Invesco published its most recent "Global Fixed Income Strategy," which includes a brief entitled, "Get to know Invesco Global Liquidity." The Q&A explains, "We speak with the Invesco Global Liquidity Team about the main tenets of their management process and how money market fund reform has impacted the money markets and the team's investment approach." It first asks, "What are the key tenets of managing global liquidity assets?" Marques Mercier, Head of Invesco's Govt MMFs, responds, "Safety, liquidity and yield. These are the three tenets of managing global liquidity. Our priorities are preserving principal, selecting liquid securities and generating competitive yield.... Our disciplined and well-defined fundamental research and investment processes have been tested and proven through multiple credit events and various economic cycles."
He explains, "We believe the great communication and collaboration between our portfolio managers and credit research analysts also drives our success. Because the money market asset class is governed by a 'same day' trading convention, the high velocity of trading and shareholder activity requires efficiency across all aspects of operational work flows, decision-making and strategy implementation. The ability to incorporate and execute our investment strategies while simultaneously understanding underlying market trends in a fast-paced environment requires well-coordinated communication among the team."
Invesco's piece also asks, "How has regulatory change affected your market?" Mercier says, "New regulations in the US money market industry have effectively homogenized our market, resulting in very little differentiation among funds. We believe a key differentiator for Invesco Global Liquidity has been our commitment to shareholders, the investment teams and the three key tenets that have helped us achieve our investment objectives and provide investment solutions to clients."
It queries, "What changes have you had to implement due to US money market fund reform?" Head of Credit & Muni MMFs Joe Madrid tells us, "The latest reforms, which became effective in October 2016, were very impactful for both investment managers and clients. The most significant reforms were the adoption of floating net asset values (FNAVs) and the potential imposition of liquidity fees and redemption gates for certain types of funds. The industry, as well as Invesco, invested significant financial resources and employee hours to implement and comply with these new rules. For Invesco Global Liquidity, these changes required coordination and teamwork among many different areas of Invesco, including fund accounting, compliance, information technology, the transfer agency, legal and operations, to name just a few."
He adds, "Fortunately, the transition out of prime funds into government funds was orderly, although it caused some distortions in both commercial paper and Libor rates that finally normalized in the first quarter of 2017. Assets are now weighted toward government funds, amid reduced size and number of surviving prime funds.... This shift has resulted in a smaller number of large prime fund managers and, therefore, the potential for greater fund concentration risk, in our view."
Madrid also comments, "As the dust settles, it appears that fund size has become more meaningful in the prime category. Managers have also become more conservative, maintaining excess liquidity over and above regulatory requirements to help reduce the potential need to impose fees and gates. This, along with improved relative value, has resulted in approximately USD60 billion returning to prime funds this year.... We believe many investors would like to diversify among more prime funds, as long as competing funds offer competitive yields and have sizable assets. We believe, going forward, successful managers will not only offer scale, but will offer multiple liquidity solutions, such as ultra-short duration strategies."
Invesco also asks, "Where are we on European Money Fund reform?" Senior Portfolio Manager Paul Mueller explains, "The European Commission proposed new money market fund regulations in September 2013.... The final rules were published in June 2017 and the compliance date for existing funds is January 2019. The regulation introduced new types of short-term money market funds: a public debt constant net asset value (CNAV) fund, a low volatility NAV (LVNAV) fund and a variable NAV (VNAV) fund. As in the US, European regulations have included fee and gates provisions. However unlike in the US, CNAV and LVNAV will have fees and gates, including CNAV public debt funds. Therefore, we would not expect a large flow out of prime LVNAV funds into public debt funds, as seen in the US. VNAV funds are not subject to fee and gate requirements. Industry expectation is that LVNAV will be the most likely replacement for current prime CNAV funds, although this will likely be influenced by country and type of investor."
Finally, Senior Analyst Jennifer Brown comments on Invesco's credit process, "The Global Liquidity Credit Research Team employs a robust, bottom-up approach to credit analysis that has been in place for many years. This process proved successful in navigating the global financial crisis and has changed very little in the years since.... US money market regulatory reform has had a limited impact on Global Liquidity's longstanding, market-tested credit process. Many of the new credit-quality and diversification requirements implemented by the SEC in October 2016 had already been practiced as part of Invesco's historically conservative approach."
In other news, money market mutual fund assets, which broke above $2.8 trillion 2 weeks ago, declined in the latest week. Assets of Retail MMFs broke above $1.0 trillion for the first time since April 2010 last week, and rose again this week. The Investment Company Institute's latest "Money Market Fund Assets" report shows that year-to-date, MMF assets have increased by $91 billion, or 3.3%. For 2017, money fund assets are still showing their biggest annual increase since 2009. ICI's numbers also show Prime money market fund assets fell for the first week in 10 weeks, but Tax Exempt MMFs rose. Prime MMFs have increased by $67.7 billion, or 17.5%, year-to-date.
ICI writes, "Total money market fund assets decreased by $21.15 billion to $2.82 trillion for the week ended Wednesday, December 20, the Investment Company Institute reported today. Among taxable money market funds, government funds decreased by $16.04 billion and prime funds decreased by $5.67 billion. Tax-exempt money market funds increased by $560 million." Total Government MMF assets, which include Treasury funds too, stand at $2.233 trillion (79.2% of all money funds), while Total Prime MMFs stand at $455.5 billion (16.2%). Tax Exempt MMFs total $131.2 billion, or 4.7%.
They explain, "Assets of retail money market funds increased by $5.32 billion to $1.01 trillion. Among retail funds, government money market fund assets increased by $2.87 billion to $611.81 billion, prime money market fund assets increased by $1.87 billion to $268.95 billion, and tax-exempt fund assets increased by $575 million to $125.26 billion." Retail assets account for over a third of total assets, or 35.7%, and Government Retail assets make up 60.8% of all Retail MMFs.
ICI's release adds, "Assets of institutional money market funds decreased by $26.47 billion to $1.81 trillion. Among institutional funds, government money market fund assets decreased by $18.91 billion to $1.62 trillion, prime money market fund assets decreased by $7.55 billion to $186.59 billion, and tax-exempt fund assets decreased by $15 million to $5.89 billion." Institutional assets account for 64.3% of all MMF assets, with Government Inst assets making up 89.4% of all Institutional MMFs.
