News Archives: April, 2016
Money fund assets increased $10.4 billion in the past week, according to the ICI's latest statistics, but that wasn't enough to make up for April's big drop month-to-date. Crane Data shows money fund assets still down $45.2 billion for the month through April 27 with almost all of the decline coming from the Prime sectors. This will be the second straight month of MMF asset declines (assets dropped by $15.1 billion in March), no surprise given it includes tax season. We review ICI's latest weekly "Money Market Fund Assets" report, and their latest monthly "Trends in Mutual Fund Investing" report below. We also discuss ICI's "Month-End Portfolio Holdings of Taxable Money Funds," which confirms that holdings of CDs (primarily Time Deposits) plummeted in March, while Repo and Treasuries surged. (See our April 12 News, "April Portfolio Holdings: Repo and T-Bills Jump; TDs and CDs Plunge.")
ICI's latest weekly says, "Total money market fund assets increased by $10.35 billion to $2.71 trillion for the week ended Wednesday, April 27, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $7.24 billion and prime funds increased by $6.52 billion. Tax-exempt money market funds decreased by $3.42 billion." Government assets, including Institutional and Retail (and Treasury and Government), stand at $1.284 trillion, while Prime assets are at $1.208 trillion. Government fund assets moved ahead of Prime assets earlier this year, fueled by the conversion of $242.1 billion of Prime funds to Govt funds to date (through May 2).
The release explains, "Assets of retail money market funds decreased by $6.48 billion to $978.18 billion. Among retail funds, government money market fund assets increased by $420 million to $383.05 billion, prime money market fund assets decreased by $3.95 billion to $427.81 billion, and tax-exempt fund assets decreased by $2.95 billion to $167.32 billion. Assets of institutional money market funds increased by $16.82 billion to $1.73 trillion. Among institutional funds, government money market fund assets increased by $6.82 billion to $900.98 billion, prime money market fund assets increased by $10.47 billion to $780.47 billion, and tax-exempt fund assets decreased by $470 million to $48.97 billion." Our analysis of ICI data shows assets down about $56 billion in April (3/30–4/27), and down $50 billion YTD through 4/27.
A Footnote to ICI's weekly adds, "In anticipation of the Securities and Exchange Commission's (SEC) new money market fund regulations, many advisers are changing their prime money market funds into government money market funds. As a result, there have been, and will continue to be, large shifts in assets from prime funds to government funds before the October 2016 deadline." After May 2 (when Deutsche and several other funds convert), we count $242.1 billion of Prime funds that will have converted to Government and another $47.6 billion scheduled to switch over before the October 14 MMF Reform deadline.
ICI's "Trends in Mutual Fund Investing March 2016" confirms a decrease in MMF assets in March, down $15.1 billion, or -0.5%, to $2.759 trillion. It's been a rollercoaster few months, as assets jumped $38.2 billion in February, decreased $19.0 billion in January, and climbed $35.3 billion in December. (As mentioned above, assets will be down in April, too). But in the 12 months through March 31, 2016, money fund assets are up $114.2 billion, or 4.3%, according to ICI.
The monthly release says, "The combined assets of the nation's mutual funds increased by $633.32 billion, or 4.2 percent, to $15.72 trillion in March, according to the Investment Company Institute's official survey of the mutual fund industry.... Bond funds had an inflow of $21.40 billion in March, compared with an inflow of $1.12 billion in February.... Money market funds had an outflow of $16.08 billion in March, compared with an inflow of $37.41 billion in February. In March funds offered primarily to institutions had an inflow of $2.71 billion and funds offered primarily to individuals had an outflow of $18.79 billion."
The report shows that the bulk of the money fund outflows in March were from Tax-Exempt MMFs, which declined by $13.2 billion, compared to taxable, which had only $2.9 billion in outflows. Year-to-date through March, MMFs have had $1.1 billion in inflows, with $31.3 billion in inflows to Taxable funds and $30.2 billion in outflows from Tax-Exempt funds." Money funds now represent 17.6% of all mutual fund assets, while bond funds represent 22.3%. The total number of money market funds dropped to 478 in March, down from 479 in February 2016 and down from 525 a year ago.
ICI's latest "Portfolio Holdings" summary shows that Repo, US Treasury Bills, and CP holdings gained in March, while CDs dropped sharply and Agencies also declined. Repurchase agreement moved ahead of CDs as the largest portfolio segment, gaining $55.1 billion, or 10.2%, in March to $597.1 billion. Repo represents 23.6% of taxable MMF holdings. Treasury Bills & Securities also leapfrogged CDs to move into second place among composition segments. Treasuries increased $30.9 billion, or 6.0%, in March to $545.3 billion (21.5% of assets). This reflects the ongoing shift of Prime funds to Government funds.
CDs (including Eurodollar CDs) fell to third, decreasing $84.0B, or 14.2%, in March to $507.8 billion. (ICI's CD totals likely include Time Deposits, which Crane Data and the SEC categorize as "Other" -- we reported a large decrease in Other/TDs in March.) CDs make up 20.0% of all holdings. U.S. Government Agency Securities stood in fourth place, decreasing $15.6 billion, or 3.3%, to $460.6 billion (18.2% of assets). Commercial Paper remained fifth, increasing $20.9B, or 6.7%, to $334.0 billion (13.2% of assets). Notes (including Corporate and Bank) dropped by $17.8 billion, or 25.3%, to $52.7 billion (2.1% of assets), and Other holdings (including Cash Reserves) stood at $36.1 billion.
The Number of Accounts Outstanding in ICI's series for taxable money funds increased by 309.5 thousand to 23.113 million, while the Number of Funds fell by 1 to 337. Over the past 12 months, the number of accounts fell by 194.3 thousand and the number of funds declined by 26. The Average Maturity of Portfolios was 39 days in March, unchanged from February. Over the past 12 months, WAMs of Taxable money funds have declined by 4 days.
Note: Crane Data also revised its April MFI XLS last week to reflect the latest 3/31/16 composition data and maturity breakouts for our entire fund universe. (Visit our Content Center and the latest Money Fund Portfolio Holdings download page to access our April Money Fund Portfolio Holdings and the latest files.)
In the April issue of our Bond Fund Intelligence newsletter, we profile OppenheimerFunds' Senior Portfolio Managers Chris Proctor and Adam Wilde. They manage the Oppenheimer Ultra-Short Duration Bond Fund, which is celebrating its 5th anniversary this month. Proctor and Wilde discuss the conservative nature of the portfolio and why they think it is well-positioned in a "slow and stable" rising rate environment. They also believe the funds' 5-year track record of stable returns will serve it well. Says Proctor, "Funds that can deliver reasonable income and low volatility, I think, will be the winners in the space." The following is a reprint of the BFI article.
BFI: How long has OppenheimerFunds been running short-term bond funds? Proctor: We entered the picture with the launch of our Ultra-Short Duration Fund in 2011, which came about as a result of the money market fund rule changes. This product is managed here in Denver by our Cash Strategies team. One of the other products our team manages is the Institutional Money Market Fund, which is celebrating its 10th anniversary this year. We have a team of eight people and our average tenure in the industry is 18 years. From a firm standpoint, OppenheimerFunds has been running taxable short-term bond funds for about 30 years -- our Limited Term Bond Fund series launched in the mid-'80s and is run by the Investment Grade team out of New York.
BFI: How long have you been managing bond funds? Proctor: I joined OppenheimerFunds in 2008 and I was named Portfolio Manager in 2010. Overall, I've been in the fixed income and money markets space for 26 years. Wilde: I started with the firm in 2001 in our transfer agency department and after a year there, I [moved to] our fund accounting department. In 2005, I joined the Fixed Income team as a research analyst, and I was named Portfolio Manager in 2013.
BFI: Tell us more about the launch of Ultra-Short? Wilde: The thought behind Ultra-Short was ultimately to give clients choices and options to address near-term cash needs in a changing and evolving environment. One of those clients was our own internal corporate treasury, which we worked with to establish some of the guidelines that surround our Ultra-Short fund. As we mentioned, it launched in 2011 after the 2010 money market fund reforms. The changing regulatory environment was really the [driver] of the fund launch. We saw an opportunity in the area just outside of money market funds in terms of supply and the potential for some yield pick-up. From a yield standpoint, we were hitting that gap just outside of money market funds. In terms of our offerings, it fit nicely between our money funds and our Limited Term products. Further, we wanted to build a stable track record with a variable NAV fund.
BFI: What are the biggest challenges? Proctor: The biggest challenge in this low-for-longer rate environment we've been in, and will likely stay in, is tempering yield expectations. Reaching for yield in this type of product, where you are trying to maintain relatively low volatility has historically been a bad idea. Staying focused on your investment strategy and taking what the market gives you is really smart. Everybody wants more yield, but with more yield comes more risk.
BFI: Who do you see as competitors? Proctor: Our focus in launching the fund was client driven as well as market driven. Then we started thinking: What does the peer group look like? It has a lot of different flavors -- it's a broad peer group. You've got funds that focus on credit that might have below investment grade credit, you've got funds that are all government and mortgages, and you've got funds that might do foreign currency.... But what got this group a stigma the last time around was the extension risk, so we decided to focus on the 1 year and under, and limit the volatility of principal.
Also, we cannot buy any junk. Our average credit quality is single-A, and that's where we try to maintain it. I think the peer group is segmenting. And we have seen the peer group double in size since we launched the fund in 2011. A lot of the new entrants are more of the conservative variety, a group that we think we are part of. We're fast approaching our 5-year anniversary on April 25,, and we have a stable history of low volatility in terms of the NAV on the fund. We're hoping that's attractive to investors in this environment.
BFI: What is your investment strategy? Wilde: It evolved out of the money market fund strategy. So it is more weighted to the short side of the curve, with a maximum duration of 0.75 years. The ultimate goal is to provide liquidity with low volatility. In terms of credit quality, the biggest advantage we think for the Ultra-Short fund is the ability to buy Tier-2 corporate names. Keep in mind, with the downgrades, many of these were names we bought in previous years when they were Tier 1, so they are companies we are familiar with and names we have followed for a long time. The average rating on the portfolio is single A. We can go out a little further on the curve, taking advantage of that "dead space" -- where money funds can't invest and short duration funds don't normally bother with. Another advantage of an Ultra-Short fund that you don't get in a money fund is: we have the ability to hedge some of the risk with futures. This has helped to reduce some of that volatility that we've seen with rates. Currently, we're running the duration of the fund right around 0.38.
BFI: Tell us more about what you buy. Wilde: We do purchase asset-backed securities in the portfolio, and while we have the ability to buy commercial mortgage-backed and mortgage-backed securities, it's something we have not done in the past. The positions we hold in ABS are autos and equipment, and we run that right around 13-15% of the portfolio. We don't have nearly as much in financials as ... the money funds [do]. Opening up into that Tier-2 space ... alleviates the need for a higher concentration in financials. We can't have any more than 2% in any Tier-2 name when it has a triple-B plus rating or lower by S&P. With an A-rating, we can go up to 5%. But we run the Fund with the same internal limit system we do with the money funds, so we are applying this same concept a little further out the curve. The universe of names that we're comfortable with is probably double what the money fund approved list is.
BFI: Have you seen yields go up since the Fed hike? Proctor: Yes <b:>`_. Just like money funds, these types of funds can capture the higher yield before the Fed actually raises -- that's what we saw here with this fund before they raised rates in December. This fund is short enough it was able to go and capture higher yields as the markets started to price in the Fed move. We're not targeting a yield level. But we certainly would be rooting for a Fed increase, as yields would increase similarly to how money fund yields would increase.
BFI: Who are the investors in the fund? Proctor: We currently only have Y and I shares, so those are institutional-type investors. But we do have a couple of other interesting types of clients. The first would be investment portfolios, or other investment plans. They are not using the fund as a volatility reducer. [But] they are looking for low volatility investments, and it's a bonus if it pays a 1% yield versus the alternatives. Also, corporate treasury uses it as part of a cash segmentation strategy, and we're starting to get interest from bigger advisors.
BFI: What is your outlook for the Fed? Wilde: Call is S-squared -- slow and stable rate hikes, hopefully. That's with our fingers crossed. Proctor: This slow grind upward started with the Fed's taper tantrum back in the 4th quarter of 2013. I think the Fed is very happy with that, and that's the trajectory they would love to have. These kinds of funds do well in that kind of environment. We're hoping the Fed delivers on one more hike this year. What we've seen is extreme volatility because of people placing bets on the Fed -- they're on, they're off.... So funds that can deliver with reasonable income and low volatility, I think, will be the winners in the space. We spend a lot of effort looking at the volatility of the securities we're buying and how that impacts the NAV.
BFI: What is the future of Ultra-Shorts? Wilde: With money fund reforms, low yields and bank regulations creating a mismatch in supply and demand, we think Ultra-Short funds have a place going forward. It's going to become more apparent as we approach that October money fund reform deadline that liquidity does have a cost. In order to offset some of that cost, investors of all sorts ... will be more cognizant of their asset allocations within cash. Proctor: The future is bright. This is a relatively small sector but its growing and its continuing to grow. The category has almost doubled and I think that growth rate trajectory should continue. (Contact us if you'd like to see the latest Bond Fund Intelligence or our BFI XLS performance spreadsheet "complement".)
Money fund managers continue to enhance their websites to meet the new disclosure requirements that went into effect on April 14. Goldman Sachs Asset Management posted an update on the changes they've made to comply with the SEC's reforms, and also announced strike times for their funds that will have floating NAVs in October. (For more, see our April 14 News, "Money Fund Disclosure Reforms Go Live; Websites Add MNAVs, DLA, WLA.") We also review recent earnings reports from investment managers, which so far show that fee waivers have declined sharply in the first quarter of 2016. BNY Mellon, T. Rowe Price and Northern Trust all show sharp increases in money fund revenues, following Schwab's earnings jump. (See our April 18 Link of the Day, "Schwab Earnings: MMF Revenues Jump, Shift to Bank Deposits Continues.") Federated also reports earnings this Friday.
Goldman's release, entitled, "Updated Product Line Up and Compliance of April 14, 2016 Regulatory Requirements," provides an overview of the changes to its money fund website, Liquidity Solutions. It reads, "As investors prepare for the upcoming compliance date for changes to the Securities and Exchange Commission (SEC) Rule 2a-7, we are pleased to announce two important milestones. These milestones include compliance with all of the April 14, 2016 regulatory requirements and the announcement of the NAV strike times for our Institutional Money Market Fund (MMF) product line up. We will also be updating the closing times for our tax-exempt funds."
The statement continues, "Building upon recently-launched risk management and analysis tools on the Liquidity Solutions Portal, we are pleased to announce the addition of daily and weekly liquidity percentages and net shareholder flows across the US domestic fund complexes available on the platform. Additional development is well underway to ensure the platform effectively supports Institutional Prime Money Market funds with a floating net asset value (FNAV)."
GSAM explains, "Website Reporting -- Daily reporting to the public website of: Daily and weekly liquid assets plus 6-month historical data; Daily net shareholder inflows/outflows plus 6-month historical data; Market-based NAV per share plus 6-month historical data. Stress Testing – Each MMF is required to test a fund's ability to minimize principal volatility, maintain a stable share price (in stable NAV funds), and maintain weekly liquid assets of at least 10% in response to specified hypothetical events."
They continue, "Diversification – New diversification limits for affiliates and guarantors: Aggregation of certain affiliated entities as single issues subject to the 5% diversification limit; Removal of exception that allows 25% of a fund's portfolio to be subject to guarantees or demand features from a single institution (except for tax-exempt and single state funds, for which the basket is reduced to 15%); Treatment of the sponsors of asset-backed securities as guarantors subject to the 10% diversification limits applicable to guarantees and demand features. Form N-MFP – Additional data fields are required to be reported on existing Form N-MFP which is filed monthly beginning on May 6, 2016. Form PF – Additional data fields are required to be reported on existing Form PF which is filed quarterly beginning on July 15, 2016."
Goldman also set the "strike times" for its FNAV funds. They write, "Over the past 18 months, GSAM has engaged with hundreds of clients regarding the impacts of the changes to Rule 2a-7 and the related operational considerations surrounding floating NAV to better understand what product features and services solutions are most important to our clients. We are pleased to announce following these conversations that we plan to offer Institutional FNAV funds with both single NAV strike times and multiple NAV strike times in order to meet the varied demands of our client base."
The statement adds, "We will offer Institutional NAV funds with the following NAV strike times: Financial Square Prime Obligations: 3 PM ET; Financial Square Money Market: 8AM, 12PM, 3PM ET; Financial Square Tax-Exempt: 2PM ET." We expect that all three portfolios will begin transacting at a FNAV on or around October 1, 2016. We will provide further clarity of the transition date as we get closer to October."
Finally, on their Liquidity Solutions Portal, Goldman writes, "We would also like to inform you that the Liquidity Solutions Portal has completed development of many aspects of the new regulations ahead of the October implementation date. Expanded data points are available along with "traditional" metrics across the 15 US domestic fund complexes on the platform, including daily and weekly liquid assets and the ability to establish customized monitoring thresholds. In addition, the portal is being enhanced to support single and multiple NAV FNAV funds with intra-day pricing and enhanced controls in the event of liquidity fees or redemption gates."
In other news, money fund managers continue to show lower fee waivers in their latest earnings reports. BNY Mellon issued its Q1 earnings release, saying half of its money market fund fee waivers were recovered by the December rate hike. It says, "Total fee revenues were up 1% on a linked-quarter and down 1% on a year-over-year basis. Linked-quarter results mainly reflect improvements in depositary receipts due to higher dividend fees and lower money market fee waivers in investment management, clearing services and corporate trust, offset somewhat by seasonally weaker performance fees and lower investment management fees. Year-over-year results were affected by weaker foreign exchange trading and lower asset management fees due to net outflows, offset somewhat by lease-related gains and lower money market waivers. Management indicated that roughly half of money market fee waivers have been recovered following the Fed's December rate increase."
T. Rowe Price also reported reduced fee waivers in its Q1 earnings, explaining, "Money market advisory fees and other fund expenses voluntarily waived by the firm to maintain positive yields for investors in the first quarter of 2016 were $4.0 million, compared with $13.7 million in the 2015 quarter. The firm expects that it will continue to waive such fees for the remainder of 2016."
Northern Trust too announced its Q1 earnings last week. The Northern release says, "Investment management fees increased $12.7 million, or 17%, primarily due to lower money market mutual fund fee waivers. Money market mutual fund fee waivers in C&IS totaled $1.7 million in the current quarter compared to $15.2 million in the prior-year quarter.... Trust, investment and other servicing fees totaled $748.2 million in the current quarter, up slightly from $747.1 million in the prior quarter, primarily attributable to lower money market mutual fund fee waivers, partially offset by unfavorable impact of equity markets and movements in foreign exchange rates."
Finally, Federated Investors will hold its Q1 2016 earnings call on Friday. Its press release says, "Federated Investors ... will report financial and operating results for the quarter ended March 31, 2016 after the market closes on Thursday, April 28, 2016. A conference call for investors and analysts will be held at 9 a.m. Eastern on Friday, April 29, 2016. President and Chief Executive Officer J. Christopher Donahue and Chief Financial Officer Thomas R. Donahue will host the call.... Investors interested in listening to the conference call should dial 877-407-0782 (domestic) or 201-689-8567 (international) or visit FederatedInvestors.com for real time Internet access. To listen via the Internet, go to the About Federated section of the website at least 15 minutes prior to register and join the call." (Watch for our News coverage of Federated's earnings call on Monday, May 2.)
The Dutch Presidency and a subgroup of the European Parliament's Council on Money Market Funds posted a "Presidency Compromise" draft on European money market reforms, the latest iteration of a long process that could bring changes to money funds domiciled in Ireland, Luxembourg, and France later this year. The text, issued on April 12, includes several key changes to a previous European Parliament proposal, including removing a "sunset clause" on Low Volatility NAV (LVNAV Funds), improved emergency gates and fees options and less onerous diversification requirements. Note, this is just the latest iteration of the reform process, and reforms in Europe are by no means a done deal. They still must go through the full "trilogue" process and will likely be revised further. Passage is uncertain, but this latest edition appears to be somewhat more palatable to MMF providers. We also discuss the latest on European or "International" money fund assets, yields, and portfolio holdings below.
The Council of the European Union's "Presidency Compromise" on Money Market Reform states, "Delegations will find below a Presidency compromise text on the above mentioned Commission proposal. With respect to the Commission's proposal, additions are underlined. The latest changes to the compromise text are denoted by bold underline for additions, and underlined strikethrough for deletions." Below, we highlight some of the changes.
Like some previous versions, the compromise explicitly bans any sponsor support from asset managers. The following text was stricken: "Asset managers, helped by sponsors, may decide to provide discretionary support to maintain the liquidity and the stability of their MMFs. Sponsors are often forced to support their sponsored MMFs when faced with declining value due to the reputational risk and fear that panic could spread into the sponsor's other businesses. Depending on the size of the fund and the extent of redemption pressure, sponsor support may reach proportions that exceed their readily available reserves. Therefore, it is important to provide for a framework of uniform rules in order to prevent the failure of the sponsor and risk contagion to other entities that sponsor MMFs." Later it says, "A MMF shall not receive external support." Language in the former proposal that provided exceptions was crossed out.
The following text, related to Low Volatility MMFs, was added: "It is therefore essential to adopt a uniform set of rules in order to avoid contagion of the short term funding market, which would put at risk the stability of the Union's financial market. In order to mitigate systemic risk, Constant Net Asset Value MMFs (CNAV MMFs) should, 24 months from the date of the entry into force of this Regulation, only operate in the Union as either a CNAV MMF that invests in public debt instruments or as a Low Volatility Net Asset Value MMF (LNAV MMF). Alternatively, existing CNAV MMFs would be able to choose to operate as variable net asset value MMFs (VNAV MMFs)."
The Draft says, "LVNAV MMFs are only allowed to use the amortised costs accounting method for assets with a residual maturity of up to 75 days where the underlying value of that asset does not deviate by more than 10 basis points from the value according to the amortised cost accounting method. CNAV MMFs and LVNAV MMF shall also have in place appropriate monitoring of mechanisms for credit risks and interest rate risks that could affect the difference between the constant NAV per unit or share and the value of its assets on the basis of the marking to market or marking to model methods."
It adds, "Investors should be clearly informed, before they invest in a MMF, if the MMF is of a short-term nature or of a standard nature and whether the MMF is of a CNAV type MMF, a LVNAV MMF or a VNAV MMF.... MMFs may be set up as (a) Variable Net Asset Value (VNAV) MMFs (b) Constant Net Asset Value MMF (CNAV MMF); or (c) Low Volatility Net Asset Value MMF (LVNAV MMF). The authorisation of an MMF shall explicitly state the type of MMF."
They also added some changes related to portfolio diversification. "A MMF shall invest no more than: (a) 5% of its assets in money market instruments issued by the same body, or (b) 10% of its assets in deposits made with the same credit institution. 1a. By way of derogation from point (a) of paragraph 1, a VNAV MMFs may invest up to 10% of its assets in money market instruments issued by the same body under the condition that the total value of the money market instruments held by the VNAV MMF in the issuing bodies in each of which it invests more than 5% of its assets shall not exceed 40% of the value of its assets." Furthermore, it says, "a MMF shall not combine, where this would lead to investment of more than 20% of its assets in a single body, any of the following: (a) investments in money market instruments issued by that body; (b) deposits made with that body; (c) OTC financial derivative instruments giving counterparty risk exposure to that body." The old proposal said 15%.
Also, the following was added: "All MMFs shall publish daily on the public section of their website the NAV per unit or share calculated in accordance with Article 27 and, where applicable, the difference between the constant NAV per unit or share and the NAV per unit or share calculated in accordance with Article 27a and 27b.... [T]he weekly maturing assets in the portfolio of a CNAV MMF or a LVNAV MMF shall constitute at least 30% of the assets of that MMF"
Similar to the U.S. rules, a breach of the 30% liquidity level would gives a board the option to implement: "liquidity fees of up to 2% on redemptions; (b) redemption gates which limit the amount of shares or units to be redeemed on any one dealing day to maximum 10% of the shares or units in the CNAV MMFs or the LVNAV MMF for any period up to 15 dealing days; (c) suspension of redemptions for any period up to 15 days; or (d) take no immediate action other than fulfilling the obligation laid down in Article 21(d) second sentence."
For more on European money fund reforms, see our March 2 News, "IMMFA on European Reforms; MFI Intl Review; European MF Symposium," our "Dec. 2 News, "FT Says Lux Blocking European MF Reforms; MFI Intl Update, Holdings," and our Sept. 23 News, "European Money Fund Symposium: Kooy, Lardner Push Viable Solutions."
European money fund assets domiciled in Dublin and Luxembourg and denominated in USD, Euro and Sterling are up $7.0 billion to $684.0 billion in the latest month (through 3/31) but are down $15.1 billion year-to-date, according to our Money Fund Intelligence International. U.S. Dollar (USD) funds (156) tracked by MFII account for over half ($351.6 billion, or 51.4%) of the total, while Euro (EUR) money funds (98) total just E75.5 billion (11.0%) and Pound Sterling (GBP) funds (108) total L167.4 (25.5%).
USD funds were down $17.0 billion in March and $40.5 billion, or 10.3%, YTD through 3/31. Euro funds were down E1.7 billion for the month and up E100 million YTD, while GBP funds are up L17.1 billion in March and up L16.9 billion YTD. USD MMFs yield 0.29% (7-Day) on average (3/31/16), up from 0.26% on 2/29 and up 13 basis points from 12/31/15. EUR MMFs yield -0.29% on average, down from -0.20% the previous month and down 10 basis points YTD, while GBP MMFs yield 0.41%, up 1 basis point for the month and 4 bps YTD.
European-domiciled US Dollar MMFs, on average, consist of 24.0% in Certificates of Deposit (CDs), 24.0% in Commercial Paper (CP), 24.0% in Treasury securities, 12.0% in Other securities (primarily Time Deposits), 11.0% in Repurchase Agreements (Repo), 3.0% in Government Agency securities, and 2.0% in VRDNs (Variable-Rate Demand Notes). USD funds have on average 28.6% of their portfolios maturing Overnight, 10.4% maturing in 2-7 Days, 20.7% maturing in 8-30 Days, 10.2% maturing in 31-60 Days, 11.0% maturing in 61-90 Days, 15.9% maturing in 91-180 Days, and 3.2% maturing beyond 181 Days. USD holdings are affiliated with the following countries: US (38.3%), France (11.1%), Japan (9.3%), Canada (9.0%), Sweden (6.4%), Germany (4.8%), Netherlands (4.4%), Australia (4.2%), Great Britain (3.6%), and Switzerland (2.1%), according to our latest MFII MF Portfolio Holdings report, with data as of March 31, 2016.
The 20 Largest Issuers to "offshore" USD money funds include: the US Treasury with $102.9 billion (24.4% of total portfolio assets), BNP Paribas with $13.3B (3.2%), Bank of Tokyo-Mitsubishi UFJ Ltd with $11.1B (2.6%), Wells Fargo with $10.1B (2.4%), Bank of Nova Scotia with $9.8B (2.3%), Credit Agricole with $9.4B (2.2%), Svenska Handelsbanken with $9.2B (2.2%), Federal Reserve Bank of New York with $8.8B (2.1%), RBC with $7.7B (1.8%), Sumitomo Mitsui Banking Co with $7.4B (1.8%), HSBC with $6.8B (1.6%), Sumitomo Mitsui Trust Bank Ltd with $6.8B (1.6%), Rabobank with $6.6B (1.6%), Canadian Imperial Bank of Commerce $6.2B (1.5%), Bank of America with $6.2B (1.5%), Natixis with $5.8B (1.4%), JP Morgan with $5.8B (1.4%), Societe Generale with $5.8B (1.4%), Nordea Bank with $5.7B (1.4%), and Bank of Montreal with $5.4B (1.3%).
Euro MMFs tracked by Crane Data contain, on average 29.0% in CDs, 45.0% in CP, 17.0% in Other (primarily Time Deposits), 9.0% in Repo, 2.0% in Agency securities, and 8.0% in Treasury securities. EUR funds have on average 21.1% of their portfolios maturing Overnight, 7.5% maturing in 2-7 Days, 16.5% maturing in 8-30 Days, 14.3% maturing in 31-60 Days, 16.3% maturing in 61-90 Days, 21.2% maturing in 91-180 Days, and 3.2% maturing beyond 181 Days. EUR MMF holdings are affiliated with the following countries: France (33.9%), US (14.0%), Japan (10.8%), Germany (8.5%), Netherlands (7.1%), Sweden (6.7%), Belgium (5.9%), Great Britain (4.3%), Canada (1.8%) <b:>`_, and Switzerland (1.7%).
The 15 Largest Issuers to "offshore" EUR money funds include: Republic of France with E5.4B (7.4%), BNP Paribas with E4.3B (6.0%), Proctor & Gamble with E3.0B (4.2%), Rabobank with E2.8B (3.9%), Societe Generale with E2.8B (3.9%), Credit Mutuel with E2.7B (3.7%), Svenska Handelsbanken with E2.6B (3.6%), BRED Banque Populaire SA with E2.0B (2.8%), Nordea Bank with E2.0B (2.7%), Credit Agricole with E1.9B (2.6%), Mizuho Corporate Bank with E1.9B (2.6%), Sumitomo Matsui Banking Co. with E1.8B (2.5%), Dexia Group with E1.7B (2.4%), JP Morgan with E1.6B (2.2%), Bank of Tokyo-Mitsubishi UFJ Ltd with E1.6B (2.2%), and Kingdom of Belgium with E1.6B (2.2%).
The GBP funds tracked by MFI International contain, on average (as of 3/31/16): 34.0% in CDs, 24.0% in CP, 28.0% in Other (Time Deposits), 8.0% in Repo, 4.0% in Treasury, 1.0% in Agency, and 1.0% in VRDNs. Sterling funds have on average 22.6% of their portfolios maturing Overnight, 6.3% maturing in 2-7 Days, 15.3% maturing in 8-30 Days, 13.2% maturing in 31-60 Days, 16.3% maturing in 61-90 Days, 21.1% maturing in 91-180 Days, and 5.2% maturing beyond 181 Days. GBP MMF holdings are affiliated with the following countries: France (13.4%), Great Britain (13.6%), Japan (12.4%), Germany (9.9%), Australia (9.5%), Netherlands (8.4%), Canada (7.0%), US (7.0%), Sweden (4.8%), and Singapore (3.2%).
The 15 Largest Issuers to "offshore" GBP money funds include: UK Treasury with L7.4B (5.3%), Rabobank with L5.8B (4.2%), Bank of Tokyo-Mitsubishi UFJ Ltd with L5.3B (3.8%), Sumitomo Mitsui Banking Co with L4.4B (3.2%), Erste Abwicklungsanstalt with L4.1B (2.9%), Bank of America with L3.9B (2.8%) <b:>`_, National Australia Bank Ltd with L3.6B (2.6%), Toronto Dominion Bank with L3.5B (2.5%), BNP Paribas with L3.3B (2.4%), Nordea Bank with L3.3B (2.4%), Commonwealth Bank of Australia with L3.2B (2.3%), ING Bank with L3.2B (2.3%), Westpac Banking Co. with L3.0B (2.2%), and DZ Bank AG with L3.0B (2.2%). (E-mail us at info@cranedata.com to request a copy of our latest MFI International or MFII Portfolio Holdings. Note too that Crane Data will host its 4th Annual European Money Fund Symposium on Sept. 20-21, 2016 at the London Tower Bridge Hilton.)
In the April edition of our Money Fund Intelligence, we profile Tory Hazard, President and COO of Institutional Cash Distributors. Hazard talks about the growth of ICD, which has expanded beyond money funds to include short-term bond funds, SMAs, private funds, and bank deposit products. He says, "Institutional Prime money funds are still going to be a very important part of the portfolios." Hazard also discusses enhancements to the ICD Portal slated to debut next week to help investors deal with upcoming reforms. He says, "We're extremely excited about 2016 and beyond." (We reprint the MFI article below. For more on ICD's enhancements, see our April 15 News, "Treasury Strategies, Fitch on New Disclosure; ICD Adds Enhancements," or see ICD's press release.")
MFI: Tell us about ICD's history. Hazard: Institutional Cash Distributors, or ICD, was launched in 2003 by Tom Newton (Chairman), Jeff Jellison (CEO, NA), and Ed Baldry (CEO, EMEA). I joined the company in 2009 and currently serve as President and COO. MFI: How much do you distribute? Hazard: We have over $70 billion in assets in the U.S., and about $8 billion offshore. We have approximately 35 fund families on the portal and about 300 funds. That includes money funds, as well as other types of portfolios. When we saw that changes were [proposed] with money fund reform, we were very active in fighting against onerous over-regulation. We were happy when the rules finally came out [that] they included the simplified tax accounting method. That was, as we saw it, the biggest challenge that was going to face prime money market funds. With that [solved], Institutional Prime money market funds are still going to be a very important part of the portfolios.
MFI: What is your best feature? Hazard: For us, the main attraction is the selection of products. Not only do we have all different types of money market funds in one place for efficient trading, we also offer other funds for clients. We have a federally insured cash account -- several clients are invested in that. You can invest [via] the portal and it flows all the way through to our reporting and our "Transparency Plus." Also, we have several clients that are invested in short duration bond funds that are looking to pick up a little yield, especially in Europe, to offset the [negative yields] that they've been [experiencing]. And we have clients that are invested in SMAs through ICD and, again, those positions are put into the Transparency Plus risk analytics.
Then, through our relationship with Tradeweb, you can purchase Time Deposits through [their] platform, and that is integrated into ICD. So selection is a big part of it. We knew that our clients wanted additional products, so that's what we were focused on over the last year and a half. We're also focused on providing the best VNAV solutions. We'll be able to show throughout the portal various ways to use the new information that is being reported so that our clients can make great decisions -- not only on the right products to purchase, but to do so in a way that is efficient and streamlined for them.
MFI: What are some other attractions? Hazard: A second major benefit would be the streamlined nature of how ICD delivers its product. More than 100 of our clients have integration into 10 different treasury workstation [platforms] -- so we work with all the relevant treasury workstations. We also have "auto-pay" technology, which is helpful in some situations with the settlement. If certain parties need that money quicker, the secure automated payment product is available to them to help streamline that process. The other major benefit is our service. We put together a global trading desk. We have desks that operate in London, Boston, and San Francisco.... So it's been a combination of the service we provide, the products we provide -- the technology products as well as the investment products -- and the integration. Also, we have great relationships with our fund companies.
MFI: Are customers ready for reform? Hazard: Ninety five percent of our clients have not made any changes to their lineups. Just a small portion of them have started to make some moves from prime funds into other products, such as these federally insured accounts or government accounts. It's just the uncertainty, I think, that's causing a small amount of them to do that. We've been going on road shows and meeting with clients in various parts of the country.... What we've found is, when they understand the fees and the gates and look at the value of different investment types versus their objectives, they're finding that Prime funds are still at the top of the list. Say it's a 15 basis point [spread] between Government and Prime funds -- in a billion dollar portfolio would leave over $1 million a year on the table.... They also realize that the fund managers are really, for their own viability, going to manage the assets to keep their weekly liquidity well above that 30%. They know that if they are in a position where they need to impose a fee or a gate, they're going to have a lot of trouble competing with the funds that don't.
MFI: Have higher yields restored fees? Hazard: Absolutely. The interest rate hike has helped to restore our margins closer to where we used to be. It's a welcome relief for us, because what we've done over the last several years is we have invested an enormous amount of money in our technology. In doing so, we made the bet that at some point, we would restore fees back to the normal profit margins, and it's been moving in that direction.
MFI: Are investors getting "re-sensitized" to yield? Hazard: If you look at the AFP Liquidity Survey, capital preservation is still the number one goal, with liquidity being number two. Yield is a distant third. But I think yield is a consideration for clients if they can put a portfolio together that has capital preservation and liquidity in mind. If they look at their analytics and their concentrations, there are ways for clients to put portfolios together that will increase yield while reducing risk. We're seeing that happen a lot more. They're looking at how they can optimize their portfolio, which is something that we haven't seen in a long time.
MFI: Tell us about your global investors. Hazard: We offer funds in 8 different currencies for our clients. Some are overseas for strategic reasons and some are overseas because of American tax policy. Each country has its own complexities. In Europe, where banks and money funds have negative yields, we see a lot of clients investing in short duration bond funds to get an overall positive return.
MFI: Are you looking to expand your offerings? Hazard: Absolutely. We have about 20 short duration bond funds on our platform, globally. The way that we've always built out our fund lineup is, if a client requests a particular product or fund, we will go to that fund company and set them up on our platform. We're doing that right now with some of the private funds that are coming on our platform. MFI: Any private funds live on the platform yet? Hazard: Yes.
MFI: What is your outlook for the rest of the year? Hazard: We're extremely excited about 2016 and beyond. We have been working to prepare for this [for some] time. We're getting a little bit of a break on interest rates. Our product lineup is extremely extensive, and we have the VNAV solutions that should lead the industry.... On April 14, we [did] a webinar where we ... showcase[d] the VNAV enhancements to the portal. We're also doing a road show, and we're going to publish a white paper that's going to discuss not only the challenges but the solutions to how corporate treasury is going to trade in this post-regulatory environment.
MFI: How are clients feeling? Are they adjusting to the new reality? Hazard: They actually have become less apprehensive the more they see. We had a road show in Los Angeles last week, [where] we unveiled a lot of the new features that we're including on ICD Portal to help them trade in this new environment. Once they saw the various types of information that they'll be receiving in various different views, they have gotten a lot more comfortable with the October reform requirements and time frame. We've been talking with our clients from the beginning and getting their input on these money market fund reform enhancements in the portal. So they've seen the development over the course of the last six months and we've shared the results with some of our clients. (Contact us to request the full interview in the latest issue of Money Fund Intelligence.)
The U.S. Securities & Exchange Commission released its latest "Money Market Fund Statistics" and the Investment Company Institute published its weekly "Money Market Fund Assets" yesterday. The SEC's report confirmed that assets fell (led by a sharp drop in Prime MMFs) and yields continued to rise in March, while the ICI's latest update shows money fund assets plunging in the latest week, which included the April 15 (or 18 this year) tax date. The SEC's Division of Investment Management summarizes monthly Form N-MFP data and includes asset totals and averages for yields, liquidity levels, WAMs, WALs, holdings, and other money market fund trends. (Note that the SEC had been releasing the full Form N-MFP data to the public with a 2-month lag, but this lag was removed last week after the "Additional Disclosures" segment of the SEC's 2014 MMF Reforms went into effect. See our April 14 News, "Money Fund Disclosure Reforms Go Live; Websites Add MNAVs, DLA, WLA.")
The SEC's latest statistics show total money market fund assets dropped by $50.1 billion in March to $3.072 trillion. Assets rose $58.5 billion in February, fell $21.4 billion in January, rose $6.0 billion in December, fell $6.6 billion in November, and rose $62.3 billion in October, according to the SEC's broad total. (This series includes some private and internal funds not reported to ICI, Crane Data or other reporting agencies.) Year-to-date, total assets are down $13.0 billion through 3/31.
Of the $3.072 trillion in assets, $1.518 trillion was in Prime funds, down $68.5 billion in March. Prime funds now represent 49.4% of total assets, the first time they've dropped below 50% in the 2 years the SEC's been publishing these numbers. (Note that Prime funds still are larger than Govt MMFs in the SEC's series, which includes private and internal funds.) Government & Treasury funds total $1.312 trillion, or 42.7% of assets, up $24.4 billion in March. Tax Exempt Funds were down again, dropping $6.0 billion to $242.5 billion, or 7.9% of all assets. The number of money funds was 490, down 6 for the month and down 52 for the year.
Yields continued to rise in March. The Weighted Average Gross 7-Day Yield for Prime Funds on March 31 was 0.55%, up 0.02% from the previous month and more than double the 0.27% of Nov. 2015. Gross yields were 0.39% for Government/Treasury funds, up 0.02% from last month and up 0.24% from 11/15. Tax Exempt Weighted Gross Yields rose from the dead, jumping 25 bps to 0.33%. The Weighted Average Net Prime Yield was 0.33%, up 1 basis point from the month before and up 0.22% since 11/15. For the year-to-date, 7-day gross yields are up 14 basis points and net yields are up 11 basis points. The Weighted Average Prime Expense Ratio was 0.21% (the same as the previous month). Prime expense ratios have risen from 0.16% in Nov. 2015 to 0.21% currently.
Maturities continued to inch lower and liquidity continued to inch higher in March. The average Weighted Average Life, or WAL, was 55.5 days (down 3.0 days from last month) for Prime funds, 95.5 days (up 2.9 days) for Government/Treasury funds, and 27.4 days (up 1.0 day) for Tax Exempt funds. The Weighted Average Maturity, or WAM, was 35.1 days (down 0.1 days from the previous month) for Prime funds, 41.9 days (up 0.4 days) for Govt/Treasury funds, and 23.4 days (down 0.4 days) for Tax-Exempt funds. Total Daily Liquidity for Prime funds was 31.0% in March (up 0.3% from last month). Total Weekly Liquidity was 44.7% (up 1.7%).
In the SEC's "Prime MMF Holdings of Bank Related Securities by Country" table, the United States topped the list with $176.3 billion, followed by Canada with $165.5 billion and Japan with $163.3 billion. France was fourth with $132.4 billion, followed by Sweden ($91.6B), Australia/New Zealand ($69.0B), UK ($63.8B), and Germany ($50.4B). The Netherlands ($49.8B) and Switzerland ($41.7B) round out the top 10. The biggest gainers among Prime MMF bank related securities for the month were Japan (up $7.1B), Germany (up $3.8B), Other (up $1.3B), China (up $1.3B), and Spain (up $81M). The biggest drops came from France (down $57.8B), Norway (down $30.1B), Sweden (down $20.9B), Canada (down $16.3B), and the US (down $14.6). For Prime MMF Holdings of Bank-Related Securities by Major Region, Europe had $454.7 billion (down from $584.9B from last month), while its subset, the Eurozone, had $242.3 billion (down from $304.9B). The Americas had $344.0 billion (up from $374.9B), while Asia and Pacific had $257.9 billion (down from $262.1B).
Of the $1.505 trillion in Prime MMF Portfolios as of March 31, $470.1B (31.2%) was in CDs (down from $509.3B), $409.5B (27.2%) was in Government (including direct and repo) (down from $338.5B), $301.9B (20.1%) was held in Non-Financial CP and Other Short Term Securities (down from $413.8B), $223.8B (14.9%) was in Financial Company CP (down from $229.7B), and $99.4B (6.6%) was in ABCP (down from $99.4B). Also, the Proportion of Non-Government Securities in All Taxable Funds was 39.0% at month-end, down from 43.5% the previous month. All MMF Repo with Federal Reserve was $257.1 billion on March 31, up from $79.4B. Finally, the "Trend in Longer Maturity Securities in Prime MMFs" tables shows 37.2% were in maturities of 60 days and over (down from 37.6%), while 4.6% were in maturities of 180 days and over (down from 4.7%).
ICI's MMF Assets release says, "Total money market fund assets decreased by $32.85 billion to $2.70 trillion for the week ended Wednesday, April 20, the Investment Company Institute reported today. Among taxable money market funds, government funds decreased by $11.22 billion and prime funds decreased by $19.13 billion. Tax-exempt money market funds decreased by $2.51 billion." (Last year, ICI showed assets falling $38.6 billion the week ended April 15, and $35.1 billion the prior year.)
It explains, "Assets of retail money market funds decreased by $4.21 billion to $984.66 billion. Among retail funds, government money market fund assets increased by $780 million to $382.62 billion, prime money market fund assets decreased by $2.99 billion to $431.76 billion, and tax-exempt fund assets decreased by $2.00 billion to $170.27 billion. Assets of institutional money market funds decreased by $28.64 billion to $1.71 trillion. Among institutional funds, government money market fund assets decreased by $12.00 billion to $894.16 billion, prime money market fund assets decreased by $16.13 billion to $770.00 billion, and tax-exempt fund assets decreased by $510 million to $49.43 billion."
Finally, ICI adds in a Note, "In anticipation of the Securities and Exchange Commission's (SEC) new money market fund regulations, many advisers are changing their prime money market funds into government money market funds. As a result, there have been, and will continue to be, large shifts in assets from prime funds to government funds before the October 2016 deadline."
State Street Global Advisors released a new white paper and a revamped set of papers into a 51-page document entitled, "Yielding to a New Regulatory Reality." They write, "Previously, we've shared our perspectives on the new, post-crisis banking regulations and their impact on cash management. To help you prepare for upcoming implementation deadlines, our series of whitepapers now includes "What Liquidity Means Now." This latest read drills deeper into how regulators have redefined the concept -- and how markets and managers can adapt. This joins our six-part series ... recently abridged and redesigned to help you more quickly and easily review the new regulations and get actionable ideas for reassessing your cash investments."
SSGA continues, "Individual paper links are below: `No More Bank Bailouts: What New Banking Regs Mean for Money Mkt Investors, Capital: Pillar I of Post-Crisis Bank Regs, Liquidity & Funding: Pillar II of Post-Crisis Bank Regs, Resolution Planning: Pillar III of Post-Crisis Bank Regs, What Liquidity Means Now, and Meeting the Challenges: 6 Strategies for the New World of Cash. For deeper background, check out the whitepaper that sets the stage for the series: New World of Cash."
The compendium says, "Post-Global Financial Crisis regulations order banks to boost capital, liquidity and funding duration. This imposes a tug-of-war between regulatory compliance and banks' longstanding business model of borrowing short and lending long. Money market portfolio managers face a similar conundrum, with mandates requiring them to hold very short-term, high-quality liquid investments that are in scarce supply due to the new banking rules. The enclosed white papers will help you understand the implications and how to navigate them as you optimize your portfolio for 2016."
SSGA's latest addition, "What Liquidity Means Now," tells us, "The previous paper in this series, Pillar III of Post-Crisis Banking Regulations: Resolution Planning, summed up the net effects the new regulations enacted under these pillars are likely to have on the short-term fixed-income markets. They include low yields on money market securities and the funds that hold them; potential opportunities in nongovernment debt; greater competition for retail and small business deposits; reduced market liquidity, with an accompanying rise in transaction costs; and the likely development of new, innovative cash products that may contain unappreciated risks."
It explains, "The new regulatory regime also has changed the very meaning of liquidity in the short-term markets. There was a time when "liquidity" essentially meant the same thing to all market participants. It referred to the ease and quickness of issuing (from the suppliers' perspective) or selling (from the buyers' side) a particular instrument. Today, that is no longer the case. Regulators seeking to forestall a recurrence of the global financial crisis have imposed new restrictions and requirement throughout the system, with the goal of ensuring liquidity in any market environment.... The system as a whole is undeniably safer as a result, but -- regardless of where you interact with markets today -- the flow can look very different than it once did."
State Street writes, "Prior to 2008, money market fund (MMF) managers determined themselves the amount of liquidity required to meet shareholder redemptions. Typically, a retail money market fund would hold five to 10 percent in one-day (overnight) maturities, and would not pay much attention to seven-day liquidity. Today, the SEC's rule 2a-7 mandates 10 percent one-day liquidity and 30 percent seven-day liquidity for all funds. As a result, fund managers now use this level as a floor and hold an additional buffer on top of it to ensure they meet requirements."
They add, "The regulations appear to be succeeding at making the financial markets healthier. Yet they result in a severe mismatch between supply and demand. Money funds want and need more short-term assets. Yet banks are forced by regulations to issue less of their own short-term debt— including the reverse repurchase agreements that made up much of the overnight market -- and to hoard government paper. The drop-off in supply pushes down yields on government and many kinds of corporate debt, making it difficult for investors to generate income from their cash. Investors looking to secure higher yields have to accept somewhat higher volatility or lower liquidity than they have been accustomed to from cash holdings."
The paper also says, "Investors are widely anticipated to shift out of money market prime funds and into money market government funds during 2016. A widening of the spread between the prime and government money market fund yields will follow as the reduced demand for credit debt causes those yields to rise. This will provide a good opportunity for prime money market fund managers, who will now have the chance to be more choosy and to push back on offerings that look too expensive. We have had many conversations with our clients that lead us to believe that, for some, there will be a spread that will entice them to stay in an institutional prime fund and accept the variable NAV and potential for redemption gates and fees imposed by money market fund reform."
It tells us, "Many changes will come to the short-term fixed income market over the near term. Because portfolio managers now equate liquidity with maturity, money market funds will continue to hold more very-short-term securities than they have historically. If the 30 percent weekly fund liquidity requirement is the new minimum, then portfolio managers are likely to run money market funds with significant liquidity buffers above that level. Broker/dealers will continue to extend maturities and re-shape the face of short-term investing by making today's compressed issuance and decreased inventory the new standard. And regulators will maintain their focus on all participants in the short end of the curve, continuing to drill down on risk measures and introducing new measures as the market evolves."
Finally, SSGA comments, "But as history has shown, the market and its participants will evolve to find new solutions and products to work in the new world of cash. We are already seeing new investment options and fund structures. Clients remain open to ideas to solve their investment needs, while portfolio managers are eager to explore new opportunities and structures to find ways to best serve their clients' objectives."
Vanguard released a new white paper entitled, "Post–money market reform: Considering trade-offs between short bond funds and institutional prime money market funds," which examines the risks and rewards of money market funds vs. ultra-short term bond funds. Authors Kevin DiCiurcio and Lucy Momjian with Vanguard Research write, "U.S. institutional investors are increasingly considering the trade-offs between money market funds and short-term bond vehicles for the management of their liquidity reserves.... This paper evaluates these trade-offs by integrating both a historical return analysis and forward-looking simulations using the Vanguard Capital Markets Model."
It finds, "Although noting both the historical outperformance and the forecast higher expected returns of ultra-short- and short-term bond funds versus money market funds, our analysis suggests that investors who accept the additional interest rate and credit risk materially increase their probability of loss of principal. We furthermore observe that moving from a money market fund to an actively managed ultra-short- or short-term bond fund increases manager uncertainty due to the broader opportunity set of investments."
The paper explains, "U.S. Securities and Exchange Commission rulings set to take effect in October 2016 will require floating net asset values (NAVs) on institutional prime money market funds, in addition to potential fees and other restrictions on investors to help ensure the funds' liquidity. Investors in institutional prime money market funds who desire a certain level of principal protection because of short-term spending needs or liability obligations have a range of short-maturity, pooled fixed income options to consider. They can remain in their current investment vehicles; they can switch to government money market funds, which will not be subject to floating NAVs or potential fees and restrictions; or they can invest in either ultra-short- or short-term bond funds or securities as substitutes for their liquidity needs. Choosing among these options is nuanced and requires consideration of trade-offs among risks to preservation of capital, liquidity, and yield."
It continues, "Given the prospect of higher yields that short-term bond funds might offer and their potentially increased flexibility, the small increase in fund duration may seem worth the risk. Based on both customized and industry indexes used for this study's analysis, we observed 60 and 140 basis points in respective yield advantages on average historically, for ultra-short and short-term credit investments relative to prime money market options. However, moving from a tightly regulated money market fund to a short-term bond fund that is often actively managed presents key risk-return trade-offs that should be evaluated. This paper aims to help investors better understand these trade-offs, so that they can determine whether ultra-short- and short-term bonds may be appropriate for their liquidity pool of assets."
Vanguard explains, "Fixed income investors are compensated for bearing three primary types of risks -- duration or term risk, credit risk, and risk from negative convexity. More specifically: Term premium is the compensation required for bearing the risk that interest rates do not evolve as expected; credit bonds are issued at a positive yield spread over comparable-maturity U.S. Treasury bonds to compensate investors for possible default; and callable bonds and those with prepayment risk are characterized as having a negatively convex price and yield relationship (i.e., duration may extend [or shorten] as interest rates rise [or fall], causing underperformance) for which investors also require compensation. Although investors can expect to earn additional yield for bearing these risks, exposure to them also creates additional return volatility in the portfolio. Money market funds and conservative ultrashort- and short-term bond portfolios are generally exposed to interest rate and credit risk."
Furthermore, they write, "When reviewing return behavior with respect to interest rate exposure since the financial crisis, returns of both the prime money market index and the ultra-short index have been anchored near zero. The tight performance is due partly to the fact that the U.S. Federal Reserve has kept the target federal funds rate at extremely low levels since late 2008, and only began the move to "normalize" interest rate policy in mid-December 2015. [T]he federal funds rate level has explained 75% of the variation in money market duration-matched Treasury bond returns. By comparison, the federal funds rate level has explained 60% of the variation in ultra-short bond duration-matched Treasury returns and only 19% of the variation in short-term credit returns. The Fed's move to begin policy normalization from the zero lower- bound level will likely mean that the behavior of the ultra-short-term bond index return as a result of interest rate exposure will revert to its pre-global financial crisis volatility."
Vanguard's paper continues, "In addition to differences in market risk that may result from moving to ultra-short-term or short-term bond funds from money market funds, implementation risk may also increase in the form of manager uncertainty. Although money market funds will remain tightly regulated by the SEC, and have a much more limited investment opportunity set than other investment options discussed here, the U.S. ultra-short and short-term bond fund opportunity set is derived from the more heterogeneous capital markets, spanning longer terms and crossing various credit sectors."
It says, "As such, managers have much more discretion in terms of yield curve positioning and credit risk-taking, and may also consider the negative-convexity risk premium, which is typically obtained through purchases of U.S. agency and non-agency residential mortgage-backed securities. Although most ultra-short-term bond funds have durations of about 1 year, and the duration of most short-term funds is between 2 and 3 years, variation in portfolio positioning relative to the yield curve and credit risk may be obscured by looking at the "duration" metric alone. As a result ... there is wider dispersion of returns among the cross-section of managers, which suggests greater manager uncertainty when selecting an active manager."
Finally, Vanguard concludes, "The possible liquidity and accounting implications of expected money market reform have led investors to evaluate ultra-short-term and short-term bond funds as substitutes for their cash management needs. As this paper has demonstrated, the decision to extend investment duration in this manner requires an understanding of the risk-return trade-offs. Although history suggests higher expected returns as investors add duration and credit risk to a bond portfolio -- a contention that is also supported by forward-looking simulations from the Vanguard Capital Markets Model -- we see the additional risk as two-fold: first, greater risk to principal protection from the longer duration interest rate and credit exposure and, second, risk from manager uncertainty. Given the ongoing low interest rate environment, we would expect a material increase in the probability for principal loss, while investor selection of active management in longer-term capital markets could lead to wider dispersion in return outcomes compared with those of money market managers."
BlackRock completed its merger with the BofA Funds yesterday, officially becoming the second largest money fund manager with over $266 billion in US MMFs and $370 billion in money funds globally. A press release entitled, "BlackRock Closes Transaction to Transfer $80 billion of Client Assets from BofA Global Capital Management," explains, "BlackRock and Bank of America's asset management business, BofA Global Capital Management, have completed a transaction transferring investment management responsibilities of approximately $80 billion of AUM currently managed by BofA Global Capital Management to BlackRock. The assets of five taxable money market funds, a U.S. dollar offshore fund, a private fund and customized separate account strategies were transferred to BlackRock through this transaction."
The release says, "The combined platform of over $370 billion in assets under management will enable BlackRock and legacy-BofA Global Capital Management clients' broader access to high quality, global liquidity investment solutions. BlackRock will continue to enjoy a strong distribution partnership with Bank of America and will have expanded access to several broad distribution channels." (For more, see Crane Data's previous News stories: "Prudential Core MMF Goes Bond; BlackRock, BofA Approved; Calamos (4/4/16), "BofA Details Fund Mergers Into BlackRock MMFs; WSJ on Big Retail MMFs" (2/12/16), and "BlackRock Taking Over BofA MMFs in One of Biggest Acquisitions Ever" (11/10/15).)
Tom Callahan, BlackRock's Head of global cash management, comments, "This transaction shows our commitment to delivering outstanding liquidity solutions to our clients at a time of tremendous change in the cash management industry. By expanding our partnership with Bank of America, this transaction allows us to grow our global scale, enhance our extensive product offering and best in class risk management capabilities to serve a new universe of clients."
Michael Pelzar, President of BofA Global Capital Management (who will stay on with Bank of America in another capacity), says, "BlackRock is a best-in-class liquidity solutions provider with a demonstrated ability to deliver on clients' needs for liquidity and yield.... Our selection of BlackRock was made after careful consideration of our clients' needs, our long-standing relationship with BlackRock, and their demonstrated ability to provide a comprehensive range of global liquidity management solutions."
The statement adds, "The transaction was approved by both BlackRock and BofA fund boards, BofA fund shareholders and certain regulators. The financial impact of the transaction is not material to BlackRock earnings. Terms were not disclosed." Note: The BofA Funds will be removed from our Money Fund Intelligence Daily tomorrow, and from our monthly MFI XLS in the May issue. Watch for big asset increases in the BlackRock Liquidity funds as the BofA assets are absorbed.
A statement to shareholders, entitled, "BlackRock Cash Management Platform Expands," written by Callahan and BlackRock Cash Management MD and Chairman Rich Hoerner, says, "We are pleased to announce that we have completed our transaction with Bank of America's asset management business, BofA Global Capital Management, in which the investment management responsibilities of approximately $80 billion in short term liquidity assets were transferred to BlackRock. Five taxable money market funds reorganized into BlackRock money market funds, and a U.S. Dollar offshore fund, a private fund and customized separate account strategies were transitioned to BlackRock over this past weekend."
It adds, "We enthusiastically welcome our new clients joining from BofA Global Capital Management and thank our existing clients for your ongoing partnership. We believe that this transaction has made us stronger, with the additional scale an important component to a strong and successful liquidity investment platform."
Finally, BlackRock's letter says, "At a time of tremendous change for the cash management industry, our goal is to continue to seek to provide outstanding liquidity investment solutions and excellent client service to you. In this rapidly changing environment, we strive to be the partner that helps you understand these changes, gives you a fresh look at options available and introduces new and differentiated solutions in a historically homogeneous investment space. Thank you for the privilege of serving you. If we can be of any assistance, please do not hesitate to contact us."
To recap the US MMF changes: BofA Cash Reserves and BofA Money Market Reserves merged into BlackRock TempFund; BofA Government Plus Reserves merged into BlackRock FedFund; BofA Government Reserves merged into into BlackRock Federal Trust Fund; and, BofA Treasury Reserves merged into BlackRock T-Fund. BofA funds' Tax Exempt MMFs weren't integrated into the BlackRock platform and were liquidated earlier this month.
The National Association of Insurance Commissioners (NAIC), which supports state insurance regulators, will eliminate its Class 1 money fund classification on October 1 due to the pending floating NAV for Prime Institutional money funds. The determination was made by the NAIC's Valuation of Securities (VOS) Task Force meeting on April 4. The NAIC's Class 1 List contains a number of Prime Institutional funds from a variety of the largest money market fund providers, and Crane Data estimates that the move could cause as much as $25 billion to shift away from Prime Inst MMFs. One of the NAIC's requirements for Prime 1 status is a "Stable NAV," and their new interpretation that these Prime funds can no longer be on the Class 1 list will reduce their attractiveness as investments to insurance companies. The NAIC's U.S. Direct Obligations/Full Faith and Credit Exempt List is not affected as this includes Government funds, so these funds will still be available to insurance investors.
The VOS Task Force memorandum, entitled, "Amendment to the Purposes and Procedures Manual to Delete References to the Class 1 (Money Market Fund) List," explains, "Effective October 14, 2016, under regulations recently adopted by the US Securities and Exchange Commission (SEC), institutional prime money market funds are required to report a floating net asset value (NAV) instead of a stable net asset value (NAV). Part Six, Section 2 (b) (ii) of the Purposes and Procedures Manual of the NAIC Investment Analysis Office (P&P Manual) contains the NAIC's Class 1 List, which identifies money market funds that can be reported as bonds by insurers in part because they are permitted to report stable NAV under SEC regulations."
It continues, "The money market funds on the Class 1 List fit the SEC definition of institutional prime funds, which means such money market funds can no longer report stable NAV and accordingly will no longer be eligible for bond treatment. During the 2015 Fall National Meeting, the SVO was instructed to: (a) renew the Class 1 List for January 2016; (b) but to provide for the expiration of the Class 1 List effective September 30, 2016; and, (c) to prepare an amendment to delete instructions from the Purposes and Procedures Manual related to the Class 1 List for adoption with an effective date of September 30, 2016. The proposed amendment appears below. A referral to the Statutory Accounting Principles (E) Working Group is not necessary because FRS is aware of the planned deletion of the Class 1 List text will prepare a Form A to modify statutory accounting and reporting guidance."
A footnote explains, "A money market fund is eligible for listing on the Class 1 List if the fund meets the following conditions: (A) The fund maintains a rating of Am or better from Standard and Poor's or a rating of A-mf or better from Moody's Investors Service or an equivalent or better rating from another NAIC CRP. (B) The fund maintains a stable net asset value per share of $1.00 at all times. (C) The fund allows a maximum of seven-day redemption of proceeds. (D) The fund invests at least ninety-seven percent (97%) of its total assets in any combination of: the U.S. Government securities listed in Section 2 (e) of this Part below, securities rated in the highest short-term rating category by an NAIC CRP, unrated securities determined by the fund's Board to be of comparable quality, securities of money market funds that are registered investment companies and collateralized repurchase agreements comprised of such obligations at all times. The remaining three percent (3%) may be invested in Second Tier Securities as that phrase is defined by Rule 2a-7 of the Investment Company Act of 1940 (17 CFR 270.2a-7)."
It continues, "A money market fund eligible for the Class 1 List fits the SEC definition of an institutional prime fund: SEC (institutional prime): "... hold a variety of taxable short-term obligations issued by corporations and banks, as well as repurchase agreements and asset-backed commercial paper and require a high minimum investment. NAIC (Class 1): "... invests at least 97% of its total assets in any combination of: ... U.S. Government securities ... securities rated in the highest short - term rating category ..., unrated securities determined ... to be of comparable quality, securities of ... registered investment companies and collateralized repurchase agreements comprised of such obligations at all times and the remaining 3% in Second Tier Securities ..." (Emphasis added). SEC (government fund): "... invests at least 99.5 percent or more of its total assets in cash, government securities and/or repurchase agreements collateralized solely by cash of government securities. The new SEC regulations also affect other characteristics required under the P&P such as redemptions but the more salient one is the P&P requirement for stable NAV because this is more closely related to the bond construct."
The Amendment, as stated in the introduction, deletes all references to the Class 1 list, and those deletions can be seen on the PDF link. The amended version, minus the Class 1 List, states, "The SVO maintains a money market fund and a list of bond mutual funds. Investments in these funds by reporting insurance companies are eligible for more favorable reserve treatment than funds not so listed, as noted above. These lists are published on a quarterly basis. Money market funds that meet certain criteria for exemption from NAIC reserve requirements may be listed on the U.S. Direct Obligations/Full Faith and Credit Exempt List."
Finally, the NAIC writes, "Bond mutual funds that meet certain criteria may be listed on the bond mutual fund list (Bond List) and insurance companies that own these bond mutual funds are permitted to maintain a reserve using the more favorable bond reserve factor." It continues, "Any money market fund wishing to establish that it meets the conditions for listing on the U.S. Direct Obligations/Full Faith and Credit Exempt List and any bond mutual fund wishing to establish that it meets the conditions for listing on the Bond List, must submit a completed submission package to the SVO with the following documentation: (A) The appropriate money market or bond mutual fund application form; (B) Authorization letter requesting review of the fund for approved list purposes; (C) Prospectus of the fund; (D) Statement of Additional Information (SAI); (E) Most recent annual report of the fund, and, if more recent, the latest semi-annual report; and (F) Rating letter from an NAIC CRP dated in the year of the filing."
Crane Data's Money Fund Intelligence XLS tracks whether money funds are NAIC approved or not, so we'll modify these once the NAIC changes go live. A rough count shows that over 400 funds (including share classes) are `NAIC "approved". What is the potential impact of this change? We estimate the impact on Prime assets to be about $25 billion. The Federal Reserve's Z.1, or "Flow of Funds," data shows that Property-Casualty and Life Insurance companies combined hold about $47 billion in money fund assets. We'd guess that about half of this is held in Prime assets and would be impacted. (See our March 14 News, "Fed Z1: Household Assets Retake 1.0 Tril; March Bond Fund Intelligence.") Finally, we asked the NAIC for more details and comment but received no response.
In other news, American Funds, which converted its $15.8 billion American Funds MMF into the American Funds US Govt MMF on April 1, put out a release, entitled, "Money Market Reform Affects Two American Funds." It discusses this major conversion as well as that of the American Funds Insurance Series Cash Management Fund into an Ultra-Short Bond Fund. The statement says, "In July 2014, the SEC adopted amendments that impose new requirements on money market mutual funds. The new rules are designed to address concerns that money market funds may contribute to financial instability during periods of market stress. The most significant changes become effective on October 14, 2016.... The amendments will impact American Funds Money Market Fund and American Funds Insurance Series - Cash Management Fund."
It continues, "The amended rules provide exemption from the floating NAV requirement for U.S. government money market funds. Since American Funds Money Market Fund already invests primarily in U.S. government securities, we have refined the fund's investment guidelines to ensure the fund is deemed a government money market fund under the amended rules. In connection with this change, the fund's name has changed to American Funds U.S. Government Money Market Fund, and the fund is required to invest at least 99.5% of its assets in qualifying government securities. As a result of these adjustments to the fund's name and investment requirements, the fund is exempt from the amended rules and will continue to price and transact at a stable NAV with minimal impact to its investment strategy. These changes are effective as of April 1, 2016."
Regarding the American Funds Insurance Series, it states, "On December 4, 2015, shareholders of the Cash Management Fund formally approved a proposal to convert the fund to an ultra-short bond fund. Given the fund already has a floating net asset value per share, the conversion is intended to streamline administration of the fund, to efficiently manage costs for the fund over the long term and to better position the fund to achieve superior long-term investment results for the benefit of its shareholders. The fund's investment objective will remain substantially unchanged and the fund will continue to provide investors with current income and preservation of capital and liquidity consistent with the maturity and quality standards applicable to the fund. The fund will continue to have an NAV that fluctuates." (See also our April 4 News, "Prudential Core MMF Goes Bond; BlackRock, BofA Approved; Calamos.")
The Capital Group, manager of the American Funds, adds, "In seeking to achieve its objectives, the fund's principal investment strategies will remain largely unchanged. The fund will continue to invest substantially in high-quality money market instruments, such as commercial paper, commercial bank obligations, government securities and short-term debt securities, which may have credit and liquidity support features, including guarantees and letters of credit. Additionally, the fund expects to invest in repurchase agreements backed by U.S. government securities. The fund will continue to maintain a weighted average portfolio maturity of 60 days or less. We will change the name of the fund to American Funds Insurance Series ― Ultra-Short Bond Fund. We anticipate this change to be effected on or about May 1, 2016."
Finally, Transamerica is converting the Transamerica Partners Variable Funds Money Market Subaccount to Government on May 1. The SEC filing explains, "In response to recent amendments to Rule 2a-7 under the Investment Company Act of 1940 passed by the Securities and Exchange Commission, the Board of Trustees of the underlying portfolio of the Transamerica Partners Variable Funds Money Market Subaccount has approved changes to the Portfolio's investment objectives and principal investment strategies that will allow the Portfolio to operate as a "government money market fund." Under amended Rule 2a-7, a government money market fund is a money market fund that invests at least 99.5% of its total assets in U.S. government securities, cash, and/or repurchase agreements that are fully collateralized by U.S. government securities or cash."
It continues, "Effective on or about May 1, 2016, the Transamerica Partners Money Market Portfolio will change its name to Transamerica Partners Government Money Market Portfolio. Transamerica Partners Variable Funds Money Market Subaccount will change its name to Transamerica Partners Variable Funds Government Money Market Subaccount." As we previously reported, the $228 million Transamerica Money Market Fund is converting to the Transamerica Government MMF on May 1, according to a filing.
Treasury Strategies hosted a "Quarterly Cash Briefing" webinar yesterday, where panelists discussed the new money market fund disclosure regulations that went into effect April 14. Moderator Tony Carfang said, "It's a big day for the US money market fund industry," as managers began disclosing percentages of daily and weekly liquid assets (DLA and WLA); daily net inflows and outflows; and, current market NAVs (or MNAVs) rounded to four decimal places. (The other `Phase II MMF Reforms that kicked in yesterday deal with portfolio diversification, reporting, and stress testing -- see our Feb. 18 News, "Dechert Says April MMF Reform Deadline Approaching; JPM on Basel III for more.) Others also published news releases related to the SEC's Additional Disclosure Reforms. Fitch Ratings sent out, "US Money Fund Reform Puts Focus on Liquidity Risk," and another was entitled, "ICD Unveils Comprehensive Money Market Fund Reform Solutions for Corporate Treasury."
Federated Investors' Senior Portfolio Manager Sue Hill, who participated on the webinar along with Carfang, Treasury Strategies' Kevin Ruiz, Fitch's Roger Merritt, and the Association for Corporate Treasurers' Peter Matza -- summarized the "Phase II" changes. She said, "Today's a big day from the disclosure perspective for money market funds. Fund companies need to disclose 6 months of history on daily and weekly liquidity percentages for funds, the shadow NAV of the portfolio, and also, net shareholder flows. We need to show 6 months of history and then, from this point on, disclose all of those metrics on a daily basis."
Hill continued, "It's a big step from our standpoint. The industry is approaching the October 14 deadline and investors are struggling to make final decisions. Many of them can now use the information that will publicly available to them. If fees and gates are their issue, they can see what typical daily and weekly liquidity percentages look like for any given portfolio or portfolio type. Or, if the floating NAV is one of their big hurdles, they can look to see how the shadow NAV of MMFs has behaved over certain time periods and environments. We're hoping it gives investors the tools to come to final decisions about their investment options and gives them some comfort in that process."
Fitch's Merritt added, "It certainly is a sea-change for the industry, and I think it’s going to have far reaching implications. The changes that go into effect today are going to give an unprecedented level of transparency into the shadow NAVs for these funds, how much weekly liquidity they hold, and net inflows or outflows. Liquidity, in particular, is going to be top of mind for investors as we approach October -- particularly for funds that may face the possibility of having to impose fees and or gates in the event weekly liquidity falls below 30%. That's probably going to be the most important implication. It means that funds are going to have to be managed more conservatively than they have in the past. We are already seeing that as money funds are building liquidity -- on average north of 40% -- for prime money market funds. I suspect that will continue to grow."
Fitch's "Liquidity Risk" release explains, "New disclosure regulations for US money market funds (MMFs) that go into effect today will sharpen investors' focus on liquidity as a key risk metric, according to Fitch Ratings. We believe the unparalleled transparency that comes with daily fund reporting, combined with upcoming key structural changes facing the industry, are game changers for many money fund investors."
It continues, "Effective Thursday, money funds are required to begin disclosing daily and weekly liquidity, daily net inflows/outflows and the fund's net asset value rounded to four decimal places for the preceding six months. In October, institutional prime and municipal MMFs will also have to adopt provisions for fees & gates tied to a weekly liquidity threshold of 30%. If weekly liquidity drops below 30%, fund boards may impose a liquidity fee of up to 2%. Additionally, the fund's board may suspend redemptions for up to 10 business days. If weekly liquidity falls below 10%, fund boards must impose a 1% redemption fee unless the board determines that it would not be in the fund's best interest or that a higher (or lower) fee is more appropriate."
Fitch adds, "Many investors in institutional MMFs are uncomfortable with the risk for fear that their liquidity could be gated or subject to a redemption haircut. Businesses, municipalities and not-for-profits rely on MMFs to provide timely access to their investments to meet daily operational cash needs. For those who get comfortable with a potential redemption or having their fund gated, Fitch believes there will be heightened focus on the fund's liquidity and its proximity to a weekly liquidity trigger. We believe it's probable that these funds will need to maintain a liquidity buffer above the carefully watched 30% weekly threshold."
In related news, online money fund trading "portal" Institutional Cash Distributors announced reform related enhancements. The press release says, "Institutional Cash Distributors (ICD) today released comprehensive treasury reform investing solutions in their latest ICD Intelligencer: Navigating the New Treasury Investment Era. This industry desk reference will significantly help corporate treasury manage the challenging complexities brought about by Dodd-Frank, Basel III and Money Market Fund 2a-7 reform."
Tory Hazard, ICD President & COO, says, "Our interdisciplinary team of treasurers, MMF executives, trading specialists and technology engineers developed dozens of ICD Portal and Transparency Plus enhancements that provide actionable MMF reform intelligence throughout ICD Portal. These advances enable ICD clients to meet the new MMF reform challenges and properly manage portfolio risk and liquidity." (See the April issue of our Money Fund Intelligence for a "profile" of ICD and Hazard; watch for excerpts next week.)
The release continues, "ICD Portal's new Gain/Loss Report allows corporations to efficiently take advantage of the IRS and U.S. Treasury proposed Simplified Tax Accounting Method for Variable Net Asset Value MMFs.... The new corporate treasury settlement model is beginning to unfold with the majority of fund complexes leaning toward three intraday strikes at 9am, 12pm, and 3pm ET, enabling Prime MMF investors to receive settlement of cash throughout the day. Some fund companies are also adding an end-of-day strike at 5pm ET that would operate on a T+1 basis, which is useful for locking in the transaction and price to facilitate an early redemption settlement on the following day."
"Integrated systems and automation become even more important with the complexities of intraday pricing and settlement," says ICD SVP & Head of Global Trading Sebastian Ramos. "We have worked with fund companies, transfer agents, clearing and custody banks, technology vendors and clients on streamlining VNAV MMF workflow to provide daily liquidity, seamless integration with treasury workstations and automated settlement solutions."
ICD's release concludes, "Regulatory changes have already had an effect on corporate treasury portfolios as evidenced by the AFP Liquidity Surveys of 2014 and 2015. The mean number of investment vehicles used by survey respondents with over $1 billion in revenues increased from 2.8 in 2014 to 3.2 in 2015. While other money market instruments are getting deserved attention, Institutional Prime MMFs remain the most popular investment for ICD clients because of their low risk, high liquidity and competitive yield."
Phase II of the SEC's Money Market Fund Reforms goes "live" today, April 14, which means that money fund managers must now officially begin disclosing certain information on their websites. Specifically, they must disclose the percentages of daily and weekly liquid assets (DLA and WLA); daily net inflows and outflows; and, the current market NAV (or MNAV) rounded to four decimal places. Funds must also include 6-months' worth of history of these data points in a chart or graph format. We review statements from several of the largest money fund complexes on what they have done to meet the new requirements, recap the SEC rules, and provide links to websites of the top 20 MMF managers (so readers can check out the different disclosure info and formats), below. (Note: Crane Data provides MNAVs, DLA and WLA figures in our MFI Daily product, as well as daily asset changes. E-mail info@cranedata.com to request a copy to see our full collection of these new data points. See too our April Money Fund Intelligence for more on the new disclosure requirements.)
Blackrock is one of the large managers to entirely revamp its money fund website at: www.blackrock.com/cash. The site not only includes information on the funds, but also "insights" and a page dedicated to MMF reforms. In a letter to clients, BlackRock Managing Director and Head of Cash Management Tom Callahan writes, "Knowing and understanding the changing landscape of U.S. money market funds can be challenging. Navigating these changes requires a partner who can provide you with the information you need in a clear and meaningful way. Designed with your changing needs in mind, we are pleased to announce several enhancements to our dedicated cash website, www.blackrock.com/cash."
He explains, "Three key enhancements are now available: Expanded, dynamic fund details in our Performance Section for all BlackRock U.S. money market funds, including six months of history for Mark-to-market net asset value, Daily liquid assets percentage, Weekly liquid assets percentage, and, Net shareholder flows; A new Product Screener, intended to help you navigate our product line up and find the right investment options available for you. You can filter by fund type, fund family, or search by fund name for information; and, Improved Daily Rate Sheets for our U.S. money market funds that contain even more information about your portfolios, such as daily and weekly liquid asset percentages and weighted average life (WAL) calculations."
Callahan adds, "We are committed to investing in our cash management platform and are planning even more developments over the coming months to produce a best-in-class website for our global clients. Please visit our enhanced website today.... We will continue to keep you informed of changes to our website and welcome any feedback you might have so that we can further enhance your experience." (Note: BlackRock is one of the only fund family to date to include MNAVs, DLA and WLA on its nightly yield reports to date. Most are posting this data in the middle of the next business day.)
Morgan Stanley also unveiled a new and improved money market fund website. A document entitled, "Morgan Stanley Fund Reform Bulletin: Morgan Stanley Achieves Regulatory Milestone Well Ahead of Schedule," posted 2 months ago, explains, "We are pleased to announce that ... we are fully compliant with the new website disclosure requirements ... ahead of the compliance deadline of April 14, 2016. In accordance with the amendments, every day you will find on our website updated information about each portfolio's daily and weekly liquid assets, daily market net asset value (NAV), and daily net shareholder flows. We have developed a dynamic charting capability so you can choose to review the historical date range that is most meaningful to you. Although the regulatory requirement is to show six months' worth of historical information, we are making this data available from the beginning of 2015 as we understand some investors may want a more extended analytical timeframe. All data is able to be exported to excel."
The MSIM piece continues, "In addition, to assist investors as they think through the continuing investment case for prime money market funds, we recently published a paper entitled "Prime Funds – Implementation Primer." This paper discusses the key operational and administrative adjustments necessary to continue using prime funds once the new rules take effect.... As we move closer to the key compliance dates for the amendments to Rule 2a-7 of the Investment Company Act of 1940 which governs money market funds, we intend to provide you with a series of "Bulletins" to keep you up to date on actions the `Morgan Stanley Institutional Liquidity Funds are taking in response <b:>`_. Please visit MorganStanely.com/Liquidity to access the new disclosure information as well as our full suite of market, regulatory and educational insights pieces."
First American Funds is also making changes to its website. A note on the firm's money market fund homepage explains, "Our website will be undergoing some changes to comply with money market fund reform and improve the client experience. The first, and most obvious, is there will no longer be separate websites for individual and institutional investors. All investors will have access to the same information. Secondly, the Funds' enhanced disclosure information is now being displayed for the preceding six months on each Fund's page. To access this information, click the Our Funds tab, then select the Fund and share class of interest. This will take you to the Fund's information page. The report is located at the top of the right column. Additional changes will be announced in this location as they are rolled out."
To review the SEC's MMF Reform "Disclosure Requirements" that go into effect April 14, see page 288 of the SEC's Final Rule. On page 335, The Website Disclosure section starts on page 335, and it says, "We are adopting, as proposed, amendments to rule 2a-7 that require money market funds to disclose prominently on their websites the percentage of the fund's total assets that are invested in daily and weekly liquid assets, as of the end of each business day during the preceding six months.... We believe that this disclosure will encourage fund managers to manage the fund's liquidity in a manner that makes it less likely that the fund crosses a threshold where a fee or gate could be imposed, and also discourage month-end "window dressing"."
On Daily Disclosure of Net Shareholder Flows the rules explain, "We are also adopting, as proposed, amendments to rule 2a-7 that require money market funds to disclose prominently on their websites the fund's daily net inflows or outflows, as of the end of the previous business day, during the preceding six months.... In our view, information on shareholder redemptions can help provide important context to data regarding the funds' liquidity, as a fund that is experiencing increased outflow volatility will require greater liquidity."
On Daily Disclosure of Current NAV, it says, "We are adopting, as proposed, amendments to rule 2a-7 that would require each money market fund to disclose daily, prominently on its website, the fund's current NAV per share (calculated based on current market factors), rounded to the fourth decimal place in the case of a fund with a $1.0000 share price or an equivalent level of accuracy for funds with a different share price (the fund's "current NAV") as of the end of the previous business day during the preceding six months. The amendments require a fund to maintain a schedule, chart, graph, or other depiction on its website showing historical information about its daily current NAV per share for the previous six months, and would require the fund to update this historical information each business day as of the end of the preceding business day."
Note that our Money Fund Intelligence Daily has been tracking MNAVs, DLAs and WLAs for over a year now, but only selected Institutional MMFs have been reporting until now. As of today's MFI Daily, we show MNAVs for 829 funds out of a total of 1,049. Currently, our Crane Money Fund Average MNAV is $1.0002, while the Average DLA is 54.0 days and the Average WLA is 69.5 days. We will continue to expand our coverage of MNAVs, DLAs and WLAs in the coming days and weeks to include all money funds. (Funds don't have to report this info until later in the day, so our 8am MFI Daily will show these with a day lag.)
Finally, our first thought when the SEC mandated all this information to be posted on fund "websites", was, "Where exactly is a fund's website?" So we thought we'd find a good link to start with for readers. We list the 20 largest money fund managers and hotlink to what we thought were good starting points for each of these managers below. The Top 20 include: Fidelity, Blackrock, JP Morgan, Federated, Goldman Sachs, Vanguard, Schwab, Dreyfus, Morgan Stanley, Wells Fargo, SSGA, Northern Trust, Invesco, Western AM, First American, UBS, Deutsche, Franklin, American Funds, and T. Rowe Price.
While a host of money fund managers have been busy converting prime funds into government funds, there have been some that have launched Prime Institutional MMFs, and a handful of these have even put "Floating NAV" in the fund's name. The latest of these is from BMO Funds, which filed a Form N-1A to offer a new BMO Floating NAV Prime Money Market Fund to investors. We also write below about another money fund manager that is "going Government," GuideStone Funds, which is converting its $1.3 billion GuideStone Money Market Fund to Government.
BMO Floating NAV Prime MMF's Registration Statement says, "Shares of the Fund are not bank deposits or other obligations of, or issued, endorsed or guaranteed by, BMO Harris Bank N.A. or any of its affiliates. Shares of the Fund, like shares of all mutual funds, are not insured or guaranteed by the U.S. government, the Federal Deposit Insurance Corporation (FDIC), or any other government agency, and may lose value. By October 2016, the Fund will be a "floating net asset value" money market fund. Therefore, the share price will fluctuate. It is possible to lose money by investing in the Fund."
It explains, "The Fund invests in short-term, high quality money market instruments, such as short-term commercial paper, corporate bonds and notes, asset-backed securities, bank instruments, demand and variable rate demand instruments, U.S. government obligations, municipal securities, repurchase agreements, and funding agreements. The Fund may invest in U.S. dollar-denominated instruments issued by foreign governments, corporations, and financial institutions. Prior to October 14, 2016, the securities in which the Fund invests must be rated in one of the two highest short-term rating categories by one or more nationally recognized statistical rating organizations.... Effective October 14, 2016, the Fund may invest only in securities which have been determined by the Board to present minimal credit risks to the Fund, based on the Board's consideration of a number of factors."
It continues, "In pursuing its investment objective and implementing its investment strategies, the Fund will comply with Rule 2a-7 under the Investment Company Act of 1940, as amended, which requires, among other things, the Fund to meet certain requirements as to portfolio diversification, maturity, and liquidity. Although the Fund is a money market fund, by October 2016 the net asset value (NAV) of the Fund's shares will "float," fluctuating with changes in the values of the Fund's portfolio securities. The Fund is not limited to institutional investors, and is available to retail investors as well."
Under "Fees and Gates Risks," BMO says, "On or before October 14, 2016, the Fund will adopt policies and procedures to impose liquidity fees on redemptions and/or temporary redemption gates in the event that the Fund's weekly liquid assets were to fall below a designated threshold, subject to the discretion of the Fund's Board. If the Fund's weekly liquid assets fall below 30% of its total assets, the Board, in its discretion, may impose liquidity fees of up to 2% of the value of the shares redeemed and/or impose temporary gates on redemptions. In addition, if the Fund's weekly liquid assets fall below 10% of its total assets at the end of any business day, the Fund must impose a liquidity fee in the default amount of 1% of the value of shares redeemed unless the Board determines that not doing so is in the best interests of the Fund."
Under "Floating Net Asset Value Risk," the filing says, "The Fund will not maintain a stable NAV per share by October 2016. The value of the Fund's shares will be calculated to four decimal places and will vary reflecting the value of the portfolio of investments held by the Fund. It is possible to lose money by investing in the Fund."
It adds, "Peter J. Arts and Boyd R. Eager have co-managed the Fund since its inception in 2016." BMO, the 39th largest money fund manager with $4.9 billion in assets, also offers the $3.3 billion BMO Prime Money Market Fund, which intends to qualify as a Retail fund, the $803 million BMO Government MMF, and the $662 million BMO Tax-Free Money Fund, which will also qualify as Retail.
Schwab also recently launched a new FNAV fund, Schwab Variable Share Price Money Fund, which we first reported in our Nov. 10, 2015 News, "Schwab Files Variable NAV Money Fund." Its SEC filing explained, "The fund is a money market fund that is designed to serve as a complementary product to traditional stable share price money market funds. Unlike a traditional stable share price money market fund, the fund will not use the amortized cost method of valuation or round the per share net asset value (NAV) to the nearest whole cent and does not seek to maintain a stable share price. As a result, the fund's share price, which is its NAV, will vary and reflect the effects of unrealized appreciation and depreciation and realized losses and gains." The fund recently went live but still contains only internal money.
We are also waiting for T. Rowe Price to come out with a new Prime Institutional fund, as we first wrote in our Aug. 19, 2015 News, "T. Rowe Price to Launch Prime Inst MMF." We have not yet seen a filing or come across any announcements on this proposed new fund.
Meanwhile, the Prime to Govt conversion trend continues. GuideStone Funds is the latest manager to "go Government" with its money fund. GuideStone is the 41st largest MMF manager with $1.3 billion in assets; it is converting its only fund, the $1.3 billion GuideStone MMF, to Government. Its Prospectus Supplement filing explains, "The Board of Trustees of GuideStone Funds, on behalf of the Money Market Fund, has approved an investment policy in order for the Fund to meet the definition of a "government money market fund" under Rule 2a-7 under the Investment Company Act of 1940, as amended. Under amended Rule 2a-7, a government money market fund is a money market fund that invests at least 99.5% of its total assets in U.S. government securities, cash, and/or repurchase agreements that are fully collateralized by U.S. government securities or cash. These changes will become effective on or about May 1, 2016."
It adds, "The Fund's operation as a government money market fund will result in shareholders having continued access to a money market fund which seeks to maintain a stable net asset value of $1.00 per share. As a government money market fund, the Fund may allow retail and institutional investors in the Fund. The Board has chosen not to subject the Fund to discretionary or default liquidity fees or temporary suspensions of redemptions due to declines in the Fund's weekly liquid assets. However, the Board reserves the right to impose liquidity fees or redemption gates in the future."
With the pending GuideStone conversion, we now tally $289.2 billion that will leave Prime for Government, with $213.6 billion already converted as of April 15. The latest funds poised to complete their transitions include: the $111 million Schwab MM Portfolio, which converts to Schwab Govt MM Portfolio on April 14; the $824 million UBS Liquid Assets, which converts to UBS Liquid Assets Govt Fund on April 15; and $316 million Goldman Sachs VIT MMF, which will convert to Goldman Sachs Govt MMF on April 15."
Crane Data released its April Money Fund Portfolio Holdings yesterday, and our latest collection of taxable money market securities, with data as of March 31, 2016, shows a sharp drop in holdings overall at quarter-end but increases in Repo and Treasuries. Other (Time Deposits) holdings plunged, while CDs, CP and Agencies were all down. Money market securities held by Taxable U.S. money funds overall (tracked by Crane Data) decreased by $75.5 billion in March to $2.601 trillion. (Note: the decline includes the removal of the $43 billion Prudential Core MMF, which converted to an ultra-short bond fund.) MMF holdings increased by $64.2 billion in February, increased by $6.0 billion in January, and decreased by $2.2 billion in December. Repos remained the largest portfolio segment, followed by Treasuries and Agencies. CDs were in fourth place, followed by Commercial Paper, Other (mainly Time Deposits) securities and VRDNs. Money funds' European-affiliated securities plunged to 20.3% of holdings, down from the previous month's 27.6%. Below, we review our latest Money Fund Portfolio Holdings statistics.
Among all taxable money funds, Repurchase Agreements (repo) increased $49.3 billion (8.8%) to $607.5 billion, or 20.9%, after increasing $4.4 billion in February, and decreasing $182.2 billion in January. Treasury securities jumped $37.5 billion (7.0%) in March to $575.6 billion, or 20.1% of holdings, after rising $40.9 billion in February, and falling $3.4 billion in January. Government Agency Debt decreased $14.7 billion (3.0%) to $482.1 billion, or 18.6% of holdings, after increasing $5.5 billion in February, and jumping $7.5 billion in January. The steady rise in Treasuries and Agencies has been driven by the conversion of about $212.3 billion (so far) of Prime fund assets into Government funds.
Certificates of Deposit (CDs) were down $41.8 billion (8.8%) to $430.8 billion, or 17.1%, after climbing $7.6 billion in February, and rising $33.0 billion in January. Commercial Paper (CP) was down $23.1 billion (6.5%) to $332.7 billion, or 13.3% of taxable assets, while Other holdings, primarily Time Deposits, dropped $85.8 billion (35.7%) to $153.9 billion, or 5.9% of holdings. VRDNs held by taxable funds increased by $2.8 billion (18.3%) to $17.9 billion (0.6% of assets).
Among Prime money funds, CDs represent just under one-third of holdings at 32.0% (down from 32.9% a month ago), followed by Commercial Paper at 24.7% (unchanged). The CP totals are primarily Financial Company CP (14.8% of total holdings), with Asset-Backed CP making up 6.7% and Other CP (non-financial) making up 3.2%. Prime funds also hold 5.7% in Agencies (down from 6.4%), 7.1% in Treasury Debt (up from 5.9%), 9.3% in Treasury Repo (up from 3.3%), 4.0% in Other Instruments, 2.8% in Other Instruments (Time Deposits), and 4.5% in Other Notes. Prime money fund holdings tracked by Crane Data total $1.348 trillion (down from $1.439 trillion last month), or 51.8% of taxable money fund holdings' total of $2.601 trillion.
Government fund portfolio assets totaled $716 billion, up from $704 billion in February, while Treasury money fund assets totaled $536 billion, up from $533 billion in February. Government money fund portfolios were made up of 56.7% Agency Debt, 15.8% Government Agency Repo, 10.3% Treasury debt, and 17.0% in Treasury Repo. Treasury money funds were comprised of 75.8% Treasury debt, 23.9% in Treasury Repo, and 0.3% in Government agency, repo and investment company shares. Government and Treasury funds combined total $1.252 trillion, or 48.1% of all taxable money fund assets.
European-affiliated holdings decreased $211.3 billion in March to $527.7 billion among all taxable funds (and including repos); their share of holdings decreased to 20.3% from 27.6% the previous month. Eurozone-affiliated holdings decreased $131.5 billion to $304.9 billion in March; they now account for 11.7% of overall taxable money fund holdings. Asia & Pacific related holdings decreased by $15.1 billion to $259.5 billion (10.0% of the total). Americas related holdings increased $148.7 billion to $1.807 trillion and now represent 69.5% of holdings.
The overall taxable fund Repo totals were made up of: Treasury Repurchase Agreements, which increased $99.5 billion, or 36.1%, to $374.7 billion, or 14.4% of assets; Government Agency Repurchase Agreements (down $42.9 billion to $168.2 billion, or 7.9% of total holdings), and Other Repurchase Agreements ($64.7 billion, or 2.5% of holdings, down $7.2 billion from last month). The Commercial Paper totals were comprised of Financial Company Commercial Paper (down $9.9 billion to $199.2 billion, or 7.7% of assets), Asset Backed Commercial Paper (up $800 million to $90.4 billion, or 3.5%), and Other Commercial Paper (down $14.0 billion to $43.0 billion, or 1.7%).
The 20 largest Issuers to taxable money market funds as of March 31, 2016, include: the US Treasury ($576.8 billion, or 23.8%), Federal Home Loan Bank ($342.8B, 14.1%), Federal Reserve Bank of New York ($247.0B, 10.2%), Wells Fargo ($83.6B, 3.4%), BNP Paribas ($69.4B, 2.9%), Bank of Tokyo-Mitsubishi UFJ Ltd ($57.9B, 2.4%), RBC ($54.8B, 2.3%), Federal Home Loan Mortgage Co. ($54.1B, 2.2%), Bank of Nova Scotia ($51.8B, 2.1%), Federal Farm Credit Bank ($51.5B, 2.1%), Bank of America ($43.7B, 1.8%), Credit Agricole ($39.0B, 1.6%), JP Morgan ($38.6B, 1.6%), HSBC ($37.1B, 1.5%), Sumitomo Mitsui Banking Co ($36.8B, 1.5%), Citi ($35.1B, 1.4%), Bank of Montreal ($33.3, 1.4%), Svenska Handelbanken ($31.2, 1.3%), Mizuho Corporate Bank ($30.5B, 1.3%), and Toronto-Dominion Bank ($30.2B, 1.2%).
In the repo space, the Federal Reserve Bank of New York's RPP program issuance (held by MMFs) remained the largest repo program with $247.0B, or 40.7% of money fund repo. The 10 largest Fed Repo positions among MMFs on 3/31 include: BlackRock Cash Inst MMkt ($11.2B in Fed RRP), Northern Trust Treas MMkt ($10.2B), Fidelity Cash Central ($9.7B), JP Morgan US Govt ($9.2B), Goldman Sachs FS MMkt ($8.0B), BlackRock Liq TempFund ($7.3B), Fidelity Inst MM Prime ($6.9B), Dreyfus Treas & Agency Cash Mgmt ($6.6B), Federated Govt Obligs ($6.6B), and Federated Inst MM MMkt ($6.5B).
The 10 largest Repo issuers (dealers) with the amount of repo outstanding and market share among the money funds we track) include: Federal Reserve Bank of New York ($247.0B, 40.7%), Wells Fargo ($52.5B, 8.6%), BNP Paribas ($36.0B, 5.9%), Bank of America ($34.0B, 5.6%), RBC ($24.5B, 4.0%), Citi ($21.4B, 3.5%), Bank of Nova Scotia ($20.5B, 3.4%), JP Morgan ($20.4B, 3.4%), Societe Generale ($16.0B, 2.6%), and HSBC ($15.8B, 2.6%).
The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: Bank of Tokyo-Mitsubishi UFJ Ltd ($47.2B, 5.8%), Sumitomo Mitsui Banking Co ($36.8B, 4.5%), BNP Paribas ($33.5B, 4.1%), Bank of Nova Scotia ($31.2B, 3.9%), Svenska Handelsbanken ($31.2B, 3.8%), Wells Fargo ($31.2B, 3.8%), RBC ($30.3B, 3.7%), Credit Agricole ($28.8B, 3.5%), Canadian Imperial Bank of Commerce ($25.4B, 3.1%), and Swedbank AB ($24.5B, 3.0%).
The 10 largest CD issuers include: Bank of Tokyo-Mitsubishi UFJ Ltd ($31.2B, 7.3%), Sumitomo Mitsui Banking Co ($28.4B, 6.7%), Wells Fargo ($24.4B, 5.7%), Bank of Montreal ($21.3B, 5.0%), Canadian Imperial Bank of Commerce ($21.2B, 5.0%), Toronto-Dominion Bank ($20.3B, 4.8%), Bank of Nova Scotia ($20.1B, 4.7%), Mizuho Corporate Bank Ltd ($19.1B, 4.5%), Sumitomo Mitsui Trust Bank ($19.1B, 4.5%), and Norinchukin Bank ($14.9B, 3.5%).
The 10 largest CP issuers (we include affiliated ABCP programs) include: BNP Paribas ($20.1B, 7.0%), Commonwealth Bank of Australia ($14.9B, 5.2%), JP Morgan ($13.7B, 4.8%), RBC ($13.5B, 4.7%), Bank of Tokyo-Mitsubishi UFJ Ltd ($12.5B, 4.4%), HSBC ($11.1B, 3.9%), Bank of Nova Scotia ($10.1B, 3.5%), Societe Generale ($9.7B, 3.4%), Credit Agricole ($9.2B, 3.2%), and ING Bank ($9.0B, 3.1%).
The largest increases among Issuers include: Federal Reserve Bank of NY (up $178.4B to $247.0B), US Treasury (up $38.7B to $576.8B), Svenska Handelsbanken (up $4.2B to $31.2B), Bank of Tokyo-Mitsubishi UFJ Ltd (up $1.3B to $57.9B), Norinchukin Bank (up $1.1B to $15.0B), Federal Farm Credit Bank (up $800M to $51.5B), Bank of NY Mellon (up $800M to $13.6B), Sumitomo Mitsui Trust Bank (up $600M to $26.1B), Bank of Montreal (up $600M to $33.3B), and Sumitomo Mitsui Banking Co. (up $300M to $36.8B).
The largest decreases among Issuers of money market securities (including Repo) in March were shown by: Credit Agricole (down $41.4B to $39.6B), Societe Generale (down $30.9B to $29.1B), DnB NOR Bank ASA (down $29.8B to $9.2B), Skandinaviska Enskilda Bank (down $19.1B to $11.5B), Natixis (down $17.3B to $27.5B), Credit Suisse (down $16.1B to $29.5B), BNP Paribas (down $13.5B to $69.4B), JP Morgan (down $12.0B to $38.6B), Credit Mutuel (down $12.0B to $8.0B), and Federal Home Loan Mortgage (down $7.9B to $54.1B).
The United States remained the largest segment of country-affiliations; it represents 61.3% of holdings, or $1.595 trillion (up $171.0B). Canada (8.1%, $210.5B) moved up a spot to second, displacing France (7.1%, $184.2B), which fell to third. Japan (6.7%, $173.6B) stayed in fourth, while Sweden (3.3%, $85.5B) held fifth. The United Kingdom (3.0%, $78.5B) remained sixth, while Australia (2.4%, $63.4B) stayed in seventh. The Netherlands (2.3%, $59.7B), Germany (2.0%, $52.4B), and Switzerland (1.7%, $44.8B), and round out the top 10 among country affiliations. Germany moved ahead of Switzerland into ninth place. (Note: Crane Data attributes Treasury and Government repo to the dealer's parent country of origin, though money funds themselves "look-through" and consider these U.S. government securities. All money market securities must be U.S. dollar-denominated.)
As of March 31, 2016, Taxable money funds held 29.7% (up from 29.4%) of their assets in securities maturing Overnight, and another 9.1% maturing in 2-7 days (down from 12.0%). Thus, 38.8% in total matures in 1-7 days. Another 21.6% matures in 8-30 days, while 11.3% matures in 31-60 days. Note that alnost three-quarters, or 71.7% of securities, mature in 60 days or less, the dividing line for use of amortized cost accounting under the new pending SEC regulations. The next bucket, 61-90 days, holds 11.9% of taxable securities, while 13.3% matures in 91-180 days, and just 3.0% matures beyond 180 days.
Crane Data's Taxable MF Portfolio Holdings (and Money Fund Portfolio Laboratory) were updated Monday, and our Tax Exempt MF Holdings and MFI International "offshore" Portfolio Holdings will be released Wednesday and Thursday, respectively. Visit our Content center to download files or visit our Portfolio Laboratory to access our "transparency" module. Contact us if you'd like to see a sample of our latest Portfolio Holdings Reports.
Money market fund managers continue to be busy, reaching out to clients and stakeholders, keeping them abreast of the pending changes in the industry and to their fund lineups as MMF Reforms approach. In the past week, we came across new "white papers" and updates from Dreyfus/BNY Mellon, Fidelity and BlackRock, which we recap below. Dreyfus published the report, "Money Market Funds: Ready for Today and Tomorrow," which gives an overview of reforms. In addition, Fidelity posted a series of papers on money market funds, most of which focus on the Government fund sector, and BofA Funds issued the update, "Important Information for Dealers about Proposed BofA Funds Reorganizations into BlackRock Liquidity Funds." (Note: Watch for an update on new Money Fund Reform Disclosures, which go live on April 14, and a review and compilation of money fund manager websites next week.)
The Dreyfus MMF paper includes a clear, succinct definition of the new types of funds. It explains, "Retail Prime and Municipal/Tax-Exempt Funds: Limit investors of the fund to "natural persons," which generally means individual investors and certain accounts, such as custodial accounts (ie. IRA's), whose beneficiaries are individuals; Will continue to use a stable $1.00 net asset value (NAV) using amortized cost accounting. The fund's board of directors may impose liquidity fees (up to 2% of redemption proceeds) or redemption gates in times of severe market stress if it is determined to be in the best interest of shareholders in protecting their investment in the fund."
Furthermore, it defines, "Government/Treasury Funds: Eligible investors include both "natural" and "non-natural persons;" Defined as any money market fund that invests 99.5% (formerly 80.0%) or more of its total assets in cash, government securities or repurchase agreements collateralized by such securities. U.S. Government and Treasury funds are included in this definition; Will continue to use a stable $1.00 net asset value (NAV) using amortized cost accounting. The funds have no current intention to impose liquidity fees and/or redemption gates."
Also, Dreyfus writes, "Institutional Prime and Municipal/Tax-Exempt Funds: Eligible investors include "natural" and "non-natural persons." Non-natural persons include financial institutions, corporations, defined benefit plans, endowments and foundations, etc.; Will be required to trade at a variable net asset value versus a stable net asset value using market value prices to the 4th decimal place (for example, $1.0002); The fund's board of directors may impose liquidity fees (up to 2% of redemption proceeds) or redemption gates in times of severe market stress if it is determined to be in the best interest of shareholders in protecting their investment in the fund."
The piece adds, "The institutional prime and municipal/tax exempt money market fund definition limits the type of eligible investor that can invest in the fund and requires such a fund to price its shares using a variable net asset value. The reference of an "institutional share class" is not necessarily synonymous with the meaning of an institutional fund but is simply a naming convention that is used to characterize a share class as having a low total expense ratio that carries a higher minimum investment. In general, prime retail and institutional funds have the potential to provide higher yields than government and treasury funds while municipal funds are designed to generally offer greater tax equivalent yields over government and treasury funds."
Dreyfus explains in a subhead, "Liquidity Fees and Redemption Gates: Checks and balances to protect investor's principal," "Since 2010, the SEC has required money market funds to maintain sufficient portfolio liquidity to meet reasonably foreseeable redemption requests. To ensure portfolio liquidity, the Rule now gives fund boards a set of tools to further protect shareholder principal during periods of exceptional market stress. Liquidity Fee: A fee that could be imposed on investors for selling or redeeming shares in a money market fund. Liquidity fees provide investors continued access to their liquidity at a cost while reducing the incentives for shareholders to redeem shares. Redemption Gate: A restriction that stops redemptions, thus preventing investors from selling or redeeming shares in a money market fund for a certain period of time. A gate can be in place no more than 10 business days during any 90-day consecutive period."
The paper explains, "A fund's board of directors will consider market conditions, a fund's portfolio holdings and the best interest of the shareholders before determining if liquidity fees and/or gates will be imposed. Liquidity fees and redemption gates will be applicable to retail and institutional prime and municipal/tax-exempt money market funds. There is no current intention to impose fees and gates on Government and U.S. Treasury money market funds.... Effective April 2016, shareholders will have access to the fund's levels of daily and weekly liquid asset percentages, net shareholder inflows or outflows, market-based net asset value per share, and whether any liquidity fees or redemption gates have been imposed or removed on the Dreyfus website."
It closes by saying, "Here's a quick summary of how the new rules will affect institutional and retail investors. Effective October 14, 2016: If you are invested in a fund that will be classified as retail stable NAV fund and are not a natural person, you will have to choose another investment option such as a government/treasury money market fund, FDIC insured deposit program or private placement fund to continue to invest in a money market vehicle with a stable NAV. If you are a client and invested in a fund that will be classified as a retail prime/municipal money market fund and are a natural person, you can continue to invest in the funds as you do today. If you own a government or treasury stable NAV money market fund, you can continue to invest in the funds as you do today."
Also, Fidelity compiled a series of white papers on money market fund reform, most of which were refreshes of previously released reports. One is on, "Government Money Market Mutual Funds: An Attractive Option for Investors Seeking Capital Preservation and Liquidity," while another is on "Institutional Liquidity Managers and the New Reality." The latter says of "The new face of institutional liquidity management: customization that optimizes liquidity and returns. Despite having what may seem to be a distant effective date of October 2016, the rule changes have already created a more complicated environment for many institutional liquidity managers. The days of one simple cash management solution have been replaced by the need for a customized suite of products, based on liquidity needs, strategic goals, and risk tolerance."
It explains, "Institutional liquidity managers would now be well served to begin reviewing the details behind the purpose of their assets and the amount needed to meet each function. Shorter term operational cash may require one set of investment solutions, while taking an updated view of longer-term strategic cash may open up a set of investment opportunities that had not been considered. Managers also will need to determine their risk tolerance level and may want to approach liquidity management based on their anticipated total rate of return when deciding between MMFs, judging whether the anticipated yield spread between prime and municipal MMFs versus government MMFs will compensate them for potential trade-offs and risks."
Fidelity adds, "The new environment may be more challenging initially; however, as is often the case, transitions may lead to new opportunity. Customizing cash solutions may provide the chance to better optimize liquidity and returns -- and once liquidity managers identify the operational and strategic utility that best fits their institutions, they will find a wide variety of investment solutions available to help accomplish their goals."
BofA Funds' update states, "Bank of America Corporation has agreed to transfer the investment management responsibilities of BofA Global Capital Management to BlackRock, Inc., including the management of certain of the BofA Funds. The transaction entails, among other things, the reorganization of certain of the BofA Funds into certain corresponding institutional money market funds managed by BlackRock. These reorganizations are expected to occur at the close of business on Friday, April 15, 2016.... When the reorganizations close, the assets in certain of the BofA Funds will transfer to certain of the BlackRock Liquidity Funds." BofA Cash Reserves and BofA MM Reserves will merge into BlackRock TempFund, BofA Govt Plus Res will merge into BlackRock FedFund, BofA Govt Res will merge into BlackRock Federal Trust Fund, and BofA Treasury Res will merge into BlackRock T-Fund. Also, BofA's Muni Funds –- CA Tax-Exempt Res, BoA CT Muni Res, BofA MA Muni Res, BofA Municipal Reserves, BofA NY Tax-Exempt Res, and BofA Tax-Exempt Res -- will be `liquidated on April 8. (See our April 4, News, "Prudential Core MMF Goes Bond; BlackRock, BofA Approved; Calamos," and see our latest MFI and MFI XLS for more on the mergers and liquidations.)
Finally, a news release, "First American Funds Announces Voluntary Waiving of Additional Fees for Treasury Obligations Fund Class Z Shares," says, "In addition to the fund's contractual fee waivers, the advisor may choose to voluntarily waive additional management fees, with the intended effect of lowering the fund's overall expenses. As of April 1, 2016, the advisor has waived an additional two basis points (bps) of management fees for the Class Z shares of the First American Treasury Obligations Fund, resulting in a net expense ratio of 18 bps. The advisor can stop waiving these additional fees and revert to the contractually agreed upon net expense ratio of 20 bps (25 bps gross) -- as stated in the prospectus -- at any time."
Crane Data's latest Money Fund Market Share rankings show asset decreases for majority of the largest U.S. money fund complexes in the latest month. Money market fund assets decreased by $22.5 billion, or 0.8%, overall in March, and they've decreased by $7.5 billion, or 0.3%, over the past 3 months YTD. For the past 12 months through March 31, total assets are up $99.2 billion, or 3.9%. The biggest gainer in the past month was Goldman Sachs, which rose by $4.3 billion, or 2.2%. BlackRock, Invesco, First American, Fidelity, and Franklin also increased, rising by $1.5 billion, $1.1B, $1.0B, $968M, and $850M, respectively. (Our domestic U.S. "Family" rankings are available in our MFI XLS product, our global rankings are available in our MFI International product, and the combined "Family & Global Rankings" are available to Money Fund Wisdom subscribers.) We also write below about Invesco, which posted an update that discloses the strike times for its floating NAV money funds (come Oct. 1, 2016).
Goldman Sachs, Northern, Invesco, Federated, and Fidelity had the largest money fund asset increases over the past 3 months, rising by $27.3 billion, $6.4B, $4.7B, $3.3B, and $2.7B, respectively. Over the past year through March 31, 2016, Fidelity showed the largest asset increase (up $44.7B, or 11.1%), followed by Goldman Sachs (up $43.3B, or 28.5%), Morgan Stanley (up $14.8B, or 12.7%), SSGA (up $14.5B, or 18.1%), and Federated (up $9.5B, or 4.6%). Other asset gainers for the past year include: Vanguard (up $7.2B, 4.1%), BlackRock (up $7.0B, or 3.3%), Northern ($5.9B, 6.8%), Schwab (up $4.9B, 3.0%), and Wells Fargo (up $2.5B, or 2.3%).
The biggest decliners over 12 months include: Dreyfus (down $17.4B, or -10.3%), JP Morgan (down $15.1B, or -6.1%), Deutsche (down $6.8B, or -20.7%), RBC (down $4.8B, or -29.4%), and BofA (down $4.0B, or -8.5%). BofA's assets decreased $9.8 billion in March, the bulk of which was due to the liquidation of its Municipal MMFs. These weren't part of the pending merger into BlackRock's MMFs, which is scheduled to take place April 15. (Note that money fund assets are volatile month to month.)
Our latest domestic U.S. Money Fund Family Rankings show that Fidelity Investments remains the largest money fund manager with $448.2 billion, or 16.8% of all assets (down $968 million in March, up $2.7B over 3 mos., and up $44.7B over 12 months). Fidelity was followed by JPMorgan with $232.8 billion, or 8.7% market share (down $6.0B, down $11.9B, and down $15.1B for the past 1-month, 3-mos. and 12-mos., respectively). BlackRock remained the third largest MMF manager with $222.6 billion, or 8.3% of assets (up $1.5B,down $2.4B, and up $7.0B). (Note, it should move ahead of JP Morgan next month after it merges in the BofA funds.) Federated Investors was fourth with $215.2 billion, or 8.0% of assets (up $515M, up $3.3B, and up $9.5B). Goldman Sachs remained in 5th place, after surpassing Vanguard in February, with $195.0 billion, or 7.3% of assets (up $4.3B, up $27.3B, and up $43.3B).
Vanguard stayed in sixth place with $180.9 billion, or 6.8%, (down $347M, up $1.6B, and up $7.2B). Schwab ($165.5B, 6.2%) was in seventh place, followed by Dreyfus in eighth place with $152.4B (5.7%), Morgan Stanley in ninth place with $130.7B (4.9%), and Wells Fargo in tenth place with $113.0B (4.2%). The eleventh through twentieth largest U.S. money fund managers (in order) include: SSGA ($94.6B, or 3.5%), Northern ($91.7B, or 3.4%), Invesco ($56.3B, or 2.1%), BofA ($43.5B, or 1.6%), Western Asset ($42.9B, or 1.6%), First American ($40.4B, or 1.5%), UBS ($38.0B, or 1.4%), Deutsche ($25.9B, or 1.0%), Franklin ($23.8B, or 0.9%), and American Funds ($16.1B, or 0.6%). Crane Data currently tracks 65 U.S. MMF managers, the same number as last month.
When European and "offshore" money fund assets -- those domiciled in places like Dublin, Luxembourg, and the Cayman Islands -- are included, the top 10 managers match the U.S. list, except for Goldman moving up to No. 4 (dropping Vanguard to 6) and SSGA breaking into the top 10. Looking at the largest Global Money Fund Manager Rankings, the combined market share assets of our MFI XLS (domestic U.S.) and our MFI International ("offshore"), the largest money market fund families are: Fidelity ($448.2 billion), JPMorgan ($349.3 billion), BlackRock ($324.1 billion), Goldman Sachs ($282.5 billion), and Federated ($223.8 billion). Vanguard ($180.9B) was sixth, followed by Dreyfus/BNY Mellon ($177.2B), Schwab ($165.5B), Morgan Stanley ($149.5B), and SSGA ($114.9B) round out the top 10. These totals include "offshore" US Dollar money funds, as well as Euro and Pound Sterling (GBP) funds converted into US dollar totals.
Finally, our April Money Fund Intelligence and MFI XLS show that both net and gross yields continued to rise in March. The Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 799), rose 1 basis point to 0.12% for the 7-Day Yield (annualized, net) Average, while the 30-Day Yield also went up 1 basis point to 0.11%. The Gross 7-Day Yield was 0.40% (up 2 basis points), while the Gross 30-Day Yield was 0.39% (up 2 basis points).
Our Crane 100 Money Fund Index shows an average 7-Day (Net) Yield of 0.22 (up 1 basis point) and an average 30-Day Yield of 0.22% (up from 0.20%). The Crane 100 shows a Gross 7-Day Yield of 0.46% (up 2 basis points), and a Gross 30-Day Yield of 0.46% (up 3 basis points). For the 12 month return through 3/31/16, our Crane MF Average returned 0.04% (unchanged) and our Crane 100 returned 0.08% (up 1 basis point). The total number of funds, including taxable and tax-exempt, fell to 1,103, down a whopping 58 from last month.
Our Prime Institutional MF Index (7-day) yielded 0.26% (up 2 bps) as of March 31, while the Crane Govt Inst Index was 0.12% (unchanged) and the Treasury Inst Index was 0.10% (up 1 bp). The Crane Prime Retail Index yielded 0.08% (up 1 bp), while the Govt Retail Index yielded 0.03% (unchanged) and the Treasury Retail Index was 0.02% (unchanged). The Crane Tax Exempt MF Index yielded 0.03% (up 2 bps).
The Gross 7-Day Yields for these indexes in March were: Prime Inst 0.54% (up 3 basis points from last month), Govt Inst 0.36% (up 1 bp), Treasury Inst 0.32% (up 2 bps), Prime Retail 0.44% (up 1 bp), Govt Retail 0.32% (up 2 bps), Treasury Retail 0.27%(up 3 bps), and Tax Exempt 0.19% (up 11 bps). The Crane 100 MF Index returned on average 0.02% for 1-month, 0.05% for 3-month, 0.05% for YTD, 0.08% for 1-year, 0.04% for 3-years (annualized), 0.05% for 5-year, and 1.17% for 10-years. (Contact us if you'd like to see our latest MFI XLS, Crane Indexes or Market Share report.)
In other news, Invesco published a "Money Market Regulatory Reform" update, which says, "Since July 2014, when the U.S. Securities and Exchange Commission (SEC) issued new rules for money market funds, Invesco has been thoughtfully evaluating the impact.... In order to best serve our investors, we began to outline our money market fund product line in November 2015.... Today, we announce our intended strike times for our floating net asset (FNAV) funds." (See our Nov. 10, 2015 News, "Schwab Files Variable NAV Money Fund; Invesco Announces Changes.")
The piece explains, "Under new SEC rules, prime and municipal money market funds, available to both institutional investors and retail investors, will be required to transact at a floating net asset value by October 14, 2016. The following Invesco funds, which intend to transact as FNAV funds, plan to offer the following intraday price times in order to provide same-day settlement and intraday liquidity to our investors: Liquid Assets Portfolio – 9am, 12pm, 3pm; STIC Prime Portfolio – 3pm; Premier Tax-Exempt Portfolio – 3 pm."
Finally, Invesco adds, "All these portfolios plan to begin transacting at a FNAV no earlier than October 1, 2016. We will announce more detail on specific timing in the future. At this time, Invesco's government and Constant NAV (CNAV) money market funds ... intend to maintain their current settlement times."
The April issue of our flagship Money Fund Intelligence newsletter was sent to subscribers Thursday morning. It features the articles: "Money Fund Reforms Phase II; Disclosures: MNAV, DLA, WLA," which reviews the regulatory changes that go into effect April 14; "ICD Portal's Tory Hazard on Prime MMFs, Alternatives," which profiles Tory Hazard from Institutional Cash Distributors; and "Brokerage Sweeps Go Govt, FDIC; $1 Trillion Still at 0%," which briefly examines trends in the brokerage sweep market. We have also updated our Money Fund Wisdom database query system with March 31, 2016, performance statistics, and sent out our MFI XLS spreadsheet Thursday morning. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our April Money Fund Portfolio Holdings are scheduled to ship Monday, April 11, and our April Bond Fund Intelligence is scheduled to go out Thursday, April 14.
MFI's lead article on "Money Fund Reforms Phase II," says, "On April 14, "Phase Two" of the SEC's Money Market Fund Reforms take effect, requiring firms to make several important changes to the way they report information on, and run, their money market funds. The major new requirements deal with portfolio diversification, website disclosure, reporting, and stress testing. We believe the website disclosures generate the most interest, but a host of other changes will soon go live too. Law firms Dechert and Perkins Coie issued summaries of the upcoming April 14 changes in recent legal updates. We review the imminent changes and excerpt from Dechert and Perkins' briefs below."
It continues, "Among the pending website disclosures are: percentages of daily and weekly liquid assets (DLA and WLA); daily net inflows and outflows; and, the current market NAV (or MNAV) rounded to four decimal places. Funds must also include 6-months worth of data in a chart or graph. The changes will also remove the 2-month lag on the SEC's Form N-MFP; this form will undergo minor changes. (See our Aug. 6, 2014 News, "SEC Money Fund Reform Disclosure Requirements Not Quite Kitchen Sink," and see the SEC's full "MMF Reform Final Rules.") Note that our Money Fund Intelligence Daily has been tracking MNAVs, DLAs and WLAs for over a year now, but that only some of the large Institutional MMFs have been reporting until now."
Our ICD Portal Profile reads, "This month, Money Fund Intelligence profiles Tory Hazard, President and COO at Institutional Cash Distributors, or ICD. Hazard talks about the growing ICD Portal, which has expanded beyond money funds to include Short-Term Bond Funds, SMAs, Private Funds, and some bank deposit products. He tells us, "Institutional Prime money market funds are still going to be a very important part of the portfolios." Hazard also discusses new enhancements to the ICD Portal that are slated to debut later this month that will help investors deal with upcoming money market reforms. He says, "We're extremely excited about 2016 and beyond. We have been working to prepare for this time."
Responding to the question How much do you distribute? Hazard says, "We have over $70 billion in assets in the U.S., and about $8 billion offshore. We have approximately 35 fund families on the portal and about 300 funds. That includes money funds, as well as other types of portfolios. When we saw that changes were happening with money fund reform, we were very active in fighting against onerous over-regulation. We were happy when the rules finally came out [that] they included the simplified tax accounting method. That was, as we saw it, the biggest challenge that was going to face prime money market funds. With that in play, Institutional Prime money market funds are still going to be a very important part of the portfolios."
The "Brokerage Sweeps" article explains, "With the major elements of money fund reform approaching, brokerage "sweep" providers are tweaking their offerings, moving away from Prime funds and into Govt MMFs or FDIC insured bank deposit programs. They also continue to add features for brokerage customers, but yields remain pinned to zero. We review some of the recent changes in this market below, which we estimate is around $1 trillion in size (bank deposits & MFs combined)."
It adds, "Schwab, UBS, Morgan Stanley, Merrill and others have all made changes to sweep funds or options. UBS filed with the SEC to state that it would no longer be offering several funds on sweep platforms. The filing says, "Later this year, but before the October 2016 compliance deadline, [funds] may no longer be offered as a sweep fund as part of certain distributor platforms. As a result, the Fund's shareholders would be transitioned to an alternative money market sweep fund." UBS also converted its Liquid Assets sweep option from Prime to Govt."
In a sidebar, we also discuss, "Yet More Prime to Govie." This brief says, "SEI Investments and Wilmington Trust are the latest firms to make a major retreat from the money fund space and "go government." Also, we do a sidebar on "Federated, Edward Jones Restructure Deal," which says, "One of the largest "private label" relationships in the money fund business is changing after over 3 1/2 decades. Federated Investors and brokerage firm Edward Jones will alter the terms of their money fund management agreement later this year." Finally, as we do every month, we review all the important "Money fund News."
Our April MFI XLS, with March 31, 2016, data, shows total assets decreasing $22.2 billion in March to $2.676 trillion, after increasing $37.4 billion in February decreasing $22.4 billion in January, and increasing $44.2 billion in December. Our broad Crane Money Fund Average 7-Day Yield climbed by 1 bps to 0.12% for the month, while our Crane 100 Money Fund Index (the 100 largest taxable funds) increased 1 basis point to 0.22% (7-day).
On a Gross Yield Basis (before expenses were taken out), funds averaged 0.40% (Crane MFA, up 2 basis points) and 0.47% (Crane 100, up 3 bps). Charged Expenses averaged 0.29% (up 2 bps) and 0.25% (up 1 bp) for the Crane MFA and Crane 100, respectively. The average WAM (weighted average maturity) for the Crane MFA was 36 days (down 1 day from last month) and for the Crane 100 was 37 days (unchanged). (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
The Investment Company Institute sent a letter to the IRS seeking an update on MMF reform related issues, we learned from mutual fund news source Fund Action. FA's brief, entitled, "IRS Urged to Hasten MMF Guidance," says, "As the Oct. 16 deadline for prime money market funds to float net asset values or convert to government funds is getting closer, the industry is getting a bit restless with the Internal Revenue Service. So far, the IRS hasn't come up with regulatory actions firms say are needed to cope with the tax consequences of money fund reform." We review the letter below. Also, we have updates on the launch of a new Goldman Sachs Institutional Tax-Exempt fund, on the designation of several USAA Muni money funds as Retail, and on the surprising jump in Tax-Exempt MMF yields.
ICI's March 9 letter, authored by Associate General Counsel Karen Lau Gibian, and addressed to IRS Associate Chief Counsel (Financial Institutions and Products) Helen Hubbard, states, "The Investment Company Institute wishes to withdraw its prior request for guidance permitting money market funds to treat certain reorganizations as tax-free under section 368. We understand that none of our members currently plan to utilize such a strategy in preparation for compliance with the Securities and Exchange Commission money market fund rule adopted in 2014. Given the number of guidance requests pending before the Internal Revenue Service and the Treasury Department, we hope that withdrawing this request will allow the government to focus on more important issues."
It adds, "With respect to the remaining money market fund guidance requests, we wish to reiterate the industry's priorities. First, the issue for which most immediate guidance is necessary is the diversification of variable insurance product money market funds under section 817(h). Given the quickly approaching compliance deadline for money market fund rule, mutual fund complexes need guidance on this issue before they can determine whether and how to continue using money market funds in their variable insurance products. In the absence of such guidance, it is unclear whether the use of money market funds in such a way will remain a viable strategy." (Note: In Crane Data's "Prime to Government" spreadsheet, we count, among the 74 funds "going Government" to date, almost 20 that are variable annuity or insurance company related MMFs.)
The ICI letter continues, "The second issue for which immediate guidance is necessary is the issue of adviser contributions. Again, fund complexes currently are deciding how to manage their existing money market funds in anticipation of the compliance date of the money market fund rule. The use of adviser contributions may be an important tool necessary to ease the transition for investors from stable net asset value to floating NAV money market funds."
It concludes, "Finally, we note that it remains vitally important to the success of the new SEC rule that the proposed regulations under sections 446 and 6045 be finalized. If the proposed NAV method and the exemption from information reporting are not formally adopted, it is unclear how the new floating NAV rules will work. Although the proposed regulations permit shareholders and funds to rely upon the guidance therein prior to the publication of final regulations, the industry clearly would prefer the certainty that final regulations would provide." (See our July 30, 2014 News, "Reform Floating NAV Accounting Issues Addressed by Treasury Proposal.")
In December, Goldman Sachs Asset Management issued a press release stating their plans to designate the Goldman Sachs Financial Square Tax-Free MMF as Retail and change its name to the Goldman Sachs Investor Tax-Exempt MMF around March 31, 2016. (See our Dec. 21, 2015 News, "Goldman Sachs AM Details More MMF Changes, Portal Enhancements.") These changes occurred last week. Our April MFI XLS will show the fund as the Goldman Sachs Investor Tax-Exempt MMF.
In that same December story and press release, GSAM announced that it was planning to launch a new Tax-Exempt Institutional fund, the Goldman Sachs FS Tax-Exempt MMF. An April 4 SEC filing explains, "Goldman Sachs Financial Square Tax-Exempt Money Market Fund (the "Fund"). Supplement dated April 1, 2016 to the Prospectus, Summary Prospectuses, and Statement of Additional Information. The Board of Trustees of the Goldman Sachs Trust has approved the designation of the Fund as an "institutional" money market fund under Rule 2a-7 under the Investment Company Act of 1940, effective on the earlier of October 14, 2016 or upon 30 days' prior written notice to investors."
It adds, "As an institutional money market fund, the Fund will be required to price and transact in its shares at a net asset value reflecting market-based values of its portfolio holdings. The floating NAV will need to be rounded to four decimal places (e.g., $1.0000). In addition, on or after the Effective Date, the Board will be permitted to impose a liquidity fee on redemptions from the Fund (up to 2%) or temporarily restrict redemptions from the Fund up to 10 business days during any 90-day period, in the event that the Fund's weekly liquid assets fall below the required regulatory thresholds."
Also, USAA filed a Prospectus Supplement designating the USAA California, USAA New York, USAA Virginia, and USAA Tax-Exempt MMFs as Retail. The filings say, "In July 2014, the Securities and Exchange Commission (SEC) adopted amendments to money market fund regulations that will affect the manner in which the Fund and other money market funds are structured and operated. Under the 2014 Amendments, money market funds that qualify as "retail" (Retail MMFs) or "government" (Government MMFs) will be permitted to continue to utilize amortized cost to value their portfolio securities and to transact at a stable $1 net asset value (NAV) per share as they do today. The Fund currently intends to qualify as a Retail MMF no later than October 14, 2016."
Finally, we are seeing signs of life in the Tax-Exempt money fund market. Our April MFI XLS shows that the average 7-Day Yield for our Crane Tax Exempt Index is 0.03%, triple (up 2 basis points from) the previous month. On the rise in Tax-Exempt yields and the SIFMA Index, JP Morgan Securities' Alex Roever, "[I]n the municipal markets, this week's setting of 40bp for the SIFMA index marked its cheapest level of the post-crisis era and highest ratio of 3m Libor (64%) since mid-2013. We continue to believe that SIFMA's rise is due in large part to effects stemming from MMF reform and tax season cyclicals. While there may be room for SIFMA to drift modestly higher, our derivative strategists believe the worst of the sell off is likely behind us as cross-over demand from prime funds should help to stabilize the VRDN complex."
Now that most of the major change announcements are out, we continue to see a steady stream of "housekeeping" moves among money fund managers as we approach the home-stretch (6 months to go) for implementing MMF Reforms. Among the latest batch, T. Rowe Price filed with the SEC to classify certain funds, and Federated officially changed the names of its Institutional funds. We cover the latest "baby steps" below, and we also excerpt from a recent Ignites article, entitled, "Reform Deadline Nears for Money Funds." (Watch for more on the coming April 14 Disclosure Reforms deadline and more on fund name changes in the pending April issue of Money Fund Intelligence, due out Thursday a.m.)
T. Rowe Price is making a couple of sizable moves leading up to reforms, most notably, switching its $6.5 billion TRP Prime Reserves fund to TRP Government Money Market Fund. (We first reported this our Aug. 19, 2015 News, "T Rowe Price to Launch Prime Inst MMF; ICI, JPM on Holdings, WAMs," where T. Rowe also announced that it planned to launch a Prime Inst Fund.) While we haven't seen a filing yet for the latter, we have come across others. In our March 9 News, "MF Market Share: Goldman Assets Surge; Yields Higher; T. Rowe Update," we reported that the $5 billion Summit Cash Reserves will change its name to the T. Rowe Price Cash Reserve Fund and qualify as a Retail fund, effective August 1.
Their latest Prospectus Supplement sets a new conversion date for T. Rowe Price Prime Reserves. The filing states, "On August 1, 2016, the fund will change its name to the T. Rowe Price Government Money Fund, which reflects the fund's intention to qualify as a "government money market fund" in accordance with amendments to Rule 2a-7." Also, T. Rowe's US Treasury Fund will be categorized as a Government fund, per a March 31 filing.
Furthermore, T. Rowe also designated all of its Tax-Exempt funds as Retail, including Summit Municipal Money Market Fund, Tax-Exempt Money Fund , Maryland Tax-Free Money Fund, New York Tax-Free Money Fund, and California Tax-Free Money Fund. All these funds will all be categorized as Retail on October 14.
Federated officially changed the names of several funds that it has designated as "Institutional" late last week. As we first reported in our Nov. 17, 2015 News, "Federated Designates Inst MMFs; Wells, Goldman, BlackRock Gain in Oct.," Federated designated 4 funds as Institutional -- Federated Money Market Management, Federated Prime Obligations Fund, Federated Prime Value Obligations Fund, and Federated Tax-Free Trust. Each will adopt a floating NAV on October 14, 2016. All of these fund names will be changed in the pending April MFI XLS.
Federated's filing explains, "Effective March 31, 2016, the Funds will change their names as follows: Federated Money Market Management will change to Federated Institutional Money Market Management; Federated Prime Obligations Fund will change to Federated Institutional Prime Obligations Fund; and Federated Prime Value Obligations Fund will change to Federated Institutional Prime Value Obligations Fund." Federated Tax-Free Trust's filing says, "Effective March 31, 2016, the Fund will change its name to Federated Institutional Tax-Free Cash Trust."
In other news, UBS's PACE Government Money Market Investments (which converted from Prime to Govt in November 2015) `filed a Prospectus Supplement that discusses the pending April 14 MMF disclosures. It says, "PACE Government Money Market Investments will disclose on UBS AM's Web site, within five business days after the end of each month, a complete schedule of portfolio holdings and information regarding the weighted average maturity of the fund. This information will be posted on the UBS Web site at the following internet address: http://www.ubs.com/usmoneymarketfundsholdings. In addition, the fund will file with the SEC on Form N-MFP, within five business days after the end of each month, more detailed portfolio holdings information. The fund's Forms N-MFP will be available on the SEC's Web site; UBS AM's Web site will also contain a link to these filings, when available."
It continues, "The UBS AM Web site will also disclose the following information for the fund as of the end of each business day for the previous six months: (1) the percentage of the fund's total assets invested in daily and weekly liquid assets; (2) the fund's daily net inflows and outflows; and (3) the fund's current market-based net asset value per share.... On each business day, PACE Government Money Market Investments will post its market-based net asset value per share for the prior business day on the UBS Web site at http://www.ubs.com/usmoneymarketfundsholdings."
Last week, mutual fund news source Ignites.com wrote on the pending "Phase II" of MMF Reforms. The article explains, "Beginning on April 14, sponsors of money market funds must update their websites daily with information about each product's shadow net asset value, net flows, and levels of daily and weekly liquid assets. The new website disclosure is just one element of a host of changes firms must put in place by that date under the SEC’s 2014 reforms. Other requirements set to kick in this month include conducting additional stress testing, applying more stringent diversification standards for holdings and providing more data in monthly disclosures." (See our March 22 News, "SEC MMF Stats: Assets, Yields Up in Feb; Updated FAQ; Keen on Phase II.")
It continues, "But of these requirements, implementing the expanded website disclosure probably has been the most operationally burdensome for firms, according to industry sources. There are a lot of "moving parts" involved in getting the data onto websites -- putting in place the mechanisms for collecting the necessary information for each fund, and making sure it's accurate and that it can be posted each day, says Peter Crane, CEO of Crane Data. And while a number of the larger money fund firms have been disclosing some of this information, such as the shadow NAV, via their websites for months -- and in some cases years -- none has been reporting all of the data points that the SEC requires be displayed on websites as of April 14, adds Crane."
Ignites adds, "Some firms are paying particular attention to one of the data points they will start posting in two weeks' time: the daily and weekly liquid net assets for each fund. That's because it will take on greater significance when the next and final deadline of the reforms kicks in on Oct. 14, says Stephen Keen, senior counsel at Perkins Coie.... Although the compliance date for the portion of the rule pertaining to fees and gates is not until October, this month's disclosure about daily and weekly liquid assets will give investors -- and anybody else who cares to look -- an indication of whether a fund may be close to that 30% threshold and therefore whether fees and gates may be imminent."
Finally, ignites says, "Some funds are putting in "extra review procedures" that are triggered prior to posting a number that's near the 30% threshold so they are prepared for possibly alerting shareholders or taking other measures, Keen says. "You don't want to put it on auto pilot and have `Pete Crane call you up and say, 'I see you're at 27% of weekly liquid assets,' and that's the first you realize it," says Keen.... And Crane will be watching. "In effect, what the new disclosures are going to do is start the clock ticking on the October 14 changes," Crane says. Investors won't be trading on shadow NAVs or weekly liquid asset disclosure at this point, but they will be "important numbers" come October, he adds."
In the latest chapter of the Prime money fund "Exodus" saga, the mammoth $42.6 billion private Prudential Core Taxable Money Market Fund converted into an Ultra Short Bond Fund late last week. While we have seen a number of Ultra-Short Bond Fund launches in the past year, we have not come across many direct Prime to Ultra-Short Bond Fund conversions. (See our next Bond Fund Intelligence issue for more. The only other one we recall seeing is Delaware Cash Reserves, which became Delaware Ultrashort in January.) The latest batch of "Prime-to-Govie" MMF conversions were also completed last week (and involved another Pru MMF). We discuss these topics, and a new update from BlackRock on the imminent BofA funds merger, below. We also report on one of the first "knock-on" effects of the pending SEC money market reforms -- advisor platforms switching their "cash" options from Prime to Govt -- below.
Prudential's "Prospectus Supplement" (497) filing says, "Effective on or about March 30, 2016, in connection with the amendments to Rule 2a-7 under the Investment Company Act of 1940, the following changes will take place: (1) Prudential Core Taxable Money Market Fund, a series of Prudential Investment Portfolios 2, will be repositioned from a money market fund to an ultra-short bond fund and will be renamed "Prudential Core Ultra Short Bond Fund"; and (2) Prudential MoneyMart Assets, Inc. will begin operating as a "government money market fund," as defined in Rule 2a-7, and will be renamed "Prudential Government Money Market Fund, Inc."
A separate SEC filing also mentions the Prudential Core transition. It says, "This prospectus provides information about the Prudential Investment Portfolios 2 (Core Fund), which consists of six separate series -- the Prudential Core Short-Term Bond Fund (Short-Term Bond Fund), the Short-Term Municipal Bond Fund, the National Municipal Money Market Fund, the Prudential Core Ultra Short Bond Fund (Ultra Short Bond Fund), the Government Money Market Fund and the Treasury Money Market Fund (each, a Fund and collectively, the Funds or Core Fund). Prior to March 30, 2016, the Ultra Short Bond Fund's name was Prudential Core Taxable Money Market Fund." (Note that the non-Prime Pru Core money funds appear inactive.)
Crane Data subscribers may notice that the former Prudential Core Taxable MMF was not listed in our Money Fund Intelligence newsletter or MFI XLS database. That's due to the fact that it's an "internal" or "private" fund (similar to others like Fidelity Cash Central Fund and Vanguard Market Liquidity Fund). While we don't track these funds in MFI XLS or MFI Daily (since they don't report performance publicly), we do include them in our `Money Fund Portfolio Holdings product and collection. In our last Holdings report, we show the recently converted (and about to be removed) Prudential Core Fund with $42.6 billion in assets. (The Federal Reserve Bank of New York also recently updated its Reverse Repo Counterparties List to remove Prudential Core Taxable MM Fund as a reverse repo counterparty.)
Prudential's brokerage sweep vehicle MoneyMart Assets ($672M), which converted to Prudential Govt MMF on 3/31, is one of several funds that converted from Prime to Govt last week. Others include: the $1.9 billion BBH Money Market Fund, which became BBH US Govt MMF (on 4/1); the $1.6 billion Cavanal Hill Cash Management, which turned into Cavanal Hill Govt Securities (on 4/1); and the $15.8 billion American Funds MMF, which, though it's invested in mostly government securities for some time, officially became American Funds US Govt MMF (on 4/1). Also, the $402 million John Hancock MMF will convert to a Government MMF on April 6, though there's been no name change indicated to date. (The next major bout of conversions will occur at the end of April/early May and will include Deutsche's wholesale exit from Prime and T. Rowe Price Prime Reserves.) Combined, these changes total $20.4 billion shifting to Govt from Prime. To date since October 2015, about $212.3 billion has shifted from Prime to Govt, with another $75.6 billion scheduled before October 14, 2016.
In related news, BlackRock's Head of Cash Management Tom Callahan sent out another update to clients, informing them that the pending BofA fund mergers had received shareholder approval. The letter states, "We are pleased to share an exciting update on our agreement with Bank of America's asset management business, BofA Global Capital Management, to transfer investment management responsibilities for approximately $94 billion of assets under management currently managed by BofA Global Capital Management to BlackRock."
He adds, "Yesterday, shareholders of the following series of the BofA Funds Series Trust approved the following fund reorganizations: BofA Cash Reserves and BofA Money Market Reserves into BlackRock TempFund; BofA Government Plus Reserves into BlackRock FedFund; BofA Government Reserves into BlackRock Federal Trust Fund; and BofA Treasury Reserves into BlackRock T-Fund. The BofA Funds reorganizations are expected to be completed on or about Monday, April 18, 2016, subject to certain closing conditions. We are excited to welcome our new investors and appreciate your continued partnership and business."
As we've mentioned, BofA funds' Tax Exempt MMFs aren't being integrated into the BlackRock platform and are being liquidated. Our pending April Money Fund Intelligence XLS removes these 9 Muni portfolios with a total of 43 funds (or share classes). The liquidated funds include: BofA CA Tax-Exempt Reserves; BofA Cash Reserve Investor; BofA CT Muni Reserves; BofA Govt Plus Reserve; BofA MA Muni Reserves; BofA Municipal Reserves; BofA NY Tax-Exempt Reserves; BofA Tax-Exempt Reserves; and BofA Treasury Reserve." (See our Feb. 12 News, "BofA Details Fund Mergers Into BlackRock MMFs; WSJ on Big Retail MMFs," and see our Nov. 10, 2015 News, "BlackRock Taking Over BofA MMFs in One of Biggest Acquisitions Ever" for more.)
We also are removing several other funds due to recent or imminent liquidations: American Beacon Money Market Select, Deutsche NY Tax-Free Money Fund, Deutsche Tax Free Money Fund, Deutsche Tax-Exempt CA MMF, and Putnam Tax-Exempt Money Market Fund. (See the "Changes" tab in MFI XLS and our most recent "prime2govt" spreadsheet for the latest updates.)
Finally, in what could signal the beginning of a second wave of Prime to government asset shifts, fund manager and investment advisor Calamos Investments switched its default money fund option from Fidelity Inst Prime MMP to Fidelity Inst MM Treasury Portfolio. Calamos used to have its own money fund, but liquidated it in 2009. (See our March 5, 2009 News, "Calamos Files to Close and Liquidate Government Money Market Fund.") A post on its website entitled, "Money Market Fund Offering Conversion - Frequently Asked Questions," describes the most recent changes in its "cash" option. Calamos explains, "As of March 1, 2016, Calamos shareholders can no longer buy shares of the Fidelity Institutional Prime Money Market Portfolio ("Fidelity Prime"). Our new money market fund offering is the Fidelity Institutional Money Market Treasury Portfolio ("Fidelity Treasury"). Below is a Q&A that may answer questions about the change."
The FAQ says, "Q1. Why is the Fidelity money market fund option being changed? The U.S. Securities and Exchange Commission (SEC) recently changed its rules related to money market funds which require that institutional prime money market funds float their net asset value per share price (NAV) to reflect the fair value of the assets being held. The current money market fund option offered by Calamos is Fidelity Prime, which falls under the new rules. The floating NAV requirement, which goes into effect October 14, 2016, does not apply to government money market funds. In order to minimize shareholder impact, Calamos is changing its money market fund option to Fidelity Treasury from Fidelity Prime. We urge shareholders to exchange their Fidelity Prime shares for Fidelity Treasury shares as soon as possible to avoid liquidation of the shares."
It adds, "Q3. Why did you choose Fidelity Treasury? We believe that offering Fidelity Treasury, a U.S. government Treasury fund that is not affected by the new SEC rules, is in the best interest of shareholders. Fidelity Treasury normally invests at least 99.5% of the fund's total assets in cash, U.S. Treasury securities and/or repurchase agreements for those securities.... Q6. When is the deadline to exchange into Fidelity Treasury? Fidelity Prime shareholders are strongly encouraged to exchange into Fidelity Treasury or liquidate their Fidelity Prime shares no later than 3 p.m. central time on June 30, 2016."
TD Asset Management, the 28th largest money fund manager with $7.8 billion, issued a press release detailing its plans to maintain a full roster of Prime Retail, Prime Institutional, Tax-Exempt Retail, Tax-Exempt Inst MMFs, and Govt MMFs in its post-reform money fund lineup. The statement, entitled, "TD Asset Management Announces Product Strategy for Money Market Funds," says, "TD Asset Management today announced plans to adjust its money fund lineup to address regulatory changes adopted by the U.S. Securities and Exchange Commission in July 2014. The adjustments are summarized below and will take effect on October 14, 2016. Throughout this process, our primary goal is to provide investors with a broad spectrum of product choices for liquidity management with little to no disruption." We also review the ICI's latest monthly "Trends in Mutual Fund Investing" and "Month-End Portfolio Holdings of Taxable Money Funds." (See our March 11 News, "March Portfolio Holdings: Treasuries Jump; TDs, CDs, Agencies Gain.")
TDAM's says of its lineup of Government funds, "In the government money market fund category, the following products will be offered: TDAM U.S. Government Portfolio; TDAM Institutional U.S. Government Fund; and TDAM Institutional Treasury Obligations Money Market Fund. Under the SEC's new rules, a government money market fund must invest at least 99.5% of its total assets in U.S. government securities, cash, or repurchase agreements collateralized by U.S. government securities or cash. Historically, TDAM has managed its government and Treasury funds consistent with this new requirement and will continue to do so. Government and Treasury money market funds are exempt from new requirements for liquidity fees and redemption gates, although they could voluntarily adopt fees and/or gates in the future upon prior notice to shareholders. TDAM does not intend to impose liquidity fees or redemption gates on any of its government or Treasury funds. Finally, government funds will continue to use the amortized cost method of valuation to transact at a stable net asset value (NAV) of $1.00 per share."
On its Retail funds, they explain, "In the retail money market fund category, the following products will be offered: TDAM Money Market Portfolio; TDAM Municipal Portfolio; TDAM California Municipal Portfolio; and TDAM New York Municipal Portfolio. Retail money market funds are defined under the new rules as funds that have policies and procedures reasonably designed to limit all beneficial owners to natural persons, whether investing directly or through an omnibus account held at a custodian. Retail money market funds will continue to transact at a stable NAV of $1.00 per share, but will be subject to liquidity fees and redemption gates."
Finally, on its Institutional funds, TDAM comments, "Prime and municipal money market funds that are available to institutional investors must transact at a floating NAV and will be subject to liquidity fees and redemption gates. TDAM will offer the following floating NAV products: Institutional Money Market Fund; and TDAM Institutional Municipal Money Market Fund. Many of the changes set out above will require approval from the funds' board of directors and disclosure in the funds' registration statements. Therefore, the changes will not take effect until the necessary approvals have been obtained and the disclosures have been filed. TDAM's plan announced today should help investors move ahead with their liquidity planning solutions."
ICI's "Trends in Mutual Fund Investing: February 2016" shows a sizable increase in MMF assets in February, up $38.2 billion, or 1.4%, to $2.774 trillion. Assets have averaged declines of about $23 billion in February since 2008; this is the first time since 2011 that MMF assets have increased in February. MMFs decreased $19.0 billion in January, increased $35.3 billion in December, rose $4.8 billion in November, and climbed $45.2 billion in October.
The release says, "The combined assets of the nation's mutual funds increased by $3.57 billion to $15.08 trillion in February, according to the Investment Company Institute's official survey of the mutual fund industry.... Bond funds had an inflow of $710 million in February, compared with an outflow of $5.16 billion in January.... Money market funds had an inflow of $37.28 billion in February, compared with an outflow of $20.25 billion in January. In February funds offered primarily to institutions had an inflow of $41.83 billion and funds offered primarily to individuals had an outflow of $4.55 billion." Money funds now represent 18.4% of all mutual fund assets, while bond funds represent 22.7%. The total number of money market funds decreased to 479 in February, from 483 the previous month.
ICI's latest "Month-End Portfolio Holdings of Taxable Money Fund" summary shows that most MMF composition segments increased in February, including Treasuries, CDs, Repo, Agencies, and Commercial Paper. CDs (including Eurodollar CDs) remained the largest portfolio sector, increasing $14.9 billion, or 2.6%, in February to $591.8 billion, representing 23.3% of taxable MMF holdings. (ICI's CD totals likely include Time Deposits, which Crane Data and the SEC categorize as "Other" -- we reported an increase in Other/TDs in February.) Repurchase agreements stayed in second place, increasing $4.6 billion, or 0.9%, in February to $542.0 billion (21.4% of assets).
Treasury Bills & Securities held on to third place among composition segments, rising $38.2 billion, 8.0%, in February to $514.4 billion (19.3% of assets). U.S. Government Agency Securities increased by $4.4 billion, or 0.9%, to $476.3 billion (18.8% of assets), remaining fourth among portfolio segments. Commercial Paper was fifth, increasing $1.9B, or 0.9%, to $313.1 billion (12.4% of assets). Notes (including Corporate and Bank) fell $5.9 billion, or 7.7%, to $70.5 billion (2.8% of assets), while Other holdings (including Cash Reserves) dropped $12.4 billion to $26.6 billion.
The Number of Accounts Outstanding in ICI's series for taxable money funds decreased by 30.0 thousand to 22.723 million, while the Number of Funds decreased by 3 to 336. Over the past 12 months, the number of accounts fell by 485.1 thousand, or 2.1%, and the number of funds declined by 27. The Average Maturity of Portfolios increased by 2 days to 39 days in February. Over the past 12 months, WAMs of Taxable money funds have declined by 4 days. Note: Crane Data updated its March MFI XLS last week to reflect 2/29/16 Portfolio Composition and Maturity Breakout data for the entire fund universe. (Visit our Content Center and the latest Money Fund Portfolio Holdings download page to access our March Money Fund Portfolio Holdings and the latest files.)
