The Investment Company Institute released its "2019 Investment Company Fact Book," an annual compilation of statistics and commentary on the mutual fund industry. Subtitled, "A Review of Trends and Activities in the Investment Company Industry," the latest edition reports that equity funds again saw outflows, bond fund inflows slowed, and money market funds had their strongest inflows in almost 10 years in 2018 ($159 billion). Overall, money funds assets were $3.037 trillion at year-end 2018, making up 17% of the $17.7 trillion in overall mutual fund assets. Retail investors held $1.187 trillion, while institutional investors held $1.850 trillion. We excerpt from the latest "Fact Book" below. (Note: The ICI also kicks off its annual General Membership Meeting in Washington on Wednesday, which runs May 1-3.)
ICI writes, "Worldwide net sales of money market funds totaled $78 billion in 2018, a decrease from the $598 billion in net sales in 2017, driven mostly by a sharp decrease in net sales in the Asia-Pacific region. Money market funds in the Asia Pacific region had net outflows of $99 billion in 2018 after experiencing $404 billion in net inflows in 2017."
They explain, "Investor demand for Chinese money market funds accounts for much of the net sales of money market funds in the Asia-Pacific region. Eighty percent of Asia-Pacific's total net assets in money market funds were held in funds domiciled in China at year-end 2018. Demand for money market funds in China weakened substantially in 2018 as the spread between money market fund yields and those on bank savings deposits narrowed from 3.1 percent at year-end 2017 to 1.9 percent at year-end 2018. In 2018, money market funds in the Asia-Pacific region saw net outflows of $99 billion compared with net inflows of $404 billion in 2017."
The Fact Book continues, "In Europe, money market funds saw outflows of $23 billion in 2018 after three consecutive years of inflows.... Europe, like the United States, has adopted reforms intended to increase the resilience of money market funds to financial shocks. US reforms, which were implemented in October 2016, had significant effects on the composition of net new cash flow to US money market funds in 2016. Although EU reforms for money market funds were adopted in 2017, existing funds are required to be in full compliance by March 2019. The deadline to comply with the 2017 regulatory changes may have caused net sales to fall significantly in France, Ireland, and Luxembourg -- the three largest money market fund domiciles in Europe."
It says, "In the United States, money market funds had net sales of $182 billion in 2018, up from $117 billion in 2017.... Recently, as the Federal Reserve has tightened monetary policy, US money market funds have become more attractive relative to other cash management investments. In particular, the spread between money market fund yields and those on money market deposit accounts has widened by more than 170 basis points since year-end 2016.... In addition, `the flattening of the US Treasury yield curve in 2018 may have spurred investors to use money market funds and short-term bond funds in an effort to minimize their interest rate risk. Prior to 2017, US money market funds were negatively affected by near-zero US short-term interest rates."
A sidebar on "China's Money Market Fund Industry," tells us, "The Chinese regulated fund industry is at a relatively early stage of its development. Prior to the 1980s, Chinese household assets consisted mainly of bank deposits, as most assets were owned by the state. China's financial market reforms started in the 1980s with the reintroduction of the government bond market and reopening of the stock market in the early 1990s. Despite being a relative newcomer, China's money market fund industry, with total net assets of $1.1 trillion at year-end 2018, is the third largest in the world, behind the United States and Europe. Net assets in Chinese money market funds have increased 800 percent in the past five years, and their share of all Chinese regulated fund net assets has increased to 60 percent at year-end 2018 from 26 percent at year-end 2013."
It explains, "The rapid growth in Chinese money market assets is remarkable considering their relatively recent introduction as an investment product. The first money market fund in China was offered in 2004 after the China Securities Regulatory Commission (CSRC) published its first guidelines for money market funds. In 2015, the CSRC announced additional regulations that aimed to more closely align with the blueprint in more developed markets. Nevertheless, there were significant differences between money market funds domiciled in China and money market funds domiciled in other jurisdictions.... In 2017 and 2018, to address some of these differences, the CSRC announced tighter regulations limiting leverage and daily redemptions, as well as limiting credit risk by reducing money market funds' ability to invest in lower-quality debt instruments. These changes narrowed the differences between Chinese money market funds and those offered in more-developed markets."
ICI adds, "Money market funds offer Chinese households a lower-risk, income-oriented investment that can compete with bank deposits. Retail investors, who hold more than 55 percent of Chinese money market fund assets, have found that money market funds are an attractive substitute for bank deposits. Until April 2018, bank deposit rates in China were effectively capped, and the yield on money market funds was considerably higher than the maximum rate set by the People's Bank of China (PBOC). Much like in the United States, net sales of money market funds increase as the yield spread between money market funds and bank deposits widens.... Between 2014 and 2017, the yield spread was as wide as 320 basis points, helping net assets of Chinese money market funds grow by $678 billion over this period. Although the PBOC relaxed guidance for bank deposit rates in 2018, deposit rates did not rise rapidly, as the PBOC eased monetary conditions at the same time. As a result, money market fund yields fell due to looser monetary policy and the yield spread of money market funds to deposit rates narrowed considerably. This likely led to reduced net sales of money market funds in 2018."
The Fact Book also tells us, "Businesses and other institutional investors also rely on funds. For instance, institutions can use money market funds to manage some of their cash and other short-term assets. At year-end 2018, nonfinancial businesses held $616 billion (18 percent) of their short-term assets in money market funds." (This is up from 16 percent in 2017 but down from 22 percent in 2013 and down from the peak of 40 percent in 2008.)
It comments, "Historically, mutual funds have been one of the largest investors in the US commercial paper market -- an important source of short-term funding for major corporations around the world. Mutual fund demand for commercial paper arose primarily from prime money market funds. In 2016, however, assets of prime money market funds fell 70 percent (nearly $900 billion) as these funds adapted to the 2014 SEC rule amendments that required the money market fund industry to make substantial changes by October 2016. Consequently, prime money market funds sharply reduced their holdings of commercial paper. From year-end 2015 to year-end 2016, mutual funds' share of the commercial paper market fell from 40 percent to 19 percent. By year-end 2017, mutual funds had increased their share of the commercial paper market to 25 percent, and their share was little changed (24 percent) at year-end 2018."
Finally, they write in a short section on "Money Market Funds," "In 2018, money market funds received $159 billion in net new cash flows, up from $107 billion in 2017. Prime money market funds received the bulk of the inflows ($103 billion), followed by government money market funds with $43 billion in inflows. The increased demand for money market funds likely stems from the Federal Reserve's decision to raise the federal funds target rate four times in 2018, which increased the attractiveness of money market funds as an investment for excess cash. Yields on prime and government money market funds ratcheted up in 2018 and far exceeded the stated rate on money market deposit accounts (MMDAs)."
