Prime money market fund assets continued their modest but relentless recovery in the latest week, rising for the 5th week in a row. They're on course to also rise for the 5th month in a row in May, and they've increased by $28.0 billion, or 7.2%, year-to-date. ICI's latest "Money Market Fund Assets" report shows Prime assets rising (barely) by $0.2 billion to $406.8 billion. Our Money Fund Intelligence Daily shows Prime MMFs up by $10.3 billion month-to-date in May (through 5/24/17) to $535.5 billion. (Note: Crane Data's collection is now larger than ICI's due to the addition of a number of internal and private money funds uncovered by the SEC's Form N-MFP reporting. See our Jan. 3, 2017 News, "Internal and Private Money Funds Revealed," for more details, or contact us for a more detailed explanation and for a list of the funds we've added over the past few months.)
ICI's weekly writes, "Total money market fund assets increased by $3.73 billion to $2.65 trillion for the week ended Wednesday, May 24, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $3.49 billion and prime funds increased by $209 million. Tax-exempt money market funds increased by $33 million." Total Government MMF assets, which include Treasury funds too, stand at $2.112 trillion (79.7% of all money funds), while Total Prime MMFs stand at $406.8 billion (15.4%). Tax Exempt MMFs total $129.6 billion, or 4.9%.
They explain, "Assets of retail money market funds decreased by $1.53 billion to $961.60 billion. Among retail funds, government money market fund assets decreased by $1.30 billion to $586.94 billion, prime money market fund assets decreased by $126 million to $251.04 billion, and tax-exempt fund assets decreased by $104 million to $123.62 billion." Retail assets account for over a third of total assets, or 36.3%, and Government Retail assets make up 61.0% of all Retail MMFs.
The release continues, "Assets of institutional money market funds increased by $5.26 billion to $1.69 trillion. Among institutional funds, government money market fund assets increased by $4.79 billion to $1.53 trillion, prime money market fund assets increased by $335 million to $155.80 billion, and tax-exempt fund assets increased by $137 million to $6.00 billion." Institutional assets account for 63.7% of all MMF assets, with Government Inst assets making up 90.4% of all Institutional MMFs.
In other news, we reported earlier this week on the recent New England AFP conference (see our May 22 News, "NEAFP Treasury Show Focuses on Prime MF Issues"). Today, we excerpt from another session from this show, this one from Fidelity Investments' Michael Morin, who presented on "Optimizing Liquidity Through Cash Segmentation."
Morin first commented on the potential move back into Prime, saying, "What's the yield differential? Here we are, we have an opportunity to pick up 35-40 basis points by moving out of government funds back into Prime funds. Is that the right thing to do for my organization, or are there better solutions? Those are the key points of the discussion this morning. A lot of investors are asking, 'What about that 35-40 basis point pick-up?' Is it here to stay? Is it going to get larger? Is it going to shrink? And how much do you need in a pick-up to take on that incremental risk?"
He continued, "Obviously the environment has changed. We survived 7 years of zero interest rates, and the industry has done quite well. We're still $2.65 trillion ... really we've been averaging $2.7 trillion for about 5 years now. So the industry came through that zero rate environment exceptionally well. So I think the [question now] is really, 'Where are we heading and how [do you] optimize your liquidity in the new environment?"
Morin told the NEAFP, "I do think investors need to think about Prime funds. Recognizing that it is a different solution than it was in the past, with a $1.00 NAV and no risk of fees and gates, it was very comparable to the bank solutions. Now I think there is a recognition that it is a slightly different product, and you need to get compensated for that remote risk of fees and gates and a small variability in the NAV. So when we think about how much money is likely to move back in, it's obviously predicated on the idea that the variable NAV is not going to be that variable, and ... any variability is likely to be measured in single basis points or just a handful of basis points."
He explained, "With respect to fees and gates, we obviously do not believe that they're going to happen. But of course it is a real possibility.... [T]he real concern is what if it does happen and what's the impact? So while that is a very low-probability event, the ramifications of losing access to your money for up to 10 days, or even worse having to pay a fee to have access to your money [are a concern]."
Morin told the Boston crowd, "Managing cash used to be easy: leave most of it at the bank and put it all in Prime funds. It's a $1.00 NAV product, what could possibly go wrong? We got the answer to that in the crisis.... Then, we had a series of regulatory reforms, and they took away the $1.00 NAV and gave us fees and gates. So I think the split between banks and prime money funds is no longer going to be the most popular solution for corporate cash, and it really requires a finer segmentation of your cash.... [F]or operating cash, money that you might need ... you can't afford to lose any of that.... So those solutions are going to [keep] you [in] $1.00 NAV product, where there's no volatility and NAV."
He added, "I think the enticing thing today is that you got this 35-40 basis points waiving out in front of you, so the easiest way to capture that is to go back into a prime fund. If you think about the worst thing that could happen ... perhaps the worst thing that could happen in a prime fund today is not as bad as what could happen in a prime fund in the past.... People think several hundred billion dollars is likely to move back into prime funds," and emphasized that any "redemption gate can only go down for 10 days."
Finally, Morin asked, "If you're giving up potential liquidity for return in Prime, another 25-50 bps, why not go out longer?" He said that Ultra-Short Bond Fund assets are up significantly and that a number of "Conservative Ultra-Short Bond Funds" have gained critical mass in size. He believes these new Conservative Ultra-Short Bond Funds will come to rival Prime money funds in size.
