The Investment Company Institute released its latest "Trends in Mutual Fund Investing" and "Month-End Portfolio Holdings of Taxable Money Funds," which confirmed our earlier reports of an increase in money fund assets in July and a jump in Treasury and Government Agency holdings. (See our Aug. 10 News, "MF Portfolio Holdings: TDs, Treasuries, Agencies Jump; CDs, CP Plummet.") We examine these latest asset and composition updates below. We also review a new article on navigating the money market's new rules in the latest issue of Money Magazine, and we quote former FDIC head Sheila Bair's comments yesterday on money market reform in a CNBC appearance.
ICI's "July 2016 "Trends" report" shows a $13.9 billion increase in money market fund assets in July to $2.706 trillion. The increase followed declines of $7.5 billion in June, $11.8 billion in May, $41.8 billion in April, and $15.1 billion in March. However, in the 12 months through July 30, money fund assets have gone up by $41.4 billion, or 0.2%. (Month-to-date in August through 8/30, our Money Fund Intelligence Daily shows total assets up by $24.9 billion with Prime MMFs down $116.4 billion, Tax Exempt MMFs down $28.2 billion, and Govt MMFs up $169.5 billion.)
The monthly report states, "The combined assets of the nation's mutual funds increased by $402.49 billion, or 2.5 percent, to $16.30 trillion in July, according to the Investment Company Institute's official survey of the mutual fund industry. In the survey, mutual fund companies report actual assets, sales, and redemptions to ICI.... Bond funds had an inflow of $24.45 billion in July, compared with an inflow of $8.66 billion in June.... Money market funds had an inflow of $14.41 billion in July, compared with an outflow of $18.37 billion in June. In July funds offered primarily to institutions had an inflow of $12.33 billion and funds offered primarily to individuals had an inflow of $2.08 billion."
The latest "Trends" shows that while Taxable MMFs increased in July, Tax-Exempt MMFs continued to bleed assets. Tax-Exempt MMFs declined by $10.1 billion, compared to taxable, which increased by $24.0 billion <b:>`_. Year-to-date through July 31, MMFs have had $47.1 billion in outflows, with $22.1 billion in inflows to Taxable funds and $69.2 billion in outflows from Tax-Exempt funds. Money funds now represent 16.6% (down from 17.0%) of all mutual fund assets, while bond funds represent 22.6%. The total number of money market funds dropped to 432 in July, down from 444 in June and down from 508 a year ago.
ICI's Portfolio Holdings confirms a jump in Treasuries and Agencies in July, and a steep decline in CDs and CP. Repo remained the largest portfolio segment, but declined by $7.9 billion, or 1.2%, to $633.6 billion or 25.1% of holdings. U.S. Government Agency Securities gained ground in second place, gaining $22.1 billion, or 3.9%, to $587.9 billion or 23.3% of holdings. Treasury Bills & Securities stayed in third place among composition segments, rising $18.8 billion, or 3.6%, to $537.1 billion, or 21.3% of holdings. These moves continue to be driven by the ongoing shifts of Prime fund assets into Government funds.
Certificates of Deposit (CDs) stood in fourth place, and increased $5.1 billion, or 1.2%, to $429.2 billion (17.0% of assets). Commercial Paper remained fifth; they decreased $30.8B, or 11.3%, to $241.4 billion (9.6% of assets). Notes (including Corporate and Bank) were flat, increasing by $47 million, or 0.3%, to $17.8 billion (0.7% of assets), and Other holdings (including Cash Reserves) jumped to $59.1 billion, up from $47.1 billion.
The Number of Accounts Outstanding in ICI's series for taxable money funds increased by 358.6 thousand to 23.767 million, while the Number of Funds fell by 2 to 320. Over the past 12 months, the number of accounts rose by 486.6 thousand and the number of funds declined by 32. The Average Maturity of Portfolios was 34 days in July, down 2 days from June. Over the past 12 months, WAMs of Taxable money funds have declined by 4 days. Note: Crane Data also revised its August MFI XLS this week to reflect the latest 7/31/16 Portfolio Composition data and Maturity breakouts. (Visit our Content Center and the latest Money Fund Portfolio Holdings download page to access our June Money Fund Portfolio Holdings and the latest files.)
In other news, Money recently published an article by John Waggoner entitled "How to Navigate a Safe-ish Harbor." Subtitled, "Money Funds Pay Little but Still Offer Ballast and Convenience – If You Understand the New Rules," the piece gives investors an overview of money funds and the new rules that will be effective October 14th.
Waggoner writes, "Here's the most astonishing fact on Wall Street: $2.7 trillion is cooling its heels in money-market mutual funds, earning less than an ant's allowance. The average yield on retail money funds -- which invest in short-term government securities, commercial paper, and bank CDs -- is a paltry 0.04%." He proceeds to say, "All that cash is a testament to the durability of money funds as the investor's parking place of choice."
According to Waggoner, a large draw towards money funds is their convenience. He says, "You can move cash from a money fund into your stock fund or bank account swiftly and easily." He quotes Crane Data President and Publisher Peter Crane, "They are like the Federal Express of mutual funds: They're for when you absolutely, positively have to have your money overnight."
The article proceeds to discuss the new reforms in store for October. "Through an accounting convention, money funds can keep share prices steady at $1, giving them the illusion of being as risk-free as a bank deposit, though they aren't FDIC insured," writes Waggoner. "If assets fall below $1 a share, the fund sponsor will backstop the fund. But that's not always possible, as in 2008 when the Reserve Fund let its shares fall below $1 in the financial panic."
Money explains that following the reforms, most institutional funds will have to endure floating share prices while individual funds will have the ability to keep their shares at $1. Waggoner then discusses tax-free money funds and prime funds. He tells us, "Going forward, prime and tax-free money funds will have to ensure they have enough cash on hand to handle large redemptions. So both types can institute a 2% redemption fee if their liquid assets fall below certain levels." According to Waggoner, "to avoid restrictions and fees, use a government fund instead of a prime or tax-free fund."
Also, in an interview yesterday with CNBC's Rick Santelli, Sheila Bair, former FDIC Chair, commented briefly on upcoming money market reforms. "We obviously are now in stronger hands," states Santelli, "but are there any issues that make you worry about the reforms? We've already seen a rather large exodus from some of the money market funds."
Bair replied, "I am worried about it.... Their shares should be marked based on what the underlying assets are worth. They didn't do that." Bair proceeds to discuss the complications, "If it's a prime institutional fund, it floats. If it's a government or retail, it doesn't float." She continues, "I think one of the worst things they did is put on gates and fees. The ability of funds to impose gates and fees, which basically says, 'Well, we're going to stop money market fund runs by denying people access to their money or making it more expensive for them to get their money.'" Bair ends the speech by expressing her concern, "`[I]t's not working as well as it might have if we had just simple good or floating NAV and be done with it."
