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Northern Institutional Funds filed to liquidate its $1.7 billion Northern Prime Obligations Portfolio earlier this week, we learned from Bloomberg. The filing says, "The Board of Trustees (the 'Board') of Northern Institutional Funds (the 'Trust') has determined, after consideration of a number of factors, that it is in the best interests of the Prime Obligations Portfolio (the 'Portfolio') and its shareholders that the Portfolio be liquidated and terminated on or about July 10, 2020 (the 'Liquidation Date') pursuant to a plan of liquidation approved by the Board. The Liquidation Date may be changed at the discretion of the Trust's officers. The pending liquidation of the Portfolio may be terminated and/or abandoned at any time before the Liquidation Date by action of the Board of the Trust. As of the date of this supplement, Williams Capital Shares of the Portfolio have not commenced operations and are not offered for purchase." (The fund's assets are down from $3.8 billion on Feb. 28, 2020.)

The Bloomberg piece, "Northern Trust to Shutter Money-Market Fund After Redemptions," tells us, "Northern Trust Corp. is shutting down a money-market mutual fund after volatility in March spurred redemptions that sent it below a regulatory threshold for maintaining liquidity. The $1.7 billion Northern Institutional Prime Obligations Portfolio will stop accepting new investments next month and start selling its holdings under a liquidation plan set for July 10, according to a filing."

Reuters, in a March 23 article,"Fed's Money Market Move Lifts Northern Trust Fund Above Key Threshhold," wrote, "Liquidity at a $2.2 billion prime money-market fund run by Northern Trust Corp fell below the key 30% U.S. regulatory threshold twice last week, but rebounded above that level after the U.S. Federal Reserve shored up the industry. As the coronavirus roils the global economy and squeezes Wall Street for cash, money-market reforms put in place after the 2007-2009 financial crisis are weathering a major test."

They explained, "Several institutional prime funds, whose investors include large corporations, were at risk of falling below the 30% threshold before the Fed took extraordinary steps reminiscent of the last financial crisis to backstop the money-market industry." The Northern Prime Obligations Portfolio disclosed that its weekly liquidity level fell to 27% of assets twice last week, according to the fund's website -- reducing its buffer for quickly converting assets into cash to meet investors' redemptions. However, Chicago-based Northern Trust, a bank and wealth manager, said on Monday the latest weekly liquidity level for the fund was nearly 41%."

In other news, The Federal Reserve Bank of New York published an update on the "The Primary Dealer Credit Facility" via its Liberty Street Economics blog. They write, "On March 17, 2020, the Federal Reserve announced that it would re-establish the Primary Dealer Credit Facility (PDCF) to allow primary dealers to support smooth market functioning and facilitate the availability of credit to businesses and households. The PDCF started offering overnight and term funding with maturities of up to ninety days on March 20. It will be in place for at least six months and may be extended as conditions warrant. In this post, we provide an overview of the PDCF and its usage to date."

The NY Fed writes, "Lending rose quickly after the PDCF's launch, and the weekly average of outstanding loans peaked at over $35 billion for the week ending April 15.... Outstanding loans remained in the $30-35 billion range for a few weeks, before decreasing recently, as market conditions improved. The vast majority of value-weighted PDCF loans have a maturity longer than overnight.... The bulk of the assets financed in the PDCF to date have been corporate and municipal debt, as well as asset-backed securities and commercial paper. These are asset classes that were experiencing considerable volatility and pressure in early March. Market conditions have improved markedly since the introduction of a variety of Fed interventions, including the PDCF."

They explain, "The Federal Reserve initially established the PDCF in March of 2008, following severe strains in the tri-party repo market, associated in part with Bear Stearns' troubles.... Following its inception in March 2008, usage of the original PDCF increased to approximately $40 billion, before decreasing to zero by mid-2008.... This $40 billion level is roughly comparable to the peak usage of today's PDCF. Usage of the original PDCF increased to over $140 billion in September 2008, following the bankruptcy of Lehman Brothers. This peak is much higher than the current use of today's PDCF. However, the range of collateral eligible for the PDCF post-Lehman was much broader than the range of eligible collateral at the PDCF today, making comparisons difficult."

The piece adds, "The PDCF is one of many facilities introduced by the Federal Reserve to support the U.S. economy in the face of the coronavirus pandemic. The PDCF helps primary dealers support smooth market functioning and facilitate the availability of credit to businesses and households in their capacity as market makers for corporate, consumer, and municipal obligations." For more, see these previous Liberty Street Economics blogs: "The Money Market Mutual Fund Liquidity Facility" and "The Commercial Paper Funding Facility."

Finally, Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics Tuesday, which track a shifting subset of our monthly Portfolio Holdings collection. The most recent cut (with data as of May 15) includes Holdings information from 80 money funds (up two from two weeks ago), which represent $2.664 trillion (up from $2.568 trillion) of the $5.123 trillion (52.0%) in total money fund assets tracked by Crane Data. (Note that our Weekly MFPH are e-mail only and aren't available on the website. For our latest monthly Holdings, see our May 12 News, "May MF Portfolio Holdings: Treasuries Skyrocket, Repo Plunges in April.)

Our latest Weekly MFPH Composition summary again shows Government assets dominating the holdings list with Treasury totaling $1.344 trillion (up from $1.209 trillion two weeks ago), or 50.4%, Repurchase Agreements (Repo) totaling $635.7 billion (down from $706.4 billion two weeks ago), or 23.9% and Government Agency securities totaling $470.7 billion (up from $470.4 billion), or 17.7%. Certificates of Deposit (CDs) totaled $70.7 billion (up from $48.7 billion), or 2.7% and Commercial Paper (CP) totaled $59.2 billion (up from $58.7 billion), or 2.2%. A total of $46.9 billion or 1.8%, was listed in the Other category (primarily Time Deposits), and VRDNs accounted for $37.6 billion, or 1.4%.

The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $1.344 trillion (50.4% of total holdings), Federal Home Loan Bank with $289.3B (10.9%), Fixed Income Clearing Co with $99.9B (3.7%), Federal Farm Credit Bank with $69.9B (2.6%), BNP Paribas with $69.5B (2.6%), Federal National Mortgage Association with $57.5B (2.2%), Federal Home Loan Mortgage Corp with $51.3B (1.9%), JP Morgan with $49.5B (1.9%), RBC with $46.8B (1.8%) and Mitsubishi UFJ Financial Group Inc with $30.0B (1.1%).

The Ten Largest Funds tracked in our latest Weekly include: JP Morgan US Govt ($228.4B), Goldman Sachs FS Govt ($217.0B), Fidelity Inv MM: Govt Port ($194.3B), BlackRock Lq FedFund ($175.5B), JPMorgan 100% US Treas MMkt ($142.3B), Wells Fargo Govt MM ($138.6B), Goldman Sachs FS Treas Instruments ($133.3B), Morgan Stanley Inst Liq Govt ($109.3B), State Street Inst US Govt ($105.4B) and BlackRock Lq T-Fund ($86.4B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary, or our Bond Fund Portfolio Holdings data series.)

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MFI Daily Data News

Jun 05
 

The June issue of our flagship Money Fund Intelligence newsletter, which was sent out to subscribers Friday morning, features the articles: "MFs Begin Waiving Expenses to Avoid Negative Yields," which focuses on fee waivers as money fund yields approach zero; "Invesco's Brignac on Time-Tested Process, Client Care," which profiles the CIO for Invesco Global Liquidity; and, "NY Fed Blog Reviews MMLF, CPFF, PDCF Fed Support Plans," which looks at the Fed's lending facilities. We've also updated our Money Fund Wisdom database with May 31 statistics, and was 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 June Money Fund Portfolio Holdings are scheduled to ship on Tuesday, June 9, and our June Bond Fund Intelligence is scheduled to go out Friday, June 12.

MFI's "Waiving Expenses" article says, "Money funds have stabilized at a record $5.2 trillion following a harrowing March and a surprisingly robust recovery in April and May. While CP market turmoil, the Prime asset drop and recovery and the Government MMF asset bonanza are still stories, the big issue facing funds is now zero and perhaps negative yields, along with fee waivers and reduced expenses. Yields have fallen to 0.15% on average and over 25% of assets (and 50% of funds) are now on the 0.00%-0.01% floor."

It continues, "During the last zero yield era (2009-2015), funds basically waived half of their fees, cutting expenses from roughly 0.35% to 0.17%. While it's difficult to get timely and accurate expense and waiver data, it's clear that waivers are starting to bite and expenses are moving downwards. (We update ours using the SEC's Form N-MFP info, but we don't update until the 6th business day -- so see our June MFI XLS and craneindexes.xlsx file on the website on Monday for the latest.)"

Our "Profile" reads, "This month, Money Fund Intelligence interviews Laurie Brignac, Chief Investment Officer for Invesco Global Liquidity, which will celebrate its 40th birthday this year. (Money funds will celebrate their 50th this October.) Brignac tells us about Invesco's history, about the events of the last several months and the issues facing money fund managers for the remainder of 2020. Our Q&A follows."

MFI says, "Give us a little history. Brignac tells us, "We launched our first money market fund back in 1980 and at that time we were known as AIM Investments. AIM merged with Invesco in the late '90s, but we're proud of the fact that we have the same investment process that we used on that first day in 1980. I don't know if many people can say that. The process has stood the test of time and worked very well for our clients over multiple interest rate and credit cycles. We're very proud of the fact that we have never had to buy securities or support any of our money market funds, even through the financial crisis. We've been able to honor all purchases and redemptions on T-0 basis."

The "NY Fed Blog" article tells readers, "The Federal Reserve Bank of New York posted a series of 'Liberty Street Economics' blogs reviewing the Fed's recent support facilities, including 'The Money Market Mutual Fund Liquidity Facility,' 'The Primary Dealer Credit Facility' and 'The Commercial Paper Funding Facility.' The MMLF piece tells us, 'Over the first three weeks of March, as uncertainty surrounding the COVID19 pandemic increased, prime and municipal (muni) money market funds (MMFs) faced large redemption pressures. Similarly to past episodes of industry dislocation, such as the 2008 financial crisis and the 2011 European bank crisis, outflows from prime and muni MMFs were mirrored by large inflows into govt MMFs.'"

The post explains, "To prevent outflows from prime and muni MMFs from turning into an industry-wide run, as happened in September 2008 when one prime MMF 'broke the buck,' the Federal Reserve announced the establishment of the Money Market Mutual Fund Liquidity Facility, or MMLF, on March 18. Under this facility, the Federal Reserve Bank of Boston provides loans to eligible borrowers ... taking as collateral eligible securities purchased from prime and muni MMFs. The U.S. Treasury provides $10 billion of credit protection to the Federal Reserve from the Treasury's Exchange Stabilization Fund."

The latest MFI also includes the News brief, "Money Fund Assets Up in May But Down in June," which writes, "MMF assets increased by $31.6 billion in May to a record $5.163 trillion according to Crane's MFI XLS. ICI's latest weekly shows assets falling by $36.3 billion in the latest week to $4.752 trillion."

A second News piece titled, "Northern Liquidating Prime Obligs," says, "Northern Institutional Funds filed to liquidate its $1.7 billion Northern Prime Obligations Portfolio. The filing says, 'The Board ... has determined ... that the Portfolio be liquidated and terminated on or about July 10, 2020.' See Bloomberg's 'Northern Trust to Shutter Money-Market Fund After Redemptions.'"

Our June MFI XLS, with May 31 data, shows total assets increased by $31.6 billion in May to $5.163 trillion, after jumping $417.9 billion in April, $688.1 billion in March and $23.4 billion in February. Our broad Crane Money Fund Average 7-Day Yield fell 8 bps to 0.11% during the month, while our Crane 100 Money Fund Index (the 100 largest taxable funds) was down 11 bps to 0.15%.

On a Gross Yield Basis (7-Day) (before expenses are taken out), the Crane MFA was down 8 bps at 0.41% and the Crane 100 fell to 0.38%. Charged Expenses averaged 0.30% (down 4 bps from last month) and 0.23% (down two from the previous month), respectively for the Crane MFA and Crane 100. The average WAM (weighted average maturity) for the Crane MFA and Crane 100 was 41 (up 2 days) and 44 days (up 3 days) respectively. (See our Crane Index or craneindexes.xlsx history file for more on our averages.)

May 26
 

For those of you who might have missed it, we hosted our first webinar, entitled, "Crane's Money Fund Update & Training," last Thursday. It featured Peter Crane reviewing recent events and trends involving money market mutual funds for 30 minutes, including discussions of asset flows, negative yield and a number of other topics. The webinar also included a brief, 15 minute tutorial on our Money Fund Intelligence Daily product. Below, we review Crane's latest comments, and we also include links to the recordings and Powerpoint. (See the bottom of our "Content" page for all of our Webinar and conference materials.) Mark your calendars and watch for details on our next webinar, which will be held June 25 at 2pm, and bear with us as we ramp up our virtual event capabilities over the next couple of months.

On record money fund asset growth, Crane comments, "The ICI series is hitting $4.8 trillion. Crane Data's [series] has hit $5 trillion already. We're saying money fund assets are over $5 trillion because we're counting funds that ICI is not. (Crane Data tracks internal money market funds like American Funds Central Cash, Fidelity Cash Central Fund and Vanguard Market Liquidity Fund.) The inflows into government funds were just gigantic, so, it's been quite a huge buildup. Looking at the month-by-month numbers, it has certainly tapered off. And in the last few days, you've even seen outflows."

He continues, "The ICI's weekly numbers are going to come out this afternoon, they'll probably show a little increase. We're about to see a decrease in assets for almost the first time this year, but ... the flows have been incredible.... Government funds have seen $1.16 trillion in assets the last two and a half, three months. In March, they saw $790 billion. In April, they saw $362 billion. Then month-to-date in May, it's been interesting because Prime has been taking the lion's share. Prime funds saw about $160 billion of outflows in March. In April, they saw an $82 billion inflow. And in May, they've seen an $82 billion inflow. So, the inflows into prime funds have recovered all of the outflows from March, which is just amazing."

Crane explains, "You probably saw the news on Northern liquidating its Prime. That was a little bit of an anomaly and a leftover from what had already happened there during March, when one of the funds went below the 30% weekly liquid assets. But the asset inflows have been incredible.... Looking at ICI's number, they're up $1.2 trillion, 31.8% year-to-date, and that's after a 20% gain in 2019. The 52 week [changes] are up 54%. It has been incredible, the buildup."

He says "I'm guessing we're going to see a flattening out [of asset growth]. But this cash war chest that you've seen raised -- no cash bucket is big enough for the coronavirus or is big enough, for individuals, governments, institutions. It's like everybody's got to plan for operating for two months, three months, six months, two years. Who knows? With no revenue coming in, with no cash coming in. So, there's been this just mad raising of cash. And of course, that's the giant spikes that we've seen. I don't think it's going out anytime soon. I think that you're basically going to have people spending down the cash as they have to meet payrolls and expenses. But as they turn revenue on, and they're going to be converting other cash and trying to protect themselves because they were just taught a painful lesson that you shouldn't just have a couple of days of spending money in the kitty. You better have a couple of months. And who knows? Maybe even a couple of years."

Crane also comments, "The Fed support programs were awesome. We'll be arguing about how necessary they were. But from my standpoint, they were a godsend. It certainly was a real dangerous scenario. You’ve probably heard other fund companies talking about the Money Market Liquidity Facility, the Primary Dealer Credit Facility, the Commercial Paper Funding Facility, they were all good in ways and helped support the market in general. And putting pricing under those Commercial Paper and CD markets was key because at the time, in that week in the middle of March, you didn't know what to price things at. And of course, if you want to sell something, good luck with that. Now things have stabilized, Prime is back and things are doing fine."

He tells us, "As an aside, the Treasury Guarantee Program was never used, never implemented, but it was part of that first big CARES Act. Back in that nail-biting week, it looked as if it might be necessary. Who knows how it would have been structured, whether it would have been like it was in 2008. Everybody went to the 2008 playbook and assumed that's where you start.... Unfortunately, with the coronavirus they don't have a playbook for that yet, we're writing it out. So, it certainly helps if you've been through this before."

Crane continues, "Looking at the deposit numbers too … bank deposits were up $1 trillion as well. That has been an absolute crazy side effect, too. If you look at the overall cash. I like adding the Fed's H.6 series. I'll take their money fund stats and add them to their deposit, their money market deposit accounts from banks and thrifts. Those two are now $15 trillion, so you've seen this $2.2 plus trillion surge in cash, in both money funds and bank deposits. That's usually a rarity, they're usually sort of battling against each other and taking market share against each other. But bank deposits have been absolutely gigantic as well. The cash build up has been immense."

On yields, he states, "The big thing is the yields already had been declining going into 2020. You saw yields roughly at 2.0% at the start of 2019, 1.5% at the start at 2020 and then during March with that big 100 basis point Fed cut to zero. You're seeing money funds digest those and come down. Money fund yields on average went through 1.0% in March, through 0.5%, and now are 0.17% according to the Crane 100, as of yesterday. That's the hundred largest money funds and is really representative of what the market's yielding.... The average Prime institutional fund is 0.31%, as of yesterday. The average government institutional fund is 0.11%, with the treasury at 0.8%. So, you’ve got 20 basis points or so of spread in there. As yields are being crushed to zero, you do see this migration and push out of risk and struggle for yield on the curve. So, expect to see more of that."

Crane adds, "You've probably heard about the Treasury soft closings; they're not liquidating the funds, they just restricted tempered new money coming in. Fidelity did that first and then Vanguard did that with a Treasury fund. None of the other big providers have done that. And the negative yields on T-bills have gone away for now and have been alleviated."

He continues, "What you're looking at now is when you had this period of zero yields before in 2009 through 2015, you had, in effect, fund companies waive fees to maintain a positive yield. And if you look at funds with fee waivers now, they change them day to day so they're hard to spot. The easiest way to spot who's waiving fees is to look at the yield and say, 'Is their yield 0.00 or 0.01%?' And right now, brokerage sweep accounts are all, across all the tiers, 0.01%, so they've hit the floor. Money funds, you have 20% of assets at 0.00 to 0.01%, which is usually the floor. So, they pay a tiny token dividend just so they're not mistaken as an n/a and it stays positive. So, 20% is at zero already and so it's starting to get hit by fee waivers. Another 20% is at 10 basis points to 0.01%, and that percentage is getting crushed in. You’re soon going to have 40% of the assets at zero and starting to waive fees that can be felt."

Crane says, "Money fund managers and others have said the Fed doesn't want to go negative. The Fed has said they don't want to go negative. But we've seen the last couple of years, couple of decades, that the Fed does what the market tells it to do and the government does what the market tells it to do. So, though people say it's unlikely, you know, people are starting to gear up and say, what happens if we might go negative? From a theoretical standpoint, it's no big deal. In Europe, in euro, you have $100 billion. If you look at the euro money funds, which are much smaller, they're different, they're institutional, but they're yielding negative 0.5%. These numbers are all annualized realize, of course. It's been that way for five years and they're hitting record asset levels; they got a big surge from the coronavirus panic as well. I think it's merely jumping through some regulatory hoops and dealing with some issues. Money funds might even prefer to go negative and to have negative yields because then they don't have the waive expenses."

He explains, "Though it's unlikely, negative yields do not mean investors are going to take their cash away. I mean, in this scenario, it's the old Will Rogers comment about return of principal, instead a return on principal, that always applies to cash. And of course, if people are worried, they're nervous, they're panicked if they have to pay payrolls, if they have to meet expenses, what do you care what rate you're getting? The rate is nice, it drives money around the margin, but it's not going to make a big dent in that gigantic $5 trillion balance. So, I don't see the money fleeing."

Crane asks, "If you go negative, how would you do it? That’s the question. But I think that problem can be solved as well, whether you do a reverse distribution mechanism or a share cancelation mechanism like euro money funds used to do before they changed the regulations. Some people think you have got to have an S.E.C. change to do that. The S.E.C. might even be able to do it through a no action letter, or it might be something that doesn't require a big regulatory change. That's unclear. Or, you could even have government funds going and filing and saying we're going floating and going to a four-digit NAV, and just having that gradual small erosion. But negative yield is not breaking the buck, is not losing money. People aren't losing the money if they're paying you the fee. They're aware of what that charge is, of what that cost is, and I believe they're going to be more than happy to pay it."

He also states, "Regulatory changes are something that people are asking about, they're a big issue. I don't think money funds are destined for dramatic reforms, but people are dusting off their copies of the President's Working Group or ICI Working Group and seeing what kind of crazy ideas might come out of the woodwork again.... We went through and settled on modest incremental changes last time. This time you're going to blame the coronavirus and not mortgage backed securities and complex securities and the financial system. But of course, a lot does depend on what regulators are looking at and who wins the election. If Elizabeth Warren gets in there, she's probably going to want to regulate something. But who knows what's going to happen? Regulators have a lot of bigger fish to fry and other issues, but I'm sure it is going to be talked about again."

Crane adds, "If you, like me, lived through the last set of regulatory discussions and issues you realize in 2007/2008, the subprime liquidity crisis, there was no clear answer to any of this stuff. And again, I think you're going to have that same problem and issue. Do you want to kill the money funds to save them? Do you want to change radically? And I think we're destined for a stalemate and perhaps minor tweaks again. So, I'd bet against regulatory issues and changes. The one big thing that you could argue worked was the prime space was half the size that it was in 2008. It was a trillion dollars in the CP markets, in the prime markets, versus $2 trillion plus back then. So, your problem was smaller and the fact that everybody's got government money funds, and that tier of government fund liquidity certainly may have helped. I think Prime survives. I think credit survives, but that's something that people will be talking about."

Again, watch for more webinars in coming months, and we still remain hopeful that travel will resume later this summer and that we'll be able to host our annual Money Fund Symposium and European Money Fund Symposium. Crane's Money Fund Symposium is scheduled for August 24-26, 2020 at the Hyatt Regency Minneapolis. We'll continue to monitor events carefully in coming weeks, and we'll be prepared to move, to cancel, and/or to webcast if our client base deems it unsafe. Meanwhile, we'll be preparing for the show and taking steps to spread out and make the event safer. (Note: We'll offer full refunds or credits for any cancellations.) Our next European Money Fund Symposium is now scheduled for Nov. 19-20, 2020 in Paris, France. Also, mark your calendars for next year's Money Fund University, which is scheduled for Jan. 21-22, 2021, in Pittsburgh, Pa, and our next Bond Fund Symposium, which is scheduled for March 25-26, 2021 in Newport Beach, Calif. Watch for details in coming months, and we'll keep you posted on our upcoming virtual, and live, events.

May 22
 

This month, MFI interviews Paul Schott Stevens, President & CEO of the Investment Company Institute (ICI). Stevens has been with the mutual fund trade association for 20 years and has been involved in the fund industry for even longer. We discuss his storied career, and ICI's crucial involvement in the development of money fund regulations. Our Q&A follows. (Note: The following is reprinted from the May issue of Money Fund Intelligence, which was published on May 7. Contact us at info@cranedata.com to request the full issue or to subscribe.)

MFI: Tell us about your background and history. Stevens: The ICI is 80 years old this year. We started in 1940 at the time that the Investment Company Act was passed, and the SEC needed an industry group to work with as it began to develop implementing regulations. If you look at what our mission is, it's been the same over those 80 years.... It's to advance the interests of funds and their investors and the constituencies that make fund investing possible, the advisers and boards. Funds are complicated financial instruments in many respects for people and so, trying to provide public information about them has always been a part of our mission.... The third part is, trying to promote high ethical standards. That is incredibly important in an industry that serves 100 million individual investors here in the United States.

Outside of ICI, I've spent 15 years in private law practice.... I had my first money market fund related assignment, I think probably in 1979. So, my involvement with this industry goes back -- can it possibly be that long? -- over 40 years.... It has been an interesting and varied career. But I'll tell you, no challenge of that career, no position that I'd ever held, has been quite as satisfying as leading the ICI. Very few lawyers actually get the chance to move out of the law and into a CEO role. I found meeting the challenges of our organization, working with our members and the incredible staff we have to be among the most gratifying things that I've done.

It has been a pretty challenging period.... When I came in in 2004, we were in the midst of our late trading and market timing situation. No sooner did we get out of that when we entered the phase of the great financial crisis, with a preoccupation about money fund issues lasting over five years and two cycles of SEC rulemaking. In 2011, our board said we want you to refashion the ICI as a global organization. We’ve been working on that ever since.... And now, dealing with this global pandemic and having to adopt completely new ways of working. It has been one extraordinary challenge after another.

MFI: What is your biggest priority? Stevens: The recent issues have been unlike the issues that we saw in many respects during the financial crisis. The issues then were at their heart credit problems. The ones that we've been seeing now are really the result of the government ordering the economy shut down and the demands of investors of all kinds for safe haven assets and ready liquidity to meet unexpected needs.

Early on our focus was clearly on trying to make sure that we could respond to the problems caused by markets that just simply froze up. The good news is that in fairly short order, the Federal Reserve began to establish programs that have greatly, I think, helped markets recover. In just a matter of days, they put together the Primary Dealer Credit Facility, the Commercial Paper Funding Facility, the Money Market Mutual Fund Liquidity Facility, followed by a whole bunch of others. And if you look at the amounts that have actually been utilized in those facilities to date, they're small by comparison to the size of, say, the money market fund industry. But just the fact that they’re there provided a sense of renewed confidence to the markets. I think that the Federal Reserve, the SEC and the Treasury Department deserve very high marks for what they did.

The other thing that's different this time around is that we didn't have money flowing as much out of prime funds into government funds. What we had was money coming from other sources, hugely into government funds.... People are looking to these funds as safe haven assets ... at a time when that liquidity is absolutely essential.

Our focus has been also on continuing with ordinary business, and that’s one of the important things to emphasize. The SEC, very much to its credit, has not just simply stopped everything to focus on coronavirus issues, it's continuing with other very, very important work. It just issued a rule proposal concerning fair valuation of securities held by funds. They're continuing to do work on the derivatives proposal, on proxy voting proposals, on a whole raft of other things. So our normal work process is very much continuing even against the background of the implications of the pandemic.

MFI: Your proudest accomplishment? Stevens: Well, I'll mention a couple of things that I'm particularly proud of. After the great financial crisis, there was an inclination on the part of bank regulators, both the United States and elsewhere, to want to fasten on our business, the regulated fund business, a regulatory model which was completely inappropriate, to treat us like banks, and to have the central bankers begin managing us in a prudential fashion, the way they manage banks. Fighting that off, I think was one of the most important challenges that we met during my time at the ICI.

We have always welcomed effective regulation, and we were as deeply committed to maintaining financial stability as any other part of the system. What the bank regulators saw is that asset management, the regulated fund business, was growing in importance at the same time that the banking business was decreasing, relatively speaking, in importance. So, they wanted to begin regulating us. But the capital markets form of regulation is far more appropriate, so we fought to try to sustain an appropriate model of regulation for the industry, and I think we largely succeeded in doing that.

Now, that's a battle that continues. And in a sense, it's a conversation that's been going on with our industry and central bankers for probably generations.... We had to fight that battle not only domestically here in the United States with the FSOC and the Federal Reserve, but we had to do it with the Financial Stability Board and central bankers and finance ministry officials on a global basis as well.

The second accomplishment, as I mentioned earlier, is leading the charge to refashion the ICI as a global trade organization. That was a completely new organizational challenge for us. And I think it's one that we've risen to very, very effectively. That global dimension now informs everything that we do.

MFI: Talk about the ICI Money Market Working Group. ICI didn't wait for regulators last time, right? Stevens: That’s absolutely correct. It's very consistent with the way the ICI has conducted itself.... We knew when the Reserve Primary Fund broke a buck and the Treasury Department chose to introduce a guarantee program that our world had changed overnight. I suggested and the board and leadership, like Jack Brennan of Vanguard, readily agreed that we had to turn to and think about what was appropriate and necessary by way of reforms. We worked very, very hard at that working group. I think we came up with a report and recommendations for the SEC that were substantial. I know that [the SEC's] Mary Shapiro appreciated them at the time, although she concluded at a later point that more needed to be done.

In truth, money market funds were the very first part of the financial system to be reformed in the aftermath of the crisis, and that was largely because of the initiative that we took at ICI. So that was a very proud moment for us, and it's not much different from other things that we've done. I could name governance standards for the fund business that we helped to raise on our own initiative, standards on personal investments by portfolio managers and a variety of other things as well.

MFI: Talk about investors. Stevens: Well, if you think about our investors in the retail space, they’ve reacted in this crisis more or less the way they have historically. There have not been precipitous outflows from our funds and we follow those trends on a daily and weekly basis. You did not see the same reaction in the retail prime funds that you saw in the institutional prime funds.... That's just been our experience with one of these market events after the other. It suggests that people look at these funds as long-term propositions.... They look at money market funds ... as a store of liquidity that's there available for them should they need it.

MFI: Can you talk about expenses, waivers and consolidation? Stevens: I think that the wildcard here to some degree is what happens with interest rates. Negative interest rates will be a challenge for the money market fund business. I think the fee waivers are something that have become commonplace over the years. There's obviously this very, very strong commitment by fund sponsors to continue their money market fund offerings because they’re such an important arrow in the quiver for their clients.

The general trends in fees and expenses that we've documented now for a generation are very clear. They are declining. The other trend is that distribution and other costs, the cost of help and advice, are being separated from the costs of the funds.... You don't see classes or shares with loads or 12b-1 fees and that sort of thing. Those share classes that have those associated expenses are really dwindling in the industry. Those costs are being externalized and charged separately.

The other great trend that you see across the industry is consolidation. And again, this is something that we've followed closely. The flows into the industry have been strong, but they’re not shared equally by all the players. Some are getting much bigger. I think it’s a tougher proposition for smaller and medium sized enterprises. Scale is an extraordinarily important thing. That certainly would be the case in the money market fund world. So those dynamics are ones, I think, that are very clear and likely to continue into the future.

MFI: What about the future? Stevens: I've been ICI president for 16 years. If you cast your mind forward 16 years further to 2036, what will the fund investing world look like? I suspect that it will be an even more distinctly global phenomenon, and you’ll have major centers of fund investing in China and elsewhere that will go through a period of growth and maturity similar to what our domestic fund sector has gone through during my lifetime. I think the future is bright.

May 07
 

The May issue of our flagship Money Fund Intelligence newsletter, which was sent out to subscribers Thursday morning, features the articles: "MMF Assets Break $5 Trillion; Huge Liquidity Build Continues," which reviews the continued massive inflows into money market funds; "ICI's Stevens Revisits MMFs Once More Before Retiring," which profiles the ICI President and CEO; and, "ICI 2020 Fact Book Shows Money Fund Trends in '19," which looks at the newly released Investment Company Fact Book. We've also updated our Money Fund Wisdom database with April 30 statistics, and sent out our MFI XLS spreadsheet Thursday a.m. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our May Money Fund Portfolio Holdings are scheduled to ship on Monday, May 11, and our May Bond Fund Intelligence is scheduled to go out Thursday, May 14.

MFI's "MMF Assets Break $5 Trillion" article says, "After a historic buildup of liquidity in March due to panic over coronavirus shutdowns, money funds continued to see huge inflows in April, as assets broke above the $5.0 trillion level for the first time ever. MMF assets increase by $417.9 billion in April after rising $688.1 billion in March, a total 2-month gain of $1.106 trillion. Assets have risen slightly in May month-to-date too, but they’re up just $17.3 billion through May 5."

It continues, "Government funds (including Treasury MMFs) jumped $329.3 billion in April to $3.900 trillion (after a surge of $821.0 billion in March), while Prime funds saw assets rise $79.7 billion, retaking the $1.0 trillion level, to $1.038 trillion in April (after falling $123.9 billion in March). Tax-Exempt assets increased $8.9 billion to $140.6 billion in April (after falling $8.9 billion in March).

Our latest "Profile" reads, "This month, MFI interviews Paul Schott Stevens, President & CEO of the Investment Company Institute (ICI). Stevens has been with the mutual fund trade association for 20 years and has been involved in the fund industry for even longer. We discuss his storied career, and ICI’s crucial involvement in the development of money fund regulations. Our Q&A follows."

MFI says, "Give us some history. Stevens tells us, "The ICI is 80 years old this year. We started in 1940 at the time that the Investment Company Act was passed, and the SEC needed an industry group to work with as it began to develop implementing regulations. If you look at what our mission is, it's been the same over those 80 years.... It's to advance the interests of funds and their investors and the constituencies that make fund investing possible, the advisers and boards. Funds are complicated financial instruments in many respects for people and so, trying to provide public information about them has always been a part of our mission.... The third part is, trying to promote high ethical standards. That is incredibly important in an industry that serves 100 million individual investors here in the United States."

Stevens continues, "Outside of ICI, I've spent 15 years in private law practice.... I had my first money market fund related assignment, I think probably in 1979. So, my involvement with this industry goes back -- can it possibly be that long -- over 40 years.... It has been an interesting and varied career. But I'll tell you, no challenge of that career, no position that I'd ever held, has been quite as satisfying as leading the ICI. Very few lawyers actually get the chance to move out of the law and into a CEO role. I found meeting the challenges of our organization, working with our members and the incredible staff we have to be among the most gratifying things that I've done."

He adds, "It has been a pretty challenging period.... When I came in in 2004, we were in the midst of our late trading and market timing situation. No sooner did we get out of that when we entered the phase of the great financial crisis, with a preoccupation about money fund issues lasting over five years and two cycles of SEC rulemaking. In 2011, our board said we want you to refashion the ICI as a global organization. We've been working on that ever since.... And now, dealing with this global pandemic and having to adopt completely new ways of working. It has been one extraordinary challenge after another."

The "ICI 2020 Fact Book" article tells readers, "ICI's new '2020 Investment Company Fact Book' looks at MMF demand and Government MMF flows, as well as worldwide money fund issues. Overall, money funds assets were $3.632 trillion at year-end 2019, making up 17.1% of the $21.3 trillion in overall mutual fund assets. Retail investors held $1.370 trillion, while institutional investors held $2.262 trillion."

ICI adds, "In 2019, money market funds received $553 billion in net new cash flows, up from $159 billion in 2018. Government money market funds received the bulk of the inflows ($364 billion), followed by prime money market funds with $198 billion in inflows. Tax-exempt money market funds, on the other hand, had net outflows of $9 billion."

The latest MFI also includes the News brief, "Money Fund Yields Approach Zero," which writes, "Money market fund yields continued lower in April, falling 25 bps to 0.25% (Crane 100 Money Fund Index). Almost 20% of assets are now yielding 0.00% or 0.01% and waiving portions of fees."

A second News piece titled, "Vanguard Closes Treasury Money Market Fund to New Investors," says, "Vanguard ... closed its $39.5 billion Treasury Money Market Fund (VUSXX) to new shareholder accounts. The company is seeking to protect existing Fund shareholders from high levels of cash flow that could potentially accelerate reductions to the Fund's yield. Existing shareholders ... can continue to make purchases.”

Our May MFI XLS, with April 30 data, shows total assets jumped by $417.9 billion in April to $5.078 trillion, after jumping $688.1 billion in March, rising $23.4 billion in February and falling $7.8 billion in January. Our broad Crane Money Fund Average 7-Day Yield fell 19 bps to 0.20% during the month, while our Crane 100 Money Fund Index (the 100 largest taxable funds) was down 18 bps to 0.26%.

On a Gross Yield Basis (7-Day) (before expenses are taken out), the Crane MFA was down 20 bps at 0.54% and the Crane 100 fell to 0.50%. Charged Expenses averaged 0.34% (unchanged from last month) and 0.25% (unchanged), respectively for the Crane MFA and Crane 100. The average WAM (weighted average maturity) for the Crane MFA and Crane 100 was 38 (up five days) and 41 days (up six days) respectively. (See our Crane Index or craneindexes.xlsx history file for more on our averages.)