The Investment Company Institute discusses shifting money fund assets and the reclassification of Prime funds to Government in their latest "Viewpoint," entitled, "Changes to Money Market Funds Are Showing Up in Data." Last week, ICI's "Money Market Fund Assets" data series showed a big decrease in Prime assets and increase in Government assets last week as money managers began converting Prime funds to Govt funds. (ICI's latest numbers only show minor shifts this week, however. See today's "Link of the Day" for more.) Also, mutual fund publication Ignites recaps recent Prime to Govie conversions in an article Wednesday, "The Great Money Fund Migration Kicks Off." Finally, another big conversion is finalized today (and will be reflected in next week's asset totals) as the $15.7 billion Fidelity Cash Management Prime Fund is officially merged into Fidelity Government Money Market Fund.
ICI Senior Director for Industry and Financial Analysis Sean Collins writes, "In July 2014, the Securities and Exchange Commission (SEC) adopted new regulations for money market funds. One major provision of the rule required prime money market funds sold to institutional investors to adopt "floating NAVs" -- net asset values that are priced to four decimal points (one-hundredth of one cent for a $1.00 share). Prime money market funds invest in a range of short-term securities, including commercial paper, large certificates of deposit, and floating rate notes.... Once implemented on October 14, 2016, the new rule will allow only government money market funds (funds that invest almost entirely in Treasury and government agency securities) and prime and tax-exempt money market funds sold to retail investors to offer a stable NAV."
He explains, "Analysts have predicted that the new rule will lead to a large decline in the assets of prime money market funds and a potentially offsetting rise in the assets of government money market funds. They predict that institutions that have previously invested in prime money market funds with stable NAVs will be either unable or unwilling to hold floating NAV money market funds with fees and gates, and thus will shift to government money market funds, which under the SEC's new rule can continue to offer a stable NAV without fees or gates."
Collins continues, "In anticipation of this trend, many money market fund advisers have announced plans to change their prime funds into government funds in advance of the October 2016 deadline. These changes began to appear last week in the data that ICI reports. On November 5, we released our weekly report on money market fund assets for the week ending Wednesday, November 4. Assets in prime money market fell sharply ($34.68 billion) while assets in government funds rose ($18.34 billion). In coming weeks, as other advisers undertake similar changes, readers can expect to see continued large shifts of assets from prime money market funds to government money market funds. ICI will continue to explain these changes -- including their impact on our monthly money market fund reports -- as the industry moves toward full implementation of the SEC rule."
Ignites' "Great Money Fund Migration" story says, "Several Franklin and Dreyfus prime funds last week converted to government funds, kicking off an industrywide migration of an estimated $230 billion in assets slated to shift out of the category. While funds undergoing the conversions have been steadily selling off commercial paper and other prime holdings in favor of government securities, the name changes that started last week make the switches official. And a number of midsize and smaller providers have now announced conversions, joining the ranks of giants like Fidelity and BlackRock, which put forth their plans in the first months of the year." (See our Nov. 6 News, "Nov. MFI Features Consolidation, Govt Conversions, Prior, BofA Deal" and our November Money Fund Intelligence.)
The ignites piece continues, "The conversions announced to date will push about $230 billion from prime to government funds industrywide, Crane Data estimates. Prime funds, both retail and institutional, represented about $1.4 trillion in assets as of Nov. 4, according to Investment Company Institute data. The industry's "most popular guessing game" right now is trying to predict whether investors who are not automatically moved as part of conversions will shift their money out of prime funds in the months leading up to the October 2016 deadline, and if so, how much will move, says Peter Crane, CEO of Crane Data. "At this point, these automatic conversions are really the only solid numbers. Everything else is a guess," he says."
It adds, "SunGard found that 60% of the approximately 25 U.S. corporate treasurers it recently surveyed as part of a broader look at global cash management trends anticipate continuing to invest in prime funds at a similar level that they already do once the SEC reforms are in place. On the other hand, 37% said they plan to decrease their prime holdings. Goldman Sachs Asset Management predicted in an August research piece that as much as $980 billion will leave the prime category due to the floating NAV and the threat of gates and liquidity fees' being imposed on non-government products."
Further, "JPMorgan wrote in a November research note that while the fund conversions may be the first wave of outflows from prime funds, once the October 2016 deadline approaches, investors that have until now stayed put are likely to make changes. "With no sizable outflows experienced [year-to-date], it is very possible that sizable outflows do not occur until the middle of next year as the final rules draw near," according to JPMorgan. "With fund conversions and investor outflows combined, we now believe that the shift in assets away from prime [money market funds] could be as large as $600 [billion] to $650 [billion]." Crane Data, on the other hand, expects that Federal Reserve interest rate hikes and greater yields "will keep many investors in prime (and draw new investors from banks)." About 25% of the category's assets will leave, or about $375 billion, including the $230 billion from fund conversions, the firm estimates."
Ignites concludes, "But some also predict the prime fund exodus will be followed by a shift back into the products at some point after October 2016, when investors have adjusted to the floating NAV and interest rates are presumably higher. "I think it's probably a 2017 event," says Deborah Cunningham, CIO of global money markets at Federated Investors, referring to this later shift. The amount that may return to prime funds will depend to some degree on how much the NAVs of funds that float actually fluctuate and on the Federal Reserve's eventual rate increases, she says."
As we mentioned above, on Nov. 13, Fidelity Cash Management Prime Fund officially merges into Fidelity Government Money Market Fund, so expect to see another $15.7 billion shift from Prime to Government next week. (See here for details and see our Oct. 28 News, "Fidelity's Prior at AFP on Recent and Pending Changes; No Silver Bullet for more.) Funds that were among the $26 billion that converted Nov. 1 include: Franklin Institutional Fiducuary Trust Money Market Portfolio, Franklin MMF, and Dreyfus Inst Reserves.
Finally, watch for more conversions in coming weeks and months. On Dec. 1, Fidelity will complete the conversion of its massive $115.1 billion Cash Reserves and 2 other Prime funds (including the $11.6 billion Fidelity MMT Retirement portfolio) to Government, and the $1.4 billion American Century Premium MMF will also convert to American Century US Govt MMF. Then a series of BlackRock's BIF and FFI money funds will convert on Jan. 4.
