Bloomberg on Floating NAV Loophole
Bloomberg published a story on Friday entitled, "Money Funds Look at Loophole to Preserve $1 Share Price." Dave Michaels and Christopher Condon write, "Don't mourn the stable $1-per-share money-market mutual fund just yet. Firms including Federated are suggesting that fund companies can avoid new U.S. Securities and Exchange Commission requirements to show share-price variations by limiting holdings to very short-term corporate debt. Fund sponsors warned after the SEC adopted rules for institutional prime funds that a floating price would put off corporations such as Boeing Inc. that use the products to manage billions in spare cash. Two months later, Joseph Lynagh, head of money markets and short cash funds at Baltimore-based T. Rowe Price, is saying some fund companies will absolutely roll out products to take advantage of the loophole. T. Rowe Price, he said, isn't planning any such products. "You may see stuff engineered that camps out on that border," said Peter Crane, president of money-market researcher Crane Data LLC. "There could be a market for it." ... One aspect of the rules received little public notice. It left intact a longstanding provision that mutual funds can value debt that matures within 60 days at original cost, instead of at market prices. As a result, a fund invested exclusively in 60-day debt probably wouldn't see its share price vary from $1. The exemption "has always been there but now it takes on significance," said Jay Baris, chairman of law firm Morrison & Foerster LLP's investment management practice. "Now, if you are an institutional fund and you want to maintain a steady net-asset value, you can do it provided all your portfolio securities are under 60 days." While limiting a fund to shorter debt maturities makes it safer, a 60-day cut-off wouldn't have saved the Reserve Primary Fund. Most of the $785 million of Lehman debt it held when the bank failed was within 60 days of maturing.... Limiting investments to debt that matures in 60 days or less would require funds to give up the higher return earned by longer-term investments. With rates low, many funds use a "barbell" strategy balancing very short-term investments with longer-term debt that earns a higher yield, Crane said. The weighted average life of all prime money funds is currently 78 days, according to the Investment Company Institute, the lobbying group for mutual funds. "They have got to get out there and do six-month trades just to get some yield," Crane said.... Some prime funds already operate with short maturities. Invesco's STIC Prime Portfolio, which manages $2.8 billion, only invests in securities that mature in 60 days or less. In periods with interest rates higher than today's, the fund will "tend to have a better yield than Treasury and agency funds" though not as high as a fund that holds securities with the maximum maturity of 397 days, said Bill Hensel, an Invesco spokesman <b:>`_. Chris Donahue, chief executive officer at Pittsburgh-based Federated, which manages $240 billion in money-fund assets, doesn't offer such a fund. He said the product might grow more attractive in coming years. "In a different rate environment, that would work," Donahue said during a July 25 earnings call. "And its economics would be very comparable to the current fund." ... Corporations that park cash in money funds will eventually divide it into ones maintaining a stable $1 share price and those whose share prices float but earn a higher yield by investing in riskier corporate debt, Lynagh said. "This is where the industry will begin to differentiate itself," he said.
