Wells on 3 Types of Prime Outlows
Wells Fargo Asset Management's latest "Portfolio Manager Commentary says, "Reform-related cash flows out of prime and municipal money market funds so far can be broadly classified into three categories. The first type of cash flow is sponsor- or advisor-driven. In this case, the money market fund sponsor or advisor has decided to convert its prime or municipal money market funds from its current strategies to one that doesn't have a floating net asset value (NAV) and/or the ability to impose fees and gates -- in other words, a government fund strategy. Additionally, given a perceived lack of interest from current and prospective shareholders, some fund complexes have determined that they no longer wish to offer such a product and have liquidated their prime and/or municipal money market funds altogether. Of note is that this type of conversion has affected both institutional and retail funds, which suggests fees and gates, rather than the variable NAV, is the main focus of the decision-making process. By and large, the prime-to-government conversions or prime fund liquidations have already occurred, with only a small amount still to liquidate between now and October 14. These changes amounted to an estimated $272 billion at the end of May (Crane Data). In addition, we've also seen approximately $100 billion of sponsor-driven flows from municipal funds into government funds. The second type of reform-related cash flow in the money markets has been intermediary-driven. This occurs when an organization (such as a brokerage, wealth advisory, or trust department) with some sort of trust or custody relationship of client assets decides that it will not support funds that have either a variable NAV or can impose fees and gates. Characteristics of these holdings are that they typically cover a large number of clients with fairly small balances as part of an overall relationship, and the money market fund component is usually a sweep product. Other types of holders, though, can be large, institutional relationships, and the cash holdings in money market funds are usually there for a reason -- for example, either required by something like a trust document or bond indenture or serving as a temporary investment vehicle in anticipation of making scheduled payments, such as what would occur with a concentration account associated with mortgage- or asset-backed securities. Intermediary-driven changes to prime and government funds seem to have characterized the bulk of the fund flows during the summer. The third wave of fund flows has yet to occur in any meaningful way. Direct holders of the funds have not only been silent as to their intentions for their cash positions but also have yet to make significant changes that are related to money market reform. These clients typically have large cash balances, trade directly with funds or through investment portals, and are institutional in nature (think corporate or state treasurers, other investment managers, or endowments or trusts, for example). One thing portfolio managers think they know about this type of money, based on cash-management surveys conducted over the past few years, is that some of it will flow from prime funds to government funds. Portfolio managers also know that these flows likely will occur sometime before the implementation date of October 14. However, two big unknowns are shaping portfolio management strategies: when the flows will occur and what the size of the flows will be. As a result of this uncertainty, portfolio managers have implemented strategies to bring their liquidity position to a very high level -- maybe even verging on 100% -- by October 14 with the goal of meeting liquidity needs."
