News Archives: February, 2020
The Investment Company Institute released its latest weekly "Money Market Fund Assets," as well as its latest monthly "Trends in Mutual Fund Investing – January 2020" and "Month-End Portfolio Holdings of Taxable Money Funds." The former report shows that money fund assets were unchanged even as the stock market plunged, and the latter shows that money fund assets decreased by $18.1 billion to $3.614 trillion in January. Last month's decrease follows increases of $67.0 billion in January, $47.0 billion in November and $77.4 billion in October. For the 12 months through Jan. 31, 2020, money fund assets have increased by $569.0 billion, or 18.7%.
ICI's latest "MMF Assets" weekly shows money fund assets inched higher in the latest week, but didn't show the increases many expected due to market turmoil. It explains, "Total money market fund assets increased by $646 million to $3.63 trillion for the week ended Wednesday, February 26, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $9.28 billion and prime funds decreased by $7.63 billion. Tax-exempt money market funds decreased by $1.00 billion." ICI's weekly series shows Institutional MMFs falling $2.9 billion and Retail MMFs increasing $3.5 billion. Total Government MMF assets, including Treasury funds, were $2.697 trillion (74.2% of all money funds), while Total Prime MMFs were $801.9 billion (22.1%). Tax Exempt MMFs totaled $135.1 billion, 3.7%.
Money fund assets are flat year-to-date in 2020 (up $2B, or 0.1%), but they've increased in 12 out of the last 16 weeks. Note that almost all major brokerages now "sweep" cash to bank deposits and not to money market funds, so any stock market selling would show up in banks and not MMFs (and banks don't report timely deposit information). Over the past 52 weeks, ICI's money fund asset series has increased by $555 billion, or 18.0%, with Retail MMFs rising by $200 billion (16.7%) and Inst MMFs rising by $355 billion (18.8%).
ICI explains, "Assets of retail money market funds increased by $3.49 billion to $1.39 trillion. Among retail funds, government money market fund assets increased by $3.95 billion to $792.19 billion, prime money market fund assets decreased by $217 million to $478.79 billion, and tax-exempt fund assets decreased by $241 million to $123.57 billion." Retail assets account for over a third of total assets, or 38.4%, and Government Retail assets make up 56.8% of all Retail MMFs.
The release adds, "Assets of institutional money market funds decreased by $2.85 billion to $2.24 trillion. Among institutional funds, government money market fund assets increased by $5.33 billion to $1.90 trillion, prime money market fund assets decreased by $7.42 billion to $323.12 billion, and tax-exempt fund assets decreased by $762 million to $11.53 billion." Institutional assets accounted for 61.6% of all MMF assets, with Government Institutional assets making up 85.0% of all Institutional MMF totals. Money fund assets ended 2019 with their fastest growth rate and biggest asset increase since 2008. Assets increased by more than 2 1/2 times 2018's 7.2% gain.
ICI's monthly "Trends" release states, "The combined assets of the nation's mutual funds decreased by $44.69 billion, or 0.2 percent, to $21.25 trillion in January, 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 $57.16 billion in January, compared with an inflow of $36.58 billion in December.... Money market funds had an outflow of $21.29 billion in January, compared with an inflow of $63.76 billion in December. In January funds offered primarily to institutions had an outflow of $26.12 billion and funds offered primarily to individuals had an inflow of $4.83 billion."
ICI's latest statistics show that Taxable MMFs and Tax Exempt MMFs lost assets last month. Taxable MMFs decreased by $16.6 billion in January to $3.614 trillion. Tax-Exempt MMFs decreased $1.5 billion in January to $136.1 billion. Taxable MMF assets increased year-over-year by $573.2 billion (19.7%). Tax-Exempt funds fell by $4.6 billion over the past year (-0.03%). Bond fund assets increased by $126.6 billion in January (0.03%) to $4.831 trillion; they've risen by $697.5 billion (16.9%) over the past year. (Our MFI Daily shows assets up by $33.6 billion in February month-to-date through 2/26 though.)
Money funds represent 17.0% of all mutual fund assets (down 0.1% from the previous month), while bond funds account for 22.7%, according to ICI. The total number of money market funds was 364, unchanged from the month prior and down from 367 a year ago. Taxable money funds numbered 284 funds, and tax-exempt money funds numbered 80 funds.
ICI's "Month-End Portfolio Holdings" update confirms a jump in Repo and a plunge in Agencies and Treasuries last month. Repurchase Agreements remained in first place among composition segments; they increased by $65.7 billion, or 5.6%, to $1.245 trillion, or 35.8% of holdings. Repo holdings have risen $209.0 billion, or 20.2%, over the past year. (See our Feb. 12 News, "Feb. MF Portfolio Holdings: Repo, TDs, CDs Jump; Treas, Agencies Fall.")
Treasury holdings in Taxable money funds decreased by $81.7 billion, or -7.9%, to $954.4 billion, or 27.4% of holdings. Treasury securities have increased by $164.1 billion, or 20.8%, over the past 12 months. U.S. Government Agency securities were the third largest segment; they decreased $36.4 billion, or -4.8%, to $718.6 billion, or 20.7% of holdings. Agency holdings have risen by $72.1 billion, or 11.1%, over the past 12 months.
Certificates of Deposit (CDs) stood in fourth place; they increased by $46.4 billion, or 17.6%, to $310.9 billion (8.9% of assets). CDs held by money funds have grown by $88.8 billion, or 40.0%, over 12 months. Commercial Paper remained in fifth place, up $3.9 billion, or 1.7%, to $236.1 billion (6.8% of assets). CP has increased by $33.0 billion, or 16.2%, over one year. Notes (including Corporate and Bank) were up $197 million, or 1.7%, to $12.0 billion (0.3% of assets), while Other holdings decreased $777 million to $13.2 billion.
The Number of Accounts Outstanding in ICI's series for taxable money funds increased by 474.2 thousand to 37.697 million, while the Number of Funds remained unchanged from last month’s 284. Over the past 12 months, the number of accounts rose by 4.033 million and the number of funds decreased by two. The Average Maturity of Portfolios was 33 days, four less than in December. Over the past 12 months, WAMs of Taxable money have increased by four.
This month, Bond Fund Intelligence interviews Fort Washington Investment Advisors' Senior Portfolio Manager Brent Miller and Portfolio Manager Laura Mayfield, who manage investments for the Touchstone Ultra Short Duration Fixed Income Fund. We discuss their focus and policies, why spread duration is an underappreciated metric and how the pair navigate the 'flat relative value landscape.' Our Q&A follows. (Note: The following is reprinted from the February issue of our Bond Fund Intelligence, which was published on Feb. 14. Contact us at info@cranedata.com to request the full issue or to subscribe. Note too that we published our latest Bond Fund Portfolio Holdings last Friday; let us know if you'd like to see our latest "cut".)
BFI: Give us some history. Miller: Fort Washington has been involved in the ultra-short space since 1995. Scott Weston and I have been running ultrashort duration portfolios together at Fort Washington since 2001, and Laura Mayfield joined our team in 2010. Touchstone started offering funds in 1994. The Ultra Short Duration Fund was acquired by Touchstone in 2006, and then Fort Washington began sub-advising it in 2008. Fort Washington also sub-advises Touchstone Active Bond Fund, High Yield Fund and Ohio Tax Free Bond Fund. Touchstone also has other funds sub-advised by other institutional asset managers.
BFI: What's new with the fund? Mayfield: At the portfolio level, with the strong rally in corporate bond spreads at the end of the year, we've rotated out of some of our corporate exposure at relatively tight levels, and rotated more heavily into structured products -- CMBS, ABS and RMBS -- where we continue to find pockets of value. We're always a structured product focused fund, but even more so today than we have been over recent years.
At the broader level ... what's been new over the last few years is, with Basel III and Money Market Reform, a heightened awareness brought to the ultrashort space from investors looking to optimize their cash or their cash like portfolios. Our view is that traditionally banks had a pretty tight handle on a lot of the cash account relationships with corporations. That no longer seems to be the case.... For managers like ourselves, we've seen increased interest and flows, we believe as a direct result of both the industry shakeup and our strong track record in the space. We think we're well positioned to help those types of cash investors move away from their bank relationships with our customizable range of front-end investment strategies, which includes the Touchstone Ultra Short Duration Fixed Income Fund.
BFI: What do and don't you buy? Miller: The Ultra Short Duration Fund is investment grade only, so we're limited to securities that are rated investment grade by every rating agency that rates that security. The Fund also has a one year maximum portfolio duration. There's no explicit limit on security duration, however we tend to target securities that have less than a three-year duration. The Fund has industry concentration limits of 25 percent. There are no issuer or security concentration limits, but we typically target one percent positions.
In terms of duration, the Fund's typical operating range is going to be in the 1/2-year to 0.9-year duration range. We tend to target higher quality securities than just merely investment grade. As a result, the Fund's average quality tends to toggle between AA- and A+. The strategic focus, as Laura mentioned, is on structured products, particularly in the 'off-the-run' ABS sectors that were battle tested during the financial crisis. The larger firms ... tend to disregard these sectors because the markets are just too small to move the needle. Some of these sectors are only $5 billion to $10 billion in total issuance. Conversely, smaller firms can't play effectively in these spaces because they don't have the right resources or expertise. So we think at our level of assets under management, Fort Washington is 'right-sized' to play effectively in these esoteric ABS sectors, and the Touchstone Ultra Short Duration Fixed Income Fund benefits from that.
Another characteristic of the securities we tend to invest in for the Fund is short spread duration. Like we saw during the financial crisis, there were a number of 'wolves in sheep's clothing,' funds that had short option adjusted durations but had a lot of spread duration. Thinking about some of the funds that blew up ... they bought a lot of longer maturity AA, A, and BBB non-agency securities. At that time, they were getting an extra 25 to 40 bps of spread. But when spreads blew out, those funds were down anywhere from 15 to 40 percent.
So we think maintaining a short spread duration is the key to managing risk in this space. The way we manage that is by focusing on cash flow. In the Fund, anywhere from 50 to 70 percent of the principal typically matures every year, and we think that helps mitigate the spread duration risk. I just don't think a lot of investors in the ultra-short space pay enough attention to spread duration. They're so focused on the interest rate risk component that they're not always as aware of what can happen when spreads widen significantly.
BFI: What's your biggest challenge? Miller: The biggest challenge that we see for the Ultra Short Duration Fund and all of Fort Washington's ultra-short duration mandates is the flat relative value landscape. A lot of the investable universe seems to offer substantially similar yields. So, it's been difficult for us to differentiate ourselves from our peer group. If you look at that peer group, the range of returns over the last couple of years has been very tight.
In the ultra-short space, there's always the temptation to extend out the curve or take additional credit risk to get more yield. But right now, you have to take a lot more risk to stand out. Fund investors, we think, need to look closely at the funds that are sticking out.... They need to understand how much spread duration these funds have and how much credit risk is being taken, just to make sure that there isn't any hidden volatility that’s embedded in these funds.
The majority of the Ultra Short Duration Fund's investors ... we've found, are simply looking for a modest risk premium over cash. They want a volatility profile consistent with a true ultra-short duration strategy. They don’t want the volatility of a longer duration bond. They value a fund that is going to perform with relatively low volatility, not the low volatility of a money market fund necessarily, but lower volatility in exchange for a modest pickup in yield over money market funds. We don't think it's the right environment to reach for yield. We fight for every basis point we can, and we take a critical eye to every security that we invest in.... We also work very hard to optimize the cash in the Fund.
This kind of environment has made ultra-short an attractive place among investment grade fixed income strategies. Due to the wider array of investment types that we can buy in the Fund compared to, say, a money market strategy, we've been able to maintain a healthy yield over prime money market funds. But conversely, with the yield curve having become so flat and credit curves having also gotten very flat, it just doesn't make a lot of sense to park money in the two to three-year part of the curve or the intermediate part of the curve currently. We think it's time to declare victory in the two plus year part of the curve and move into an ultra-short strategy that is typically going to offer a much lower risk profile. You will likely give up very little, if any, yield to do that, so it's a very compelling risk return tradeoff right now.
BFI: What about inflows? Mayfield: The Fund's size has grown pretty steadily.... We are generally able to get heavy inflows put to work within a day and then have them optimized generally within a week or two.... We like to be accessible to our investor base, whether it's somebody doing the due diligence on the investment strategy or someone wanting to monitor us after they've made an investment in the Fund. We like to have a two-way dialog with our investors. Sometimes that also can help us understand potential liquidity needs of the holders.
BFI: What is your outlook for 2020? Miller: Our outlook is that the Fed stays pretty much on hold.... In terms of what that means for the Ultra Short Duration Fund, we're biased [towards] the shorter end of our duration range.... Right now, the Fund's duration is around half a year. The Fund also has a high quality bias at AA-, and is even more overweight in structured products versus corporate bonds than we usually are. Being short duration is not really a rate call as much as it is where we're finding the best relative value, which is in shorter average life floating rate securities. We have more floating rate exposure now than we've probably ever had.
We also have a lot of exposure to very short, fixed-rate ABS and CMBS. The quality bias is more a function of our overweight to structured products versus corporate bonds because that part of the portfolio tends to be more highly rated. That's pushed the Fund's average credit quality rating up.
BFI: Any thoughts on the future? Mayfield: We think [the segment] has really strong appeal for both types of investors [cash and core fixed]. One thing that will be interesting to see play out going forward is how risk will manifest itself in a diverse peer group. We've been in a pretty low volatility period for some time now, which has helped mask the downside risk of some peers.... But going forward, at some point we're bound to have a more volatile environment and these risks will be exposed.... We think that Touchstone Ultra Short Duration Fixed Income Fund has one of the best profiles out there, when you consider both the return profile and the volatility or downside risk profile.
The Securities and Exchange Commission released its latest "Money Market Fund Statistics" summary yesterday, which confirmed that total money fund assets decreased by $4.3 billion in January to $4.017 trillion, after hitting a record $4.021 trillion in December. This is the first decrease in MMF assets following 18 straight months of gains. Prime MMFs increased $28.1 billion in January to close at $1.123 trillion, while Govt & Treasury funds dropped by $31.4 billion to $2.752 trillion. Tax Exempt funds fell by $1.0 billion to $141.8 billion. Yields were mixed for Prime MMFs while Govt MMFs and Tax-Exempt MMF yields decreased in January. The SEC's Division of Investment Management summarizes monthly Form N-MFP data and includes asset totals and averages for yields, liquidity levels, WAMs, WALs, holdings, and other money market fund trends. We review their latest numbers below.
January's modest asset decline follows increases of $37.2 billion in December, $45.6 billion in November, $88.6 billion in October, $82.9 billion in September, $76.3 billion in August, $75.6 billion in July, $41.9 billion in June, $78.2 billion in May, $690 million in April, $87.9 billion in March, $76.9 billion in February and $31.4 billion in January. Over the 12 months through 1/31/20, total MMF assets increased by $687.4 billion, or 20.6%, according to the SEC's series. (Note that the SEC's series includes a number of internal money funds not reported to ICI or others, though Crane Data tracks most of these.)
The SEC's stats show that of the $4.017 trillion in assets, $1.123 trillion was in Prime funds, which rose $28.1 billion in January. This follows a decrease of $26.5 billion in December and increases of $20.2 billion in November, $38.4 billion in October, $11.7 billion in September and $10.6 billion in August <b:>`_. Prime funds represented 28.0% of total assets at the end of January. They've increased by a stunning $308.3 billion, or 37.8%, over the past 12 months.
Government & Treasury funds totaled $2.752 trillion, or 68.5% of assets. They fell $31.4 billion in January, after rising $64.7 billion in December, $24.2 billion in November, $46.6 billion in October, $72.9 billion in September and $66.0 billion in August. Govt & Treas MMFs are up $383.1 billion over 12 months, or 16.2%. Tax Exempt Funds decreased $1.0B to $141.8 billion, or 3.5% of all assets. The number of money funds was 367 in January, up one from the previous month and down 2 funds from a year earlier.
Yields for Taxable MMFs were largely down in January, with only Prime Institutional yields rising. The declines of the past 10 months follow almost 24 months of straight increases. The Weighted Average Gross 7-Day Yield for Prime Institutional Funds on Jan. 31 was 1.83%, up 3 basis points from the previous month. The Weighted Average Gross 7-Day Yield for Prime Retail MMFs was 1.83%, down 5 basis points. Gross yields fell to 1.64% for Government Funds, down 3 bps from last month. Gross yields for Treasury Funds decreased 3 basis points to 1.63%. Gross Yields for Muni Institutional MMFs fell from 1.58% in December to 0.97 %. Gross Yields for Muni Retail funds plummeted from 1.54% to 1.00% in January.
The Weighted Average 7-Day Net Yield for Prime Institutional MMFs was 1.74%, up 2 bps from the previous month and down 78 bps since 1/31/19. The Average Net Yield for Prime Retail Funds was 1.58%, down 6 bps from the previous month and down 0.82% since 1/31/19. Net yields fell to 1.38% for Government Funds, down 2 bps from last month. Net yields for Treasury Funds decreased 2 basis points to 1.41%. Net Yields for Muni Institutional MMFs fell from 1.44% in December to 0.84%. Net Yields for Muni Retail funds decreased from 1.26% 0.73% in January. (Note: These averages are asset-weighted.)
WALs and WAMs were mostly lower in January, with only Prime Institutional WALs and WAMs increasing. The average Weighted Average Life, or WAL, was 63.4 days (up 1.3 days from last month) for Prime Institutional funds, and 64.1 days for Prime Retail funds (down 6.1 days). Government fund WALs averaged 93.0 days (down 3.1 days) while Treasury fund WALs averaged 95.0 days (down 2.7 days). Muni Institutional fund WALs were 16.3 days (down 2.5 days), and Muni Retail MMF WALs averaged 34.7 days (down 1.9 days).
The Weighted Average Maturity, or WAM, was 30.6 days (up 0.2 days from the previous month) for Prime Institutional funds, 32.3 days (down 4.2 days from the previous month) for Prime Retail funds, 30.1 days (down 5.4 days) for Government funds, and 38.1 days (down 4.5 days) for Treasury funds. Muni Inst WAMs were down 2.6 days to 15.9 days, while Muni Retail WAMs decreased 2.2 days to 32.4 days.
Total Daily Liquid Assets for Prime Institutional funds were 37.0% in January (unchanged from the previous month), and DLA for Prime Retail funds was 24.6% (up 0.3% from previous month) as a percent of total assets. The average DLA was 47.1% for Govt MMFs and 90.5% for Treasury MMFs. Total Weekly Liquid Assets was 53.1% (down 0.2% from the previous month) for Prime Institutional MMFs, and 40.6% (up 1.2% from the previous month) for Prime Retail funds. Average WLA was 72.0% for Govt MMFs and 98.1% for Treasury MMFs.
In the SEC's "Prime MMF Holdings of Bank-Related Securities by Country table for January 2020," the largest entries included: Canada with $149.6 billion, the US with $119.1 billion, Japan with $115.7 billion, France with $108.2B, New Zealand/Australia with $54.8B, Germany with $54.5B, the UK with $44.7B, the Netherlands with $43.1B and Switzerland with $32.9B. The biggest gainers among the "Prime MMF Holdings by Country" include: France (up $31.5B), Germany (up $18.7B), the US (up $12.2B), the Netherlands (up $9.1B), the UK (up $8.9B), Switzerland (up $4.8B) and New Zealand/Australia (up $0.2B). The biggest and only decreases were the Canada (down $19.2B) and Japan (down $1.6B).
The SEC's "Trend in Prime MMF Holdings of Bank-Related Securities by Major Region" table shows Europe had $137.9B (up $137.9B from last month), the Eurozone subset had $223.0B (up $66.7B). The Americas had $269.1 billion (down $6.9B), while Asia Pacific had $194.3B (down $2.1B).
The "Prime MMF Aggregate Product Exposures" chart shows that of the $1.123 trillion in Prime MMF Portfolios as of January 31, $369.1B (32.9%) was in CDs and Time Deposits (up from $307.9B), $311.0B (27.7%) was in Government & Treasury securities (direct and repo) (down from $359.3B), $226.9B (20.2%) was in Financial Company CP (up from $214.0B), $153.9B (13.7%) was held in Non-Financial CP and Other securities (up from $146.7B), and $60.3B (5.4%) was in ABCP (down from $62.3B).
The SEC's "Government and Treasury MMFs Bank Repo Counterparties by Country" table shows the U.S. with $191.3 billion, Canada with $168.7 billion, France with $197.6 billion, the UK with $102.3 billion, Germany with $23.3 billion, Japan with $153.1 billion and Other with $40.7 billion. All MMF Repo with the Federal Reserve fell by $42.8 billion in January to $4.5 billion.
Finally, a "Percent of Securities with Greater than 179 Days to Maturity" table shows Prime Inst MMFs with 10.1%, Prime Retail MMFs with 8.8%, Muni Inst MMFs with 2.2%, Muni Retail MMFs 6.0%, Govt MMFs with 18.4% and Treasury MMFs with 18.6%.
This past weekend, both The Wall Street Journal and Barron's discussed the news that Morgan Stanley would buy E*Trade, citing sweep cash as one of the major reasons behind the move. The Journal's Jason Zweig writes in, "What the E*Trade Deal Tells You About the New Investing Game," that, "Morgan Stanley's takeover of E*Trade Financial Corp. for $13 billion shows how drastically the brokerage industry's business model has changed. Firms no longer want to offer investment products from all sources. Instead, they want to milk their customers' cash and manage all of the assets themselves. Investors need to understand the rules of the new game." We review this merger, as well as the latest statistics on the brokerage sweep sector, below.
The Journal explains, "Wall Street can't make oodles of money off your trades anymore; technology has driven commissions to near zero. And it can't make the windfall it once did off managing portfolios; there, too, market-tracking index funds and exchange-traded funds have become cheap as dirt. Where are the remaining profits for brokerage firms?"
They answer, "They can take your cash and, instead of investing it for your benefit in the highest-yielding money fund or deposit account, they can put it in their own bank and pay you peanuts. Then they lend it out and keep the profit for themselves. Morgan Stanley, E*Trade and Schwab all own banks to which they route much of their customers' cash. E*Trade pays its customers 0.01% to 0.25% on their uninvested cash; Morgan Stanley, 0.03% to 0.2%; Schwab, 0.06% to 0.3%."
The piece elaborates, "Brokerages have been pocketing 2% and up on that money (and you can do almost as well, if you pull the cash from your brokerage account and park it in a certificate of deposit or savings account at the right online bank). Schwab, which has hoovered up $220 billion in bank deposits, earned 61% of its total net revenues in 2019 from the interest it captured on those balances."
Barron's article, "Wall Street Is Taking Over Main Street. Morgan Stanley's Deal for E*Trade Heats Up the Race," tells us, "E*Trade will lift Morgan's deposit base to over $200 billion.... E*Trade brings a few other prized assets to Morgan Stanley. Included in its $360 billion of client assets are $56 billion in cash deposits -- a low-cost, stable funding source that Morgan Stanley can transform into interest income for its bottom line."
It also comments, "Goldman's Marcus platform has garnered the most attention in its retail push. In its three years, Marcus has grown rapidly. Over the next five years, Goldman hopes deposits and loans will exceed $125 billion and $20 billion, respectively, up from $60 billion and $7 billion.... And Vanguard Group, although not a big player in retail brokerage, is developing a new low-cost robo service and using its enormous scale to scoop up more fund assets."
Barron's adds, "[Morgan Stanley CEO James Gorman] also sees an opportunity to accelerate deposit growth with digital banking, through E*Trade's checking and online bill-paying service.... Nearly two thirds of E*Trade's $2.9 billion in revenue last year came from interest income on cash deposits."
Rates were largely unchanged in the latest week while brokerage sweep accounts remained flat. Our Money Fund Intelligence Daily shows the flagship Crane 100 MF Index unchanged at 1.42%. The Crane 100 is down from 1.81% on Sept. 30 and down from 2.18% on June 30. It is down 81 bps from the beginning of 2019 (2.23%), but up from its near low of 0.06% ten years ago (12/31/09). The Crane Brokerage Sweep Index, which is currently 0.12%, is up 7 bps from ten years ago (0.05%) and down 16 bps from the end of 2018 (0.28%). Our latest Brokerage Sweep Intelligence, with data as of Friday, Feb. 21, shows no major brokerages lowering rates in the past week.
The Crane Money Fund Average, which includes all taxable funds tracked by Crane Data, shows a 7-day yield of 1.30%, unchanged in the week through Friday, Feb. 21. Treasury Inst MFs , Government Inst MFs and Prime Inst MMFs were all flat at 1.32%, 1.38% and 1.51%, respectively. Treasury Retail MFs currently yield 1.06%, (unch.), Government Retail MFs yield 1.07% (up 1 bps), and Prime Retail MFs yield 1.33% (down a basis point), Tax-exempt MF 7-day yields increased 0.06% to 0.74%.
Crane's Brokerage Sweep Index remained flat at 0.14% in the week ended February 21 (for balances of $100K. E*Trade and TD Ameritrade currently have the lowest rate for balances at the $100K level (0.01%). Meanwhile, Fidelity continues to have the highest sweep rate (0.82%). (Fidelity also has a higher-yielding money fund option for new accounts.) Morgan Stanley is paying 0.03%. UBS, Merrill, Raymond James and Wells Fargo are all paying 0.05%, and Schwab is paying 0.06%. Ameriprise is paying 0.08% and RW Baird is paying 0.33% for balances of $100K.
Our MFI Daily, with data as of February 21, shows money fund assets have risen $30.8 billion over the past week to $3.965 trillion. Prime assets were up $4.1 billion, Government assets were up by $15.3B. Tax-Exempt MMFs increased $1.4 billion. The MFI Daily also shows money fund assets up $39.5 billion month-to-date to $3.965 trillion. Prime assets are up $26.5 billion MTD, while Government assets are up by $12.3B. Tax-Exempt MMFs increased $668 million. Prime and Government MF assets were up $378.7 billion and $492.6 billion in 2019, respectively.
For more, see our latest Brokerage Sweep Intelligence, or see these Crane Data News articles: N-MFP Holdings Shows MMF Assets Hold Above $4.0 Trillion; Sweeps Flat (2/11/20), Concerns Remain about Brokerage Cash Says Investment News; Sweeps (2/4/20), FINRA Fallout: More on Sweeps, Fin-Tech Cash Accounts by ignites, FP (1/22/20), Finra Latest To Scrutinize Sweeps (1/15/20), Ignites on UBS Sweep Changes (12/9/19), More on Regulators and Sweeps (11/25/19) and SEC Warns on Cash Sweeps (11/12/19).
Federated Hermes, the recently renamed Federated Investors, released its latest "10-K Annual Report" Friday, which discusses a number of issues involving money funds and risks to the business. The report says, "Of the 135 Federated Funds as of December 31, 2019, Federated's investment advisory subsidiaries managed 27 money market funds totaling $286.6 billion in AUM, 49 fixed-income funds with $44.2 billion in AUM, 43 equity funds with $48.1 billion in AUM, 11 alternative/private markets funds with $11.4 billion in AUM and five multi-asset funds with $4.0 billion in AUM. As of December 31, 2019, Federated provided investment advisory services to $181.5 billion in Separate Account assets. These Separate Accounts represent assets of government entities, high-net-worth individuals, pension and other employee benefit plans, corporations, trusts, foundations, endowments, sub-advised funds and other accounts or products owned or sponsored by third parties." (See also our Feb. 3 News, "Newly Renamed Federated Hermes Earnings Call Light on Money Funds," which quotes from Federated's most recent quarterly earnings call.)
It tells us, "Federated, which began selling money market fund products to institutions in 1974, is one of the largest U.S. managers of money market assets, with $395.5 billion in AUM at December 31, 2019. Federated has developed expertise in managing cash for institutions, which typically have strict requirements for regulatory compliance, relative safety, liquidity and competitive yields. Federated also manages retail money market products that are typically distributed through broker/dealers. At December 31, 2019, Federated managed money market assets across a wide range of categories: government ($257.3 billion); prime ($126.8 billion); and tax-free ($11.4 billion)."
The 10-K continues, "Federated's distribution strategy is to provide investment management products and services to more than 11,000 institutions and intermediaries, including banks, broker/dealers, registered investment advisors, government entities, corporations, insurance companies, foundations and endowments. Federated uses its trained sales force of more than 225 representatives and managers backed by an experienced support staff to offer its products and strategies, add new customer relationships and strengthen and expand existing relationships. Federated's investment products and strategies are distributed in three markets. These markets and the relative percentage of managed assets at December 31, 2019 attributable to such markets are as follows: U.S. financial intermediary (65%); U.S. institutional (23%); and international (12%)."
On the "U.S. Financial Intermediary" market, it states, "Federated distributes its products and strategies in this market through a large, diversified group of over 7,700 national, regional and independent broker/dealers, banks and registered investment advisors. Financial intermediaries use Federated's products to meet the needs of their customers, who are often retail investors. Federated offers a full range of products to these customers, including mutual funds, Separate Accounts and private funds. As of December 31, 2019, managed assets in the U.S. financial intermediary market included $282.9 billion in money market assets, $55.1 billion in equity assets, $35.5 billion in fixed-income assets, $3.2 billion in multi-asset and $0.1 billion in alternative/private markets assets."
For the "U.S. Institutional" market, "Federated offers its products and strategies to a wide variety of domestic institutional customers including government entities, not-for-profit entities, corporations, corporate and public pension funds, foundations, endowments and non-Federated investment companies or other funds. As of December 31, 2019, managed assets in the U.S. institutional market included $99.1 billion in money market assets, $27.7 billion in fixed-income assets, $3.7 billion in equity assets, $1.0 billion in multi-asset and $0.2 billion in alternative/private markets assets."
For "International," they write, "Federated manages assets from institutional and financial intermediary customers outside the U.S. through subsidiaries focused on gathering assets in Europe, the Middle East, Canada, Latin America and the Asia Pacific region. The 2018 Hermes Acquisition expanded the distribution footprint of Federated outside of the U.S. As of December 31, 2019, managed assets in the international market included $30.2 billion in equity assets, $17.8 billion in alternative/private markets assets, $13.6 billion in money market assets and $5.9 billion in fixed-income assets."
In the "Risks" section, Federated comments, "While the pace of new regulation is expected to continue to be moderate in 2020 compared to the post-financial crisis period, the U.S. Securities and Exchange Commission (SEC) (among other regulatory authorities, self-regulatory organizations or exchanges) continues to propose and finalize new rules and regulations.... While new regulations continue to be promulgated, efforts also continue to eliminate certain regulatory requirements. For example, legislation has been introduced in both the Senate and the House of Representatives in 2019 in a continuing effort to get revisions to money market fund reform passed and signed into law. The proposed law would permit the use of amortized cost valuation by, and override the floating net asset value (NAV) and certain other requirements for, institutional and municipal (or tax-exempt) money market funds."
They explain, "These requirements were imposed under the SEC's structural, operational and other money market fund reforms adopted through amendments to Rule 2a-7, and certain other regulations, on July 23, 2014 (2014 Money Fund Rules) and related guidance (collectively, the 2014 Money Fund Rules and Guidance). Compliance with the 2014 Money Fund Rules and Guidance became effective on October 14, 2016. Federated continues to support efforts to permit the use of amortized cost valuation by, and override the floating NAV and certain other requirements imposed under the 2014 Money Fund Rules and Guidance for, institutional and municipal (or tax-exempt) money market funds."
The report adds, "In addition to the above Regulatory Developments, the SEC staff has been engaging in a series of investigations, enforcement actions and/or examinations involving investment management industry participants, including investment advisors and investment management companies such as Federated's investment management subsidiaries and the Federated Funds. The SEC examinations have included certain sweep examinations of investment management companies and investment advisors involving various topics, including, but not limited to, representations regarding use of ESG factors, cyber-security, certain technology systems, index construction and maintenance, disclosure of risks of investing in smaller or thinly traded ETFs, funds with "aberrational" performance, compliance with the 2014 Money Fund Rules and Guidance, "distribution in guise," the impact of the UK's vote to exit the European Union (EU) (known as "Brexit"), share class selection, fixed-income and high yield liquidity, liquidity controls and liquid alternatives."
Federated also writes, "The activities of the Financial Stability Oversight Council (FSOC) also continue to be monitored by the investment management industry, including Federated. Since the FSOC indicated in 2014 that it intended to monitor the effectiveness of the 2014 Money Fund Rules, concerns persisted that the FSOC may recommend new or heightened regulation for "non-bank financial companies," which the Board of Governors of the Federal Reserve System (Governors) have indicated can include open-end investment companies, such as money market funds and other mutual funds.... In its 2019 Annual Report published on December 4, 2019, the FSOC turned its focus to other types of cash management vehicles that continue to use amortized cost or have a stable NAV, and that may be sponsored or advised by registered investment advisers, but are nevertheless not subject to SEC oversight. These include entities such as local government investment pools and private liquidity funds. Noting that such entities are not subject to the 2014 Money Fund Rules, the FSOC recommended that financial regulators monitor developments concerning such short-term cash management vehicles for any financial stability risk implications."
The 10-K Report continues, "The current regulatory environment has impacted, and will continue to impact, Federated's business, results of operations, financial condition and/or cash flows. For example, regulatory changes, such as the 2014 Money Fund Rules and Guidance, can result in shifts in asset mixes and flows. These shifts impact Federated's AUM, revenues and operating income. Management continues to believe that, as and to the extent interest rates remain at higher levels and do not return to near zero, money market funds will benefit generally from increased yields, particularly as compared to deposit account alternatives, and that assets will continue to flow back into money market funds. While 2018 and 2019 did see a shift in asset mix back toward institutional prime and municipal (tax-exempt) money market funds, there is no guarantee such shift will continue and return the asset mix between institutional prime, municipal (or tax-exempt) and government money market funds to pre-October 2016 levels; therefore, the degree of improvement to Federated's prime money market business can vary and is uncertain."
It adds, "On July 19, 2019, ESMA published a Final Report on Guidelines on stress test scenarios under the EU Money Market Fund Regulation (MMF Regulation) and a Final Report on reporting to competent authorities under Article 37 of the MMF Regulation, which are aimed at ensuring a coherent application of the MMF Regulation. As required by Article 28 of the MMF Regulation, the Guidelines on stress testing establish common reference parameters of the stress test scenarios money market funds or managers of money market funds should include in their stress testing scenarios. As required by Article 37 of the MMF Regulation, the Guidelines on reporting provide guidance on how to fill in the reporting template on money market funds that their managers will transmit to competent authorities as of the first quarter of 2020. Federated continues to analyze the new Guidelines and the requirements for compliance."
Federated writes, "The activities of the Financial Stability Board (FSB) and the International Organization of Securities Commissions (IOSCO) also continue to be monitored by the investment management industry, including Federated. Building on consultations and other reports published from 2015 through 2019 regarding methodologies for identifying non-bank non-insurer global systemically important financial institutions, recommendations to address structural vulnerabilities from asset management activities, and liquidity risk management, the FSB and IOSCO continued, and will continue, to assess, recommend and implement regulatory reforms affecting money market funds, liquidity risk management, derivatives, leverage, and other aspects of the investment management industry."
They comment, "The actual amount of future fee waivers, if any, the resulting negative impact of any waivers and Federated's ability to recover the net pre-tax impact of such waivers (that is, the ability to capture the pre-tax impact going forward, not re-capture previously waived amounts) could vary significantly from prior years as they are contingent on a number of variables including, but not limited to, changes in asset levels and mix within the money market funds or among customer assets, yields on instruments available for purchase by the money market funds, actions by the Governors, the FOMC, the Treasury Department, the SEC, the DOL, the FSOC and other governmental entities, changes in fees and expenses of the money market funds, changes in customer relationships, changes in money market product structures and offerings, demand for competing products, changes in distribution models, changes in the distribution fee arrangements with third parties, Federated's willingness to continue the fee waivers and changes in the extent to which the impact of the waivers is shared by any one or more third parties. The duration, level and impact of a further decline in interest rates and/or future Voluntary Yield-related Fee Waivers, if any, as well as Federated's ability to recover the net pre-tax impact of such waivers (that is, the ability to capture the pre-tax income going forward, not re-capture previously waived amounts) could have a material adverse effect on Federated's business, results of operations, financial condition and/or cash flows."
Finally, on the "Risk of Federated's Money Market Products' Ability to Maintain a Stable Net Asset Value," they state, "Approximately 40% of Federated's total revenue for 2019 was attributable to money market assets. An investment in money market funds is neither insured nor guaranteed by the FDIC or any other government agency. Federated's retail and government/public debt money market funds, as well as its private and collective money market funds, seek to maintain a stable or constant NAV. Federated also offers non-U.S. low volatility money market funds that seek to maintain a constant NAV, but will move to a four-digit NAV if such fund's net asset value falls outside of a twenty basis point collar. Although stable or constant NAV money market funds seek to maintain an NAV of $1.00 per share, it is possible for an investor to lose money by investing in these funds. Federated also offers institutional prime or municipal (or tax-exempt) money market funds which transact at a fluctuating NAV that uses four-decimal-place precision ($1.0000). Federated also offers a short-term variable NAV non-U.S. money market fund. It is possible for an investor to lose money by investing in these funds."
They add, "Federated devotes substantial resources, such as significant credit analysis and attention to security valuation in connection with the management of its products and strategies. However, the NAV of an institutional prime or municipal (or tax-exempt) money market fund, or variable NAV fund or, if the above described conditions are met, a low-volatility NAV fund, can fluctuate, and there is no guarantee that a government/public debt or retail (i.e. stable or constant NAV) money market fund, or a low-volatility money market fund, will be able to preserve a stable or constant NAV in the future. Market conditions could lead to a limited supply of money market securities and severe liquidity issues and/or declines in interest rates or additional prolonged periods of low yields in money market products or strategies, and regulatory changes or developments could lead to shifts in asset levels and mix, which could impact money market fund NAVs and performance. If the NAV of a Federated stable or constant NAV money market fund were to decline to less than $1.00 per share, such Federated money market fund would likely experience significant redemptions, resulting in reductions in AUM, loss of shareholder confidence and reputational harm, all of which could cause material adverse effects on Federated's business, results of operations, financial condition and/or cash flows. It is also possible that, if the fluctuating NAV of an institutional prime or municipal (or tax-exempt) money market fund, or variable NAV money market fund or low-volatility money market fund consistently or significantly declines to less than $1.0000 per share, such Federated money market fund could experience significant redemptions, resulting in reductions in AUM, loss of shareholder confidence and reputational harm, all of which could cause material adverse effects on Federated's business, results of operations, financial condition and/or cash flows."
Dan Wiener, Editor of The Independent Advisor for Vanguard Investors newsletter, published a news brief entitled "In the Land of One (Basis point, that is)," which discusses the zero-yield era for money market mutual funds. He writes, "[T]here are ... anniversaries that you'd rather forget -- forever. Here's one: Feb. 18, 2010. I'd love to forget that day but there are some important lessons Vanguard investors can learn from at least acknowledging the 10-year anniversary just a few weeks ago. On Feb. 18, 2010, all three of Vanguard's taxable money market funds' yields hit 0.01%. That's one one-hundredth of one percent."
Wiener explains, "How low is that? So low that Vanguard was forced to waive expenses to keep yields in the black. These fee waivers totaled more than $122 million for all of Vanguard's taxable and tax-exempt money funds and were in effect for about four to five years depending on the fund.... In 2014, not a single one of Vanguard's taxable money market funds reported a yield over 0.01% for even a day. That year all three funds returns, even with compounding, totaled just 0.01%."
He continues, "Fortunately, yields didn't stay at 0.01% for the entire 10 years after they first hit that ignominious milestone. Unfortunately, they were low for a long time, remain very low by historical standards and returns over the last decade were abysmal. Prime Money Market, generally the highest-yielding Vanguard money fund, generated a 6.2% total return over the last 10 years. That's not an annualized number but an absolute number. Annualized it comes out to about 0.6% compounded. Ugh!"
Wiener tells us, "This raises the important question of just how much 'super-safe' money you have squirrelled away in a money market fund. Yes, we should all have some money set aside for near-term expenses and to cover emergency costs, but beyond a certain point of safe reserves (and that point will vary from person to person) it might be better to step slightly up the risk ladder for a better return on your money." He shows a chart comparing 10-year returns for Vanguard's three taxable money funds vs. "my favorite short-term fund, Short-Term Investment-Grade, as well as Short-Term Treasury. The differences are astounding."
He states, "Where the money market funds returned between 5% and 6% in total (about 4% for the tax-exempt money funds), the two short-term bond funds grew 13% and 29%. That means Short-Term Investment-Grade grew your money six times as much as a money fund.... [But] there were only a few speed bumps along the way. The fund's worst drop, a 1.3% decline in mid-2013, took four months to recover from. In my book, the greater return more than covers the additional risk."
Wiener also comments, "But if that's too rich for your blood, in February 2015 Ultra-Short-Term Bond was introduced. What Jeff and I refer to as a money-market fund on steroids has returned 8.6% since its inception compared to Prime Money Market's 6.1% return and Short-Term Investment-Grade's 13.3% gain over the same period. Investors looking for tax-free income have had Short-Term Tax-Exempt to call home for their cash since 1977. It too is like a money market on steroids with a much shorter duration (a measure of risk) than the taxable short-term funds. Since Ultra-Short-Term Bond's introduction the tax-exempt fund returned 6.1% and it's up 11.8% over the past decade."
Finally, he adds, "Money market yields have fallen from their recent highs and without a dose of inflation that might force the Federal Reserve to begin hiking short-term interest rates, it's a good bet yields are going to remain low and returns will be paltry. We all have a need for liquid, safe, never-loses-a-dime cash for those immediate emergencies that simply can't wait. But on this anniversary as you count the blessings of the long bull market in bonds and stocks, you might also contemplate the size of your money market balances. It might make sense to take some of your excess reserves, if you have them, and take a bit more risk for a better return in a short or ultra-short bond fund."
In other news, J.P. Morgan writes in its latest "Taxable money market fund holdings update," "For the first time since April 2019, MMFs saw month over month net outflows, totaling $17bn in January.... Outflows of this magnitude have not occurred since June 2018. The outflows were confined to government funds which lost $34bn. Meanwhile, prime funds actually saw inflows of $17bn.... That said, these sort of outflows are actually quite normal for January. In fact, taxable MMF outflows in January have averaged $27bn since 2012 (excluding 2016 because of MMF reform). For the rest of 2020, while we don't anticipate a repeat of 2019's performance, we think the combination of a flat front-end yield curve and low deposit rates should keep MMF balances relatively elevated this year."
They continue, "MMF's exposure to FICC sponsored repo declined by $44bn to $232bn in January.... Despite the decline, this level is still $92bn higher than at the end of November and is the second-highest level on record. This indicates that sponsored repo is not just a year-end alleviator, but is turning into something of a constant force in the repo markets, as more sponsoring and sponsored members are added to the platform.... Usage of the Fed's RRP dropped off, down $43bn to just $5bn as MMFs found better yields beyond RRP's 1.50%."
The update explains, "Dealers' use of repo came roaring back in January, with their total repo borrowing increasing $127bn. Up until January, primary dealers had been successively paring down their borrowing in each of the previous four months as the Fed's open market operations reduced their borrowing needs from MMFs and as they prepared for year-end constraints."
It adds, "Consistent with the decline in government MMFs' WAMs and WAL, government MMF holdings of Treasuries and Agencies decreased while exposure to repo increased.... With the Fed's bill purchases crowding out money funds, total holdings of T-bills decreased $50bn last month.... Presumably, the shift toward repo can also be explained by the attractive yield pickup repo offered relative to bills and coupons, especially at month end, and the lack of a yield pickup from going out the Treasury curve."
JPM's piece states, "In December, prime funds turned toward Banks, shifting allocations away from Treasuries and Repo.... Bank CP/CD/TD exposures increased by $66bn. While bank CP/CD/TD exposure to Eurozone and UK banks increased, US and Canada bank exposures decreased.... At the individual issuer level, changes were largely idiosyncratic."
Finally, they write, "Month over month, the weighted average maturity of bank CP/CD held by prime MMFs decreased 4 days to 41 days, while the weighted average life fell 14 days to 92 days.... Canadian banks had the longest WAL at 137 days, followed by Australian banks at 130 days.... Month over month, overall prime MMF WAMs decreased by 1 day to 29 days and WALs increased 2 days to 70 days. Treasury MMF WAMs decreased 6 days to 32 days and WALs decreased 2 days to 93 days, while Government and Agency WAMs decreased by 3 day to 29 days and WALs decreased 2 days to 87 days."
Last year, we saw Federated take over PNC's fund business and Invesco absorb OppenheimerFunds, and now it appears we'll see more fund consolidation in 2020. A press release entitled, "Franklin Templeton to Acquire Legg Mason, Creating $1.5 Trillion AUM Global Investment Manager," tells us, "Franklin Resources ... operating as Franklin Templeton ... announced that it has entered into a definitive agreement to acquire Legg Mason, Inc.... The acquisition of Legg Mason and its multiple investment affiliates ... will establish Franklin Templeton as one of the world's largest independent, specialized global investment managers with a combined $1.5 trillion in assets.... The combined footprint of the organization will significantly deepen Franklin Templeton's presence in key geographies and create an expansive investment platform that is well balanced between institutional and retail client AUM."
Franklin Templeton President & CEO Jenny Johnson comments, "This acquisition will add differentiated capabilities to our existing investment strategies with modest overlap across multiple world-class affiliates, investment teams and distribution channels, bringing notable added leadership and strength in core fixed income, active equities and alternatives. We will also expand our multi-asset solutions, a key growth area for the firm amid increasing client demand for comprehensive, outcome-oriented investment solutions."
Joseph Sullivan, Chairman & CEO of Legg Mason, adds, "The incredibly strong fit between our two organizations gives me the utmost confidence that this transaction will create meaningful long-term benefits for our clients and provide our shareholders with a compelling valuation for their investment. By preserving the autonomy of each investment organization, the combination of Legg Mason and Franklin Templeton will quickly leverage our collective strengths, while minimizing the risk of disruption. Our clients will benefit from a shared vision, strong client-focused cultures, distinct investment capabilities and a broad distribution footprint in this powerful combination."
CNBC writes in "Franklin Resources to buy Legg Mason, forming $1.5 trillion asset manager," "Franklin Resources announced Tuesday a deal to buy rival asset manager Legg Mason, a tie-up that could help each navigate a worldwide shift in investor preference away from active money management.... Baltimore-based Legg Mason, which manages $803.5 billion, operates nine investment managers that do business under separate brands.... San Mateo, California-based Franklin, meanwhile, has $698 billion in assets and manages a host of equity and bond investments under the Franklin Templeton brand."
In the money market mutual fund space, Franklin Templeton is a minor player with just $18.1 billion in assets (ranking 21 out of 67 managers). Meanwhile, Legg Mason's Western Asset Management ranks 18th among fund families tracked by Crane Data with $22.9 billion under management. When combined (likely much later in 2020), the two will manage a total of $41.0 billion, which would rank 18th (behind T. Rowe Price). (See also these Crane Data News stories: Franklin Merges Money Funds (12/4/19) and Franklin Files for Blockchain Enabled U.S. Govt Money Market Fund (9/4/19).")
Also, both Charles Schwab and BlackRock are merging and liquidating a number of money market funds. A Prospectus Supplement filing for Schwab Retirement Advantage Money Fund and the Schwab Investor Money Fund tells us, "The Board of Trustees (the Board) of The Charles Schwab Family of Funds (the Trust) has determined that it is in the best interests of each of the Schwab Retirement Advantage Money Fund and Schwab Investor Money Fund (each, a Target Fund and collectively, the Target Funds), each a series of the Trust, and their respective shareholders to reorganize with and into the Schwab Value Advantage Money Fund (the Surviving Fund). Accordingly, the Board has approved Agreements and Plans of Reorganization (the Plans of Reorganization) that would provide for the reorganization of each of the Target Funds into the Surviving Fund. The Surviving Fund has the identical investment objective and investment strategy to that of each of the Target Funds."
It continues, "The Plans of Reorganization approved by the Board sets forth the terms by which each of the Target Funds will transfer its assets and liabilities to the Surviving Fund in exchange for Investor Shares of the Surviving Fund, and subsequently distribute those Surviving Fund shares to shareholders of each of the Target Funds (the Reorganization). After the Reorganization is consummated, shareholders of each of the Target Funds will become shareholders of the Surviving Fund. The Reorganization is intended to be tax-free, meaning that shareholders of each of the Target Funds will become shareholders of the Surviving Fund without realizing any gain or loss for federal income tax purposes and the Reorganization will be tax-free."
The Supplement adds, "Shareholder approval of the Reorganization is not required. Shareholders of each of the Target Funds will receive a prospectus/information statement prior to the Reorganization that describes the investment objective, strategies, expenses and risks of an investment in the Surviving Fund and provides further details about the Reorganization. It is expected that the Reorganization will occur on or about February 24, 2020. The investment adviser will bear the costs associated with the Reorganization."
A shareholder communication from Schwab tells fund investors, "Enclosed is important information concerning your investment in the Schwab Investor Money Fund and/or Schwab Retirement Advantage Money Fund (each, an 'Acquired Fund' and collectively, the 'Acquired Funds'). We wish to inform you that the Board of Trustees (the 'Board') of The Charles Schwab Family of Funds (the 'Trust'), after careful consideration, has separately approved the reorganization of each Acquired Fund into the Schwab Value Advantage Money Fund (the 'Surviving Fund' and, together with the Acquired Funds, the 'Funds'), another fund of the Trust that has a substantially similar investment objective and investment strategies."
It adds, "Following the close of business on or about February 21, 2020, each Acquired Fund will be reorganized into the Surviving Fund such that each shareholder of the Acquired Funds will receive an amount of the Investor Shares of the Surviving Fund equal in value to the shares of the Acquired Fund(s) owned by such holder at the time of the closing of the reorganizations."
An SEC filing for BlackRock Premier Government Institutional Fund, BlackRock Select Treasury Strategies Institutional Fund and FFI Government Fund explains, "On November 12, 2019, the Board of Trustees of Funds For Institutions Series, on behalf of each Fund, approved a proposal to liquidate and terminate each Fund subject to a Plan of Liquidation and Termination. The Plan of Liquidation and Termination will be presented to the shareholders of each Fund and must be approved by the requisite number of shares of each Fund before a liquidation and termination of a Fund can occur."
It explains, "Joint special meetings of shareholders of each Fund to consider the Plan of Liquidation and Termination are expected to be held on February 10, 2020. The record date for the joint special meetings is December 13, 2019. If approved by shareholders of a Fund, the liquidation date for such Fund is expected to be on or around February 13, 2020. The approval of the Plan of Liquidation and Termination with respect to each Fund is not contingent upon the approval of the Plan of Liquidation and Termination with respect to any other fund."
For more on Liquidations and Consolidation, see these Crane Data News pieces: Federated Completes $11.3B Acquisition of PNC's Money Market Funds (11/20/19), June MFI: Consolidation, Morgan Stanley Ultra Short, Fin-Tech Invasion (6/7/19), Oppenheimer Funds Now Invesco Oppenheimer; Dreyfus Keeping Name (6/3/19), Nov. MFI: Consolidation, Vanguard's Smith, Yields Break 2.0 Percent (11/7/18), Invesco Buying Oppenheimer Funds; DWS ESG, Northern's RAVI Advertise (10/22/18), More MFs Liquidate: Calvert, Hartford Exit; Bad Timing for Bond Funds (6/27/13) and More Fund Liquidations: HSBC, Dreyfus T-E; More FSOC MMF Comments (1/3/13).
HSBC Global Asset Management is the latest money market mutual fund manager to enter the ESG space, filing a Form N-1A (485APOS) to launch HSBC ESG Prime Money Market Fund. The new fund will include the following share classes: Class D (HEDXX), Class I (HEIXX), Intermediary Class (HEGXX), Intermediary Service Class (HETXX) and Class Y (HEYXX). The filing explains, "The Fund is a money market fund. The Fund seeks to achieve its investment objective by investing in a portfolio of high quality debt obligations with maturities of (or deemed maturities of) 397 days or less and repurchase agreements collateralized by these types of obligations. The Fund will maintain a dollar-weighted average portfolio maturity of 60 days or less and a dollar-weighted average portfolio life of 120 days or less."
It continues, "The Fund invests in high quality debt obligations that have been determined by HSBC Global Asset Management (USA) Inc., the Fund's investment adviser, to present minimal credit risks to the Fund. In determining whether a security presents minimal credit risks to the Fund, the Adviser will analyze the capacity of the security's issuer or guarantor to meet its financial obligations and other factors."
HSBC's N-1A tells us, "The Adviser will also use a proprietary scoring system to assign an ESG score to each potential investment. The ESG score measures the performance of an issuer or guarantor's business operations and governance based on select ESG criteria deemed to be material by the Adviser. Potential investments are evaluated and scored on a relative basis against other issuers and guarantors in the same sector and on an absolute basis for compliance with the principles outlined in the United Nations Global Compact in the areas of human rights, labor, the environment and anti-corruption. The proprietary scoring system seeks to provide a more comprehensive approach to security selection than credit analysis alone."
It says, "Although the Fund must invest, under normal circumstances, at least 80% of its net assets, plus any borrowings for investment purposes, in debt obligations whose issuer or guarantor, in the opinion of the Adviser, meet the minimum ESG criteria determined by the Adviser at the time of purchase, the Fund generally expects to invest all or substantially all of its net assets in these investments. Once a security is purchased, the Adviser will periodically review an issuer or guarantor's ESG score to determine how it compares to the Adviser's ESG criteria and affects the Fund's overall ESG orientation."
The filing also comments, "The Fund invests primarily in bank certificates of deposit, time deposits, bankers' acceptances, prime commercial paper, corporate obligations, municipal obligations, U.S. government securities and repurchase agreements collateralized by U.S. government securities. The Fund's investments may also include variable rate demand notes and repurchase agreements secured by collateral other than cash and U.S. government securities, including equity securities and investment grade debt securities, to the extent permitted by Rule 2a-7 under the Investment Company Act of 1940, as amended."
HSBC explains, "The Fund may invest without limit in the domestic banking industry when, in the opinion of the Adviser, the yield, marketability and availability of investments meeting the Fund's quality standards and the Adviser's ESG criteria in such industry justify any additional risks associated with the concentration of the Fund's assets in the industry. The Fund may also invest without limit in commercial paper and short-term corporate obligations of domestic financial institutions. The Fund may also make investments in U.S. dollar denominated commercial paper and other obligations of foreign issuers and in bank certificates of deposit and bankers' acceptances payable in U.S. dollars and issued by foreign banks or by foreign branches of U.S. banks."
The section states, "The Fund seeks to maximize yields by portfolio trading and by buying and selling portfolio investments in anticipation of or in response to changing economic and money market conditions and trends. Additionally, the Fund will seek to take advantage of temporary disparities in yields of different segments of high-grade money market instruments or among particular instruments within the same segment of the market. In purchasing and selling securities for the Fund, portfolio managers consider the Adviser's credit analysis and the Adviser's ESG criteria. Portfolio managers select investments from an approved credit list compiled by the Adviser's global credit analysts, who have conducted an independent qualitative and quantitative review of each issuer on the list. Safety is prioritized, with additional emphasis placed on liquidity, yield and the Adviser's ESG criteria."
HSBC adds, "Although the Fund is a money market fund, the net asset value ('NAV') of the Fund's shares will be calculated to four decimal places and will fluctuate with changes in the values of the Fund's portfolio securities."
Under the "Investment Risks" section, they write, "ESG Investing Risk: The incorporation of the Adviser's ESG criteria into the investment process may cause the Fund to forgo investment opportunities available to funds that do not use these criteria, or to increase or decrease its exposure to certain sectors or types of issuers, which could cause the Fund to perform differently compared to funds that do not consider ESG criteria in the investment process. In evaluating an issuer or guarantor, the Adviser is dependent upon information and data that may be incomplete, inaccurate or unavailable, which could adversely affect the analysis of ESG criteria relevant to a particular issuer or guarantor. Investing on the basis of ESG criteria is qualitative and subjective by nature and there can be no assurance that the process utilized by any third-party data providers or any judgment exercised by the Adviser will reflect the beliefs or values of any particular investor."
The filing shows that the Management Fee will be 0.10% for all classes, and the Shareholder Servicing Fees are listed as 0.25% for Class D; 0.00% for Class I; 0.05% for Intermediary Class; 0.10% for Intermediary Service Class; and 0.00% for Class Y. The Total Annual Fund Operating Expense is to be determined. The Minimum Initial Investment for Class D Shares is $1,000 for Class I Shares $50,000,000, for Intermediary Shares $20,000,000, for Intermediary Service Shares $10,000,000 and for Class Y Shares $5,000,000.
In related news, a recent Statement of Additional Information filing for DWS ESG Liquidity Fund reveals some of the owners of ESG funds in its "5% or Greater Ownership of Share Classes" table. These include for the Capital Shares: DWS Enhanced Commodity Strategy Fund (43.22%), DWS GNMA Fund (27.27%), XTrackers MSCI EAFE Currency Hedged Equity ETF (15.37%) and Northern American Development Bank (10.89%). For the Institutional Reserve Shares: JPMS LLC – Chase Processing FBO Starbucks Corporation (96.14%); for the `Institutional Shares: Xylem Inc (22.32%), The Starbucks Foundation (21.18%) and ShelterPoint Life Insurance Co (20.46%).
Crane Data currently shows 5 ESG MMF Portfolios with a total of $6.4 billion, and another 2 Social MMF Portfolios with another $6.5 billion. The ESG funds include (largest share class only is listed with total portfolio assets): BlackRock LEAF Direct (LEDXX, $994M), DWS ESG Liquidity Inst (ESGXX, $565M), Morgan Stanley Inst Liq ESG MMP I (MPUXX, $3,886M), State Street ESG Liq Res Prem (ELRXX, $879M) and UBS Select ESG Prime Inst Fund (SGIXX, $30M). (Pending: HSBC ESG Prime MMF.) Social MMFs include: Dreyfus Govt Sec Cash Instit (DIPXX, $4.7B), Goldman Sachs FS Fed Instr Inst (FIRXX, $1.8B). Note: Federated, Goldman Sachs and J.P. Morgan also all have ESG principles built in complex-wide at the analyst level (so they might argue that all their funds are all "ESG" funds).
For more on ESG and Social Money Market Funds, see these Crane Data News articles: Fitch Ratings, ICD Host Webinars on ESG Money Funds, Cash Investing (2/6/20), Goldman Launches Social Class; Tiedemann Adds FICA; CS Green ABCP (1/24/20), Mischler Financial Joins "Impact" or Social Money Market Investing Wave (12/5/19), BNP Insticash Adds ESG Overlay (11/29/19), Dreyfus Launches "Impact" or Diversity Government Money Market Fund (11/21/19), Goldman Adds ESG Screen (11/14/19), Aviva Investors Discusses ESG MMFs; Fitch Rates MS ESG (11/6/19), UBS Asset Mgmt Files to Launch Select ESG Prime Institutional Fund (11/4/19), BlackRock Launches First Offshore ESG MMF; ICS LEAF in EUR, GBP, USD (7/22/19), SSGA Goes Live with ESG Money Market Fund (7/3/19) and Cap Advisors Group Demystifies ESG Investing (6/19/19).
Crane Data's latest MFI International shows assets in European or "offshore" money market mutual assets falling in US Dollar and GBP funds but rising in Euro funds in the latest month. These U.S.-style funds, domiciled in Ireland or Luxemburg and denominated in US Dollars, Pound Sterling and Euros, increased by $8.3 billion over the last 30 days to $897.6 billion; they're up by $21.0 billion year-to-date. Offshore USD money funds, which hit a record $500 billion on Jan. 2, are down $3.3 billion over 30 days but up $3.1 billion YTD. Euro funds are up E11.4 billion over the previous 30 days, and YTD they're up E10.3 billion. GBP funds have fallen by L756 million over 30 days, but are up by L5.3 billion YTD. U.S. Dollar (USD) money funds (189, unchanged from the previous month) account for over half ($497.6 billion, or 55.4%) of our "European" money fund total, while Euro (EUR) money funds (92, up 5 from the previous month) total E109.0 billion (12.1%) and Pound Sterling (GBP) funds (123, up 3 from the previous month) total L230.2 billion (25.6%). We summarize our latest "offshore" money fund statistics and our Money Fund Intelligence International Portfolio Holdings (which went out to subscribers Friday), below.
Offshore USD MMFs yield 1.54% (7-Day) on average (as of 2/13/20), down from 2.29% on 12/31/18, but up from 1.19% at the end of 2017. EUR MMFs yield -0.57 on average, compared to -0.49% at year-end 2018 and -0.55% on 12/29/17. Meanwhile, GBP MMFs yielded 0.64%, the same as 12/31/18 and up from 0.24% at the end of 2017. (See our latest MFI International for more on the "offshore" money fund marketplace. Note that these funds are only available to qualified, non-U.S. investors.)
Crane's MFII Portfolio Holdings, with data (as of 1/31/20), show that European-domiciled US Dollar MMFs, on average, consist of 30% in Commercial Paper (CP), 22% in Certificates of Deposit (CDs), 17% in Repo, 15% in Treasury securities, 14% in Other securities (primarily Time Deposits) and 2% in Government Agency securities. USD funds have on average 36.7% of their portfolios maturing Overnight, 8.4% maturing in 2-7 Days, 16.1% maturing in 8-30 Days, 11.3% maturing in 31-60 Days, 14.1% maturing in 61-90 Days, 8.9% maturing in 91-180 Days and 4.4% maturing beyond 181 Days. USD holdings are affiliated with the following countries: the US (24.8%), France (14.4%), Japan (10.6%), Canada (9.7%), Germany (7.2%), the United Kingdom (6.8%), the Netherlands (5.9%), Sweden (4.6%), Australia (2.8%), Switzerland (2.8%), China (1.9%), Norway (1.6%), Singapore (1.6%) and Belgium (1.6%).
The 10 Largest Issuers to "offshore" USD money funds include: the US Treasury with $82.4 billion (14.6% of total assets), Credit Agricole with $19.4B (3.4%), BNP Paribas with $17.6B (3.1%), Mitsubishi UFJ Financial Group with $16.6B (2.9%), Bank of Nova Scotia with $16.3B (2.9%), Barclays PLC with $15.2B (2.7%), Mizuho Corporate Bank Ltd with $14.2B (2.5%), Credit Suisse with $12.7B (2.3%), Sumitomo Mitsui Banking Corp with $11.1B (2.0%) and Toronto-Dominion Bank with $10.8B (1.9%).
Euro MMFs tracked by Crane Data contain, on average 47% in CP, 20% in CDs, 20% in Other (primarily Time Deposits), 12% in Repo, 1% in Treasuries and 0% in Agency securities. EUR funds have on average 26.8% of their portfolios maturing Overnight, 8.5% maturing in 2-7 Days, 14.8% maturing in 8-30 Days, 13.0% maturing in 31-60 Days, 16.2% maturing in 61-90 Days, 17.7% maturing in 91-180 Days and 3.0% maturing beyond 181 Days. EUR MMF holdings are affiliated with the following countries: France (30.3%), the US (13.1%), Japan (12.6%), Germany (8.2%), Sweden (7.5%), the U.K. (6.5%), the Netherlands (4.9%), Switzerland (3.2%), China (2.7%), Canada (2.6%), Belgium (2.5%), Finland (1.5%) and Qatar (0.9%).
The 10 Largest Issuers to "offshore" EUR money funds include: Credit Agricole with E8.2B (7.7%), BNP Paribas with E4.4B (4.1%), JP Morgan with E3.9B (3.6%), BPCE SA with E3.5B (3.3%), Mitsubishi UFJ Financial Group with E3.5B (3.3%), Sumitomo Mitsui Banking Corp with E3.5B (3.2%), Societe Generale with E3.5B (3.2%), Nordea Bank with E3.3B (3.1%), Mizuho Corporate Bank Ltd with E3.3B (3.1%) and Svenska Handelsbanken with E3.2B (3.0%).
The GBP funds tracked by MFI International contain, on average (as of 1/31/20): 38% in CDs, 24% in Other (Time Deposits), 22% in CP, 14% in Repo, 2% in Treasury and 0% in Agency. Sterling funds have on average 31.9% of their portfolios maturing Overnight, 8.0% maturing in 2-7 Days, 10.3% maturing in 8-30 Days, 14.1% maturing in 31-60 Days, 11.4% maturing in 61-90 Days, 17.7% maturing in 91-180 Days and 6.6% maturing beyond 181 Days. GBP MMF holdings are affiliated with the following countries: France (17.6%), Japan (17.0%), the U.K. (16.6%), Canada (9.3%), Germany (6.7%), the Netherland (5.4%), the US (4.4%), Sweden (4.0%), Australia (3.5%), Switzerland (3.4%) and Singapore (3.4%).
The 10 Largest Issuers to "offshore" GBP money funds include: the UK Treasury with L15.5B (8.5%), Mizuho Corporate Bank Ltd with L8.7B (4.8%), Credit Agricole with L8.5B (4.7%), BNP Paribas with L7.4B (4.1%), BPCE SA with L7.0B (3.8%), Sumitomo Mitsui Banking Corp with L6.7B (3.7%), Sumitomo Mitsui Trust Bank with L6.6B (3.7%), Mitsubishi UFJ Financial Group with L6.0B (3.3%), DZ Bank AG with L5.9B (3.3%) and Nordea Bank with L5.4B (3.0%).
In related news, J.P. Morgan Securities writes in their "JPM Mid-Week US Short Duration Update," that, "Dealer repo is open for business." They tell us, "The January taxable MMF holdings reveal that dealers' use of repo came roaring back in January, with their total repo borrowing increasing $140bn.... The last time that dealer repo borrowing was this high was back in September.... Up until this month, primary dealers had been successively paring down their borrowing in each of the last four months, presumably to prepare for year-end constraints. Last month's decline was also due to a massive liquidity injection from the Fed's open market operations, which effectively crowded out MMF lending to dealers."
JPM's piece continues, "Meanwhile, FICC sponsored repo declined $44bn, but this level is still $92bn higher than at the end of November and is the second-highest level on record. This indicates that sponsored repo is not just a year-end alleviator, but is turning into something of a constant force in the repo markets, as more sponsoring and sponsored members are added to the platform.... Usage of the Fed's RRP dropped off, down $43bn to just $5bn as MMFs found better yields beyond RRP's 1.50%."
It adds, "At the country level, most of the return in repo balances was driven by French and US dealers, who respectively increased repo borrowing by $79bn and $35bn.... At the same time, the heroes of US year-end, the Canadian banks, pulled back their repo borrowing by $32bn in order to deal with their own quarter-end this month. As we have noted before, Canadian banks' quarter-ends and year-ends are two months before US and other banks', allowing them to police US funding markets to some degree during times of calendar-related stress."
Finally, JPM comments, "In the second quarter of this year, repo will become increasingly important for MMFs. As Treasury reduces its issuance and the Fed continues to buy bills for its Reserve Management Purchases, the supply of bills will contract to its lowest level since fall 2017.... If this month's repo volumes are any indication, MMFs should be better able to weather the coming storm as dealers are freed from the same year-end constraints which we saw last month."
The February issue of our Bond Fund Intelligence, which was sent to subscribers Friday morning, features the lead story, "Too Hot To Handle: Bond Funds in Bubble. Burst in '20?," which reviews the latest flows and signs of a market top, and, "Touchstone Ultra Short Hits $1 Billion; Miller & Mayfield," which interviews Fort Washington Investment Advisors' Brent Miller and Laura Mayfield. BFI also recaps the latest Bond Fund News and includes our Crane BFI Indexes, which show bond fund yields fell sharply and returns surged in January. 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.)
Our "Bond Bubble" article says, "Given the gigantic inflows year-to-date and over the past several years, it's clear that bond funds and bond ETFs are in the midst of one of the biggest asset bubbles in history. We'd wager that the bubble will burst very soon, but, unlike climate change disciples, we know better than to try to predict the future. But clearly the end must be nigh. While our prediction may be suspect, we review the latest on flows and signs of a market top below."
It continues, "The Wall Street Journal's Jason Zweig probably agrees, writing in, "Bond Funds Are Hotter Than Tesla," explains, "Tesla Inc.'s stock isn't the only hot asset. Nearly four decades into a bull market for bonds, investors still have a ravenous appetite for them, even though interest rates are near historic lows around the world. Much of the influx into bonds has come from individual investors. But that doesn't make them the 'dumb money,' especially because many giant institutions are investing just as avidly."
Our "Touchstone Ultra Short" profile reads, "This month, Bond Fund Intelligence interviews Fort Washington Investment Advisors' Senior Portfolio Manager Brent Miller and Portfolio Manager Laura Mayfield, who manage investments for the Touchstone Ultra Short Duration Fixed Income Fund. We discuss their focus and policies, why spread duration is an underappreciated metric and how the pair navigate the 'flat relative value landscape.' Our Q&A follows."
BFI says, "Give us some history." Miller answers, "Fort Washington has been involved in the ultra-short space since 1995. Scott Weston and I have been running ultra-short duration portfolios together at Fort Washington since 2001, and Laura Mayfield joined our team in 2010. Touchstone started offering funds in 1994. The Ultra Short Duration Fund was acquired by Touchstone in 2006, and then Fort Washington began sub-advising it in 2008. Fort Washington also sub-advises Touchstone Active Bond Fund, High Yield Fund and Ohio Tax Free Bond Fund. Touchstone also has other funds sub-advised by other institutional asset managers."
BFI also asks, "What's new with this fund?" Mayfield tells us, "At the portfolio level, with the strong rally in corporate bond spreads at the end of the year, we've rotated out of some of our corporate exposure at relatively tight levels, and rotated more heavily into structured products -- CMBS, ABS and RMBS -- where we continue to find pockets of value. We're always a structured-product focused fund, but even more so today than we have been over recent years."
Our Bond Fund News includes the brief, "Yields Plunge, Returns Jump in January," which tells us, "Bond fund yields fell sharply and returns surged last month. Our BFI Total Index returned 1.13% over 1-month and 7.18% over 12 months. The BFI 100 returned 1.31% in Jan. and 7.92% over 1 year. Our BFI Conservative Ultra-Short Index returned 0.27% over 1-mo and 2.76% over 1-yr; Ultra-Shorts averaged 0.34% in Jan. and 3.11% over 12 mos. Short-Term returned 0.64% and 4.86%, and Intm-Term gained 1.69% last month and rose 8.69% over 1-year. BFI's Long-Term Index returned 2.44% in Jan. and 12.07% for 1-yr; our High Yield Index rose 0.12% in Jan. and 8.14% for 1-year."
In another News brief, we quote the Morningstar piece, "Bond Funds Dominate in 2019 Fund Flows." They tell us, "The strong long-term inflows owed almost entirely to record inflows for both taxable-bond and municipal-bond funds, which collected $413.9 billion and $105.5 billion, respectively. With greater 2019 flows than their active counterparts, passive taxable-bond funds now have a third of that market."
In "The Year in Bond Funds 2019," Morningstar also comments, "This past year was one of the best since the financial crisis for fixed-income returns.... Every bond fund Morningstar Category had positive returns in 2019, led by the 19.3% average return on long-term bond funds, while the worst-performing category (ultrashort bond) still posted a respectable average return of 3.1%. The Bloomberg Barclays U.S. Aggregate Bond Index, a proxy for typical U.S. core bond exposure, returned 8.7%, its best year since the financial crisis."
A third News update covers the The New York Times' article, "The Great Bond Party of 2019 Is Ending," which tells us, "With Federal Reserve rate cuts behind us and recession fears waning, don't expect much from bond funds this year. Economic worries last year turned out to be great news for bond investors ... the most profitable calendar year for bond fund investors since 2002. Core investments such as the Vanguard Total Bond Market Index mutual fund and the iShares Core U.S. Aggregate Bond exchange-traded fund gained nearly 9 percent in 2019. Investors playing it safe in high-quality short-term bonds profited, too. The 3.5 percent gain for the Schwab Short-Term U.S. Treasury E.T.F. was more than a percentage point above inflation. The Baird Short-Term Bond fund gained 4.7 percent. But the bond party of 2019 is expected to give way to a bit of a hangover this year."
BFI also features a sidebar entitled "BlackRock Bets on Bond ETFs." It says: "BlackRock CEO Larry Fink commented on the company's latest earnings call, 'Fixed income ETFs will be one of the largest drivers of BlackRock's growth over the next decade.... The combination of BlackRock's history as a bond manager, our expertise in ETFs and our industry leading technology and data capabilities has created significant differentiation for iShares. After having pioneered the first fixed income ETF in 2002, iShares fixed income AUM surpassed $565 billion and generated a record $112 billion of net inflows in 2019, compared to the previous record of 2017 of $67 billion.'"
Finally, we wanted to remind you again about our fourth annual ultra-short bond fund event, Bond Fund Symposium, which will take place March 23-24, at the Hyatt Regency Boston. Crane's Bond Fund Symposium offers a concentrated and affordable educational experience, as well as an excellent networking venue, for bond fund and fixed-income professionals. Registrations are being accepted ($750) and sponsorship opportunities are still available. (Tickets are also available to select Crane Data clients and PMs. Let us know if you'd like more information.) See the latest agenda here and click here for details or to register.
The SEC recently released its latest quarterly "Private Funds Statistics report, which summarizes Form PF reporting and includes some data on "Liquidity Funds." The publication shows that overall Liquidity fund assets rebounded in the latest reported quarter to $580 billion (up from $573 billion in Q1). The SEC's "Introduction" tells us, "This report provides a summary of recent private fund industry statistics and trends, reflecting data collected through Form PF and Form ADV filings. Form PF information provided in this report is aggregated, rounded, and/or masked to avoid potential disclosure of proprietary information of individual Form PF filers. This report reflects data from Third Calendar Quarter 2017 through Second Calendar Quarter 2019 as reported by Form PF filers." (Note: Crane Data believes many of the liquidity funds are securities lending reinvestment pools and other short-term investment funds; these are not the "3c-7" private liquidity funds being offered to institutional clients by Federated, JPMorgan and some others.)
The tables in the SEC's "Private Funds Statistics: Second Calendar Quarter 2019 the most recent data available, now show 116 Liquidity Funds (including "Section 3 Liquidity Funds," which are Liquidity Funds from advisers with over $1 billion total in cash), down 1 from the last quarter and up 3 from a year ago. (There are 72 Liquidity Funds and 44 Section 3 Liquidity Funds.) The SEC receives Form PF reports from 39 Liquidity Fund advisers and 22 Section 3 Liquidity Fund advisers, or 61 advisers in total, unchanged from last quarter (up 1 from a year ago).
The SEC's table on "Aggregate Private Fund Net Asset Value" shows total Liquidity Fund assets at $580 billion, up $7 billion from Q1'19 and down $34 billion from a year ago (Q2'18). Of this total, $292 billion is in normal Liquidity Funds while $288 billion is in Section 3 (large manager) Liquidity Funds. The SEC's table on "Aggregate Private Fund Gross Asset Value" shows total Liquidity Fund assets at $584 billion, up $3 billion from Q1'19 and down $34 billion from a year ago (Q2'18). Of this total, $294 billion is in normal Liquidity Funds while $290 billion is in Section 3 (large manager) Liquidity Funds.
A table on "Beneficial Ownership for Section 3 Liquidity Funds" shows $84 billion is held by Private Funds (29.1%), $60 billion is held by Unknown Non-U.S. Investors (20.7%), $58 billion is held by Other (20.1%), $19 billion is held by SEC-Registered Investment Companies (6.6%), $10 billion is held by Insurance Companies (3.3%) and $3 billion is held by Non-U.S. Individuals (1.1%).
The tables also show that 76.2% of Section 3 Liquidity Funds have a liquidation period of one day, $276 billion of these funds may suspend redemptions, and $241 billion of these funds may have gates (out of a total of $517 billion). The Portfolio Characteristics show that these funds are very close to money market funds. WAMs average a short 30 days (38 days when weighted by assets), WALs are a short 57 days (67 days when asset-weighted), and 7-Day Gross Yields average 2.3% (2.5% asset-weighted). Daily Liquid Assets average about 50% (49% asset-weighted) while Weekly Liquid Assets average about 61% (59% asset-weighted). Overall, these portfolios appear shorter with a much heavier Treasury exposure than money market funds in general; almost half of them (47.7%) are fully compliant with Rule 2a-7.
In other news, Fitch Ratings published "Local Government Investment Pools: 3Q19," which summarizes trends in the LGIP marketplace. They explain, "To add more granularity to the Fitch Local Government Investment Pool (LGIP) indices, Fitch has expanded the dataset of underlying pools tracked. Fitch added 15 LGIPs to the data, with approximately $39 billion in assets as of 3Q19. Fitch also further broke out yield and duration metrics by classifying pools into prime or government, and rated or unrated.... In total, the indices now track 43 funds with $280 billion in assets."
Fitch continues, "As typically seen during the third quarter, assets for both Fitch LGIP indices declined due to a slowdown in tax collection. On a quarter-over-quarter basis, the Fitch Liquidity LGIP Index and the Fitch Short-Term LGIP Index experienced a 2% and 8% decrease in assets, respectively.... On a year-over-year basis, the Fitch Liquidity LGIP Index was up $27 billion (+15%) and the Fitch Short-Term LGIP Index was up $7 billion (+9%)."
The brief shows the Fitch Liquidity LGIP Index's Average Net Yield at 2.08% as of September 2019 compared to our Crane Taxable Institutional Money Fund Average's 1.76%. They show the Fitch Short-Term LGIP Index's Average Net Yield at 2.14% as of September 2019 compared to a Blended Crane Short-Term Bond Fund Index's 2.32% Yield.
Fitch writes, "Short-term market yields across the curve continued to decline during the third quarter.... Net yields decreased by approximately 34bps and 24bps during the period for the Fitch Liquidity LGIP Index and the Fitch Short-Term LGIP Index, respectively."
Finally, they add, "In an effort to sustain yields, LGIPs within Fitch's Short-Term LGIP Index slightly extended durations out to an average of 1.33 years, up from 1.17 years at the end of 2Q19. Conversely, the weighted average maturity (WAM) for LGIPs within Fitch's Liquidity LGIP Index decreased slightly from 40 to 38 days during the period, contrary to similarly managed money funds, which increased WAMs by three days on average, and can likely be explained by outflows from LGIPs."
Crane Data released its February Money Fund Portfolio Holdings yesterday, and our most recent collection, with data as of Jan. 31, 2020, shows a jump in Repo, Other (Time Deposits) and CDs, and a sharp drop in Treasuries and Agencies. Money market securities held by Taxable U.S. money funds (tracked by Crane Data) increased by $19.0 billion to $3.830 trillion last month, after increasing $24.7 billion in December, $20.8 billion in November and $75.8 billion in October. Repo continues to be the largest portfolio segment, followed by Treasury securities, then Agencies. CP remained fourth, ahead of CDs, Other/Time Deposits and VRDNs. Below, we review our latest Money Fund Portfolio Holdings statistics. (Visit our Content center to download the latest files, or contact us to see our latest Portfolio Holdings reports.)
Among taxable money funds, Repurchase Agreements (repo) rose by $66.6 billion (5.4%) to $1.300 trillion, or 33.9% of holdings, after increasing $75.3 billion in December, but decreasing $35.2 billion in November and $24.7 billion in October. Treasury securities fell $83.6 billion (-7.5%) to $1.028 trillion, or 26.8% of holdings, after decreasing $14.7 billion in December, but increasing $55.3 billion in November and $30.2 billion in October. Government Agency Debt decreased by $40.4 billion (-5.0%) to $767.4 billion, or 20.0% of holdings, after increasing $42.0 billion in December, decreasing $19.2 billion in November and increasing $39.4 billion in October. Repo, Treasuries and Agencies totaled $3.105 trillion, representing a massive 80.8% of all taxable holdings.
Money funds' holdings of CP, CD and Other (mainly Time Deposits) securities all rose in January. Commercial Paper (CP) increased $16.1 billion (5.2%) to $325.3 billion, or 8.5% of holdings, after decreasing $37.6 billion in December, increasing $5.1 billion in November and $13.9 billion in October. Certificates of Deposit (CDs) rose by $25.5 billion (9.7%) to $290.1 billion, or 7.6% of taxable assets, after decreasing $10.5 billion in December, increasing $12.6 billion in November and increasing $12.6 billion in October. Other holdings, primarily Time Deposits, increased $35.1 billion (45.3%) to $112.7 billion, or 2.9% of holdings, after decreasing $29.5 billion in December, increasing $2.3 billion in November and $5.0 billion in October. VRDNs remained at $6.4 billion, or 0.2% of assets. (Note: This total is VRDNs for taxable funds only. We will publish Tax Exempt MMF holdings separately late Wednesday.)
Prime money fund assets tracked by Crane Data increased $30 billion to $1.095 trillion, or 28.6% of taxable money funds' $3.830 trillion total. Among Prime money funds, CDs represent 26.5% (up from 24.9% a month ago), while Commercial Paper accounted for 28.9% (down from 29.1%). The CP totals are comprised of: Financial Company CP, which makes up 18.2% of total holdings, Asset-Backed CP, which accounts for 6.1%, and Non-Financial Company CP, which makes up 4.6%. Prime funds also hold 6.1% in US Govt Agency Debt, 7.9% in US Treasury Debt, 6.9% in US Treasury Repo, 1.2% in Other Instruments, 6.7% in Non-Negotiable Time Deposits, 6.6% in Other Repo, 6.5% in US Government Agency Repo and 0.5% in VRDNs.
Government money fund portfolios totaled $1.856 trillion (48.5% of all MMF assets), down $19 billion from $1.875 trillion in December, while Treasury money fund assets totaled another $879 billion (23.0%), up from $871 billion the prior month. Government money fund portfolios were made up of 37.7% US Govt Agency Debt, 19.9% US Government Agency Repo, 17.6% US Treasury debt, 24.3% in US Treasury Repo, 0.3% in Other Repurchase Agreement, and 0.1% in Investment Company. Treasury money funds were comprised of 69.8% US Treasury debt, 30.1% in US Treasury Repo, and 0.1% in Other Repurchase Agreement. Government and Treasury funds combined now total $2.735 trillion, or 71.4% of all taxable money fund assets.
European-affiliated holdings (including repo) rose by $221.5 billion in January to $739.1 billion; their share of holdings rose to 19.3% from last month's 13.6%. Eurozone-affiliated holdings rose to $480.1 billion from last month's $319.6 billion; they account for 12.5% of overall taxable money fund holdings. Asia & Pacific related holdings rose by $16.9 billion to $362.3 billion (9.5% of the total). Americas related holdings fell $222.0 billion to $2.723 trillion and now represent 71.1% of holdings.
The overall taxable fund Repo totals were made up of: US Treasury Repurchase Agreements (down $11.6 billion, or -1.4%, to $790.8 billion, or 20.6% of assets); US Government Agency Repurchase Agreements (up $71.8 billion, or 19.4%, to $441.6 billion, or 11.5% of total holdings), and Other Repurchase Agreements (up $6.4 billion, or 10.5%, from last month to $67.7 billion, or 1.8% of holdings). The Commercial Paper totals were comprised of Financial Company Commercial Paper (up $7.9 billion to $208.8 billion, or 5.5% of assets), Asset Backed Commercial Paper (down $2.0 billion to $66.3 billion, or 1.7%), and Non-Financial Company Commercial Paper (up $10.2 billion to $50.2 billion, or 1.3%).
The 20 largest Issuers to taxable money market funds as of Jan. 31, 2020, include: the US Treasury ($1,028.0 billion, or 26.8%), Federal Home Loan Bank ($565.0B, 14.8%), Fixed Income Clearing Co ($232.3B, 6.1%), RBC ($126.5B, 3.3%), BNP Paribas ($113.9B, 3.0%), Federal Farm Credit Bank ($89.7B, 2.3%), Federal Home Loan Mortgage Co ($88.3B, 2.3%), Mitsubishi UFJ Financial Group Inc ($84.6B, 2.2%), JP Morgan ($84.5B, 2.2%), Credit Agricole ($82.7B, 2.2%), Barclays ($70.8B, 1.8%), Wells Fargo ($69.0B, 1.8%), Sumitomo Mitsui Banking Co ($62.1B, 1.6%), Bank of Montreal ($50.6B, 1.3%), Bank of America ($50.3B, 1.3%), Societe Generale ($48.0B, 1.3%), Natixis ($45.9B, 1.2%), Bank of Nova Scotia ($45.1B, 1.2%), Toronto-Dominion Bank ($43.8B, 1.1%) and HSBC ($43.6B, 1.1%).
In the repo space, the 10 largest Repo counterparties (dealers) with the amount of repo outstanding and market share (among the money funds we track) include: Fixed Income Clearing Co ($232.3B, 17.9%), BNP Paribas ($101.1B, 7.8%), RBC ($99.6B, 7.7%), JP Morgan ($74.4B, 5.7%), Barclays ($59.4B, 4.6%), Credit Agricole ($57.5B, 4.4%), Wells Fargo ($54.4B, 4.2%), Mitsubishi UFJ Financial Group ($52.2B, 4.0%), Bank of America ($43.8B, 3.4%) and Sumitomo Mitsui Banking Corp ($39.6B, 3.0%). Fed Repo positions among MMFs on 1/31/20 included only one fund: Goldman Sachs FS Treas Sol ($4.5B).
The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: Mitsubishi UFJ Financial Group ($32.4, 5.1%), Credit Suisse ($29.9B, 4.7%), Toronto-Dominion Bank ($29.1B, 4.6%), Bank of Nova Scotia ($27.6B, 4.4%), RBC ($27.0B, 4.3%), Credit Agricole ($25.2, 4.0%), Sumitomo Mitsui Banking Co ($22.5B, 3.6%), Svenska Handelsbanken ($19.2B, 3.0%), Federated ($18.9B, 3.0%) and Mizuho Corporate Bank Ltd ($18.8B, 3.0%).
The 10 largest CD issuers include: Mitsubishi UFJ Financial Group Inc ($20.8B, 7.2%), Sumitomo Mitsui Banking Co ($18.6B, 6.4%), Bank of Montreal ($15.5B, 5.3%), Toronto-Dominion Bank ($14.7B, 5.1%), Wells Fargo ($14.3B, 4.9%), Credit Suisse ($13.6B, 4.7%), Bank of Nova Scotia ($13.6B, 4.7%), Mizuho Corporate Bank ($12.2B, 4.2%), Natixis ($12.0B, 4.1%) and Sumitomo Mitsui Trust Bank ($10.5B, 3.6%).
The 10 largest CP issuers (we include affiliated ABCP programs) include: RBC ($19.8B, 7.4%), Toronto-Dominion Bank ($14.0B, 5.2%), Bank of Nova Scotia ($13.8B, 5.1%), Credit Suisse ($12.8B, 4.8%), National Australia Bank Ltd ($10.4B, 3.9%), JP Morgan ($10.1B, 3.8%), Canadian Imperial Bank of Commerce ($10.1B, 3.7%), Societe Generale ($10.1B, 3.7%), BNP Paribas ($9.7B, 3.6%) and Credit Agricole ($9.0B, 3.3%).
The largest increases among Issuers include: BNP Paribas (up $44.4B to $113.9B), Credit Agricole (up $33.0B to $82.7B), Goldman Sachs (up $19.6B to $36.3B), Barclays PLC (up $19.3B to $70.8B), Natixis (up $12.8B to $45.9B), JP Morgan (up $11.5B to $84.5B), Citi (up $11.2B to $42.8B), Societe Generale (up $11.2B to $48.0B) and HSBC (up $11.1B to $43.6B).
The largest decreases among Issuers of money market securities (including Repo) in January were shown by: US Treasury (down $83.6B to $1,028.0B), Fixed Income Clearing Corp (down $44.1B to $232.3B), Federal Home Loan Bank (down $37.8B to $565.0B), RBC (down $25.2B to $126.5B), Canadian Imperial Bank of Commerce (down $9.1B to $39.8B), Bank of Montreal (down $9.0B to $50.6B), Bank of America (down $7.9B to $50.3B), Federal National Mortgage Association (down $5.5B to $18.4B), Bank of Nova Scotia (down $4.1B to $45.1B) and Norinchukin Bank (down $1.2B to $17.0B).
The United States remained the largest segment of country-affiliations; it represents 62.6% of holdings, or $2.397 trillion. Canada (8.5%, $326.1B) was number two, and France (8.2%, $315.0B) was third. Japan (7.3%, $280.8B) occupied fourth place. The United Kingdom (3.9%, $150.3B) remained in fifth place. Germany (2.1%, $79.6B) was in sixth place, followed by The Netherlands (1.8%, $68.8B), Australia (1.6%, $59.9B), Sweden (1.2%, 47.3B) and Switzerland (1.2%, $45.0B). (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 Jan. 31, 2020, Taxable money funds held 37.9% (up from 36.0%) of their assets in securities maturing Overnight, and another 14.6% maturing in 2-7 days (up from 13.8% last month). Thus, 52.4% in total matures in 1-7 days. Another 17.1% matures in 8-30 days, while 12.9% matures in 31-60 days. Note that over three-quarters, or 82.4% of securities, mature in 60 days or less (up slightly from last month), the dividing line for use of amortized cost accounting under SEC regulations. The next bucket, 61-90 days, holds 8.4% of taxable securities, while 6.1% matures in 91-180 days, and just 3.1% matures beyond 181 days.
Crane Data's latest monthly Money Fund Portfolio Holdings statistics will be released later today, and we'll be writing our normal monthly update on the Jan. 31 data for Wednesday's News. But we also generate a separate and broader Portfolio Holdings data set based on the SEC's Form N-MFP filings, and we posted these to the website yesterday. (We continue to merge the two series, and the N-MFP version is now available via Holding file listings to Money Fund Wisdom subscribers.) Our new N-MFP summary, with data as of Jan. 31, 2020, includes holdings information from 1,082 money funds, representing assets of a record $4.031 trillion (up from $4.016 trillion last month). MMFs totaled over $4.0 trillion for the first time ever last month. We review the latest N-MFP data below.
Our latest Form N-MFP Summary for All Funds (taxable and tax-exempt) shows Repurchase Agreement (Repo) holdings in money market funds totaling $1,308 billion (up from $1,243 billion), or 32.5% of all assets. Treasury holdings total $1,038 billion (down from $1,123 billion), or 25.7%, and Government Agency securities totaled $787.7 billion (down from $828.7 billion), or 19.5%. Holdings of Treasuries, Government agencies and Repo (the vast majority of which is backed by Treasuries and agencies) combined total $3.134 trillion, or 77.7% of all holdings.
Commercial paper (CP) totals $340.3 billion (up from $323.0 billion), or 8.4%, and Certificates of Deposit (CDs) total $295.3 billion (up from $269.6 billion), or 7.3%. The Other category (primarily Time Deposits) totals $163.9 billion (up from $127.9 billion), or 4.1%, and VRDNs account for $98.2 billion (down from $100.7 billion last month), or 2.4%.
Broken out into the SEC's more detailed categories, the CP totals were comprised of: $226.9 billion, or 5.6%, in Financial Company Commercial Paper; $59.4 billion or 1.5%, in Asset Backed Commercial Paper; and, $54.0 billion, or 1.3%, in Non-Financial Company Commercial Paper. The Repo totals were made up of: U.S. Treasury Repo ($798.7B, or 19.8%), U.S. Govt Agency Repo ($447.1B, or 11.1%) and Other Repo ($62.3B, or 1.5%).
The N-MFP Holdings summary for the 222 Prime Money Market Funds shows: CP holdings of $334.2 billion (up from $317.0 billion), or 29.8%; CD holdings of $295.3 billion (up from $269.6 billion), or 26.3%; Repo holdings of $213.1 billion (down from $243.9 billion), or 19.0%; Other (primarily Time Deposits) holdings of $113.1 billion (up from $77.6 billion), or 10.1%; Treasury holdings of $91.1 billion (down from $101.3 billion), or 8.1%; Government Agency holdings of $69.1 billion (down from $75.4 billion), or 6.2%; and VRDN holdings of $5.3 billion (down from $5.4 billion), or 0.5%.
The SEC's more detailed categories show CP in Prime MMFs made up of: $226.9 billion (up from $214.0 billion), or 20.2% in Financial Company Commercial Paper; $59.4 billion (down from $61.3 billion) or, 5.3% in Asset Backed Commercial Paper; and $47.9 billion (up from $41.8 billion), or 4.3% in Non-Financial Company Commercial Paper. The Repo totals include: U.S. Treasury Repo ($79.0 billion, or 7.0%), U.S. Govt Agency Repo ($71.8 billion, or 6.4%), and Other Repo ($62.3 billion, or 5.6%).
In other news, rates on money market funds were slightly up in the latest week while brokerage sweep accounts remained flat. Our Money Fund Intelligence Daily shows the flagship Crane 100 MF Index up a basis point at 1.43%. The Crane 100 is down from 1.81% on Sept. 30 and down from 2.18% on June 30. It is down 80 bps from the beginning of 2019 (2.23%), but up from its near low of 0.06% ten years ago (12/31/09). The Crane Brokerage Sweep Index, which is currently 0.12%, is up 7 bps from ten years ago (0.05%) and down 16 bps from the end of 2018 (0.28%). Our latest Brokerage Sweep Intelligence, with data as of Friday, Feb. 7, shows no major brokerages changed rates in the past week.
The Crane Money Fund Average, which includes all taxable funds tracked by Crane Data, shows a 7-day yield of 1.31%, up a basis point in the week through Friday, Feb. 7. Treasury Inst MFs and Government Inst MFs were also both up a basis point at 1.33% and 1.39%, respectively. Prime Inst MMFs were flat in the latest week, holding at 1.52%. Treasury Retail MFs currently yield 1.06%, (up 1 bps), Government Retail MFs yield 1.07% (up 1 bps), and Prime Retail MFs yield 1.35% (unchanged), Tax-exempt MF 7-day yields increased 0.06% to 0.61%.
Crane's Brokerage Sweep Index remained flat at 0.14% in the week ended February 7 (for balances of $100K. E*Trade and TD Ameritrade currently have the lowest rate for balances at the $100K level (0.01%). Meanwhile, Fidelity continues to have the highest sweep rate (0.82%). (Fidelity also has a higher-yielding money fund option for new accounts.) Morgan Stanley is paying 0.03%. UBS, Merrill, Raymond James and Wells Fargo are all paying 0.05%, and Schwab is paying 0.06%. Ameriprise is paying 0.08% and RW Baird is paying 0.33% for balances of $100K.
Our MFI Daily, with data as of February 7, shows money fund assets have risen $5.7 billion over the past week to $3.931 trillion. Prime assets were up $10.3 billion, while Government assets were down by $4.2B. Tax-Exempt MMFs decreased $453 million. The MFI Daily also shows money fund assets up $5.7 billion month-to-date to $3.931 trillion. Prime assets are up $10.3 billion MTD, while Government assets are down by $4.2B. Tax-Exempt MMFs decreased $453 million. Prime and Government MF assets were up $378.7 billion and $492.6 billion in 2019, respectively.
For more, see our latest Brokerage Sweep Intelligence, or see these Crane Data News articles: Concerns Remain about Brokerage Cash Says Investment News; Sweeps (2/4/20), FINRA Fallout: More on Sweeps, Fin-Tech Cash Accounts by ignites, FP (1/22/20), Finra Latest To Scrutinize Sweeps (1/15/20), Ignites on UBS Sweep Changes (12/9/19), More on Regulators and Sweeps (11/25/19) and SEC Warns on Cash Sweeps (11/12/19).
Crane Data's latest Money Fund Market Share rankings show assets were down for the majority of U.S. money fund complexes in January. Money market fund assets decreased by $7.9 billion, or -0.2%, last month to $3.947 trillion. Assets have risen by $72.8 billion, or 1.9%, over the past 3 months, and they've increased by $701.5 billion, or 21.6%, over the past 12 months through Jan. 31, 2020. The biggest increases among the 25 largest managers last month were seen by Vanguard, Northern, Dreyfus, Schwab, UBS, DWS and First American, which increased assets by $7.9 billion, $7.4B, $4.8B, $2.5B, $2.3B, $1.9B and $1.9B, respectively. Declines in assets among the largest complexes in January were seen by Goldman Sachs, Morgan Stanley, Federated, BlackRock, JP Morgan, Fidelity, SSgA, Western and Wells Fargo, which decreased by $10.1B, $7.9B, $6.0B, $5.0B, $4.7B, $2.3B, $1.9B, $1.6B and $1.2B. 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. We review the latest market share totals below, and we also look at money fund yields in January.
Over the past year through Jan. 31, 2020, Fidelity (up $130.8B, or 19.7%), American Funds (up $104.1B, or 578.9%; this was inflated by the addition last year of the $108 billion American Funds Central Cash Fund), Federated (up $82.9B, or 35.8%), BlackRock (up $71.2B, or 25.8%), JP Morgan (up $60.3B, or 20.6%), Vanguard (up $59.7B, or 17.0%) and Goldman Sachs (up $47.9B, or 24.3%) were the largest gainers. These complexes were followed by Schwab (up $43.7B, or 27.8%), SSgA (up $32.4B, or 38.4%), Morgan Stanley (up $16.5B, or 14.8%) and Wells Fargo (up $16.1B, or 14.1%).
Goldman Sachs, Fidelity, BlackRock, Federated and JP Morgan had the largest money fund asset increases over the past 3 months, rising by $24.8B, $18.5B, $16.1B, $15.0B and $10.6B, respectively. Decliners over 3 months included: American Funds (down $15.0B, or -10.9%), UBS (down $7.9B, or -11.0%), Invesco (down $4.7B, or -36.4%), Franklin (down $3.4B, or -15.4%), First American (down $1.6B, or -2.3%), T Rowe Price (down $1.5B, or -3.9%) and SSgA (down $1.3B, or -1.1%).
Our latest domestic U.S. Money Fund Family Rankings show that Fidelity Investments remains the largest money fund manager with $793.6 billion, or 20.1% of all assets. That was down $2.3 billion in January, up $18.5 billion over 3 mos., and up $130.8B over 12 months. Vanguard ranked second with $411.2 billion, or 10.4% market share (up $7.9B, up $10.5B and up $59.7B for the past 1-month, 3-mos. and 12-mos., respectively). JPMorgan was third with $352.2 billion, or 8.9% market share (down $4.7B, up $10.6B and up $60.3B). BlackRock ranked fourth with $347.7 billion, or 8.8% of assets (down $5.0B, up $16.1B and up $71.2B for the past 1-month, 3-mos. and 12-mos.), while Federated remained in fifth with $314.6 billion, or 8.0% of assets (down $6.0B, up $15.0B and up $82.9B).
Goldman Sachs remained in sixth place with $245.3 billion, or 6.2% of assets (down $10.1 billion, up $24.8B and up $47.9B), while Schwab was in seventh place with $201.0 billion, or 5.1% (up $2.5B, up $8.7B and up $43.7B). Dreyfus ($163.6B, or 4.1%) was in eighth place (up $4.8B, up $558M and up $1.1B), followed by Northern ($132.0B, or 3.3%, up $7.4B, up $8.6B and up $13.8B). Wells Fargo was in 10th place ($130.3B, or 3.3%; down $1.2B, up $3.8B and up $16.1B).
The 11th through 20th-largest U.S. money fund managers (in order) include: Morgan Stanley ($128.6B, or 3.3%), American Funds ($122.1B, or 3.1%), SSgA ($117.0B, or 3.0%), First American ($71.1B, or 1.8%), UBS ($64.0B, or 1.6%), Invesco ($63.4B, or 1.6%), T Rowe Price ($37.7B, or 1.0%), DWS ($27.5B, or 0.7%), Western ($22.9B, or 0.6%) and HSBC ($21.1B, or 0.5%). Crane Data currently tracks 67 U.S. MMF managers, the same as last month.
When European and "offshore" money fund assets -- those domiciled in places like Ireland, Luxembourg and the Cayman Islands -- are included, the top 10 managers match the U.S. list, except JPMorgan and BlackRock move ahead of Vanguard, Goldman moves ahead of Federated, and Morgan Stanley, SSGA and Northern move ahead of Wells Fargo and American Funds. 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 ($804.8 billion), J.P. Morgan ($524.6B), BlackRock ($517.3B), Vanguard ($411.2B) and Goldman Sachs ($364.5B). Federated ($325.5B) was sixth, Schwab ($201.0B) was in seventh, followed by Dreyfus/BNY Mellon ($185.0B), Morgan Stanley ($167.5B) and Northern ($156.5B) which round 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 February issue of our Money Fund Intelligence and MFI XLS, with data as of 1/31/20, shows lower yields in January across all of our Crane Money Fund Indexes. The Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 757), fell 3 basis points to 1.28% for the 7-Day Yield (annualized, net) Average, and the 30-Day Yield decreased by 2 bps to 129%. The MFA's Gross 7-Day Yield decreased by 3 bps to 1.69%, while the Gross 30-Day Yield fell 2 bps 1.70%.
Our Crane 100 Money Fund Index shows an average 7-Day (Net) Yield of 1.42% (down 4 bps) and an average 30-Day Yield that decreased to 1.43%. The Crane 100 shows a Gross 7-Day Yield of 1.69% (down 4 bps), and a Gross 30-Day Yield of 1.70%. Our Prime Institutional MF Index (7-day) yielded 1.51% (down by 4 bps) as of January 31, while the Crane Govt Inst Index was 1.36% (down 2 bps) and the Treasury Inst Index was 1.31% (down 3 bps). Thus, the spread between Prime funds and Treasury funds is 18 basis points, while the spread between Prime funds and Govt funds is 5 basis points. The Crane Prime Retail Index yielded 1.34% (down 4 bps), while the Govt Retail Index was 1.07% (down 2 bps) and the Treasury Retail Index was 1.05% (down 3 bps). The Crane Tax Exempt MF Index yield plummeted in January to 0.55% (down 55 bps).
Gross 7-Day Yields for these indexes in January were: Prime Inst 1.82% (down 4 bps), Govt Inst 1.64% (down 2 bps), Treasury Inst 1.62% (down 3 bps), Prime Retail 1.83 (down 4 bps), Govt Retail 1.64% (down 2 bps) and Treasury Retail 1.62% (down 3 bps). The Crane Tax Exempt Index decreased 56 basis points to 1.00%. The Crane 100 MF Index returned on average 0.11% over 1-month, 0.34% over 3-months, 0.11% YTD, 1.81% over the past 1-year, 1.34% over 3-years (annualized), 0.83% over 5-years, and 0.43% over 10-years. The total number of funds, including taxable and tax-exempt, increased by four to 938. There are currently 757 taxable funds, eight more than the previous month, and 181 tax-exempt money funds (one less than last month). (Contact us if you'd like to see our latest MFI XLS, Crane Indexes or Market Share report.
The February issue of our flagship Money Fund Intelligence newsletter, which was sent out to subscribers Friday morning, features the articles: "Money Market Supply to Slow in '20 Says JPM's Ho at MFU," which features one of the highlights from our recent Money Fund University; "Cohen, Gershkow Review MMF Regs, Reforms at MFU," which excerpts from the "Money Fund Regulations: 2a-7 Basics & History" MFU session; and, "Social Gets Hotter, But What Exactly Is an ESG MMF?," which writes about the growing but confusing ESG Money Fund space. We've also updated our Money Fund Wisdom database with Jan. 31 statistics, and sent out our MFI XLS spreadsheet Friday a.m. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our February Money Fund Portfolio Holdings are scheduled to ship on Tuesday, Feb. 11, and our Feb. Bond Fund Intelligence is scheduled to go out Friday, Feb. 14.
MFI's "Money Market Supply" article says, "Crane Data recently hosted its Money Fund University in Providence, R.I. While MFU is meant to be our 'basic training' conference, there are usually discussions of hot topics and always a wealth of statistics of interest even to veterans in the space. We excerpt some of the highlights below and in the article to the right."
It explains, "J.P. Morgan Securities' Teresa Ho presented the 'Instruments of the Money Markets Intro,' giving an overview of the types of money market securities owned by money funds. She tells us, 'Borrowers use [the money markets] as a way to finance their short-term expenses, and investors use [it] as a way to temporarily invest their cash.... As long as there's a demand for liquidity and a mismatch between cash inflows and cash outflows, there is a need for money markets." (Note: Crane Data Subscribers and Money Fund University Attendees may access the Powerpoints and recordings for MFU in our 'Money Fund University 2020 Download Center.')"
Our "Cohen, Gershkow Review" piece reads, "Our recent MFU event also always contains a segment on 'Money Fund Regulations: 2a-7 Basics & History,' which featured Dechert's Steve Cohen & Stradley Ronon's Jamie Gershkow. The two reviewed regulations governing money funds and recent reforms, and also touched on some topics like ESG and ETFs. Cohen tells us, 'Money market funds were developed in the 1970s as an option for investors to purchase essentially a pool of short-term securities that gave them higher returns than banks were providing at the time.'"
He continues, "Initially funds had to get exempted from the SEC in order to operate money market funds using amortized cost, that was up until 1983. In 1983, the SEC adopted Rule 2a-7 in a much more basic form than today. It codified those exempted borders and allowed all money market funds to operate with a stable NAV, using amortized cost, or the penny-rounding method.... Amortized cost allows a fund to take the acquisition cost of its security and adjust for amortization of the premium or accretion of the discount."
Our "Social Gets Hotter" piece says, "ESG and Social money market funds keep getting hotter, but it still remains to be seen whether the strategy makes sense in the money markets. The latest events in the space include webinars from fund ratings firm Fitch Ratings and online money fund trading portal Institutional Cash Distributors (ICD), the launch of another social or 'impact' share class and separate deposit program, and the debut of UBS Select ESG Prime (which appears in the rankings this month)."
This week's "ESG in Money Market Funds" webinar (see yesterday's Crane Data News, which featured Fitch's Alastair Sewell and SSGA's Will Goldthwait, discussed ESG Money Market Funds and their definition problems in detail. Sewell comments, "Certain high profile investors, both in Europe and ... in the U.S., have indicated an interest in having ESG exposure in the cash element of their portfolio. So, what does that mean for money market funds? We can see that the number of ESG money market funds has increased sharply.... We now count a total of 34 explicit, dedicated ESG money market funds globally. The question presumably on everyone's minds then is, 'What exactly is an ESG money market fund?'"
The latest MFI also includes the News brief, "SEC Stats: MMF Assets Break $4.0 Trillion, Up 18th Month; Prime Dips," which writes, "The Securities & Exchange Commission’s latest 'Money Market Fund Statistics' showed that total money fund assets rose by $37.2 billion to a record $4.021 trillion in December, the 18th straight month of gains. Prime MMFs decreased $26.5 billion to close at $1.095 trillion, while Govt & Treasury funds rose by $64.7 billion to a record $2.783 trillion. Tax Exempt funds fell by $1.0 billion to $142.8 billion. Yields fell for Prime MMFs and Govt MMFs, while Tax-Exempt MMFs increased rates."
A second News piece titled, "Federated Renamed Federated Hermes," explains, "J. Christopher Donahue, president and CEO, comments in their earnings release, 'Federated reached new records across all three major asset classes -- equity, fixed income and money market -- with the latter increasing by $94 billion in 2019 as Federated's diverse lineup of liquidity products offered competitive yields for investors seeking cash-management solutions.’ The release explains, ‘As announced earlier this month, Federated will change its name to Federated Hermes.'"
Our February MFI XLS, with Jan. 31 data, shows total assets fell by $7.8 billion in January to $3.950 trillion, after rising $72.7 billion in December, $40.9 billion in November and $85.2 billion in October. Our broad Crane Money Fund Average 7-Day Yield fell to 1.29% during the month, while our Crane 100 Money Fund Index (the 100 largest taxable funds) was down 4 basis points to 1.42%.
On a Gross Yield Basis (7-Day) (before expenses are taken out), the Crane MFA fell 3 basis points to 1.69% and the Crane 100 fell to 1.69%. Charged Expenses averaged 0.40% (down one basis point from last month) and 0.27% (unchanged from last month), respectively for the Crane MFA and Crane 100. The average WAM (weighted average maturity) for the Crane MFA and Crane 100 was 30 (down three days) and 33 days (down four days), respectively. (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
Both fund ratings firm Fitch Ratings and online money fund trading portal Institutional Cash Distributors (ICD) hosted webinars on ESG, or environmental, social, governance, money funds and cash investing. The former's event, "ESG in Money Market Funds," featured Fitch's Alastair Sewell and SSGA's Will Goldthwait, while the latter's, "ESG for Short Term Investing: What Matters Counts," featured Justin Brimfield of ICD and Bob Smith of SAGE. The Fitch event discussed ESG Money Market Funds in detail, while the latter talked about ESG more broadly and separately managed accounts.
Sewell commented, "Certain high profile investors, both in Europe and ... in the US, have indicated an interest in having ESG exposure in the cash element of their portfolio. So, what does that mean for money market funds? We can see that the number of ESG money market funds has increased sharply.... We now count a total of 34 explicit, dedicated ESG money market funds globally. The question presumably on everyone's minds then is, 'What exactly is an ESG money market fund?'"
He continues, "To set our definition, what we look for to define an ESG money market fund, is a money market fund which explicitly references an ESG element in its investment objective. So, did the fund explicitly tie its process and its strategy, or the fund in particular, to ESG factors? To be clear, what that would exclude is a fund which is managed by an investment manager, which has a broad ESG integration process and as a money market fund we would exclude that. But if there was a manager with a money market fund with a specific ESG element to that fund in particular, then we would include that fund in our sample."
Sewell explains, "In terms of assets under management ... the growth has been reasonably strong in money market funds. We got to somewhere in the order of, 18-19% growth in assets in ESG money market funds over the course of 2019 in total. Just to put that into context, global money market fund assets have also expanded quite extensively in 2019. In the US, we see 20 percent growth in money market fund assets in 2019. So broadly speaking, ESG money market fund growth has been in line with total global growth."
SSGA's Goldthwait tells Fitch, "We spent a lot of time on the development of our money market fund product and considerable effort went into it. I think at the same time, State Street Global Advisors was also developing their R-Factor ... scoring methodology. One of the things that we thought [was] important in a money market fund is to have all of the assets within the fund receive some ESG score, or in our case R-factor, score. When we went about the design, we recognized that we didn't want an exclusionary fund, but we wanted a fund that would tilt, to try to enhance the ESG score. We thought that was important because we saw with a money market fund that principal preservation, liquidity market rate of return, were still top of mind.... We've noticed across the industry that ESG scoring methodology is moving more towards the sustainability and more towards the tilt, as opposed to, pure screening and pure exclusionary methodology."
He states, "Ultimately, we did come up with a product where we are able to buy all of the asset types. But we do have to eliminate certain underlying asset types within that example. So, for example, ... we can certainly buy asset backed commercial paper in the fund. We just can't buy all of the names that are otherwise on our approved list due to the underlying ratings of the collateral, the receivables. And then as an example around alternative repo, we looked through to the underlying assets and then determined what is viable as far as being able to rate that underlying collateral and then included that we could rate, and excluded that we couldn't."
When asked if ESG funds differ from non-ESG MMFs, Goldthwait answers, "We don't really see too many differences. When we compare our fund to our other prime fund that is not ESG, we know that approximately 20 to 30 percent of the non-ESG fund does not have an R-Factor score. Like I noted before, with regard to repo and regard to certain ABCP, that's easy to see, and you can also see it just observing our holdings, where the differences are. I would say from an overall risk standpoint, we really don't see any differences. It's just this idea of tilting the portfolio towards those credits that have slightly higher ESG scores or R-Factor scores."
He asks, "Will ESG funds become the norm? I think yes.... But I think ultimately the norm is going to change. I think this whole idea of 'green-washing' is certainly top of mind for anyone that is developing an ESG product. Ultimately, the investor in that product ... has to make a decision based on detailed analysis and examination of what the ESG process is within that product offering. I think it's very much up to the investor to make the decisions on what they consider valuable and important."
Fitch's slides contained a list of ESG funds, which includes US MMFs: Morgan Stanley Inst Liq ESG MMP, BlackRock Liquid Environmentally Aware Fund, State Street ESG Institutional Liquid Reserves, DWS ESG Liquidity Fund and UBS Select ESG Prime Institutional Fund. European MMFs domiciled in Ireland or Luxembourg include: BlackRock ICS Euro, Sterling and USD LEAF, DWS Inst ESG Euro and USD MMF and Candriam SRI Money Market Euro. Standard (longer-term) MMFs domiciled in France include: `Amundi Cash Institutions SRI, Ostrum Sustainable Tresorerie, BNP Paribas Mois ISR, CPR Monetaire SR Aviva Monetaire ISR CT, Allianz Securicash SRI, Federal Support Monetaire ESG, Aviva Monetaire ISR, HGA Monetaire ISR, OFI RS Liquidites, Federal Support Court Terme ESG, Carmignac Court Terme, SG Monetaire ISR, ABN AMRO Euro Sustainable Money Market and Ecofi Premiere Monetaire.
On the ICD call, Smith says, "Let me talk a little bit about cash management at SAGE.... First and foremost the objective of our separately managed ESG cash management strategy is to provide investors with portfolios that offer current income that is greater than money market instruments, while limiting their principle volatility and offering operating liquidity throughout all market environments. The four top priorities for our strategy are: capital preservation, daily liquidity, competitive yields and most importantly, a thorough ESG risk assessment. Our security selection process takes into consideration each company's environmental, social and governance rated performance in conjunction with its relative credit strength, to assess its ability to demonstrate a strong alignment with responsible and sustainable business practices and policies over the near and the long term."
He continues, "We believe our ESG research, our factor assessment and integration process are truly core value added dimensions of our overall active management activities. And, we believe that they can positively influence corporate behaviors and create long term sustainable value for our clients. We also believe that the active evaluation of ESG factors is best conducted in the context of fundamental credit and investment analysis. This is important, because they are important drivers of investment returns, from both an opportunity, and even more importantly, a risk mitigation perspective."
On the origin of ESG, Smith says, "The term ESG was actually first coined in 2004, in the United Nations' landmark study that was titled, 'Who Cares, Wins,' which was issued as part of a joint initiative with the UN and major financial institutions around the world. That report assumed, very importantly, that ESG principles have economic significance ... and that they should be integrated into the capital market.... ESG investment has grown exponentially in the year since the UN study was published."
Finally, he adds, "Many companies are feeling pressure from large institutional investors ... and shareholders alike, to recognize and better manage their ESG risks and disclose those efforts in their 10-Ks and 10-Q financial reports. These risks come from a wide range of concerns from climate change to board gender composition, to workplace culture, to human rights, anti-bribery, anti-corruption efforts, date privacy, gun violence, and sadly for some the opioid crisis. And, these companies and their investors perceive these issues as reputational threats."
For more on ESG and Social Money Market Funds, see these Crane Data News articles: Goldman Launches Social Class; Tiedemann Adds FICA; CS Green ABCP (1/24/20), Mischler Financial Joins "Impact" or Social Money Market Investing Wave (12/5/19), BNP Insticash Adds ESG Overlay (11/29/19), Dreyfus Launches "Impact" or Diversity Government Money Market Fund (11/21/19), Goldman Adds ESG Screen (11/14/19), Aviva Investors Discusses ESG MMFs; Fitch Rates MS ESG (11/6/19), UBS Asset Mgmt Files to Launch Select ESG Prime Institutional Fund (11/4/19), BlackRock Launches First Offshore ESG MMF; ICS LEAF in EUR, GBP, USD (7/22/19) and SSGA Goes Live with ESG Money Market Fund (7/3/19).
With our recent Money Fund University "basic training" event now history, Crane Data is getting ready for its fourth annual ultra-short bond fund event, Bond Fund Symposium. BFS will take place in less than two months, March 23-24, at the Hyatt Regency Boston. Crane's Bond Fund Symposium offers a concentrated and affordable educational experience, as well as an excellent networking venue, for bond fund and fixed-income professionals. Registrations are being accepted ($750) and sponsorship opportunities are still available. (Tickets are also available to select Crane Data clients and PMs. Let us know if you'd like more information.) We review the latest agenda and details below.
Bond Fund Symposium's Day One (3/23) morning agenda includes: Bond Market Strategists: Rates, Risks, Spreads with Ira Jersey of Bloomberg Intelligence, Alex Roever of J.P. Morgan Securities and Michael Cloherty of UBS; Short & Shorter: Ultra-Shorts vs. SMAs & ESG with Dave Martucci of J.P Morgan A.M. and Jerome Schneider of PIMCO; and ETF & Near-Cash ETF Trends, with Will Goldthwait of State Street Global Advisors; Brian McMullen of Invesco and James McNerny of JPMAM.
The Day One afternoon agenda includes: Senior Portfolio Manager Perspectives with Frank Gianatasio, Jr. of BlackRock, Joanne Driscoll of Putnam Investments and Dave Rothweiler of UBS Asset Management; Major Issues in Fixed-Income Investing featuring Logan Miller of Wells Fargo Securities, Matthew Brill of Invesco and Morten Olsen of Northern Trust; and, Index Fund & ESG Issues in the Bond Space with William Goldthwait of State Street Global Advisors and Henry Shilling of Sustainable Research Analysis. Finally, the segment, US Bond Fund Ratings & LGIP Market Update with Peter Gargiulo of Fitch Ratings and Guyna Johnson of S&P Global Ratings, will close Monday's session, followed by a reception sponsored by Wells Fargo.
Day Two's agenda includes: State of the Bond Fund Marketplace with Peter Crane of Crane Data and Shelly Antoniewicz of the Investment Company Institute; Regulatory Update: Latest Bond Fund Issues with Aaron Withrow of Dechert LLP and Jamie Gershkow of Stradley Ronon Stevens & Young; Government Bond Market & Fund Discussion with Sue Hill of Federated Investors and Ira Jersey of Bloomberg Intelligence; Municipal Bond Market Overview with Kristian Lind of Neuberger Berman and J.R. Rieger of The Rieger Report; and a Money Fund Update & Conservative USBFs with Crane and Kerry Pope of Fidelity Investments.
Portfolio managers, analysts, investors, issuers, service providers, and anyone interested in expanding their knowledge of bond funds and fixed-income investing will benefit from our comprehensive program. A block of rooms has been reserved at the Hyatt Regency. We'd like to thank our sponsors and exhibitors -- Wells Fargo Securities, Fidelity Investments, Fitch Ratings, J.P. Morgan Asset Management, Northern Trust, S&P Global Ratings, Invesco, Dechert, INTL FCStone, Bloomberg Intelligence, Toyota Financial Services and DTCC -- for their support. E-mail us for more details.
Also, mark your calendars for our big show, Crane's Money Fund Symposium, which will be held June 24-26, 2020, at the Hyatt Regency Minneapolis. The preliminary agenda is now available and registrations are now being taken at: www.moneyfundsymposium.com. We've also set the dates and location for our next European Money Fund Symposium. It is scheduled for Sept. 17-18, 2020, in Paris, France. Let us know if you'd like more details on any of our events, and we hope to see you in Boston, Minneapolis or Paris in 2020!
Finally, thanks to those who attending Crane Data's 10th annual Money Fund University, which took place Jan. 23-24, 2020, in Providence, R.I. Mark your calendars for next year's event, which will be Jan. 21-22, 2021, in Pittsburgh, Pa. Watch for details in coming months, and let us know if you're interested in sponsoring or speaking, and contact us if you have any feedback or questions. Attendees to MFU and Crane Data subscribers may access the latest recordings, Powerpoints and binder materials here: https://cranedata.com/publications/mfuniversity-2020.
In other news, the February 2020 issue of The Independent Adviser for Vanguard Investors discusses Tax Exempt Money Funds in the brief, "Investors Year-End Fireworks Come and Go." They tell us, "It's that time of year again when Dan [Wiener] and I caution against chasing the year-end yields you may have seen on tax-exempt money market funds -- they never last, and this year was no different. Year-in and year-out, we warn you about the machinations in the municipal paper markets that cause yields on tax-exempt money funds to skyrocket at year-end and then fall back to earth just as quickly."
The piece continues, "Okay, we didn't have to offer that warning for several years following the financial crisis when short-term yields were pinned at a single basis point, 0.01%. But with yields at more normal levels, the pattern of a short-lived, year-end spike in yields is back. So, don't count on the yield you see listed on Vanguard's or other companies' websites. And please don't pay any attention to lists of 'best tax-exempt money market yields' because the data being used are already irrelevant."
It explains, "Just look at the chart ... showing Vanguard's municipal money market funds alongside Prime Money Market over the last two months. While Prime Money Market traded in a narrow range of 1.65% to 1.74%, the municipal funds moved all over the place. Municipal Money Market entered December yielding 1.05%. Its yield climbed to 1.41% by the first trading day of the New Year before quickly falling to 0.81%."
The Independent Adviser elaborates, "The cause of this year-end yield spike is varied. In part, the situation arises as holiday shoppers sell money market holdings to pay the bills, causing a supply of bonds that overwhelms the market. Prices fall and yields rise. Another factor is institutional trading to 'window dress' year-end statements with higher-yielding and 'better looking' taxable securities even though the after-tax yields on municipals may be higher. Municipal bond dealers then must boost yields on their securities to attract buyers. All this meshugas begins to fade within the first few days of the New Year, and yields quickly revert to what should be normal."
Finally, they write, "Bottom line: You can earn some extra yield on your municipal money market funds for a few days around year-end if you want to, but that opportunity has already come and gone. Plus, trading in and our may trigger a warning from Vanguard. I'd rather enjoy the holidays and let the municipal bond dealers battle it out amongst themselves." (See our January 9 News, "MMF Market Share: BlackRock, Goldman, Federated Jump; T-E Yields Up. Tax-exempt yields jumped up to 1.11% in December, up 39 bps, but they are currently yielding just 0.59% as of Feb. 3, according to our MFI Daily.
Investment News published the editorial, "Keep sweep accounts clean and transparent," which is subtitled, "Idle cash is a significant profit center for broker-dealers." The opinion piece tells us, "In 'olden' days, or at least up until the mid-1990s, the Glass-Steagall Act prohibited commercial banks from owning or operating brokerage firms, and equity trades required five days to settle. Since then, much has changed. Banks and brokerage firms now operate under one roof. And settlement -- the process of going from transaction to receiving payment or securities -- has shrunk to two days. But concerns remain about whether brokerage firms are giving investors a fair deal on cash -- whether it's the cash received when securities are sold or the cash that must be available for securities to be purchased."
They continue, "Unlike in the past, when idle cash sitting in a customer's brokerage account typically received no interest, cash today usually is swept into a money market mutual fund or into a money market bank account, typically at a bank that is a unit of the same parent as the broker-dealer. As noted in a recent report by Mark Schoeff Jr., the Financial Industry Regulatory Authority Inc. will be making brokerage firm cash sweep programs one of its examination priorities this year, citing its own worries and those of the Securities and Exchange Commission. Essentially, Finra is concerned that brokerage firms may be encouraging customers to use in-house bank sweep accounts without informing them of other alternatives for cash management, namely money market mutual funds."
Investment News writes, "To be sure, the bank sweep accounts offered by brokerage firms come with several user conveniences, including debit cards and ATM withdrawals. At the same time, bank sweeps often pay far less interest than money market funds -- about 175 basis points less, on average, according to Bankrate.com. What's left unstated by Finra is that it is clearly in a broker-dealer's financial interest, and not necessarily in the customer's, to avoid money market mutual funds and instead steer idle cash to a bank sweep account.... This creates an ethical and business conflict for firms: Do the right thing for the customer by enabling them to earn a higher return on their cash, or do the right thing for the firm by keeping those returns in-house?"
IN says, "With brokerage commissions falling to zero at many of the largest firms, interest earned on idle cash -- or in this case, the spread between what brokerage firms pay customers on bank sweep account balances and what their parent firm earns on those funds as an institutional investor -- is a significant profit center for broker-dealers. It is not likely one they will want to cede."
The Opinion adds, "Finra said it will take several factors into consideration when looking at firms' sweep practices, most of which involve clear and complete disclosure of where the cash is going and the alternatives available to the investor. Among the many specifics it will be reviewing are whether firms omit or misrepresent material information concerning the relationship of the brokerage accounts to partner banks, the nature and terms of the arrangements, and the amount of time it may take for customer funds to reach the bank accounts."
Finally, they conclude, "In the old days, there was little investors could do to speed the settlement process or share in part of the sizable interest earned by brokerage firms on the cash that coursed leisurely through customer accounts on the way toward settlement. In those days, too, brokerage firms were often less than diligent about making sure idle cash was moved promptly into customers' hands -- prompting complaints about 'dirty sweeps.' In today's faster, interconnected world, there is no reason for anything other than clean sweeps. Let's hope that Finra's efforts result in more transparency and greater cleanliness in the cash sweep process."
In related news, rates on money market funds and brokerage sweep accounts remained flat in the latest week. Our Money Fund Intelligence Daily shows that the flagship Crane 100 MF Index remaining flat at 1.42%. The Crane 100 is down from 1.81% on Sept. 30 and down from 2.18% on June 30. It is down 77 bps from the beginning of 2019 (2.23%), but up from its near low of 0.06% ten years ago (12/31/09). The Crane Brokerage Sweep Index, which is currently 0.12%, is up 7 bps from ten years ago (0.05%) and down 16 bps from the end of 2018 (0.28%). Our latest Brokerage Sweep Intelligence, with data as of Friday, Jan. 31, shows no major brokerages lowering rates in the past week.
The Crane Money Fund Average, which includes all taxable funds tracked by Crane Data, shows a 7-day yield of 1.30%, unchanged in the week through Friday, Jan. 31. Treasury Inst MFs were flat at 1.32%. Government Inst MMFs and Prime Inst MMFs were also flat in the latest week, holding at 1.38% and 1.52%, respectively. Treasury Retail MFs currently yield 1.05%, (unchanged), Government Retail MFs yield 1.06% (unchanged), and Prime Retail MFs yield 1.35% (down 0.01%), Tax-exempt MF 7-day yields increased 0.07% to 0.55%.
Crane's Brokerage Sweep Index remained flat at 0.14% in the week ended January 31 (for balances of $100K. E*Trade and TD Ameritrade currently have the lowest rate for balances at the $100K level (0.01%). Meanwhile, Fidelity continues to have the highest sweep rate (0.82%). (Fidelity also has a higher-yielding money fund option for new accounts.) Morgan Stanley is paying 0.03%. UBS, Merrill, Raymond James and Wells Fargo are all paying 0.05%, and Schwab is paying 0.06%. Ameriprise is paying 0.08% and RW Baird is paying 0.33% for balances of $100K.
Our MFI Daily, with data as of January 31, shows money fund assets have fallen $5.9 billion over the past week to $3.926 trillion. Prime assets were down $6.8 billion, while Government assets were up by $2.5B. Tax-Exempt MMFs decreased $1.6 billion. The MFI Daily also shows money fund assets down $51.8 billion month-to-date to $3.926 trillion. Prime assets are down $11.1 billion MTD, while Government assets are down by $39.4B. Tax-Exempt MMFs decreased $1.2 billion. Prime and Government MF assets were up $378.7 billion and $492.6 billion in 2019, respectively.
For more, see our latest Brokerage Sweep Intelligence, or see these Crane Data News articles: FINRA Fallout: More on Sweeps, Fin-Tech Cash Accounts by ignites, FP (1/22/20), Finra Latest To Scrutinize Sweeps (1/15/20), Ignites on UBS Sweep Changes (12/9/19), More on Regulators and Sweeps (11/25/19) and SEC Warns on Cash Sweeps (11/12/19).
Federated Investors reported 4th quarter earnings last week and hosted its quarterly earnings call Friday. The company, which is changing its name to Federated Hermes, barely discussed money market funds in its latest call, a rare event. (See the press release, "Federated Investors, Inc. Reports Fourth Quarter 2019 Earnings" and see the Q4 Earnings Call Transcript on Seeking Alpha here.) J. Christopher Donahue, president and chief executive officer, commented in the earnings release, "Federated reached new records across all three major asset classes -- equity, fixed income and money market -- with the latter increasing by $94 billion in 2019 as Federated's diverse lineup of liquidity products offered competitive yields for investors seeking cash-management solutions." The release explains, "As announced earlier this month, Federated will change its name to Federated Hermes, Inc., and the company will change its NYSE ticker symbol from FII to FHI. The name change will be effective Jan. 31, 2020.... Also, on Feb. 3, Federated Hermes will launch a multi-faceted campaign to reintroduce the combined company to the investing public."
On the call, Donahue comments, "As of today, we have officially changed our name to Federated Hermes, Inc. and we are unveiling an updated corporate identity next week, focused on a commitment to responsible investing to achieve financial outperformance. The new name reflects the combining of two active management firms, Federated Investors, Inc. and Hermes Investment Management."
He continues, "Moving to Money Markets, assets increased about $36 billion or 10% in the fourth quarter, including about $11 billion from the PNC acquisition. Money Market assets increased $94 billion or 31% for the full year to close 2019 at record high assets of $396 billion. Money Market strategies continue to have a significant yield advantage compared to average deposit rates. Money Market yields also compared favorably to applicable direct market rates and longer duration securities."
Donahue tells us, "Our Money Market mutual fund market share, including sub-advised funds at year-end was about 8.8%, up from about 8.4% at the end of Q3 and 7.9% at the end of 2018.... Taking a look now at our most recent available asset totals ... managed assets were approximately $583 billion, including $401 billion in Money Markets.... On the Money Market mutual fund asset side, the assets were $283 billion."
CFO Tom Donahue states, "Total revenue was up about $18 million or 5% from the prior quarter due mainly to higher Money Market revenue of about $12 million, primarily from higher average Money Market assets.... Revenue was up about $191 million or 17% for the full year due mainly to higher Money Market revenue of $115 million and the inclusion of a full year of Hermes results in 2019 compared to half of 2018, which accounted for $96 million.... Distribution expense increased about $5 million in Q4 compared to the prior quarter and $53 million for the full year due mainly to higher average Money Market fund assets."
During the brief Q&A, Tom Donahue adds on the PNC funds merger, "So the expenses with the Money Markets will primarily be related to distribution payments and all the other funds merged into our existing funds. So where there [are] distribution payments there, we also picked up a great team in Cleveland with three funds. So we're picking up the expense of that team and at Cleveland office and the connections into Federated and the new efforts to sell and distribute those three funds in a wider fashion."
When asked about the Federated Hermes rebranding, Money Markets CIO Debbie Cunningham comments, "The full integration of ESG analysis into our credit review process for all of our liquidity product, that was something we had been driving toward since the 2018 acquisition and accomplished in 2019. That was evolutionary, not revolutionary. It will continue to develop, but we have absolutely included from the analysts and the engagers the information that's coming out of the Hermes proprietary model and used that within the qualitative aspects of our credit analysis process for our Money Market fund."
On flows, Tom Donahue says, "So it's the spread products that have been responsible for the inflows. Ultrashorts were a meaningful part of the Q4 positive.... They are actually a little bit negative in the first part of 2020, and that's really just more technical, analogous to what happens in the Money Market fund side where money tends to come in especially late in the year and then go.... You can kind of think of that as much more like long cash than that the spread products that really have driven the inflows on fixed income."
When asked about spreads over bank products, Cunningham states, "Deposit rates are still [dismal].... The last [sweep] brokerage deposit rate index came in at 14 basis points. So it's not much above where money funds were in a zero rate environment, and we're no longer in a zero rate environment. Most of our funds are somewhere on a net yield basis, between 160 and 180 [bps]. The interest rates went down with the coronavirus [scare] over the course of the last several weeks and concerns about what that might do from an economic activity perspective and how the Fed may need to react."
Finally, she adds, "The Fed, however, on Wednesday confirmed rates and actually raised IOER and the RRP, which is overnight lending by five basis points. So that's beneficial to our products and has made the yield curve look a little bit more attractive on a fund basis. So I don't expect those yields to drop very much. So when you're talking about deposit rates, you're talking at least 150 basis point advantage over what most customers in those types of accounts are receiving at this point."
An earlier press release, entitled, "Federated Investors, Inc. to Change Name and Ticker Symbol," tells us, "Federated Investors, Inc. (FII), a leading global investment manager, intends to change its name to Federated Hermes, Inc. In relation, the company also intends to change its NYSE ticker symbol from FII to FHI. It is expected that the name change will be effective Jan. 31, 2020, and that Federated's Class B Common Stock will begin trading on the NYSE under the FHI ticker symbol on Feb. 3, 2020. These changes will come a little more than 18 months after Federated's July 2018 acquisition of a majority interest in London-based Hermes Fund Managers Limited, which operates as Hermes Investment Management, a pioneer of integrated ESG investing. Federated will provide more information about these changes in February 2020."
