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Crane Data released its April Money Fund Portfolio Holdings yesterday, and our latest collection of taxable money market securities, with data as of March 31, 2017, shows a decline in Agencies, and a jump in Repo; "credit" -- CDs and CP -- was flat. Money market securities held by Taxable U.S. money funds overall (tracked by Crane Data) decreased by $11.8 billion to $2.635 trillion last month, after decreasing $18.1 billion in Feb., but increasing by $7.2 billion in Jan. and $34.7 billion in Dec. Repo remained the largest portfolio segment, followed by Treasuries and Agencies. CDs were slightly lower but remained in fourth place, followed by Commercial Paper, Other/Time Deposits and VRDNs. Below, we review our latest Money Fund Portfolio Holdings statistics. (Visit our Content center to download the latest files, or contact us if you'd like to see a sample of our latest Portfolio Holdings Reports.)
Among all taxable money funds, Treasury securities fell $1.6 billion (-0.2%) to $753.9 billion, or 28.6% of holdings, after falling $29.3 billion in February, $37.8 billion in January, and $59.4 billion in Dec. Repurchase Agreements (repo) rose $41.6 billion (5.3%) to $833.7 billion, or 31.6% of holdings, after rising $3.3 billion in February, falling $43.6 billion in January, and rising $56.3 billion in Dec. Government Agency Debt decreased $49.3 billion (-7.3%) to $627.8 billion, or 23.8% of all holdings, after decreasing $10.7 billion in February, rising $35.3 billion in January, and falling $7.7 billion in Dec. Repo, Treasuries and Agencies in total continued to gradually retreat from December's record levels, but they still represent a massive 84.1% of all taxable holdings. Govt and Treasury MMFs lost assets and Prime MMFs increased slightly yet again last month.
CDs and CP decreased last month while Other (Time Deposits) increased slightly again. Certificates of Deposit (CDs) were down $3.3 billion (-1.9%) to $172.2 billion, or 6.5% of taxable assets, after rising $5.5 billion in February and $22.4 in January (but declining $0.2 billion in Dec). Commercial Paper (CP) was down $1.3 billion (-0.8%) to $149.7 billion, or 5.7% of holdings (after rising $10.4 billion in February and $16.9 billion in January), while Other holdings, primarily Time Deposits, rose $7.7 billion (12.1%) to $71.4 billion, or 2.7% of holdings. VRDNs held by taxable funds decreased by $5.5 billion (-17.3%) to $26.4 billion (1.0% of assets).
Prime money fund assets tracked by Crane Data rose to $543 billion (up from $532 billion last month), or 20.6% (up from 20.1%) of taxable money fund holdings' total of $2.635 trillion. Among Prime money funds, CDs represent just under a third of holdings at 31.7% (down from 33.0% a month ago), followed by Commercial Paper at 27.5% (down from 28.2%). The CP totals are comprised of: Financial Company CP, which makes up 17.4% of total holdings, Asset-Backed CP, which accounts for 5.6%, and Non-Financial Company CP, which makes up 4.5%. Prime funds also hold 1.7% in US Govt Agency Debt, 7.5% in US Treasury Debt, 8.6% in US Treasury Repo, 3.2% in Other Instruments, 10.9% in Non-Negotiable Time Deposits, 5.8% in Other Repo, 1.5% in US Government Agency Repo, and 3.0% in VRDNs.
Government money fund portfolios totaled $1.486 trillion (56.3% of all MMF assets), down from $1.496 trillion in February, while Treasury money fund assets totaled another $606 billion (23.0%) in March, down from $618 billion the prior month. Government money fund portfolios were made up of 41.6% US Govt Agency Debt, 16.0% US Government Agency Repo, 18.3% US Treasury debt, and 23.3% in US Treasury Repo. Treasury money funds were comprised of 73.0% US Treasury debt, 26.8% in US Treasury Repo, and 0.2% in Government agency repo, Other Instrument, and Investment Company shares. Government and Treasury funds combined now total $2.092 trillion, or almost 80% (79.4%) of all taxable money fund assets, down from 79.9% last month.
European-affiliated holdings plunged $106.5 billion in March to $363.0 billion among all taxable funds (and including repos); their share of holdings decreased to 13.8% from 17.7% the previous month. Eurozone-affiliated holdings decreased $83.8 billion to $247.1 billion in March; they now account for 9.4% of overall taxable money fund holdings. Asia & Pacific related holdings increased by $11.2 billion to $184.8 billion (7.0% of the total). Americas related holdings increased $83.8 billion to $2.087 trillion and now represent 79.2% of holdings.
The overall taxable fund Repo totals were made up of: US Treasury Repurchase Agreements, which increased $42.5 billion, or 8.3%, to $555.6 billion, or 21.1% of assets; US Government Agency Repurchase Agreements (down $3.1 billion to $245.9 billion, or 9.3% of total holdings), and Other Repurchase Agreements ($32.2 billion, or 1.2% of holdings, up $2.2 billion from last month). The Commercial Paper totals were comprised of Financial Company Commercial Paper (up $5.4 billion to $94.8 billion, or 3.6% of assets), Asset Backed Commercial Paper (down $0.6 billion to $30.3 billion, or 1.2%), and Non-Financial Company Commercial Paper (down $6.0 billion to $24.6 billion, or 0.9%).
The 20 largest Issuers to taxable money market funds as of March 31, 2017, include: the US Treasury ($753.9 billion, or 28.6%), Federal Home Loan Bank ($456.2B, 17.3%), Federal Reserve Bank of New York ($313.6B, 11.9%), BNP Paribas ($81.2B, 3.1%), Federal Home Loan Mortgage Co. ($67.6B, 2.6%), Federal Farm Credit Bank ($67.6B, 2.6%), RBC ($62.3B, 2.4%), Wells Fargo ($52.0B, 2.0%), Nomura ($40.7B, 1.5%), Bank of America ($38.3B, 1.5%), Mitsubishi UFJ Financial Group Inc. ($37.2B, 1.4%), Federal National Mortgage Association ($35.0B, 1.3%), Bank of Montreal ($32.7B, 1.2%), Bank of Nova Scotia ($31.4B, 1.2%), Citi ($30.6B, 1.2%), Societe Generale ($28.2B, 1.1%), HSBC ($27.2B, 1.0%), JP Morgan ($24.5B, 0.9%), Toronto-Dominion Bank ($23.9B, 0.9%), and Natixis ($22.9B, 0.9%).
In the repo space, the 10 largest Repo counterparties (dealers) with the amount of repo outstanding and market share (among the money funds we track) include: Federal Reserve Bank of New York ($313.6B, 37.6%), BNP Paribas ($69.3B, 8.3%), RBC ($47.9B, 5.7%), Nomura ($40.7B, 4.9%), Wells Fargo ($40.6B, 4.9%), Bank of America ($33.7B, 4.0%), Societe Generale ($23.5B, 2.8%), Citi ($22.8B, 2.7%), Mitsubishi UFJ Financial Group Inc ($22.6B, 2.7%), and HSBC ($21.6B, 2.6%). The 10 largest Fed Repo positions among MMFs on 3/31 include: JP Morgan US Govt ($75.2B), Goldman Sachs FS Gvt ($51.9B), Fidelity Govt Cash Reserves ($48.0B), Fidelity Govt Money Market ($35.2B), Dreyfus Govt Cash Mngt ($34.9B), BlackRock Lq FedFund ($33.1B), Federated Gvt Oblg ($29.0B), Fidelity Inv MM: Govt Port ($25.7B), BlackRock Lq T-Fund ($24.3B), and Wells Fargo Gvt MMkt ($24.0B).
The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: Mitsubishi UFJ Financial Group Inc. ($14.6B, 4.2%), Canadian Imperial Bank of Commerce ($14.6B, 4.2%), Toronto-Dominion Bank ($14.5B, 4.1%), RBC ($14.4B, 4.1%), Swedbank ($13.2B, 3.8%), Svenska Handelsbanken ($13.1B, 3.7%), Bank of Montreal ($12.6B, 3.6%), BNP Paribas ($11.9B, 3.4%), Wells Fargo ($11.4B, 3.2%), and Bank of Nova Scotia ($11.0B, 3.1%).
The 10 largest CD issuers include: Toronto-Dominion Bank ($12.9B, 7.5%), Bank of Montreal ($12.2B, 7.1%), Mitsubishi UFJ Financial Group Inc. ($11.6B, 6.8%), Wells Fargo ($10.8B, 6.3%), RBC ($8.8B, 5.1%), Sumitomo Mitsui Banking Co ($8.3B, 4.9%), Sumitomo Mitsui Trust Bank ($7.8B, 4.5%), Svenska Handelsbanken ($7.5B, 4.4%), Mizuho Corporate Bank Ltd ($6.0B, 3.5%), and Citi ($5.6B, 3.3%).
The 10 largest CP issuers (we include affiliated ABCP programs) include: Commonwealth Bank of Australia ($7.7B, 5.8%), Canadian Imperial Bank of Commerce ($6.5B, 4.8%), Westpac Banking Co ($6.2B, 4.6%), Bank of Nova Scotia ($6.0B, 4.5%), National Australia Bank Ltd ($5.6B, 4.2%), Credit Agricole ($5.5B, 4.1%), JP Morgan ($5.4B, 4.0%), Natixis ($5.3B, 4.0%), BNP Paribas ($4.9B, 3.7%), and RBC ($4.4B, 3.3%).
The largest increases among Issuers include: The Federal Reserve Bank of New York (up $138.0B to $313.6B), RBC (up $9.3B to $62.3B), Canadian Imperial Bank of Commerce (up $4.4B to $20.6B), Nomura (up $3.9B to $40.7B), Federal Home Loan Mortgage Co (up $3.4B to $67.6B), Svenska Handelsbanken (up $3.4B to $13.1B), Swedbank AB (up $3.0B to $13.2B), Mitsubishi UFJ Financial Group Inc (up $3.0B to $37.2B), ABN Amro Bank (up $1.9B to $11.8B), and Bank of Montreal (up $1.8B to $32.7B).
The largest decreases among Issuers of money market securities (including Repo) in March were shown by: Federal Home Loan Bank (down $49.1B to $456.2B), Credit Agricole (down $38.3B to $20.7B), BNP Paribas (down $20.1B to $81.2B), Barclays PLC (down $16.2B to $10.2B), Societe Generale (down $12.4B to $28.2B), Credit Suisse (down $7.8B to $6.5B), JP Morgan (down $6.7B to $24.5B), Deutsche Bank AG (down $4.8B to $14.8B), and Natixis (down $4.2B to $22.9B).
The United States remained the largest segment of country-affiliations; it represents 72.3% of holdings, or $1.905 trillion. Canada (6.9%, $180.5B) moved into second place ahead of France (6.1%, $161.0B) in 3rd. Japan (5.1%, $134.7B) stayed in fourth, while the United Kingdom (1.9%, $51.0B) remained in fifth place. Sweden (1.8%, $46.1B) and Australia (1.5%, $39.3B) moved ahead of Germany (1.5%, $38.3B) into sixth and seventh place. The Netherlands (1.3%, $34.8B) and Switzerland (0.5%, $13.5B) ranked ninth and tenth, respectively. (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 March 31, 2017, Taxable money funds held 32.7% (up from 29.9%) of their assets in securities maturing Overnight, and another 12.8% maturing in 2-7 days (up from 14.8%). (Note that our "Overnight" is 3 days due to the weekend this month.) Thus, 45.5% in total matures in 1-7 days. Another 21.2% matures in 8-30 days, while 10.7% matures in 31-60 days. Note that over three-quarters, or 77.3% of securities, mature in 60 days or less (up from last month), the dividing line for use of amortized cost accounting under the new pending SEC regulations. The next bucket, 61-90 days, holds 10.7% of taxable securities, while 8.2% matures in 91-180 days, and just 3.8% matures beyond 180 days.
The April issue of our flagship Money Fund Intelligence newsletter, which was sent to subscribers Friday morning, features the articles: "Conservative Ultra-Shorts Big Draw at Bond Symposium," which recaps our recent Bond Fund Symposium conference in Boston, "J.P. Morgan's Przybylski on Prime, Rates, Repatriation," which "profiles" the Executive Director, Head of Global Liquidity Product Development & Strategy for J.P. Morgan Asset Management and, "Private Liquidity Funds Focus of SEC Paper, CAG's Pan," which reviews recent papers on this little noticed segment of the money markets. We have also updated our Money Fund Wisdom database query system with March 31, 2017, performance 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 April Money Fund Portfolio Holdings are scheduled to ship Tuesday, April 11, and our April Bond Fund Intelligence is scheduled to go out Friday, April 14.
MFI's "Conservative Ultra-Shorts" lead article says, "Crane Data recently hosted its first Bond Fund Symposium conference in Boston, and the turnout and enthusiasm of attendees confirmed what many had thought, that the ultra-, ultra short or "conservative" ultra-short bond fund sector is one of the hottest and fastest-growing in the mutual fund industry. We briefly review some of the highlights from the sessions and recent news on this growing segment below."
The piece continues, "Bond Fund Symposium's Keynote, "The Time Is Now for Short‐Term Strategies," featured PIMCO's Jerome Schneider, who gave an excellent overview of the short-term space and PIMCO's dramatic growth in this area. (Assets in their ultra-shorts have increased from under $4 billion before the crisis to over $18 billion currently.) He urged attendees to redouble efforts to educate investors on the benefits of ultra-short bond funds."
Our JPMAM profile reads, "This month, Money Fund Intelligence spoke with Paul Przybylski, Executive Director, Head of Global Liquidity Product Development & Strategy for J.P. Morgan Asset Management, and we also include a couple of comments from some other members of the JPMAM team. We discussed recent trends in the global money markets, including the gradual shift back into Prime money funds in 2017 and how the pending European money fund reforms will affect how you should think about cash investments. JPMAM is the 3rd largest U.S. money fund manager and the 2nd largest MMF manager globally with over $250 billion in US assets and another $150+ billion in Europe and elsewhere. Our Q&A follows."
MFI says, "Tell us about your history and the current team at JPMAM. Przybylski comments, "I started working in the space as Chief Operating Officer and Chief Financial Officer for the J.P. Morgan Global Liquidity business around three years ago. Prior to that, I was CFO for the Global Fixed Income & Liquidity business for four years. Over the past three years, I was involved in various strategic projects, which included, among other things, product development and working directly with JD [John Donohue, CEO, Asset Management Americas and Head of Global Liquidity] and the team."
He adds, "The current Liquidity team includes: John Tobin, Global Head of Liquidity Portfolio Management; Dave Martucci, Global Head of Managed Reserves Strategy; Paula Stibbe, Global Head of Sales across Money Market Funds, Managed Reserves, and Short Duration Strategies; Jimmie Irby, Heads of Credit Risk Administration; and, Ted Ufferfilge, Head of Global Short-Term Fixed-Income Client Portfolio Managers."
Our "Private Liquidity Funds" update explains, "Two new papers review "Private Liquidity Funds," a little noticed segment of the money markets which recent SEC Statistics estimate at over $500 billion. The SEC's paper, "Private Liquidity Funds: Characteristics and Risk Indicators," says in its "Abstract," "At the end of 2015, $534 billion in assets were held by private liquidity funds or managed in their parallel accounts that follow similar investment mandates as money market mutual funds (MMFs), but are unregistered. Limited information is publically available about these funds that are in AUM terms roughly a quarter of the size of institutional MMFs. This white paper characterizes these private liquidity funds using data from Form PF and compares them to MMFs."
It continues, "The SEC also published, "Private Funds Statistics, Second Calendar Quarter 2016," which says, "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." (Note: Crane Data believes that the majority of these funds are securities lending reinvestment cash, and these "private liquidity funds" are not the same as some new ones that are being marketed to corporate investors.)"
In a sidebar, we discuss, "JP Morgan, BlackRock Say Time to Come Back to Prime," saying, "J.P. Morgan Asset Management and BlackRock published briefs urging investors to reconsider Prime money market funds. JPM's lead piece, entitled, "Capitalizing on the prime opportunity," and subtitled, "A fresh look at the case for prime money market funds (MMFs)," explains, "SEC amendments to Rule 2a-7 have spurred growing demand for government MMFs, resulting in a move away from prime MMFs. However, growing confidence in the operational stability of prime funds -- along with increasingly attractive spreads — is gearing up to entice investors back again."
Our April MFI XLS, with March 31, 2017, data, shows total assets decreased $25.2 billion in March to $2.741 trillion after increasing $51.5 billion in February, and decreasing $38.6 billion in January. Our broad Crane Money Fund Average 7-Day Yield was up 12 bps to 0.41% for the month, while our Crane 100 Money Fund Index (the 100 largest taxable funds) was up 13 bps to 0.61% (7-day).
On a Gross Yield Basis (before expenses were taken out), the Crane MFA rose 0.11% to 0.81% and the Crane 100 rose 12 bps to 0.88%. Charged Expenses averaged 0.40% and 0.27% for the Crane MFA and Crane 100, respectively. The average WAM (weighted average maturity) for the Crane MFA was 33 days (down 2 days from last month) and for the Crane 100 was 35 days (down 2 days from last month). (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
This month, Bond Fund Intelligence speaks with Morten Olsen, Director of Ultra-Short Fixed Income at Northern Trust Asset Management. Olsen oversees Northern's ultra-short bond fund lineup, including the $2.1 billion Northern Ultra Short Fixed-Income (NUSFX) and the $3.5 billion Northern Tax-Advantaged Ultra-Short Fixed-Income (NTAUX). We discuss fund strategies, rates, risks and the future of ultra-short bond funds below. Olsen expects a very busy 2017 for the sector. (Note: This "profile" is reprinted from the March issue of BFI. Contact us if you'd like to see the full issue.) Also, thank you to those who attended our inaugural Bond Fund Symposium in Boston, which attracted over 150 participants!
BFI: How long have you been running ultra-shorts? Olsen: Northern Trust has been running ultra-short strategies since the late 1980's. Ultra-short is part of our broader liquidity management capabilities at Northern Trust Asset Management, which currently total approximately $225 billion in AUM. Our liquidity management capabilities include government and prime money market funds, as well as ultra-short strategies. Common across all these strategies is our conservative investment approach, which focuses on credit research and risk management. I have 13 years of experience in the fixed income industry. I joined Northern Trust back in 2009 in the London office, and in May of 2016 I took over as director of ultra-short based here in Chicago.
BFI: Tell us about the funds. Olsen: We have two mutual funds. They were started back in 2009 and have a combined AUM of $5.5 billion. The two funds differ in their strategies, and therefore attract a different client base. The taxable mutual fund focuses on corporate bonds and on Treasury securities, and the tax-advantaged fund focuses mainly on municipal securities but will also add corporate bonds.... The tax-advantaged strategies will only add corporate bonds when the after-tax yields of these are favorable compared to a tax-free municipal bond.
Olsen: Ultra-short falls under our cash segmentation strategy, which is a way for our clients to bucket their cash. The three buckets are: operational cash, which is for day-to-day needs -- a client should typically be investing into a government fund for this portion; reserve cash, which is for intermediate needs -- this portion should be invested into a prime money market fund; then the last bucket, strategic cash. That's where ultra-short really becomes interesting. Strategic cash has a horizon of up to 6 to 18 months, and using an ultra-short strategy is a way for our clients to earn a bit higher yield while only taking limited additional risk.
BFI: How has the reception been of late? Olsen: Over the last couple of years, ultra-short has become extremely popular, not only at Northern Trust. Money market fund reform certainly played a big part in the growth we saw last year, and it still does. But the market that we've been in the last 7-8 years, with close to zero interest rates, meant that investors were looking for additional yield. Ultra-short played nicely in the search for higher yields and our conservative approach resonated well with clients. They know that we never compromise our risk management practices when we search for higher yields. When I look at the asset growth for our ultra-short business, we have seen significant growth last 5 years. We now manage close to $20 billion across our whole ultra-short business.
BFI: What's your biggest challenge? Olsen: Fixed income investors face some significant challenges at the moment, but it's important to remember that challenges often open the door for new opportunities. A good example of that is the potential for a more active Fed in 2017; that's certainly a concern for most fixed income managers at the moment. No client likes to see negative performance, which could be the consequence of higher rates in the short term. That is, I would say for us, the biggest challenge for us at the moment.
The way we've been trying to deal with this is to position our portfolios a bit shorter in duration. We've also made a big effort to get in front of our clients and talk about the consequences of higher rates. The flip side of higher rates and the short-term negative effect on performance is the fact that, as an investor and as a portfolio manager, you start investing into higher yields. The floating rate notes that we have in our portfolio will start resetting at higher rates. With higher rates we often see a steeper yield curve as well, something that's welcomed by fixed income portfolio managers.
BFI: What kinds of strategies can and can't you use? Olsen: Compared to a money market fund, we do take additional duration risk. A typical ultra-short fund will target duration anywhere between 6 and 18 months. The other big difference between an ultra-short fund and a money market fund is the fact that we will utilize the full investment grade spectrum. Then looking at the other side and comparing us to how long bond funds tend to invest, ultra-short funds certainly will have a much larger allocation to floating rate notes. We tend to set a final legal maturity on our bonds. An ultra-short fund typically won't invest further out than 5 years for a floating-rate note and 3 years for a fixed-rate note.
A conservative approach is certainly one of our main messages to our clients. That's why we've decided not to add any high yield bonds into our portfolios. We don't add any derivatives. We don't add any cross-currency securities into our portfolios. We want to be straightforward in our approach to investing. One other point to highlight when we talk about our conservative approach is our diversification and our issuer concentration limits. We have plenty of clients that are comfortable with a 5% allocation to a credit. But we don't think that is appropriate. So we've set our own internal credit risk management limits much lower.
BFI: What sectors does the fund buy? Olsen: It's always been one of the worries about money market funds -- the high concentration to financial securities. One of the advantages of being in an ultra-short fund is that you have better diversification. We set our overall industry limits at 25%, so we will not have more than 25% exposure to financial securities within our mutual funds. So that leaves us with 75% of something else. On average, we probably have 15% of allocation to Treasuries. The rest of the portfolio is diversified between corporate bonds and triple-A rated asset-backed securities. Then in our tax-advantaged funds, we obviously have a fairly high allocation to municipal securities. But here again we will diversify across different sectors. We have some clients who specifically ask us to only buy U.S. bonds, and we can still produce a fully diversified portfolio.
BFI: Do you do separate accounts? Olsen: We do have a pretty large separately managed account business within ultra-short. If you look at our overall AUM at roughly $20 billion, the two mutual funds are roughly $5.5 billion [vs.] nearly $15 billion in separately managed accounts. These accounts tend to be preferred by our larger investors. They really appreciate our flexibility in creating guidelines and portfolios that match their risk appetite. That's why, prior to opening any new account, we will spend a considerable amount of time with our clients. We sit down and talk to them to understand their constraints, their liquidity needs, and really understand their risk appetite. That's really the number one advantage of the separately managed accounts -- the flexibility you can offer your clients.
Our FlexShares Ready Access Variable Income (RAVI) exchange-traded fund launched in 2012 and follows the same guidelines as our taxable mutual fund. The big difference is that we target a shorter duration in the ETF. We mainly do this to limit the price fluctuation. While the mutual funds tend to target duration of up to 1 year, the ETF will be much closer to 6 months. Hence the ETF will have a higher allocation to money market securities than our mutual fund.
BFI: Will rate increases impact you? Olsen: Absolutely. If the Fed is successful in raising rates slowly, ultra-shorts certainly benefit. We like slow increases in rates due to the higher reinvestment rates. We spend a lot of time with our clients to remind them and tell them up-front that ultra-short funds do have risk, although it is limited. It's important to know that an ultra-short fund is not for day-to-day liquidity. There will be fluctuations in the NAV. If your investment horizon is shorter than 12 months, ultra-short is probably not the right product.
BFI: Can you comment on regulations? Olsen: The biggest regulatory change, although it didn't directly impact ultra-short funds, was clearly money market fund reform. It meant two things for our market. We saw investors move out of prime funds into government funds. But it also meant more flows for ultra-short funds. The second effect was mispricing of some money market securities [which had] yields that were much higher than expected. That was certainly something that we took advantage of in our ultra-short funds.
BFI: Tell us about your investors. Olsen: Historically our client base was very much driven by our wealth management business; almost 100% of our clients came through that channel. But over time that has evolved. So when I look at our client base right now, I would say roughly 50% are still wealthy, private individuals. But the other 50% are institutional clients. What made me really excited about the growth we saw in 2016 was that the interest for ultra-short came through both client channels.
BFI: Any thoughts on the future? Olsen: We're really positive about the future of ultra-short. I don't think the effects of the money market reform have fully played out yet. I still think we'll see plenty of interest from clients that are looking for something other than a prime money market fund.... The fact that the rates are going up also opens up ultra-shorts for another type of client -- those that are currently invested in longer duration bond funds. As rates move higher, ultra-short is a pretty powerful strategy to shorten your duration, keep your overall asset allocation in fixed income but decrease the effect of higher rates by shortening your duration. So we're really excited about the next couple of years, and we expect to be really busy in 2017.
This month, Money Fund Intelligence interviews Tim Huyck, Chief Investment Officer for Money Markets at Fidelity Investments. Fidelity is by far the largest manager of money funds with over $500 billion, almost double its next largest competitor. The company's history goes back to the earliest days of money funds (recently retired Chairman Edward "Ned" Johnson III played a key role in popularizing money funds), and Fidelity remains the most important player in the space. Our Q&A follows. (This interview is reprinted from the March issue of our flagship Money Fund Intelligence newsletter; e-mail firstname.lastname@example.org to request the full issue.)
MFI: Tell us a little about your history. Huyck: Fidelity Daily Income Trust (FDIT) was the first money fund that we launched at Fidelity [in 1974], and it was the first money fund with check writing privileges... I joined Fidelity in September 1990, just before the move of the money market desk from Boston to Dallas. We were in Dallas for 7 years, and then in November of '97 we moved from Dallas to Merrimack. We're celebrating our 20-year anniversary here in Merrimack (NH) this year. I'm coming up on 27 years at Fidelity, and all but three of those years have been spent in money markets. I've traded; I've managed the trading desk; I basically had every trading role on the taxable money market desk. I managed most of the taxable money market funds that we had at some point or another. In 2014, I took over as CIO for the money market group, and I report into Nancy Prior.
Money funds are important to Fidelity because they are important to our customers. We have more than 11 million customers investing in Fidelity's money market mutual funds. Our market leadership position has grown over the course of the last several years, and has grown quite a bit since 2008. [Regarding our people] money funds at Fidelity are not a stepping stone into other asset classes. Money funds are a career at Fidelity.
Because it is an important part of our business, we commit a tremendous amount of resources to our money market business. From trading to portfolio management, to credit and quantitative research, we have a full team dedicated to the support of managing our money market funds. That includes a research team on the ground in London that is responsible for covering our foreign bank exposure. The team numbers 93 in total, including seven portfolio managers, 13 traders, 70 research analysts and associates and three quantitative analysts.
MFI: What is your biggest priority currently? Huyck: With reform behind us, we're able to focus our time on Fed policy and fiscal policy under the new Presidential Administration and Congress. There are a lot of open questions at this point. You can include credit in there too. The credit environment is pretty solid, [and] bank credit quality is as high as it’s been in years.
MFI: Are there any more changes that need to be done? Huyck: There aren't any changes in queue at the moment. However, we are, probably like many of our competitors, constantly reevaluating our product line. The industry had a tremendous amount of assets moving between fund types last year. So we will take a look at our fund lineup this year and make sure that it remains appropriate.
With respect to the movement of assets, we had close to $300 billion in assets move among our funds, and we've got a little over $500 billion under management. So a tremendous amount of money moved. But one of the things I'm particularly proud of was the ability of our team, and the overall industry, to handle that money movement. We were able to manage those flows and accommodate those flows without any disruption to the shareholders.... It went remarkably smoothly, given the amount of flows. I think it speaks volumes to the preparedness of the industry and the tremendous liquidity that is in the money markets.
MFI: What are your biggest challenges? Huyck: I would say a challenge may be too strong of a word. We have now roughly $400 billion in government assets. We are focused on getting those dollars invested. We've spoken publicly about the 2a-7 eligible universe of government securities, which is close to $7 trillion. So the eligible pool of investments is huge. At the same time, the demand is also big and growing.... Obviously, you've got $1 trillion more in demand that has shown up from money funds in the last year. Getting government assets invested is more of a rate story, than an availability story. The question is not whether you can get the funds invested, but what rate do you have to pay to get access to that government supply?
The market has seen the spread in government and prime funds expand. Historically, the spread between prime funds and government funds has been 10-12 basis points. That spread has moved to 35-40 basis points now. So, that's a result of less demand in the prime area, and more demand in government money market securities suppressing the yields on government securities. Customers are showing increased interest in prime funds ... now that the spread is 35-40 basis points. Some customers are considering moving back, and as you've pointed out, institutional prime assets industrywide are up almost $20 billion YTD. [But] clients still have questions about what their investment guidelines allow. Many ... said 'We're going to move from prime to government for the initial transition and revisit the investment strategy later.' That 'later' is starting to happen now.
MFI: What are you buying now? Huyck: We've been very active in floating rate securities, in both the government and prime funds. Futures markets are predicting multiple rate moves from the Fed in 2017. So we think floaters will perform well as the Fed continues to move rates higher. Treasuries are another security where we've been very active. We hold a lot more in Treasury securities now than we did a year ago.
MFI: Are customers noticing the yields? Huyck: It certainly makes for easier conversations with customers when you can tell them you're paying them more than just a basis point. Shareholders and investment professionals tell us they're excited about potential for increased investment yields. It's not a lot, but in some cases it hits 40, 50, 60, 70 basis points, in net yields that money funds are paying.... Bank deposits since 2008 have grown nearly $4.5 trillion dollars. We looked at some FDIC data that suggested that the rate on bank demand deposit accounts hasn't varied at all over the course of last year and a half.... So when bank deposits were paying [roughly] 15-20 basis points and money funds were paying a basis point, the marginal dollars generally went into banks. That investment calculus may start to change if money fund yields continue higher.
As market rates rise in a rising rate environment in the short end, money funds have historically grown in those types of environments because banks are slower to raise their administered rates. This could be a potential source of ... demand for money market funds as fund yields continue to rise.
MFI: Talk about ultra-short bond funds. Huyck: We had a very good year in both our taxable and municipal Conservative Income Bond (CIB) funds. The Conservative Income Municipal Bond Fund, which passed its three-year anniversary in October, has grown to over $1 billion. The taxable fund also grew tremendously last year.... Clients are asking a lot about [these].... Prime money funds are no longer a one-stop shop where investors can get their return, liquidity, and stable NAV. So we’ve talked a lot about segmenting cash. Some clients are choosing to invest operational cash in a government money market fund, while investing shorter-term strategic cash in a prime money fund, and investing longer term strategic cash in a conservative income bond fund.
Note though that as the Fed continues to hike, the Prime to CIB spread has tightened.... So variable NAV prime funds have gotten closer to that conservative income yield. That will be something to keep an eye on too, not only the government to prime spread but also the prime to CIB spread.... We're not trying to reinvent or manage funds to "old 2a-7." We want to be very clear that these conservative income bond funds are just that, they're bond funds.
MFI: What is your outlook? Huyck: I think the future for money market funds is pretty bright, as bright as it's been in a while. We've gotten reform behind us, the Fed has told us they're going to move rates higher three times this year, [and] the credit markets are relatively subdued.... Typically in an environment where the Fed is moving rates higher ... that has been an environment where money is coming into money market funds. So the extent that we do get ... Fed hikes this year, I think it's reasonable to expect the industry to grow.
Our guiding principles for money market fund management since the day we started [have been] safety, followed by liquidity, followed by return, and in that order. I think it became very apparent that shareholders view money market funds the same way. If return [been] higher on the pecking order of what investors were seeking in money funds, the industry would be a fraction of what it is. I think it really speaks again to the value of proposition of money funds. Shareholders still find MMFs useful and valuable in ways that yield can't measure.