund, you're getting about what you get in a 3-year Treasury. This is a good setup for the viability of the underlying decision to go into a money market fund if you happen to be in 'pause mode.' So now that assets in the industry have crossed $3 trillion, [it's] almost like the return to the thrilling days of yester-year."
He explained, "Back in the old days, the money was in deposits, and we would have to get single tickets and show the importance of the service of a money fund and the yield on a money fund to make the thing grow like we are today. So, if you look at the dynamics, yes deposits are still increasing but at a much slower rate. Banks and broker-dealers that have banks are tightly managing their deposit "beta".... When those instruments are paying 20 basis points or 30 basis points, and something over 2% is available in a money market fund, 200 basis points makes a difference. That engine has only yet started to get its feet."
Donahue continues, "For us, we're up about $12 billion so far this year ... about $4 billion on the mutual funds side, and about $8 billion on the separate accounts side. A lot of the separate account side is seasonal. But on both sides, it's not unrelated to the basic level of rates and to the difference between what you can get in a money fund versus what you can get in a deposit. Of course, [it helps to have] an outstanding product that does what it says and has continued to do so even when it was being deprecated in the marketplace by high rollers."
He told the RBC event, "On a macro level, back before '08, there were over 200 purveyors of money market funds. Today, if you look at the list it's about 50, and frankly only the top 20 or 25 actually collect assets and make it a business. That's a macro trend that continues where people are continuing to get out of this business, so that's one thing. In terms of fees, back when I was a child, we were able to charge 1% for a money fund. Those days are more or less over and you see a lot of changes throughout and it's not in the cards for any increases in fees in money market funds."
Donahue stated, "However, some interesting dynamics have occurred. If you look at quarter to quarter, our actual net-revenue rate on money funds, they have stabilized.... The fee pressure is an inevitable part of every aspect of the investment management business. You just have to run faster, work better and do a great job. But in the money market fund business there is one other factor, and that is that increased regulation has been a driver of this consolidation in the business because it creates oligopoly. That's what more regulation does. You only have a few players left who really matter on big mandates, and some of the bigger customers want to be diversified among 2, 3, or 4 of the money market fund shops. This dynamic is not going to change."
He also commented, "On the fund side, the dynamic has been that a lot of broker dealers have opened up deposit banks and moved the money from the actual money market fund or sweep because of the change in rules into deposit accounts. This has been a really good move for the broker dealers who have done this. But there is now a [big spread] in the rate that is available. Not only a difference of 20 basis points between 'govies' and prime, but the difference between what's paid on a deposit account and what's paid on a money fund account."
When asked if money funds will break their previous $3.9 trillion mark, Donahue added, "It's just steady growth.... [Whether the Fed moves again] really isn't going to influence a lot of getting our way to $4 trillion dollars for money funds. The efforts by people like us to continuingly tell the story and show the beauty of a money market fund, which I consider ... the 8th Wonder of the World, is part of the effort as well. The money market fund industry kept all these funds intact, offering the service to clients when the rates were 0 or 1 basis point. This was not a pleasant experience, but it really showed commitment and it showed that the customers wanted the cash management service. The money market fund is as much as a customer service as it is an investment product; because of that we think its going to be a steady growth to that magic $4 trillion-dollar mark."
In other news, the Investment Company Institute released its latest "Money Market Fund Holdings" summary on Wednesday (with data as of Feb. 22, 2019). This monthly update reviews the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds. (See our Feb. 12 News, "March Money Fund Portfolio Holdings: Treasuries Rebound; CP, CDs Up.")
The MMF Holdings release says, "The Investment Company Institute (ICI) reports that, as of the final Friday in February, prime money market funds held 25.9 percent of their portfolios in daily liquid assets and 42.4 percent in weekly liquid assets, while government money market funds held 59.7 percent of their portfolios in daily liquid assets and 78.3 percent in weekly liquid assets." Prime DLA rose from 25.8% in January, and Prime WLA dipped from 42.5% the previous month. Govt MMFs' DLA declined from 61.0% in January and Govt WLA decreased from 79.0% that month.
ICI explains, "At the end of February, 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 28 days and a WAL of 90 days." Prime WAMs were the same as last month, and WALs rose by one day. Govt WAMs shortened by one days from January levels and Govt WALs rose by two days the last month.
Regarding Holdings By Region of Issuer, ICI's release tells us, "Prime money market funds’ holdings attributable to the Americas rose from $256.98 billion in January to $273.50 billion in February. Government money market funds' holdings attributable to the Americas rose from $1,811.68 billion in January to $1,855.33 billion in February." The Prime Money Market Funds by Region of Issuer table shows Americas-related holdings at $273.5 billion, or 43.5%; Asia and Pacific at $120.4 billion, or 19.2%; Europe at $228.9 billion, or 36.4%; and, Other (including Supranational) at $6.0 billion, or 0.9%. The Government Money Market Funds by Region of Issuer table shows Americas at $1.855 trillion, or 79.0%; Asia and Pacific at $120.6 billion, or 5.1%; and Europe at $366.5 billion, or 15.6%.
Finally, J.P. Morgan also recently published a "February taxable MMF holdings update," which tells us, "Total taxable MMF AUMs rose $47bn in February. Prime funds rose $29bn and government/agency funds added $21bn, while Treasury funds were mostly unchanged (-$2bn). MMFs have continued to see banner inflows in 2019, continuing the trend from late last year -- total year-to-date inflows have been about $110bn above what has been typical in recent years. These inflows have been driven mostly by prime funds, both retail (+$32bn) and institutional (+$35bn), and by institutional government funds (+$31bn). With risk appetite low given the recent volatility in the financial markets, we suspect both retail and institutional investors have generally been hiding out in cash for the time being."
The update reads, "Dealer repo with MMFs registered $1,074bn, a modest $4bn decline month over month. There was some rotation from Japanese banks (-$21bn) into US (+$15bn) and Canadian (+$10bn) banks, and from Agency repo (-$26bn) into Treasury repo (+$21bn). French banks dropped $6bn to $236bn, but it still seems that BIS's recent proposal to require banks to report their leverage exposure measures as daily averages in addition to snapshots has not yet significantly affected behavior. FICC sponsored repo rose $7bn to $102bn, and FICC remained the second largest individual counterparty."
It continues, "Away from repo, government funds increased their allocations to Treasury bills by $43bn amid $150bn of net T-bill issuance in February. Government funds also added $16bn of Treasury FRNs, while fixed-rate Treasury coupons dropped $21bn. Total holdings of Agencies were unchanged. Government MMFs remain large buyers of SOFR floaters, increasing their holdings by $12bn to $39bn. Of the more than $70bn of SOFR floaters that have been issued to date, about 78% has come from GSEs, so it's not surprising that government funds have played a large role, taking down over half of all SOFR issuances so far."
In conclusion, they write, "Prime funds also added Treasuries in February -- total holdings rose $27bn month over month. Prime funds exposure to Yankee banks also rose modestly, largely due to increased exposure to CP and CDs. On the individual bank level changes were idiosyncratic, although most of the largest issuers saw increases. The weighted average life of bank CP/CD held by prime MMFs increased by 8 days to 115 days. The weighted average maturity of bank CP/CD also rose, from 44 days to 48 days. Australian banks continued to have the longest WAL, at 147 days, followed by the Canadian banks at 130 days."
Crane Data's 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), flat year-to-date, though Euro MMFs are seeing declines. Through 3/13/19, overall MFII assets are down $20.3 billion to $825.6 billion. (They rose $15 billion in 2018.) Offshore USD money funds are down $8.3 billion YTD (they rose $29B last year). Euro funds are still feeling the pain of negative rates and pending European MMF reforms set to take final effect next week; they're down E10.5 billion YTD (following 2 flat years). GBP funds are up, however, by L1.9 billion. U.S. Dollar (USD) money funds (173) account for over half ($445.7 billion, or 53.7%) of this "European" money fund total, while Euro (EUR) money funds (95) total E88.5 billion (11.7%) and Pound Sterling (GBP) funds (102) total L211.3 billion (24.8%). We summarize our latest "offshore" money fund statistics and our Money Fund Intelligence International Portfolio Holdings (which went out to subscribers Thursday afternoon), and we also review a notice that Wells Fargo will convert its European MMF to a Govt CNAV, below.
Offshore USD MMFs yield 2.35% (7-Day) on average (as of 3/13/19), up from 2.29% on 12/31/18, 1.19% at the end of 2017 and 0.56% at the end of 2016. EUR MMFs yield -0.51 on average, compared to -0.49% at year-end 2018, -0.55% on 12/29/17 and -0.49% on 12/30/16. Meanwhile, GBP MMFs yielded 0.69%, up from 0.64% on 12/31/18, 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 MFII Portfolio Holdings, with data (as of 2/28/19), show that European-domiciled US Dollar MMFs, on average, consist of 27% in Commercial Paper (CP), 22% in Repurchase Agreements (Repo), 22% in Certificates of Deposit (CDs), 14% in Other securities (primarily Time Deposits), 14% in Treasury securities and 1% in Government Agency securities. USD funds have on average 38.8% of their portfolios maturing Overnight, 8.9% maturing in 2-7 Days, 14.8% maturing in 8-30 Days, 15.3% maturing in 31-60 Days, 10.0% maturing in 61-90 Days, 9.9% maturing in 91-180 Days and 2.4% maturing beyond 181 Days. USD holdings are affiliated with the following countries: the US (25.7%), France (15.9%), Japan (11.4%), Canada (10.1%), the United Kingdom (7.0%), Germany (4.8%), Sweden (4.7%), the Netherlands (4.5%), Australia (2.8%), Switzerland (2.3%), China (2.1%), Belgium (2.0%), Singapore (1.9%) and Norway (1.6%).
The 10 Largest Issuers to "offshore" USD money funds include: the US Treasury with $68.6 billion (13.7% of total assets), BNP Paribas with $24.7B (4.9%), Mitsubishi UFJ Financial Group Inc with $17.8B (3.5%), Barclays PLC with $17.8B (3.5%), Credit Agricole with $16.3B (3.2%), Wells Fargo with $14.2B (2.8%), Mizuho Corporate Bank Ltd with $12.7B (2.5%), Bank of Nova Scotia with $12.0B (2.4%), Toronto-Dominion Bank with $11.3B (2.3%) and RBC with $10.3B (2.1%).
Euro MMFs tracked by Crane Data contain, on average 46% in CP, 23% in CDs, 22% in Other (primarily Time Deposits), 8% in Repo, 1% in Agency securities and 0% in Treasuries. EUR funds have on average 24.0% of their portfolios maturing Overnight, 9.6% maturing in 2-7 Days, 21.8% maturing in 8-30 Days, 12.3% maturing in 31-60 Days, 13.9% maturing in 61-90 Days, 17.4% maturing in 91-180 Days and 0.9% maturing beyond 181 Days. EUR MMF holdings are affiliated with the following countries: France (29.7%), Japan (13.3%), the US (11.8%), Germany (8.9%), Sweden (6.4%), the Netherlands (4.8%), Canada (4.4%), the U.K. (4.0%), Belgium (3.8%), Finland (2.7%), China (2.4%), Switzerland (2.4%) and Australia (1.8%).
The 10 Largest Issuers to "offshore" EUR money funds include: Credit Agricole with E5.5B (6.8%), Mitsubishi UFJ Financial Group with E3.2B (4.0%), BNP Paribas with E2.9B (3.6%), Credit Mutuel with E2.6B (3.3%), Procter & Gamble Co. with E2.6B (3.2%), Svenska Handelsbanken with E2.5B (3.1%), DekaBank Deutsche Girozentrale with E2.4B (3.0%), Citi with E2.4B (2.9%), Societe Generale with E2.3B (2.9%) and Mizuho Corporate Bank Ltd with E2.3B (2.9%).
The GBP funds tracked by MFI International contain, on average (as of 2/28/19): 35% in CDs, 28% in Other (Time Deposits), 21% in CP, 12% in Repo, 3% in Treasury and 1% in Agency. Sterling funds have on average 22.7% of their portfolios maturing Overnight, 12.6% maturing in 2-7 Days, 14.8% maturing in 8-30 Days, 20.8% maturing in 31-60 Days, 12.8% maturing in 61-90 Days, 11.9% maturing in 91-180 Days, and 4.4% maturing beyond 181 Days. GBP MMF holdings are affiliated with the following countries: the United Kingdom (15.9%), Japan (15.5%), France (15.4%), Canada (9.9%), Australia (7.2%), Germany (7.0%), the Netherlands (6.0%), the United States (4.5%), Singapore (3.9%), Sweden (3.9%), Abu Dhabi (2.1%) and China (2.1%).
The 10 Largest Issuers to "offshore" GBP money funds include: UK Treasury with L11.2B (7.1%), Mizuho Corporate Bank Ltd with L6.9B (4.4%), Credit Agricole with L5.4B (3.4%), BNP Paribas with L5.1B (3.2%), Sumitomo Mitsui Banking Co with L5.0B (3.2%), Toronto-Dominion Bank with L5.0B (3.2%), Mitsubishi UFJ Financial Group with L5.0B (3.2%), BPCE SA with L4.9B (3.1%), Sumitomo Mitsui Trust Bank with L4.8B (3.0%) and Standard Chartered Bank with L4.3B (2.7%).
In other news, Wells Fargo Asset Management released a Product Update entitled, "U.S. Dollar Short-Term Money Market Fund Transition Plan to comply with European Union Money Market Fund Reform." It says, "New European Union money market fund regulations came into effect in July 2018 and apply to existing money market funds beginning in 2019. In response to the new regulations, Wells Fargo Asset Management is pleased to announce its intent to convert the Wells Fargo (Lux) Worldwide Fund - U.S. Dollar Short-Term Money Market Fund ... into a public debt constant NAV (constant NAV, or CNAV) money market fund. We believe that the public debt CNAV structure best accommodates our shareholder base by providing a conservative investment strategy that retains the ability to operate with a constant NAV."
The release continues, "The Fund's investment strategy will change from a prime money market strategy to a government money market strategy to accommodate a requirement under the new regulations that only those money market funds that pursue a public debt investing strategy are allowed to maintain a constant NAV. The Fund's new investment strategy will invest exclusively in high-quality, short-term U.S. dollar-denominated money market instruments that consist of U.S. Government obligations, reverse repurchase agreements that are fully collateralized by U.S. Government obligations and cash deposits. The Fund's name will be changed to the Wells Fargo (Lux) Worldwide Fund - USD Government Money Market Fund to better reflect the new strategy. Both the investment strategy and name changes will take effect on or about 21 March 2019."
It tells us, "The Fund will continue to utilize amortised cost accounting and process transactions at a constant US $1.00 NAV. The Fund will also continue to be managed as a short-term money market fund as defined by the European Securities and Markets Authority (ESMA). Information regarding the Fund's NAV will be posted on a daily basis on the Fund's website at www.wellsfargoworldwidefund.com. The ISINs and CUSIPs for the share classes for the Fund are not changing."
Wells adds, "Upon conversion to the public debt CNAV structure, the Fund will be subject to the potential imposition of liquidity fees and/or redemption suspensions or gates if the Fund's weekly liquid assets fall below 30% of its total assets and net redemptions from the Fund exceed 10% of the Fund's total assets in one day, and the Fund will be required to impose liquidity fees or a suspension of redemptions if the Fund's weekly liquid assets fall below 10% of its total assets, regardless of the level of redemptions. Redemption gates and suspensions will be managed as described in the Prospectus. In the unlikely event that a gate or suspension is imposed, we would generally expect to use a combination of communications, including but not limited to emails, phone calls, press releases, and website postings."
For more on European Reforms, see the following Crane Data News stories: "Aberdeen, Fido Make European Reform Changes; Oppenheimer Merging" (3/1/19), "Not Done Yet: European Money Funds Continue Adjusting to Reforms" (2/6/19), "Schwab USD LA Goes Govt Ahead of European Reforms; Weekly Holdings" (1/3/19); "Money Fund Average Breaks 2.0%, Yields Rise; BNP Splits European MMFs" (12/27/18); "Money Fund Assets Skyrocket, Break $3 Trillion; UBS on European MMFR" (12/14/18); "JPMorgan Now Live With European Money Fund Reforms; VNAVs SnP AAA" (12/4/18); and "Cash Will Be King in '19 Says GS; BlackRock Update; Europe Rejects RDM" (11/26/18). Finally, let us know if you'd like to see our latest Money Fund Intelligence International, which tracks the European money fund marketplace.
The March issue of our Bond Fund Intelligence, which will be sent out to subscribers Thursday morning, features the lead story, "Intermediate King of Bond Categories; Short Whiplash," which looks at the biggest segment of the bond fund marketplace, and the profile, "Calvert’s Khanduja: Socially Responsible Short Duration," our latest Portfolio Manager interview. BFI also recaps the latest Bond Fund News and includes our Crane BFI Indexes, which show lower bond fund yields and higher returns again in February. We excerpt from the new issue below. (Contact us if you'd like to see our Bond Fund Intelligence and BFI XLS spreadsheet, or our Bond Fund Portfolio Holdings data. Also, we're still taking registrations (and offering free tickets to select clients) for our 3rd annual Bond Fund Symposium, March 25-26, 2019 in Philadelphia. We hope to see you there!)
Our Intermediate Bond Fund story says, "Morningstar's 'Fund Spy' recently wrote a piece entitled, 'The Intermediate-Term Bond Category Is a Big Tent,' which got us thinking about this massive segment of the bond fund marketplace. We excerpt some of their comments, and review our own categorization and criteria for Intermediate-Term Bond Funds below."
It continues, "They write, 'As the third-largest U.S. fund category, the intermediate-term bond Morningstar Category sprawls across more than 300 funds and counts $1.4 trillion in assets. The size of the group reflects the essential role that intermediate-term bond funds often play in investor portfolios. Funds in this category invest primarily in investment-grade bonds and keep their durations -- a measure of interest-rate sensitivity -- in the intermediate-term range. They offer a moderate dose of interest-rate risk and should hold up reasonably well when equity markets suffer losses driven by other factors."
BFI writes, "Crane Data's Intermediate-Term Bond Fund category totals $898.9 billion, or 35.1% of the total $2.559 trillion tracked by our Bond Fund Intelligence. Note that ICI currently totals the bond fund universe at $4.133 trillion (these are their 1/31 numbers; their 2/28 data won't be out for a couple weeks), so our coverage is 61.9% of the bond fund universe. Intermediate-Term is by far Crane's largest category, followed by Long-Term, but note that we don't break funds by credit, only by maturity. (These numbers don't include ETFs either -- we track an additional $539.4 billion (82.2%) of ICI's total $656 billion.)"
Our "Fund Profile" says, "This month, BFI interviews Vishal Khanduja, Vice President at Calvert Research and Management (now part of Eaton Vance). Calvert, one of the original “ESG” or responsible investment managers, is based in Washington, D.C., with assets under management of over $14 billion (as of 12/31/18). We discuss their Short Duration Income Fund, and a number of other bond market topics, below."
BFI asks Khanduja to "Give us a little bit of background." He responds, "Calvert traces its roots back to 1976. We began in the money market business, launching the first variable-rate government money market fund in the United States. In 1982, we launched one of the first responsible-investment funds, the Calvert Balanced Fund. The short- duration franchise originated in 2002, with the Calvert Short Duration Income Fund. We expanded and added the Calvert Ultra-Short Duration Income Fund in 2006."
Khanduja continues, "As for me, I joined Calvert in 2012. My primary goal at the time was to strengthen our approach to portfolio construction and risk management so that our process would also appeal to larger institutional investors. We had strong success in managing a range of strategies across the yield curve and credit spectrum. This broader view expands our opportunity set in each of the strategies we manage, and our multi-sector focus ensures we capture them well. Our goal is to manage strategy-specific portfolios that address specific risk and return objectives." (Watch for more excerpts from this article later this month, or see the latest issue of BFI.)
Our Bond Fund News includes the brief "Yields Decline, Returns Rise in Feb." It explains, "Bond fund yields fell for all categories except Ultra-Shorts. The BFI Total Index returned 0.44% for 1-month and 2.56% over 12 months. The BFI 100 returned 0.37% in February and 2.98% over 1 year. Our BFI Conservative Ultra-Short Index returned 0.34% over 1 month and 2.17% over 1-year; the BFI Ultra-Short Index averaged 0.41% in Feb. and 2.00% over 12 mos. BFI Short-Term returned 0.32% and 2.28%, and BFI Intm-Term Index returned 0.12% and 2.66% for 1-mo and 1-year. BFI’s Long-Term Index returned 0.12% in Feb. and 2.62% for 1-yr; BFI’s High Yield Index returned 1.47% in Feb. and 3.10% over 1-yr."
Another brief, "lBD Says 'Vanguard Ratchets Down ETF Fees, Offering Cheapest Bond Fund,'" tells us, "A Bloomberg article comments, 'Vanguard Group, the second-largest issuer of exchange traded funds, is escalating an industry price competition by lowering fees on three of its popular products. The asset manager will reduce ETF fees on its Vanguard Total Bond Market ETF (BND), making it the cheapest U.S. bond fund, according to regulatory filings…. Vanguard Total Bond Market ETF will change its expense ratio to 0.035%, according to the filings. That makes it cheaper than comparable funds: SPDR Portfolio Aggregate Bond ETF (SPAB) carries an expense ratio of 0.04%, and iShares Core U.S. Aggregate Bond ETF (AGG) ... 0.05%.”
A News update titled, "Kiplinger’s Says No to Junk Bond Funds," says, "The article, 'Junk Bond Funds Don't Belong in Long-Term Portfolios,' tells us, 'High-yield bond funds are typically marketed to individual investors using pleasant-sounding names to suggest that they are less risky than they truly are. But, don’t lose sight of the fact that “high yield” is a euphemism for 'junk.' Funds with names like Opportunity & Income or Income Advantage are intended to inspire confidence even though the language in the prospectus may state that, 'junk bonds … involve greater risk of default.'"
A fourth News brief, "BlackRock Tells Us, 'Why Bonds Are Back,'" says, “BlackRock Chief Fixed Income Strategist Scott Thiel explains why bonds are making a comeback, and shares granular views of various fixed income asset classes.”
Finally, a sidebar entitled, "Inflows Return to BFs," explains, "ICI’s most recent weekly 'Combined Estimated Long-Term Fund Flows and ETF Net Issuance' report, with data as of March 6, tells us, 'Bond funds had estimated inflows of $6.06 billion for the week, compared to estimated inflows of $11.66 billion during the previous week. Taxable bond funds saw estimated inflows of $3.99 billion, and municipal bond funds had estimated inflows of $2.06 billion.' Over the past 5 weeks through 3/6/19, bond funds and bond ETFs have seen inflows of $52.1 billion."
An article entitled, "Why the Fed Should Create a Standing Repo Facility," written by economists at the Federal Reserve Bank of St. Louis, explains, "The Federal Open Market Committee (FOMC) is locking down its long-run monetary policy implementation framework. We know it will consist of a floor regime characterized by an ample supply of reserve balances. We argue below that the FOMC should include a standing repo facility as a part of this framework."
It continues, "These banks would presumably not want or need $784 billion in reserves if higher-yielding Treasuries could be liquidated at a modest discount on a reliable basis in times of stress. The Fed could easily incentivize banks to reduce their demand for reserves 3 by operating a standing overnight repurchase (repo) facility that would permit banks to convert Treasuries to reserves on demand at an administered rate. This administered rate could be set a bit above market rates -- perhaps several basis points above the top of the federal funds target range -- so that the facility is not used every day, but only periodically when a bank needs liquidity or when market repo rates are elevated."
The economists explain, "With this facility in place, banks should feel comfortable holding Treasuries to help accommodate stress scenarios instead of reserves. The demand for reserves would decline substantially as a result. Ample reserves -- and therefore the size of the Fed's balance sheet -- could in fact be much closer to their historical levels."
They add, "Even though balance sheet normalization is well underway, we think it is never too late to introduce a repo facility. The FOMC would learn over time whether the facility is working to reduce the demand for reserves. The FOMC could do so, for example, by permitting reserves to run off organically with the growth of currency in circulation while remaining confident that interest rate control would be maintained through the repo facility."
In other news, Pensions & Investments recently posted Commentary that asked if it's "Time to allocate out of stable value funds?" Contributor Henry Heitman writes, "Stable value funds continue to be by far the largest investment type for 401(k) participants who seek low risk and a reasonable return. Stable value balances are estimated to be more than $300 billion and growing. However, rising interest rates are creating problems for some of the largest stable value funds, which reflect in rates paid to participants that are less than money market funds and bank deposits. Participants in 401(k) plans may need to reallocate to money funds or FDIC insured deposit alternatives."
He continues, "For example, Wells Fargo Stable Value Fund, one of the largest with about $26 billion in assets, currently has about the same yield as a comparable Fidelity Money Market Fund, based on most recently reported Wells Fargo data as of Nov. 30 and Fidelity data as of Jan. 15. The comparison on the surface isn't equitable because the Fidelity fund has had the full benefit of the December 2018 25-basis-point rate hike, while the December Wells Fargo numbers have had two weeks less to absorb those increases. However, after years of having a substantial performance advantage over money market funds, stable value returns have converged. Other major stable value funds such as Morley Capital Management have had similar, and in some cases, worse results."
Heitman adds, "Two other factors should give an adviser or fiduciary pause to continue to recommend stable value: capacity and stability. It isn't well-known, but several stable value funds have either been bankrupt or sued over low participant payouts. The weakness was largely due to broader issues during the financial crisis when these funds had to actually write down a 100% loss on securities the fund was holding. More severe than today's situation, but starkly in contrast to the safety of FDIC insured product options."
He writes, "It also isn't well-known that stable value capacity is limited. Relatively few insurance companies provide the credit and liquidity wrappers stable value funds require to be plausibly stable. Capacity was hard to find during the crisis and could be hard to find again in the near future. Sooner or later, investor confidence in equity portions of retirement portfolios will enter a correction phase. Participants will want to reallocate to cash product options, pouring billions of new dollars into the stable value product. If the fund can't keep up with capacity, where will those dollars go?"
Finally, former FDIC Chairman William Isaac writes in American Banker on "A simple fix to brokered-deposit battle." He comments, "The American Bankers Association recently released a report from a major law firm detailing the legislative history of the Federal Deposit Insurance Corp.'s battle against bank purchases of deposits from money brokers, continuing a policy debate that began over 30 years ago when I was chairman of the FDIC. The ABA report suggests that over time the FDIC may well have gone further than necessary in addressing the underlying problems with the practice."
Isaac says, "I believe the ABA report is responsible and helps illuminate a possible solution to the issues that have arisen with the FDIC's rules. That said, I'm concerned that the rhetoric of some bankers paints the FDIC's restrictions on brokered deposits as antiquated vestiges of a bygone era of no value in today's rapidly evolving internet era."
He tells us, "[B]anks, including highly rated ones, that rely extensively on brokered funds should be cautious. Brokered funds tend not to be as loyal and stable as funds raised directly from bank customers located in the bank's community. If a bank's condition deteriorates, funds purchased from investors without loyalty to the bank are more likely to flee."
The letter adds, "All banks, including those that make little use of brokered funds, should participate in this debate. We learned during the banking and thrift crises of 1980-1992 and the senseless panic of 2008-2009 that even the best of banks will be forced to bear the cost of any necessary government cleanup." See also, the American Banker op-ed, "FDIC crackdown on brokered deposits goes too far: ABA report."
Crane Data released its March Money Fund Portfolio Holdings Monday, and our most recent collection of taxable money market securities, with data as of Feb. 28, 2019, shows big increases in Treasury holdings and increases in CP and CDs. Money market securities held by Taxable U.S. money funds (tracked by Crane Data) increased by $89.8 billion to $3.225 trillion last month, after increasing by $4.2 billion in January, $98.0 billion in December, and $41.7 billion in November. Repo continued to be the largest portfolio segment -- it was flat but remained above the $1.0 trillion mark -- 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) rose $0.9 billion (0.1%) to $1.080 trillion, or 33.5% of holdings, after increasing $41.4 billion in January, $29.6 billion in December and $18.1 billion in Nov. Treasury securities jumped by $69.6 billion (8.3%) to $903.8 billion, or 28.0% of holdings, after plunging $99.0 billion in January, but rising $70.2 billion in Dec. and $33.5 billion in Nov. Government Agency Debt was flat again, down $0.1 billion (-0.0%), to $661.3 billion, or 20.5% of holdings, after increasing $0.7 billion in January and $25.9 billion in Dec. Repo, Treasuries and Agencies totaled $2.645 trillion, representing a massive 82.0% of all taxable holdings.
Money funds' holdings of CDs and CP posted gains in January, but Other (mainly Time Deposits) assets inched lower. Commercial Paper (CP) moved up $13.2 billion (5.4%) to $257.2 billion, or 8.0% of holdings, after rising $17.7 billion in January, but falling $12.1 billion in December and $1.7 billion in Nov. Certificates of Deposits (CDs) rose $6.7 billion (3.0%) to $228.5 billion, or 7.1% of taxable assets, after jumping $30.4 billion in January, declining $5.1 billion in Dec., but rising $4.1 billion in Nov. Other holdings, primarily Time Deposits, decreased $0.5 billion (-0.6%) to $86.1 billion, or 2.7% of holdings, after rising $13.1 billion in January and dropping $10.5 billion at year-end. VRDNs inched up to $8.0 billion, or 0.2% of assets. (Note: This total is VRDNs for taxable funds only. We will publish Tax Exempt MMF holdings separately tomorrow.)
Prime money fund assets tracked by Crane Data gained $42 billion to $844 billion, or 26.2% of taxable money fund total taxable holdings of $3.225 trillion. Among Prime money funds, CDs represent over a quarter of holdings at 27.1% (down from 27.6% a month ago), while Commercial Paper accounted for 30.5% (up from 30.4%). The CP totals are comprised of: Financial Company CP, which makes up 19.1% of total holdings, Asset-Backed CP, which accounts for 6.9%, and Non-Financial Company CP, which makes up 4.5%. Prime funds also hold 4.0% in US Govt Agency Debt, 10.8% in US Treasury Debt, 6.2% in US Treasury Repo, 1.3% in Other Instruments, 7.6% in Non-Negotiable Time Deposits, 1.2% in Other Repo, 6.3% in US Government Agency Repo, and 0.7% in VRDNs.
Government money fund portfolios totaled $1.626 trillion (50.4% of all MMF assets), up from $1.597 trillion in Jan., while Treasury money fund assets totaled another $755 billion (23.4%), up from $729 billion the prior month. Government money fund portfolios were made up of 38.6% US Govt Agency Debt, 20.4% US Government Agency Repo, 17.4% US Treasury debt, and 23.5% in US Treasury Repo. Treasury money funds were comprised of 70.1% US Treasury debt, 29.7% in US Treasury Repo, and 0.1% in Government agency repo, Other Instrument, and Investment Company shares. Government and Treasury funds combined now total $2.381 trillion, or 73.8% of all taxable money fund assets.
European-affiliated holdings (including repo) rose by $11.0 billion in February to $680.9 billion; their share of holdings fell to 21.1% from last month's 21.4%. Eurozone-affiliated holdings inched lower to $426.5 billion from last month's $427.1 billion; they account for 13.2% of overall taxable money fund holdings. Asia & Pacific related holdings decreased by $14.8 billion to $282.8 billion (8.8% of the total). Americas related holdings jumped $100.8 billion to $2.260 trillion and now represent 70.1 % of holdings.
The overall taxable fund Repo totals were made up of: US Treasury Repurchase Agreements (up $26.2 billion, or 4.1%, to $658.8 billion, or 20.4% of assets); US Government Agency Repurchase Agreements (down $25.5 billion, or -6.2%, to $385.0 billion, or 11.9% of total holdings), and Other Repurchase Agreements (up $0.2 billion from last month to $36.3 billion, or 1.1% of holdings). The Commercial Paper totals were comprised of Financial Company Commercial Paper (up $7.7 billion to $161.0 billion, or 5.0% of assets), Asset Backed Commercial Paper (up $1.1 billion to $58.1 billion, or 1.8%), and Non-Financial Company Commercial Paper (up $4.5 billion to $38.0 billion, or 1.2%).
The 20 largest Issuers to taxable money market funds as of Feb. 28, 2019, include: the US Treasury ($903.8 billion, or 28.0%), Federal Home Loan Bank ($517.3B, 16.0%), BNP Paribas ($134.8B, 4.2%), RBC ($115.4B, 3.6%), Fixed Income Clearing Co ($102.2B, 3.2%), Federal Farm Credit Bank ($83.3B, 2.6%), JP Morgan ($75.8B, 2.4%), Credit Agricole ($67.7B, 2.1%), Barclays ($66.8B, 2.1%), Wells Fargo ($65.8B, 2.0%), Mitsubishi UFJ Financial Group Inc ($59.5B, 1.8%), HSBC ($48.4B, 1.5%), Societe Generale ($42.5B, 1.3%), Natixis ($42.0B, 1.3%), Mizuho Corporate Bank Ltd ($41.0B, 1.3%), Federal Home Loan Mortgage Co ($40.4B, 1.3%), Bank of Nova Scotia ($39.1B, 1.2%), Bank of America ($38.8B, 1.2%), Bank of Montreal ($38.4B, 1.2%) and Sumitomo Mitsui Banking Co ($38.3B, 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 ($122.9B, 11.4%), Fixed Income Clearing Co ($102.2B, 9.5%), RBC ($91.4B, 8.5%), JP Morgan ($62.3B, 5.8%), Barclays PLC ($56.2B, 5.2%), Wells Fargo ($54.4B, 5.0%), Credit Agricole ($46.7B, 4.3%), HSBC ($40.6B, 3.8%), Mitsubishi UFJ Financial Group Inc ($37.1B, 3.4%), and Nomura ($36.3B, 3.4%). Fed Repo positions among MMFs on 2/28/19 include: Franklin IFT US Govt MM ($1.6B), Northern Trust Trs MMkt ($0.7B), DFA Short Term Investment Fund ($0.4B), Goldman Sachs FS Govt ($0.4B), Northern Inst Govt ($0.3B), Northern Inst Govt Select ($0.1B), Northern Trust US Govt MMkt ($0.1B) 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: RBC ($24.0B, 4.8%), Mitsubishi UFJ Financial Group Inc. ($22.4B, 4.5%), Toronto-Dominion Bank ($21.0B, 4.2%), Credit Agricole ($21.0B, 4.2%), Mizuho Corporate Bank Ltd ($19.8B, 4.0%), Credit Suisse ($17.8B, 3.6%), Bank of Nova Scotia ($17.6B, 3.5%), Sumitomo Mitsui Banking Co ($17.1B, 3.4%), Svenska Handelsbanken ($16.0B, 3.2%) and Swedbank AB ($15.6B, 3.1%).
The 10 largest CD issuers include: Mitsubishi UFJ Financial Group Inc ($17.0B, 7.4%), Mizuho Corporate Bank Ltd ($15.1B, 6.6%), Sumitomo Mitsui Banking Co ($13.4B, 5.9%), Svenska Handelsbanken ($13.4B, 5.9%), Bank of Montreal ($11.4B, 5.0%), Bank of Nova Scotia ($11.2B, 4.9%), Wells Fargo ($11.0B, 4.8%), Sumitomo Mitsui Trust Bank ($10.4B, 4.5%), Landesbank Baden-Wurttemberg ($8.4B, 3.7%) and RBC ($8.3B, 3.6%).
The 10 largest CP issuers (we include affiliated ABCP programs) include: RBC ($14.7B, 6.7%), Toronto-Dominion Bank ($13.3B, 6.1%), JPMorgan ($13.2B, 6.0%), Credit Suisse ($9.7B, 4.4%), Credit Agricole ($7.7B, 3.5%), Toyota ($7.1B, 3.3%), UBS AG ($7.1B, 3.3%), Westpac Banking Co ($7.0B, 3.2%), Societe Generale ($6.3B, 2.9%) and Bank of Nova Scotia ($6.3B, 2.9%).
The largest increases among Issuers include: US Treasury (up $69.6B to $903.8B), Federal Home Loan Mortgage Co (up $9.1B to $40.4B), JP Morgan (up $8.4B to $75.8B), Fixed Income Clearing Co (up $7.1B to $102.2B), Credit Suisse (up $6.0B to $36.4B), Credit Agricole (up $5.4B to $67.7B), Bank of Nova Scotia (up $4.1B to $39.1B), Wells Fargo (up $4.0B to $65.8B), Swedbank AB (up $3.4B to $15.6B) and RBC (up $3.0B to $115.4B).
The largest decreases among Issuers of money market securities (including Repo) in Feb. were shown by: Sumitomo Mitsui Banking Co (down $16.1B to $38.3B), Federal Home Loan Bank (down $7.5B to $517.3B), Citi (down $3.9B to $36.6B), BNP Paribas (down $2.1B to $134.8B), KBC Group NV (down $1.9B to $7.8B), Deutsche Bank AG (down $1.5B to $16.6B), Societe Generale (down $1.3B to $42.5B), Federal National Mortgage Association (down $1.0B to $15.1B), Sumitomo Mitsui Trust Bank (down $0.8B to $18.4B) and ING Bank (down $0.7B to $27.0B).
The United States remained the largest segment of country-affiliations; it represents 61.6% of holdings, or $1.987 trillion. France (9.4%, $304.5B) remained in the No. 2 spot. Canada (8.4%, $272.0B) was third. Japan (7.2%, $230.8B) occupied fourth place. The United Kingdom (4.5%, $144.6B) remained in fifth place. Germany (1.6%, $52.3B), moved up to sixth place, followed by Sweden (1.7%, $55.9B) and The Netherlands (1.5%, $49.4B). Switzerland (1.5%, $48.9B) and Australia (1.2%, $38.6B) round out the Top 10. (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 Feb. 28, 2019, Taxable money funds held 35.1% (down from 36.0%) of their assets in securities maturing Overnight, and another 15.7% maturing in 2-7 days (up from 14.6% last month). Thus, 50.8% in total matures in 1-7 days. Another 19.3% matures in 8-30 days, while 11.6% matures in 31-60 days. Note that over three-quarters, or 81.7% 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 9.7% of taxable securities, while 7.2% matures in 91-180 days, and just 1.4% matures beyond 181 days.
The Federal Reserve released its latest quarterly "Z.1 Financial Accounts of the United States" statistical survey (formerly the "Flow of Funds") late last week. Among the 4 tables it includes on money market mutual funds, the Fourth Quarter 2018 edition shows that Total MMF Assets increased by $216 billion to $3.083 trillion in Q4. The Household Sector, which saw asset jump in Q4, remained the largest investor segment with $1.731 trillion. The next largest segment, Nonfinancial Corporate Businesses also saw assets increase in the fourth quarter, as did Funding Corporations' (primarily securities lending reinvestment cash) holdings of money funds.
The Fed's latest Z.1 numbers, which contain one of the few looks at money fund investor segments available, also show asset increases for Life Insurance Companies, the Rest of the World and Nonfinancial Noncorporate Business categories in Q4 2018. Property-Casualty Insurance and State & Local Govt Retirements saw assets fall slightly in Q4, and Private Pension Funds MMF holdings were flat. Over the past 12 months, the Household Sector, Nonfinancial Corporate Businesses, Funding Corporations, Rest of the World and Nonfinancial Noncorporate Businesses showed asset increases, 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 $216 billion, or 7.5%, in the fourth quarter to $3.083 trillion. Over the year through Dec. 31, 2018, assets were up $235 billion, or 8.2%. The largest segment, the Household sector, totals $1.731 trillion, or 56.1% of assets. The Household Sector increased by $117 billion, or 7.3%, in the quarter, after increasing $29 billion in Q3'18. Over the past 12 months through Q4'18, Household assets were up $123 billion, or 7.6%.
Nonfinancial Corporate Businesses, the second-largest segment according to the Fed's data series, held $502 billion, or 16.3% of the total. Assets here rose by $23 billion in the quarter, or 4.9%, and they've increased by $26 billion, or 5.6%, over the past year. Funding Corporations were the third-largest investor segment with $285 billion, or 9.2% of money fund shares. They rose by $14 billion, or 5.3%, in the latest quarter. Funding Corporations have increased by $20 billion, or 7.7%, over the previous 12 months.
The fourth-largest segment, Private Pension Funds held 5.0% of money fund assets ($155 billion) –- up slightly by 0.3% for the quarter, and down $2 billion, or -1.5%, for the year. Nonfinancial Noncorporate Businesses, which held $114 billion (3.7%), were in 5th place. The Rest Of The World category remained in sixth place in market share among investor segments with 3.4%, or $105 billion, while Life Insurance Companies held $54 billion (1.7%), State and Local Government Retirement Funds held $48 billion (1.6%), State and Local Governments held $25 billion (0.8%) and Property-Casualty Insurance held $20 billion (0.7%), and 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 $1.862 trillion, or 60.4% of the total. Debt securities includes: Open market paper ($194 billion, or 6.3%; we assume this is CP), Treasury securities ($874 billion, or 28.3%), Agency and GSE-backed securities ($644 billion, or 20.9%), Municipal securities ($143 billion, or 4.6%), and Corporate and foreign bonds ($8 billion, or 0.3%).
Other large holdings positions in the Fed's series include Security repurchase agreements ($1.020 trillion, or 33.1%) and Time and savings deposits ($191 billion, or 6.2%). Money funds also hold minor positions in Foreign deposits ($2 billion, or 0.0%), Miscellaneous assets ($8 billion, or 0.3%), and Checkable deposits and currency ($-44 billion, -1.4%). Note: The Fed also lists "Variable Annuity Money Funds;" they currently total $38 billion.
During Q4, Debt Securities were up $139 billion. This subtotal included: Open Market Paper (down $1 billion), Treasury Securities (up $106 billion), Agency- and GSE-backed Securities (up $24 billion), Municipal Securities (up $12 billion), and Corporate and Foreign Bonds (down $2 billion). In the fourth quarter of 2018, Security Repurchase Agreements were up $99 billion, Foreign Deposits were down $1 billion, Checkable Deposits and Currency were down $63 billion, Time and Savings Deposits were down $4 billion, and Miscellaneous Assets were up $1 billion.
Over the 12 months through 12/31/18, Debt Securities were up $182B, which included Open Market Paper up $41B, Treasury Securities up $171B, Agencies down $38B, Municipal Securities (up $8B), and Corporate and Foreign Bonds (down $1B). Foreign Deposits were down $2B, Checkable Deposits and Currency were down $66B, Time and Savings Deposits were up $12B, Securities repurchase agreements were up $63B, and Miscellaneous Assets were up $2B.
Note that the Federal Reserve changed its numbers related to money market funds substantially in the second quarter of 2018. "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."
Crane Data's latest Money Fund Market Share rankings show assets were higher again for the majority of U.S. money fund complexes in February. Money fund assets rose by $56.3 billion, or 1.7%, last month to $3.302 trillion, and assets have climbed by $129.3 billion, or 4.1%, over the past 3 months. They have increased by $275.1 billion, or 9.1%, over the past 12 months through Feb. 28, 2019. The biggest increases among the 25 largest managers last month were seen by JP Morgan, BlackRock, and Federated, which increased assets by $10.3 billion, $9.1B, and $8.3B, respectively. We review the latest market share totals below, and we also look at money fund yields in February.
The most noticeable declines in assets among the largest complexes in February were seen by Northern, whose MMF assets dropped by $2.9 billion, or -2.4%, Schwab, down $1.3 billion, or -0.8%, Dreyfus, with a decline of $1.1 billion, or -0.7%, and DWS, off $956 million, or -4.1%. 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 Feb. 28, 2019, Fidelity (up $88.9B, or 15.5%), Vanguard (up $63.4B, or 21.6%), Federated (up $41.3B, or 20.8%), JP Morgan (up $28.9B, or 10.6%), Goldman Sachs (up $26.7B, or 15.5%), and UBS (up $15.2B, or 34.9%) were the largest gainers. These complexes were followed by First American (up $11.9B, or 23.9%), Northern (up $7.2B, or 6.7%), Wells Fargo (up $4.7B, or 4.3%), and Morgan Stanley (up $4.3B, or 3.8%).
Vanguard, Federated, Schwab, Fidelity and Morgan Stanley had the largest money fund asset increases over the past 3 months, rising by $21.3B, $19.7B, $18.0B, $18.0B, and $9.5B, respectively. The biggest decliners over 3 months include: Dreyfus (down $6.8B, or -4.1%), Goldman Sachs (down $3.2B, or -1.6%), Franklin (down $2.0B, or -8.8%), DFA (down $1.8B, or -8.8%) and Western (down $1.3B, or -5.5%).
Our latest domestic U.S. Money Fund Family Rankings show that Fidelity Investments remains the largest money fund manager with $662.7 billion, or 20.1% of all assets. That was down $104 million in February, up $18.0 billion over 3 mos., and up $88.9B over 12 months. Vanguard ranked second with $356.6 billion, or 10.8% market share (up $5.1B, up $21.3B, and up $63.4B for the past 1-month, 3-mos. and 12-mos., respectively). JPMorgan was third with $302.3 billion, or 9.2% market share (up $10.3B, up $5.3B, and up $28.9B). BlackRock ranked fourth with $285.6 billion, or 8.6% of assets (up $9.1B, up $5.5B, and down $13.7B for the past 1-month, 3-mos. and 12-mos.), while Federated remained in fifth with $240.0 billion, or 7.3% of assets (up $8.3B, up $19.7B, and up $41.3B).
Goldman Sachs remained in sixth place with $198.3 billion, or 6.0% of assets (up $975 million, down $3.2B, and up $26.7B), while Dreyfus held seventh place with $161.4 billion, or 4.9% (down $1.1B, down $6.8B, and down $12.6B). Schwab ($155.9B, or 4.7%) was in eighth place (down $1.3B, up $18.0B and up $4.1B), followed by Morgan Stanley, which occupied ninth place ($116.7B, or 3.5%, up $4.6B, up $9.5B, and up $4.3B). Wells Fargo was in 10th place ($115.4B, or 3.5%, up $1.3B, up $7.0B, and up $4.7B).
The 11th through 20th-largest U.S. money fund managers (in order) include: Northern ($115.4B, or 3.5%), SSgA ($89.7B, or 2.7%), First American ($61.6B, or 1.9%), Invesco ($59.8B, or 2.1%), UBS ($58.8B, or 1.8%), T Rowe Price ($34.9B, or 1.1%), DWS ($22.5B, or 0.7%), Western ($21.7B, or 0.7%), Franklin ($21.1B, or 0.6%), and DFA ($19.1B, or 0.6%). Crane Data currently tracks 69 U.S. MMF managers.
When European and "offshore" money fund assets -- those domiciled in places like Ireland, Luxembourg, and the Cayman Islands -- are included, the top 10 managers match the U.S. list, except JPMorgan and BlackRock move ahead of Vanguard, Goldman moves ahead of Federated, and Morgan Stanley moves ahead of Northern and Wells. 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 ($671.0 billion), J.P. Morgan ($458.5B), BlackRock ($424.2B), Vanguard ($356.6B), and Goldman Sachs ($307.1B). Federated ($248.7B) was sixth and Dreyfus/BNY Mellon ($178.5B) was in seventh, followed by Schwab ($155.9B), Morgan Stanley ($152.4B), and Northern ($140.3B), which rounded out the top 10. These totals include "offshore" U.S. Dollar money funds, as well as Euro and Pound Sterling (GBP) funds converted into U.S. dollar totals.
The March issue of our Money Fund Intelligence and MFI XLS, with data as of 2/28/19, shows that yields were flat in February across all of our taxable Crane Money Fund Indexes. The Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 754), was unchanged at 2.08% for the 7-Day Yield (annualized, net) Average, and the 30-Day Yield remained at 2.06%. The MFA's Gross 7-Day Yield remained at 2.51%, while the Gross 30-Day Yield held steady at 2.50%.
Our Crane 100 Money Fund Index shows an average 7-Day (Net) Yield of 2.25% (unchanged) and an average 30-Day Yield that stayed at 2.24%. The Crane 100 shows a Gross 7-Day Yield of 2.52% (unchanged), and a Gross 30-Day Yield of 2.51% (no change). For the 12 month return through 2/28/19, our Crane MF Average returned 1.65% and our Crane 100 returned 1.84%. The total number of funds, including taxable and tax-exempt, rose by 4 to 945. There are currently 754 taxable, up by 4, and 191 tax-exempt money funds (unchanged).
Our Prime Institutional MF Index (7-day) yielded 2.27% (no change) as of Feb. 28, while the Crane Govt Inst Index was 2.16% (up 1 basis point) and the Treasury Inst Index was unchanged at 2.12%. Thus, the spread between Prime funds and Treasury funds is 15 basis points, while the spread between Prime funds and Govt funds is 11 basis points. The Crane Prime Retail Index yielded 2.14% (down 1 basis point), while the Govt Retail Index yielded 1.85% (up 1 basis point) and the Treasury Retail Index was 1.88% (up 1 basis point). The Crane Tax Exempt MF Index yield rose in February to 1.27% (up 32 bps).
Gross 7-Day Yields for these indexes in February were: Prime Inst 2.68% (down 1 basis point), Govt Inst 2.47% (up 1 basis point), Treasury Inst 2.44% (unchanged), Prime Retail 2.65% (down 1 basis point), Govt Retail 2.44% (no change), and Treasury Retail 2.44% (up 1 basis point). The Crane Tax Exempt Index rose 32 basis points to 1.75%. The Crane 100 MF Index returned on average 0.18% over 1-month, 0.54% over 3-months, 0.36% YTD, 1.84% over the past 1-year, 0.98% over 3-years (annualized), 0.61% over 5-years, and 0.34% over 10-years. (Contact us if you'd like to see our latest MFI XLS, Crane Indexes or Market Share report.)
The March issue of our flagship Money Fund Intelligence newsletter, which was sent to subscribers Thursday morning, features the articles: "Bank Deposit Growth Slowest Since '95; MF Assets Stronger," which shows money funds growing faster than bank MMDAs; "PFM's Margolis & Rowe Discuss Cash Market, LGIPs," our profile of PFM Asset Management; and, "Last European Money Fund Conversions Imminent; Euro," which talks about the about the pending EU Reforms March 21 compliance deadline. We've also updated our Money Fund Wisdom database with Feb. 28 statistics, and sent out our MFI XLS spreadsheet Thursday a.m. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our March Money Fund Portfolio Holdings are scheduled to ship on Monday, March 11, and our March Bond Fund Intelligence is scheduled to go out Thursday, March 14.
MFI's "Bank Deposit Growth," article says, "U.S. money fund assets grew by 5.7% in 2018, their biggest increase since 2008, while bank money market deposit accounts grew a mere 1.7%, their slowest rate since 1995. Money funds added $145.9 billion and MMDAs gained $153.6 billion during 2018, while Small Time Deposits, consisting mainly of bank certificates of deposit, showed annual growth of 34.3% or $138.3 billion last year, according to the Federal Reserve's H.6 data."
It continues, "Assets of MMDAs turned negative in January 2019, down $41.6 billion (-0.4%) to $9.276 trillion, while money funds grew $64.1 billion (2.4%) in January (the latest data available) to $2.785 trillion."
Our PFM "Profile", reads, "This month, MFI interviews Marty Margolis, CIO of PFM Asset Management, and Jeffrey Rowe, Co-Head of PFM Asset Management's money market portfolio management team. We ask them about their firm, which is based in Harrisburg, Pa., and about recent developments in the money markets and the LGIP, local government investment pool, marketplace. Our Q&A follows."
MFI says, "Give us a little history." Margolis responds, "We began managing LGIPs in Pennsylvania in 1981, and we now manage 17 state-specific pools with total assets approaching $35 billion, as of 12/31/2018. They range in size and are across the country, and they're part of our fixed-income strategies, which total about $85 billion. Our strength over this long period has been in the short-intermediate, fixed-income market. We've always been focused on bringing value to the public sector, and more recently as we've grown, we found relevance and interest in the broader institutional marketplace. We are an institutional-only manager, and cash, enhanced cash, and short-intermediate duration remains the area that we have the most resources devoted to."
He adds, "I started the business that eventually became PFM Asset Management in 1978. I'd been on the staff of the Governor of Pennsylvania at that point for about five or six years. His second term was running out and I needed a job.... So, I went off with a colleague and we started a public sector financial advisory business in the attic of his house in Harrisburg. When we opened the first LGIP in Pennsylvania in 1981, the first trade was a repo done at a level of 18% and change."
Our "European Reforms" update says, "Just a handful of funds have yet to convert to LVNAV or VNAV ahead of the extended March 21 deadline for European Money Fund Reforms, but the stragglers should change Monday (Invesco) and on 3/21 (HSBC). In February, Aberdeen, Deutsche, Fidelity and UBS converted funds and tweaked lineups, and most others converted in November or January ahead of the original Jan. 21 deadline. (See our latest MFI International publication for the new classifications. Short-Term money funds will all be CNAV, LVNAV or VNAV, and Standard MMFs will be tracked.)
MFI includes a sidebar, "Federated 10-K on Risks," which reviews Federated Investors' latest Annual Report. It tells us, "Deregulation also is a focus of certain legislative efforts. The House Financial Services Committee advanced a bill seeking to reverse certain aspects of money market fund reform and a hearing on that bill was held in the Senate in June 2018, and efforts continue in Congress to get this legislation passed and signed into law. The proposed law would permit the use of amortized cost valuation by, and override the floating NAV and certain other requirements."
A news brief, entitled, "Money Fund Assets Keep Rising," says, "ICI's Latest 'Money Market Fund Assets' report shows money fund assets rising for 15 out of past 17 weeks (to $3.079 trillion), while Crane Data's MFI totals show assets increasing by $51.3 billion in February to $3.298 trillion, their 8th monthly increase in a row."
Our March MFI XLS, with Feb. 28, 2019, data, shows total assets rose by $56.4 billion in February to $3.303 trillion, after gaining $14.4 billion in January, $41.9 billion in December and $64.3 billion in November. Our broad Crane Money Fund Average 7-Day Yield rose 2 bps to 2.08% during the month, while our Crane 100 Money Fund Index (the 100 largest taxable funds) was up 1 basis point to 2.25% (its highest level since Oct. 2008).
On a Gross Yield Basis (7-Day) (before expenses are taken out), the Crane MFA rose 1 basis point to 2.51% and the Crane 100 rose to 2.52%. Charged Expenses averaged 0.44% (unchanged) and 0.27% (unchanged), respectively for the Crane MFA and Crane 100. The average WAM (weighted average maturity) for the Crane MFA and Crane 100 was 29 and 29 days, respectively (unchanged). (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
Citi Research's latest "Short Duration Strategy" features an update entitled, "SIFMA/VRDNs – What will be the magnitude of the seasonal increase?" Authors Vikram Rai and Jack Muller tell us, "Tax-exempt MMFs witness outflows around tax season as investors tend to sell their near-cash alternatives in order to pay their tax bill. When tax-exempt MMFs witness redemptions, it causes a supply-demand imbalance in the short term tax-exempt space. This is because tax-exempt MMFs form a very large portion of the demand base (58%) for short term tax-exempt paper, and MMF outflows disturb the fragile supply-demand balance for this section of the market. As a result, SIFMA resets at a higher clearing rate to bring the market back into equilibrium."
They explain, "In the past, crossover investors such as prime funds used to step in quickly to buy VRDNs during periods of cheapening and help provide some sort of a cap on SIFMA resets. However, prime funds have lost 50% of their assets under management since year-end 2015 ... due to money fund reform, and since their AUM has diminished, so has their demand. As a result, the short term tax-exempt sector is extremely reliant on demand from tax-exempt money funds, and a gap in demand is reflected in higher dealer inventories of VRDNs."
The Citi brief says, "Over the last three weeks, tax-exempt money funds have witnessed about $3 billion in redemptions, but dealer inventory has not built up significantly. Thus, we do not believe that SIFMA will reset much higher this week (March 6th, 2019) and could even richen slightly."
It adds, "Tax-exempt MMFs face a unique problem – that of diminishing investible paper. VRDN outstandings, currently at $140 billion, have been shrinking.... The same is true for TOB outstandings, and the size of this market is currently about $44 billion ($23.7 billion in customer TOBs and $17.7 billion in proprietary TOB), thus down 78% from its peak of $200 billion in 2007. VRDNs and TOBs account for 78% of the short term tax-exempt market. On the other hand, demand for this category of paper from the traditional tax-exempt base can be quite sticky. This was the main reason why the SIFMA index was stuck in low single digits for a very long time in the past i.e. supply was low while demand was somewhat constant.... While we had hoped that VRDN net supply would increase last year1, the increase was far below our expectations."
In other news, a press release entitled, "Refinitiv and StoneCastle to Provide FDIC-Insured Cash Solutions to Institutions, Advisors, and Other Financial Intermediaries," announces a "strategic agreement" between Refinitiv (formerly a part of Thomson Reuters) and StoneCastle Cash Management to "provide StoneCastle's FDIC-insured cash solutions to Retinitiv's clearing and self-clearing broker-dealer clients."
The release relates that "Refinitiv, one of the world's largest providers of financial markets data and infrastructure, and StoneCastle Cash Management LLC, a leading FDIC-insured cash provider, today jointly announced they have signed a strategic partnership agreement to fully integrate StoneCastle's insured cash programs on the Refinitiv BETA platform. The integration enables financial intermediaries and wealth advisers utilizing the BETA platform to seamlessly connect their end-clients with comprehensive cash solutions that address their short-term transactional cash (sweep) and longer-term strategic cash needs."
Refinitiv Tim Rutka explains, "Cash has made a resurgence over the past year and we are committed to ensuring that our BETA clients have access to the most relevant solutions for investor cash.... As we continually look to find new ways to create or provide additional value for our clients, having full integration with StoneCastle's insured cash programs underscores our commitment and aligns to our strategy of expanding our BETA platform ecosystem with best-of-breed partner solutions."
Dan Farrell, CEO of StoneCastle Cash Management, states, "We have worked closely with Refinitiv on four major implementations and conversions over the past 18 months to establish FDIC-insured programs for our valued clients. We are thrilled to take this strategic relationship to the next level with such an impressive and respected firm that is ubiquitous in the industry."
The release notes, "With StoneCastle's InterLINK Insured Deposits sweep program and its FICA® For Advisors position-traded products, both integrated on the BETA platform, Refinitiv clients have a glide path that seamlessly connects investors to these cash solutions. FICA For Advisors made headlines in October 2018 when it was added to the RIA and institutional custody platforms at U.S. Bank.... The partnership allows Refinitiv clients to continue optimizing cash sweep balances while providing a powerful tool to attract non-sweep, held-away cash balances. With StoneCastle's 800+ active banks in its deposit network, Refinitiv clients will be able to support current and new assets while maximizing client and shareholder value."
"Our business model has always been to connect institutional and retail investors to banks through innovative deposit and cash-management solutions," adds Eric Lansky, president of StoneCastle Cash Management. "Our relationship with Refinitiv significantly widens this audience and allows us to meet growing demand quickly and more efficiently."
Finally, Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics and summary Tuesday, which tracks a shifting subset of our monthly Portfolio Holdings collection. The latest cut, with data as of Friday, March 1, includes Holdings information from 59 money funds (down from 60 on Feb. 22), representing $1.173 trillion, compared to $1.108 trillion on Feb. 22. That represents 38.1% of the $3.082 trillion in total money fund assets tracked by Crane Data. (For our latest monthly Money Fund Portfolio Holdings numbers, see our Feb. 12 News, "Feb. MF Portfolio Holdings: Repo, CD, CP, TD Jump; Treasuries Drop.")
Our latest Weekly MFPH Composition summary shows Government assets again dominated the holdings list with Repurchase Agreements (Repo) totaling $452.5 billion (rising from $406.3 billion on Feb. 22), or 38.6% of holdings, Treasury debt totaling $375.4 billion (down from $390.4 billion), or 32.0%, and Government Agency securities totaling $206.5 billion (up from $181.2 billion), or 17.6%. Commercial Paper (CP) totaled $53.5 billion (up from $49.8 billion), or 4.6%, and Certificates of Deposit (CDs) totaled $47.0 billion (down from $47.4 billion), or 4.0%. A total of $20.8 billion or 1.8% was listed in the Other category (primarily Time Deposits) and VRDNs accounted for $17.5 billion, or 1.5%.
The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $375.4 billion (32.0% of total holdings), Federal Home Loan Bank with $145.7B (12.4%), BNP Paribas with $57.1B (4.9%), RBC with $48.0B (4.1%), Federal Farm Credit Bank with $42.9B (3.7%), JP Morgan with $28.4B (2.4%), Credit Agricole with $26.1B (2.2%), HSBC with $24.8B (2.1%), Fixed Income Clearing Co. with $24.1B (2.1%), and Societe Generale with $21.2B (1.8%).
The Ten Largest Funds tracked in our latest Weekly Holdings update include: Fidelity Inv MM: Govt Port ($112.2 billion), Goldman Sachs FS Govt ($101.8B), BlackRock Lq FedFund ($87.8B), Wells Fargo Govt MMkt ($78.6B), BlackRock Lq T-Fund ($65.2B), Goldman Sachs FS Trs Instruments ($58.7B), Morgan Stanley Inst Liq Govt ($56.4B), Dreyfus Govt Cash Mgmt ($55.0B), Fidelity Inv MM: MMkt Port ($51.9B), and State Street Inst US Govt ($45.7B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary.)
BNY Mellon Investment Management announced Monday that its money market funds will keep the Dreyfus name, but that it is "rebranding the Dreyfus retail business and long-term mutual funds in the U.S. to align with the BNY Mellon Investment Management brand, effective on or about June 3, as part of a larger global brand initiative," we learned from fund industry news source ignites. The release, entitled, "BNY Mellon Investment Management to Rebrand Dreyfus ... Money Market Funds to Retain Dreyfus Name," states, "This rebrand will more clearly reinforce for investors BNY Mellon Investment Management's reputation and position as one of the world's largest investment managers. To reflect the strong heritage of Dreyfus in cash management strategies, the Dreyfus brand will be retained on money market funds."
Mitchell Harris, chief executive officer of BNY Mellon Investment Management, explains, "This is another step in our strategy to illustrate how we offer investors the best of both worlds: providing clients with access to the investment capabilities and creative solutions from our world-class investment managers, combined with the global scale and financial stewardship of BNY Mellon. In the retail space, having a strong and recognizable brand is increasingly important to investors. The rebranding of Dreyfus is a significant milestone in supporting the growth of our U.S. retail business."
The release explains, "As part of this rebranding initiative: the 'Dreyfus' brand on 94 long-term mutual funds, with approximately $63B in assets under management, will be replaced with 'BNY Mellon;' Dreyfus will remain the brand on 27 Dreyfus-managed money market funds, with approximately $160B in assets under management; the BNY Mellon Cash Investment Strategies division of Dreyfus will be renamed 'Dreyfus Cash Investment Strategies.' There will be no changes to the investment objectives, strategies, portfolio managers or sub-investment advisers for the newly branded "BNY Mellon" long-term mutual funds or related products as a direct result of this initiative."
It also points out that, "The Dreyfus Corporation (the investment adviser for the Dreyfus Family of Funds) will be renamed 'BNY Mellon Investment Adviser, Inc.'" and "MBSC Securities Corporation (the distributor of the Dreyfus open-end funds) will be renamed 'BNY Mellon Securities Corporation.'" (See new fund filings for Dreyfus's Retail Money Funds and Dreyfus's Inst MMFs for more details.)
BNY's release adds, "This initiative follows an extensive brand review that included feedback from investors and intermediaries. BNY Mellon Investment Management's eight investment managers will continue with individual brands to reflect their direct relationships with institutional investors, while the BNY Mellon Investment Management brand will become more prominent for global retail investors."
Matt Oomen, head of Global Distribution, comments, "Investing centers around meeting the needs of clients, and the strength of our business is that it is built around our investors. With intermediary and retail clients looking for investment partners with a breadth of capabilities and strong brands, leading with BNY Mellon Investment Management as our U.S. retail brand will make it easier for them to identify and access our full suite of investment solutions. In the institutional space, our clients value direct access to our investment managers and their strategies. As a result, our investment managers' brands lead in this space."
In other news, rates tracked by our Brokerage Sweep Intelligence report were unchanged in the latest week, but there are stark differences compared to rates from a year ago. On March 2, 2018, six out of 11 brokerages reported lower-tier ($1.00-$4,999) rates and APYs that were 0.10% or lower. On Friday, March 1, five out of 11 brokerages reported rates and APYs that were 0.30% or above in their lower-priced tiers. Three brokerages (RW Baird, Schwab and TD Ameritrade) have raised their rates since last Dec. 28; the remaining eight reported no changes across the board.
RW Baird led the pack with low-tier figures of 0.55% as of March 1. Its payouts are 0.80% to 1.30% in the tiers beginning at $250,000 and beyond $5 million, respectively. Baird offers households with account values of $250K or more Dreyfus General MMF A as a money-fund sweep option, which features a seven-day yield of 1.90%. Its range for the Insured Deposit Sweep program was from 0.40% to 1.15% at year-end 2018 and from 0.10% to 0.50% in March 2018.
Fidelity occupies the No. 2 spot in the weekly survey. It pays out 0.37% in its lowest tier, but offers 0.79% to accounts over $100,000 invested with the firm in either a Cash Management Account or a Brokerage Account. Shares in three Fidelity money funds offered for sweeps range in yield from 2.04% to 2.08%. Fidelity has not changed its FDIC-insured rates since December, but one year ago they ranged from 0.13% at the low end to 0.27% for the top tiers.
A Deposit Account at UBS was third-ranked with ranges of 0.35% at the lower end to 1.05% for $5 million or more. Those payouts have not changed since Dec. 28; the range in March 2018 was 0.25% to 0.50 percent and they were then the highest to be found in our survey, except for Baird's matching 0.50% at $5 million. Schwab has raised sweep rates since both Dec. 28 and last March and now sits at No. 4 in our survey. Its Bank Sweep Feature produces payouts of 0.33% from accounts of $1 to $999,999 and 0.70% above that level. One year ago, its product offered from 0.12% to a high of 0.30%.
The only other company surveyed showing higher rates now than at year-end was TD Ameritrade, at 0.07% for the smallest accounts to 0.50% at the top end. The range for its FDIC Insured Deposit Acct – Core stood at 0.05% to 0.45% on Dec. 28 and at 0.02% to 0.20% one year ago. Ameriprise reported rates and APYs of 0.70% this week for $5 million or more, up from 0.60% last December. No changes occurred in any lower tiers since then.
The Crane Brokerage Sweep Indexes are now at their highest levels since March 2018. They average 0.25% up to $99,999; 0.31% from $100K to under $250K; 0.39% from $250K to under $500K; 0.44% from $500K to under $1 million; 0.62% from $1M to under $5M; and, 0.75% for invested cash exceeding $5 million. A year earlier, these rates were 0.10%, 0.12%, 0.17%, 0.18%, 0.25%, and 0.33%, respectively.
For more on brokerage sweeps, see these Crane Data News articles: Edward Jones Latest to Shift to FDIC Sweeps; ICI: MMFs Break $3T in '18 (1/31/19), Schwab, Brokerages Discuss Sweeps, Money Funds on Earnings Calls (1/25/19), SF Chronicle on Brokerage Sweeps; Bloomberg on Europe Rejecting RDM (11/28/18), TD Ameritrade, Morgan Stanley on Sweeps; Money Fund Assets Rebound (10/26/18), and Money Fund Yields, Sweep Rates Move Higher; WSJ on Savings, Deposits (10/18/18).
J.P. Morgan Securities' latest "Short-Term Fixed Income" weekly features a "Low duration bond fund update," which briefly discusses developments and cash flows in the ultra-short bond fund marketplace. JPM writes, "In a volatile environment, bond funds focused on the front end of the curve have continued to attract cash. We estimate total AUM across short-term and ultrashort mutual funds and ETFs registered $680bn as of 1/31/19, up $49bn since the end of September and $99bn year over year." We quote from their latest, and we also excerpt from a WSJ article on "fin-tech" cash offerings below.
They explain, "Both ultrashort funds (those with a portfolio duration between 0.5 and 1.5 years), and short-term funds (with a longer duration of 1.5 to 3.5 years) have seen growth lately, with balances rising by about $25bn each over the last 4 months. This represents something of a revitalization for short-term funds, which had been relatively flat for months as investors flocked to ultrashorts."
The weekly continues, "With their longer duration, short-term funds have outperformed ultrashorts in the recent rally, but they underperformed (and often lost value) in the first quarter of 2018 as rates rose. These effects have largely offset, and funds across all styles have on average had remarkably similar cumulative total returns over the past year. The yield gap between short and ultrashort funds has narrowed as the curve has flattened, but short-term funds have a more volatile NAV, so they outperform in a rally but are more exposed when rates rise."
It adds, "With the yield curve flat, ultrashort funds remain attractive, and we expect demand for them to persist. And with the Fed's hikes on a pause for now, short-term funds may also see more inflows relative to ultrashorts if investors are less worried about negative returns from rising rates."
Crane Data's Bond Fund Intelligence publication shows overall bond fund assets rising by just $18.4 billion, or 0.7%, over the past year through Jan. 31, 2019, to $2.475 trillion, while our combined Conservative Ultra-Short Bond Fund and Ultra-Short Bond Fund categories grew by $33.2 billion, or 29.9%, to $149.9 billion. (Crane Data segments ultra-shorts into two segments to produce a tighter peer group for those funds just beyond money market funds.) Conservative Ultra-Short Bond Funds rose by $21.4 billion, or 43.6%, to $68.8 billion, while Ultra-Short BFs rose by $11.8 billion, or 19.0%, to $73.1 billion. Our Short-Term Bond Fund category increased by just $4.3 billion, or 1.6%, to $269.6 billion. (As a reminder too, Crane Data is hosting its 3rd annual Bond Fund Symposium March 25-26 in Philadelphia, where ultra-short bond funds will be discussed in detail. Registrations are still being accepted.)
In other news, this weekend's Wall Street Journal featured the piece, "Robo Advisers Aim to Take Bank Deposits." It tells us, "Automated financial advisers are expanding into the cash-management market with high rates, the latest move by these so-called robo advisers to capture clients from traditional banks and brokerages."
The article states, "Wealthfront's new cash-management account, essentially a brokerage account meant for cash, is offering a 2.24% annual interest rate, and Betterment LLC's account, launched in August, offers 2.23% after fees. That compares with a national average of 0.10% U.S. banks are paying savers, according to Bankrate.com. For a saver with a $25,000 account, the difference is roughly $500 over the course of a year."
The Journal comments, "These better deals for savers could hit higher-cost banks and brokerages: Cash deposits have long generated a significant chunk of revenue, and they became even more lucrative after the Federal Reserve raised rates last year. Savers looking to earn more on cash can opt to buy higher-yielding products such as money-market funds, analysts say. And some banks and brokerages have been offering competitive rates. Online brokerage E*Trade Financial Corp. , through its bank, pays clients 2.1% interest on savings, while Goldman Sachs Group Inc. pays 2.25% through its Marcus arm."
They write, "But many banks have held off raising their deposit rates much, even though the Federal Reserve raised short-term interest rates four times last year. With the Fed signaling that further increases are on pause, big banks aren’t likely to offer depositors more soon."
Finally, the WSJ says, "To offer the higher rate, Wealthfront is sweeping the money to partner banks, where up to $1 million is insured through the Federal Deposit Insurance Corp. Betterment is investing the cash in higher-yielding bonds. At Betterment, up to $250,000 in cash is insured by the Securities Investor Protection Corp. M1 Finance LLC, maker of another automated investing app, has also introduced a cash-management account with relatively high rates for savers." (See our Jan. 2 News, "Barron's Hits FinTech Money Markets; MarketWatch Slaps Wall of Cash," our Dec. 21, 2018 News, "Robinhood Withdraws 3 Percent Offer; MF Assets Stay Over $3 Trillion," and our Feb. 20 Link of the Day, "Wealthfront Cash Targets Deposits.")
Note: The average money market fund is currently paying 2.25% (our Crane 100 Money Fund Index, an average of the 100 largest taxable money funds as of 2/28/19), while the average Conservative Ultra-Short Bond Fund is yielding 2.63% (as of 1/31/19) according to our Bond Fund Intelligence publication. For comparison's sake, the top-yielding money market funds are currently paying annualized rates of 2.5-2.6%, while the top-yielding ultra-short bond funds have yields of around 3.0-3.25%.
Aberdeen Standard Investments is the most recent "offshore" manager to implement changes to its money funds to align with the March 21 compliance deadline for European Money Fund Reforms. A new prospectus, which changes the official fund names from "Aberdeen" to "Aberdeen Standard," states, "Aberdeen Standard Liquidity Fund (Lux) aims to provide investors with a broad range of diversified actively-managed Funds which, through their specific investment objectives and individual portfolios, offer investors the opportunity of exposure to selected short-term investment and money market strategies. The assets of the Funds are invested in accordance with the principle of risk diversification in Money Market Instruments." We review Aberdeen's changes, and also look at the pending merger of OppenheimerFunds into Invesco, below.
Aberdeen Standard Liquidity Fund (Lux) - Public Debt Sterling Fund has been categorized as a Public Debt CNAV-MMF (Short-Term) offering with a Constant NAV at amortized cost. The LVNAV MMF (Short-Term) lineup features Aberdeen Standard Liquidity Fund (Lux) – Canadian Dollar Fund, Aberdeen Standard Liquidity Fund (Lux) – Sterling Fund, and Aberdeen Standard Liquidity Fund (Lux) – US Dollar Fund. LVNAV funds are allowed to maintain a Constant NAV, though there are proscribed conditions that require a switch to a Variable NAV. All funds in those two groupings must meet minimums of 10 percent daily and 30 percent weekly liquid assets, 60-day maximum WAMs and 120-day maximum WALs and 397-day maximum maturities for portfolio securities.
The Aberdeen Standard Liquidity Fund (Lux) – Euro Money Market Fund becomes a Standard Variable NAV MMF, with an allowed WAM of up to six months and maximum WAL of 12 months, and maximum maturity of securities at two years, with resets at 397 days. The prospectus reads, "Aberdeen Standard Liquidity Fund (Lux) – Euro Fund makes use of the transitional provisions of article 44 of the MMF Regulation and is not authorised as Money Market Fund as of the date of this Prospectus. Despite the fact that Aberdeen Standard Liquidity Fund (Lux) – Euro Fund is not authorised as MMF, it is managed in accordance with the general rule as well as the specific rules applicable in respect of LVNAV MMFs (Short-Term) ... on a voluntary basis and in accordance with the provisions of Part I of the law dated 17 December 2010 on undertakings for collective investment, as may be amended."
Also joining the Euro-based fund in the Standard VNAV MMF category are: Aberdeen Standard Liquidity Fund (Lux) – Sterling Money Market Fund and Aberdeen Standard Liquidity Fund (Lux) – US Dollar Money Market Fund. Aberdeen Standard Investments is the investment businesses of Aberdeen Asset Management and Standard Life Investments and was created by a merger completed in August 2017.
Three funds will occupy the VNAV MMF (Short-Term) space. They are Aberdeen Standard Liquidity Fund (Lux) – Seabury Euro Liquidity 1 Fun, Aberdeen Standard Liquidity Fund (Lux) – Seabury Sterling Liquidity 1 Fund, and Aberdeen Standard Liquidity Fund (Lux) – Seabury Sterling Liquidity 2 Fund. These Variable-NAV vehicles are allowed to operate with lower daily and weekly liquidity targets than LVNAV MMF (Short-Term) funds but with the same maximum WAMs and WALs, and maximum maturity of 397 days for securities held.
Fidelity also made changes to its "offshore" funds this week. As we reported previously, shareholders were notified early last month that the Flex Distributing Shares of Fidelity Institutional Liquidity Fund plc's Euro Fund would be redesignated as equivalent Accumulating Shares as of Feb. 27 to comply with provisions of the EU Money Market Fund Regulation which disallowed continued use of a share cancellation/reverse distribution mechanism. Class A and Class B Accumulating Shares of The Euro Fund were created to accommodate the share conversions. (See our Feb. 6 News, "Not Done Yet: European Money Funds Continue Adjusting to Reforms.")
For more on European Reforms, see the following Crane Data News stories: "Schwab USD LA Goes Govt Ahead of European Reforms; Weekly Holdings" (1/3/19); "Money Fund Average Breaks 2.0%, Yields Rise; BNP Splits European MMFs" (12/27/18); "Money Fund Assets Skyrocket, Break $3 Trillion; UBS on European MMFR" (12/14/18); "JPMorgan Now Live With European Money Fund Reforms; VNAVs SnP AAA" (12/4/18); and "Cash Will Be King in '19 Says GS; BlackRock Update; Europe Rejects RDM" (11/26/18). Finally, let us know if you'd like to see our latest Money Fund Intelligence International, which tracks the European money fund marketplace.
In U.S. money fund news, shareholders of four government money markets and several bond funds now operated by OppenheimerFunds are expected to vote on or about April 12 to approve the transfer of those funds to "a corresponding newly formed fund" to be managed by Invesco Advisers Inc., the result of an Oct. 18 announcement by corporate parent Massachusetts Mutual Life Insurance Co. that it had entered into an agreement for OppenheimerFunds Inc. to be acquired by Invesco Ltd. (See our Oct. 22, 2018 News, "Invesco Buying OppenheimerFunds; DWS ESG, Northern's RAVI Advertise.")
The money funds to be acquired by Invesco are Oppenheimer Government Cash Reserves, which became a government fund in September 2016 as part of SEC rule changes; Oppenheimer Government Money Fund/VA; Oppenheimer Government Money Market Fund; and Oppenheimer Institutional Government Money Market Fund.
An SEC filing dated Jan. 18 also cited Oppenheimer International Bond Fund, Oppenheimer Limited-Term Bond Fund, Oppenheimer Total Return Bond Fund, Oppenheimer Total Return Bond Fund/VA, and Oppenheimer Ultra-Short Duration Fund as among those included in the reorganization plan. The filing stated that any ETFs being transferred to Invesco will be "liquidated and dissolved" after the closing, which it stated would occur sometime during the second quarter of 2019, "or as soon as practicable thereafter."
Invesco is the 14th-largest manager of money funds with assets of $58.7 billion, while Oppenheimer is the 30th-largest manager with $8.2 billion. A combined Invesco/OppenheimerFunds would rank 13th (ahead of First American but below SSGA) with its $66.9 billion. "The joining of Invesco and OppenheimerFunds will offer clients best-in-class solutions and draw on the trusted, consultative approach that has characterized both of our companies. With this expanded, diversified suite of investment solutions, we can further help clients achieve their investment goals over the long term," said John McDonough, head of Distribution and Marketing at OppenheimerFunds.
