The SEC released it latest quarterly "Private Funds Statistics" report recently, which summarizes Form PF reporting and includes some data on "Liquidity Funds." The publication shows a minimal increase in overall Liquidity fund assets in the latest quarter to $547 billion. A previous press release, entitled, "SEC Staff Supplements Quarterly Private Funds Statistics" tells us, "The U.S. Securities and Exchange Commission staff ... published a suite of new data and analyses of private fund statistics and trends. The Private Funds Statistics ... offers investors and other market participants valuable insights by aggregating data reported by private fund advisers on Form ADV and Form PF. New analyses include ... characteristics of private liquidity funds." We review the latest SEC report, as well as a recent commentary on "repatriation" from J.P. Morgan Securities, below.
The SEC's "Introduction" explains, "This report provides a summary of recent private fund industry statistics and trends, reflecting data collected through Form PF and Form ADV filings. Form PF information provided in this report is aggregated, rounded, and/or masked to avoid potential disclosure of proprietary information of individual Form PF filers. This report reflects data from First Calendar Quarter 2015 through Second Calendar Quarter 2017 as reported by Form PF filers." (Note: Crane Data believes these are primarily securities lending reinvestment pools and other short-term investment funds; these are not the new breed of "3c-7" private liquidity funds being marketed by Federated, JPMorgan and a few others.)
The tables in the SEC's "Private Funds Statistics: Second Calendar Quarter 2017," the most recent data available, now show 116 Liquidity Funds (including "Section 3 Liquidity Funds," which are Liquidity Funds from advisors with over $1 billion total in cash), up 1 fund from the prior quarter and up 13 from a year ago. (There are 69 Liquidity Funds and 47 Section 3 Liquidity Funds.) The SEC receives Form PF reports from 38 Liquidity Fund advisers and 24 Section 3 Liquidity Fund advisers, or 62 advisers in total, one fewer than last quarter (and six more than a year ago).
The SEC's table on "Aggregate Private Fund Net Asset Value" shows total Liquidity Fund assets at $547 billion, up $1 billion from Q1'17 and up $6 billion from a year ago (Q2'16). Of this total, $275 billion is in normal Liquidity Funds while $272 billion is in Section 3 (large manager) Liquidity Funds. The SEC's table on "Aggregate Private Fund Gross Asset Value" shows total Liquidity Fund assets at $549 billion, the same total as Q1'17 and up $4 billion from a year ago (Q2'16). Of this total, $276 billion is in normal Liquidity Funds while $273 billion is in Section 3 (large manager) Liquidity Funds.
A table on "Beneficial Ownership for Section 3 Liquidity Funds" shows $89 billion is held by Private Funds, $52 billion is held by Unknown Non-U.S. Investors, $51 billion is held by Other, $21 billion is held by SEC-Registered Investment Companies, $12 billion is held by Banking/Thrift Inst, $9 billion is held by Insurance Companies, $5 billion is held by Pension Plans, and $4 billion is held by Non-U.S. Individuals. State/Muni Govt Pension Plans held $1 billion, while Non-Profits held $2 billion.
The tables also show that 79.6% of Section 3 Liquidity Funds have a liquidation period of one day, $255 billion of these funds may suspend redemptions, and $224 billion of these funds may have gates (out of a total of $272 billion). The Portfolio Characteristics show that these funds are very close to money market funds. WAMs average a short 30 days (41 days when weighted by assets), WALs are a short 58 days (74 days when asset-weighted), and 7-Day Gross Yields average about 0.94% (1.00% asset-weighted). Daily Liquid Assets average about 43% while Weekly Liquid Assets average about 60%. Overall, these portfolios appear shorter with a much heavier Treasury exposure than money market funds in general; half of them (48.9%) are fully compliant with Rule 2a-7.
In other news, J.P. Morgan's latest "Short Duration Strategy" contains a section entitled, "Tax repatriation and its impact on the short-end." It explains, "Another topic that has attracted some attention this week is tax repatriation. In a recent report, analysts at Moody's estimated [that] tech firms account for about half of the $1.9tn in corporate cash held by non-financial companies. Of these they reckon that the 5 largest (AAPL, MSFT, GOOG, CSCO, and ORCL) account for about 35% of the total. Moody's further estimated about $1.4tn of this cash would be offshore at YE17 and that the top 5 comprise about $594bn (42%) of this."
They write, "The repatriation story has led to questions about how offshore MMFs as well as short corporate bonds will be affected by repatriation. With respect to the former, if we compare a history of the growth of offshore cash by US non-financial firms and prime O/S MMFs (prime is where most of the money resides) we see that in spite of offshore cash growth, MMF balances were relatively stable in the $550-600bn range up until late-2016. We believe the lack of growth in O/S MMF during this time implies that a significant fraction of the cash went into separately managed accounts (SMAs) instead. While SMAs are used for many different strategies, they are generally invested in longer maturity and somewhat less liquid securities than the instruments MMFs invest in."
JPM's piece continues, "Knowing this, some firms apparently began to plan for tax reform in following the 2016 election. After years of relatively stable AUM, balances at offshore prime MMFs jumped over 27% (about $150bn) from Election Day 2018 to today. We suspect the source of this growth continues to be growth in offshore earnings, with more cash being directed to liquid MMF rather than less-liquid SMAs. Just how this offshore MMF cash is ultimately used remains to be seen. While it could be used to partly pay repatriation taxes, MMF holdings often are used as working capital to support business needs, and this may be pertinent here with regard to the non-USD MMF balances. Even so, the growth in AUM over the past year shows some US firms have been biased toward building liquidity."
They add, "With respect to short corporate bonds, public disclosures of the 5 largest tech companies show that close to 40% of their cash holdings are invested in USD corporate bonds typically with a 1y-5y duration. While the topic of tax repatriation is often associated with the idea that corporations would sell their offshore holdings and bring it back onshore, this is somewhat of a misconception. In reality, most of the holdings are only "overseas" for tax purposes, and are in fact held in US based custodial banks. As such, there would be no need to actively sell their short corporate holdings to bring the money back onshore and it may be simply an accounting book entry to transfer the assets."
Finally, they tell us, "Instead, we think the impact on short corporate bonds will be dependent on what companies end up doing with the newly available cash and how they intend to pay for the tax related to the repatriation. Many will return a portion to shareholders, as well as deploy it for investment, for M&A, for higher compensation, etc.... [C]ompanies also hold a large percentage of assets in Treasuries where greater liquidity allows for easier liquidation, if needed."
Note: Crane Data's Money Fund Intelligence International, which tracks "offshore" (aka European) money market mutual funds, shows $451 billion of the total $845 billion in offshore assets denominated in U.S. dollars. (The remainder are in GBP, or pound sterling, and Euro; these funds are domiciled in Ireland or Luxembourg.) The USD total, presumably the portion held in part by U.S. multinational corporations, has risen by $25 billion YTD in 2018 (through 1/22), after rising by $25 billion in 2017. We believe these rising totals indicate that corporations are slowly liquidating longer-term bond holdings and moving them into "cash" in anticipation of distribution later this year.
