Are money fund yields finally starting to move up? The Independent Adviser for Vanguard Investors reports that the $103 billion Vanguard Prime Retail MMF saw its 7-day yield tick up a basis point Tuesday to 0.02%. We briefly review their story below, which verifies recent signs on both gross and net yields inching higher in 2015. In addition, we report that boutique separate account manager Horizon Cash Management is closing its doors, and we also provide more coverage of the recent New York Cash Exchange conference. (See our June 2 "News," "Money Funds Best Bad Option By Far, Says Crane at NY Cash Exchange.")
Dan Wiener and Jeffrey DeMaso of the Independent Adviser for Vanguard Investors write, "Where can you find double the yield you got yesterday? Look no further than Vanguard Prime Money Market. Ok, ok. Two basis points (0.02%) is still next to nothing, but Vanguard's Prime Money Market is yielding more than 1 basis point for the first time nearly two years -- since July 26, 2013, to be specific."
They explain that Vanguard waived about $24.1 million in fees related to its money market funds over the most recent six month reporting period. "The result of all those waived fees kept yields in the black -- barely. When short-term rates finally do rise, fund companies, including Vanguard, will have to decide whether to let money market fund yields rise or to begin paying themselves back for years of self-imposed fee waivers. For now, the immediate question on investors' minds is will the 0.02% yield last? And does it signal higher yields to come?"
The Independent Adviser adds in its most recent issue, "[D]on't for a minute think that Vanguard is going without. The company collected almost $174 million in fees for advising, administering and marketing the 10 money funds, collectively." Our latest Crane Money Fund Indexes both net and gross have been slowly inching higher this year. The Average Gross 7-Day Yield rose to 0.15% in April from 0.13% at the start of the year, while our Crane Institutional Money Fund Index rose to 0.03% in the latest month from 0.02% on Dec. 31, 2014. (Watch for our June Money Fund Intelligence XLS and our May 31 data tomorrow morning.)
In other news, Pensions & Investments writes "Horizon Cash Management to Close". The article says, "Horizon Cash Management, a cash manager for alternative investment funds, is closing effective Nov. 25, said Diane Mix Birnberg, founder, chairwoman and partner. The Chicago-based firm, which Ms. Birnberg founded in 1991, has about $500 million in assets under management and has specialized in managing the cash portions of managed futures funds. She said the firm's assets under management peaked at about $3.7 billion in 2006 and totaled $1.7 billion at the beginning of 2013."
According to Markets Wiki, "Horizon Cash Management specializes in the managing cash portfolios for managed futures funds, hedge funds, family offices and institutional investors." Birnberg told P&I, "Basically after 20 years of being very profitable, for the last two years we have not been, because our main client base is hedge funds, specifically managed futures funds. They have had terrible performance for going on three or four years."
Also, we report a little more on last week's New York Cash Exchange. Tony Carfang of Treasury Strategies and Greg Fayvilevich of Fitch Ratings, led a session called "Cash Investment Policies Post Money Fund Reform." Fayvilevich discussed the new landscape for cash management, post-reform, while Carfang focused on how the changes will impact corporate investment policies.
Fayvilevich said that since reforms were announced, investors have been taking a wait and see approach before moving money. "The effective dates are more than a year away so there's no real incentive to move now. The other reason is the industry is still developing new products, so investors don't have the full suite of products to choose from. The industry is continuing its outreach to investors and assessing what are best options. Once all these options come out it will be easier for investors to make their choice. We do expect additional flows to start happening towards the end of this year, definitely in the first half of 2016. Fund managers are going to start offering new products in the coming months and that’s when investors will probably start making some moves."
He also discussed private money market funds. "These are going to be structured very similar to hedge funds or private equity funds -- the investor and fund managers are going to work together to come up with a set of guidelines. For example, these funds can have a stable NAV and they don't have to have fees and gates. Other products that are being launched are short term bond funds and separately managed accounts." He added, "Everyone is doing something slightly different. It's interesting to see some of the different and innovative ways that fund managers are going to provide liquidity management services."
In addition, Fayvilevich touched on the use of ratings in an investment policy. "Just like in other areas of the investment policy, it's important to maintain flexibility. Investment policies that rely on only one or two rating agencies are not reflective of market coverage and put cash managers at a competitive disadvantage compared to peers. The markets have evolved significantly over the last several years since the financial crisis and so you want to make sure that you maintain flexibility so you don't lose out on certain sectors of the economy just because of the way your investment guidelines are structured."
Carfang said that investment policies are critically important these days as corporations are holding more cash than ever -- almost $2 trillion, twice as much as they were in 2000 <b:>`_. "That means that the investment policies you're writing are twice as important as they were." He said the best policies are written in fairly broad language. Carfang explained, "A stated objective of "preservation of principal" does not necessarily rule out VNAV funds. Even commercial paper and government securities fluctuate in value daily. Unless held to maturity, all money market instruments fluctuate. However, more restrictive language such as "a constant net asset value" requirement would necessitate a policy change to permit continued investment."
Finally, he added, "A stated objective of "daily liquidity" does not necessarily rule out funds subject to fees or gates. Fees and gates are board options, not requirements. The requirement in the regulation is that the board act in the best interest of the fund shareholders." He also reminded attendees to review their policies to make sure that any new products they may use, like short maturity money funds, ultrashort bond funds, private funds, or separately managed accounts, are covered. "Depending on how your policy is written, these may or may not be covered."
