News Archives: January, 2019
Brokerage Edward Jones announced plans to alter its sweep program, and money market funds will no longer be made available to new investors on or after Feb. 9. In a letter entitled, "Required Notice to All Clients: Cash Management Option Changes," they explain that the restriction also applies to current investors who "have not selected the fund as your sweep option for your brokerage [or retirement] account as of that date." They "will no longer be able to do so." There will be no immediate change for customers who have previously selected the money fund as their sweep option. They will "continue to have uninvested cash automatically transferred to the fund." The advisory also stipulated that "if you make a change to your brokerage account's sweep option on or after Feb. 9, 2019, you will not be able to select the fund as your brokerage sweep option again."
The company noted that the Edward Jones Insured Bank Deposit Program (IBD), an interest-bearing bank account, "will be available as a sweep option for Select Retirement Accounts, making it an option available for all brokerage accounts. IBD provides FDIC protection and allows you to access your funds using check writing and debit cards."
The Notice further observed, "If you do not wish to use the fund or IBD as your sweep option, you can: Hold your uninvested cash in your account and those funds will be eligible to receive interest; use your cash to invest in other securities such as a money market mutual fund or to purchase certificates of deposit, or withdraw your cash balance." It clarified that the changes "apply to new and existing Select Retirement Accounts and brokerage accounts other than 529 Plans, pooled plans and vendor-held retirement plans ('brokerage accounts'). They will not apply to Advisory Solutions or Guided Solutions accounts."
Two share classes of the Edward Jones Money Market Fund combined for assets of $29.2 billion as of Jan. 29, according to our MFI XLS. The Investor class posted a 7-day simple yield of 1.77% at year end vs. deposit rates of 0.40% for less than $250K, 0.60% for $250K-<$1M, and 1.65% for balanced over $1M. The funds are sub-advised by Federated Investors, which owns 49% of Passport, the advisor for the Edward Jones Money Market Fund. (See our March 10, 2016 News, "Federated, Edward Jones Restructure Money Fund Deal; New 10-K Filing.")
Edward Jones is the latest money-fund provider redirecting sweep cash away from its funds and into bank deposit products. Charles Schwab has been active here, plumping up assets of banks it owns, as outlined in this Jan. 25 News, "Schwab, Brokerages Discuss Sweeps, Money Funds on Earnings Calls." See also our, Jan. 22 Link of the Day, "Washington Post Column on Sweeps."
In other news, the Investment Company Institute released its latest monthly "Trends in Mutual Fund Investing" report yesterday, which shows MMF assets breaking over $3.0 trillion in the last month of 2018. Assets increased by $71.8 billion in December to $3.037 trillion. This follows an $80.4 billion increase in November, a $21.4 billion increase in October, and a $3.4 billion decrease in September. In the 12 months through Dec. 31, 2018, money fund assets have increased by $189.8 billion, or 6.7%. (Money Fund Intelligence logged a 12-month asset increase of $188 billion in 2018, with $112.8 billion of this from Prime MMFs.)
The monthly "Trends" report states, "The combined assets of the nation's mutual funds decreased by $996.95 billion, or 5.3 percent, to $17.71 trillion in December, according to the Investment Company Institute's official survey of the mutual fund industry. In the survey, mutual fund companies report actual assets, sales, and redemptions to ICI."
It explains, "Bond funds had an outflow of $65.56 billion in December (1.60 percent of November 2018 assets), compared with an outflow of $26.11 billion in November.... Money market funds had an inflow of $68.92 billion in December (2.32 percent of November 2018 assets), compared with an inflow of $77.23 billion in November. In December funds offered primarily to institutions had an outflow of $4.76 billion and funds offered primarily to individuals had an inflow of $73.68 billion."
The latest "Trends" shows that both Taxable and Tax Exempt MMFs gained assets last month. Taxable MMFs increased by $65.4 billion in December to $2.892 trillion. Tax-Exempt MMFs increased $6.4 billion in December to $145.3 billion. Taxable MMF assets increased year-over-year by $175.6 billion (6.5%) while Tax-Exempt funds rose by $14.2 billion over the past year (10.8%) <b:>`_. Bond fund assets decreased by -$38.2 billion in December (-0.9%) to $4.062 trillion; they've declined by $3.8 billion (-0.1%) over the past year.
Money funds represent 17.2% of all mutual fund assets (up from 15.9% the previous month), while bond funds account for 22.9%, according to ICI. The total number of money market funds was unchanged from 368 in November, and is down from 382 a year ago. Taxable money funds again numbered 287 funds, and tax-exempt money funds remained at 81 funds.
ICI also released its latest "Month-End Portfolio Holdings of Taxable Money Funds," which confirmed yet another jump in Repos and Treasuries in December. Repurchase Agreements remained in first place among composition segments; they increased by $41.6 billion, or 4.3%, to $1.019 trillion, or 35.2% of holdings. Repo holdings have risen by $62.7 billion, or 6.6%, over the past year.
Treasuries rose by $68.7 billion, or 8.5%, to $873.1 billion, or 30.2% of holdings. Treasury securities have increased by $171.0 billion over the past 12 months, or 24.3%. U.S. Government Agency securities were the third largest segment; they gained $24.1 billion, or 3.9%, to $644.3 billion, or 22.3% of holdings. Agency holdings have fallen by $38.2 billion, or -5.6%, over the past 12 months.
Certificates of Deposit (CDs) stood in fourth place; they decreased $13.2 billion, or -6.4%, to $192.1 billion (6.6% of assets). CDs held by money funds added $9.8 billion, or 5.3%, over 12 months. Commercial Paper remained in fifth place, down by 3.4 billion, or -1.8%, to $188.7 billion (6.5% of assets). CP has increased by $40.5 billion, or 27.3%, over one year. Notes (including Corporate and Bank) were down by $76 million, or -1.0%, to $7.3 billion (0.3% of assets), and Other holdings decreased to $10.8 billion.
The Number of Accounts Outstanding in ICI's series for taxable money funds decreased by 412.3 thousand to 33.275 million, while the Number of Funds was unchanged at 287. Over the past 12 months, the number of accounts rose by 6.390 million and the number of funds decreased by 12. The Average Maturity of Portfolios was 31 days, same as in November. Over the past 12 months, WAMs of Taxable money funds have decreased by 1 day.
The Financial Times writes, "Ant Financial's money market fund shrinks to 2-year low," which discusses the latest news on "The world's largest money-market mutual fund, Ant Financial's Tianhong Yu'E Bao." The FT explains that the fund "was at its smallest [in] two years by the end of last year as Chinese regulators pressured it to downsize over concerns about systemic risk." We review the latest news on Chinese money funds, we revisit the pending launch of BlackRock LEAF, an environmental money fund, and we summarize our latest Weekly Money Fund Portfolio Holdings below.
The FT piece tells us, "The shrinkage is a sign that Ant, the financial services business of Alibaba Group, is shifting away from marketing its own financial products to serving as a platform for other groups to access its huge customer base. It also reflects the impact of recent monetary easing by the People's Bank of China, which has pushed down money market interest rates, reducing the attractiveness of money market funds compared with other investments."
It adds, "Ant Financial owns a 51 per cent stake in Tianhong Asset Management, which manages the flagship fund. But the Yu'E Bao platform now offers 13 other money market funds from outside fund managers, which offer the same seamless integration with Ant's online payments service, Alipay."
Finally, the article says, "In 2017, China's securities regulator published new rules that imposed reserve requirements on money market funds and restricted their freedom to invest in higher-yielding but less liquid assets. In June, the agency limited instant redemptions to Rmb10,000 ($1,480) per day in an effort to control liquidity risk. In February last year, Tianhong Yu'E Bao voluntarily imposed restrictions on the total amount that a single user could invest in the fund. In May, it started introducing new money funds on to the platform. Non-Tianhong funds managed $190bn in assets by the end of last year."
In U.S. money fund news, website SustainableInvest.com, run by Moody's money fund rating veteran Henry Shilling and Steve Schoepke, review a recent SEC filing and press release announcing the launch the BlackRock Liquid Environmentally Aware Fund (LEAF), a Prime Institutional money fund which will become the second "ESG" money market fund. (See our Jan. 23 News, "BlackRock to Launch Environmental MF.")
The article notes that the LEAF fund "will invest in companies and counterparties with a better than average performance in environmental practices and, at the same time, avoid certain companies and counterparties." It says, "BlackRock is making a commitment to purchase or retire carbon offset credits with a portion of its revenues from the fund and make an annual payment to the World Wildlife Fund (WWF) to help further global conservation efforts."
Adds SustainableInvest.com, "The announcement follows the rebranding in November 2018 of the $329.3 million (as of Dec. 31, 2018) DWS ESG Liquidity Fund, a variable net asset value money market fund consisting of three share classes. While both are variable net asset value funds, the sustainable approaches and methodologies vary."
Shilling and Shoepke write, "[T]he DWS ESG Liquidity Fund integrates ESG considerations in making investment decisions. That is to say, the fund's investment selections also account for social and governance considerations rather than being limited to environmental practices. That said, the fund also employs negative screening. Formerly called the DWS Variable NAV Money Market Fund, the DWS fund, with its high minimum investments, is managed by DWS (formerly Deutsche Asset Management)."
They also write, "It is also noteworthy to mention that a number of short as well as ultra-short duration sustainable mutual funds and ETFs were also launched in the last year. These include the Hartford Short Duration ETF, the Calvert Ultra-Short Duration Income NextShares ETF and the TIAA-CREF Short Duration Impact Bond Fund."
Sustainableinvest.com adds, "The initial and by far the largest audience for LEAF as well its competitor money funds is likely to consist of the various institutional investor segments that have embodied sustainable investing strategies.... This is a growing segment that, in particular, includes foundations, university endowments, family owned offices/wealth management platforms, public defined benefit plans as well as defined contribution 403(b) plans." For more about ESG Money Market Funds, see also our Sept. 7, 2018 News, "DWS ESG Liquidity Goes Live, and our Aug. 13 News, "DWS Converts Variable NAV to DWS ESG Money Fund, First ESG Offering."
In other news, Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics and summary Tuesday, which tracks a shifting subset of our monthly Portfolio Holdings collection. The latest cut, with data as of Friday, Jan. 25, includes Holdings information from 81 money funds (up from 46 on Jan. 18), representing $1.411 trillion, compared to $850.0 billion in the prior week. That represents 45.2% of the $3.124 trillion in total money fund assets tracked by Crane Data. (For our latest monthly Money Fund Portfolio Holdings numbers, see our Jan. 11 News, "Jan. MF Portfolio Holdings: Treasuries, Repo Jump; FICC Biggest Repo.")
Our latest Weekly MFPH Composition summary shows Government assets again dominated the holdings list with Repurchase Agreements (Repo) totaling $515.5 billion (a rise from $314.8 billion on Jan. 18), or 36.5% of holdings, Treasury debt totaling $452.1 billion (up from $273.1 billion), or 32.1%, and Government Agency securities totaling $262.9 billion (up from $160.1 billion), or 18.6%. Commercial Paper (CP) totaled $69.0 billion (down from $40.4 billion), or 4.9%, and Certificates of Deposit (CDs) totaled $50.2 billion (up from $34.2 billion), or 3.6%. A total of $34.3 billion or 2.4% was listed in the Other category (primarily Time Deposits), and VRDNs accounted for $26.4 billion, or 1.9%.
The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $452.1 billion (32.1% of total holdings), Federal Home Loan Bank with $194.5B (13.8%), BNP Paribas with $59.4B (4.2%), RBC with $57.2B (4.1%), Federal Farm Credit Bank with $50.7B (3.6%), Fixed Income Clearing Co with $32.5B (2.3%), Credit Agricole with $30.5B (2.2%), Barclays PLC with $27.6B (2.0%), HSBC with $25.6B (1.8%), and J.P. Morgan with $24.5B (1.7%).
The Ten Largest Funds tracked in our latest Weekly Holdings update include: Fidelity Inv MM: Govt Port ($113.6B), Goldman Sachs FS Govt ($99.9B), BlackRock Lq FedFund ($83.2B), Wells Fargo Govt MMkt ($73.9B), Federated Govt Oblig ($71.7B), BlackRock Lq T-Fund ($65.3B), Goldman Sachs FS Trs Instruments ($59.5B), Dreyfus Govt Cash Mgmt ($56.6B), Morgan Stanley Inst Liq Govt ($55.0B), and Fidelity Inv MM: MMkt Port ($48.6B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary.)
Just under two weeks ago, Crane Data hosted its "basic training" conference, Money Fund University in Stamford, Conn. Among the highlights was a presentation from Teresa Ho of J.P. Morgan Securities, who conducted the "Instruments of the Money Markets Intro." We excerpt from her session below, and also quote from a new "Primer on sponsored repo" published by Ho and co-authors Alex Roever, Joshua Younger and Ryan Lessing. (Attendees and Crane Data subscribers may access our conference materials at the bottom of our "Content" page or our via our Money Fund University 2019 Download Center. As a reminder, make reservations soon if you plan on attending our upcoming Bond Fund Symposium, which is March 25-26 in Philadelphia.)
Ho outlined the basics, saying, "The money market is a sub-section of the fixed-income market and is comprised of instruments with high liquidity, short maturities of 13 months or less, and relatively low credit risk. Due to money market instruments' low risk and short maturity profile, returns are relatively lower than those of other fixed income securities. Because of the short-dated nature of the maturities, money markets instruments are rolled on a frequent basis."
She continued, "Generally, borrowers use [them] as a way to help them finance their short-term expenses. Investors use it as a way to help them manage their cash, also on a short-term basis. Others use it as a way to help them manage their interest-rate risk. Basically, as long as there's demand for liquidity, and as long there's a mismatch between cash inflows and cash outflows at an institution, there's going to be demand for the money markets."
J.P. Morgan forecasts that the total money market supply of securities this year is likely to grow by $485 billion, or 5%, excluding Fed offerings. A table included in Ho's presentation showed that significant supply increases are anticipated in these securities types: Treasury FRNs (16%), Domestic Financial CP (14%), Bonds (9%), Foreign Financial CP (8%), Treasury Bills (to increase the most by an estimated $153 billon) and Treasury Coupons (7% each), and lesser supply additions for Dealer Repo, Agency Discos and FRNs. No increases are projected in supply of ABCP or Yankee CDs. Shrinkage is likely for issuance of purchasable Agency Coupons (-23%) and non-Financial CP (-8%).
"The banks make up about 35 percent of the entire money market space," but she noted bank reliance on short-term wholesale funding has considerably lessened due to regulations crafted after the recent financial crisis. "At its peak in early 2008, total money market supply was around $11.5 trillion. If we take out Treasuries, [and] we're just talking about credit supply, that number is closer to $9.5 trillion. Fast forward to today. Those numbers are $10 and $6 trillion, respectively. So, over the past 10 years, we've seen a pretty dramatic reduction in credit supply of about $3.7 trillion."
"The most notable change, I think, has really been on the Treasury side. So, from 2009 to 2015, we've seen Treasury bill outstandings decline as Treasury decided to kind of change the way that they wanted to manage their debt portfolio.... But [since] around mid-2015, outstandings have pretty much reversed course and since then it's been up, and over the past probably three years it's been up by a trillion dollars. What is driving that increase? One [reason] is that Treasury wanted more liquidity in the bills market. The second reason is that they wanted more cash on hand to deal with sudden events," she commented.
Looking at repo markets, Ho observed that "Most of the exposures are now more towards foreign banks as opposed to U.S. banks." Citing a table of money funds' repo counterparty exposures across prime funds and govie funds and aggregating the notional repo exposures for the top five counterparties, she explained that "Over 40 percent of that are towards foreign banks. So why is that the case? Why are foreign banks taking off such a big part of the money markets? The reason as it relates particularly to repo is really around how leverage ratios are being calculated. There is a difference between how the regulators are imposing a leverage ratio for foreign banks and the leverage ratio being imposed on U.S. banks."
Finally, she added, "We are seeing some growth on the U.S. side in the repo markets. I think some of it is attributed to the development of sponsored repo. This is a new product that's been rolled out in mid-2017 to money funds as an alternative to access repo through the FICC platform. It's beneficial from the dealer side because it allows dealers to net their reverse repos and repos off balance sheet. So, it's less balance-sheet intensive ... it's a beneficial trade for dealers to engage in.... It's a way for them to reduce their balance sheet as well as their balance-sheet cost."
In related news, JPM's new primer dealing with sponsored repo, explains, "While the repo market has evolved in many ways since the Global Financial Crisis, repos are still a way for dealers to borrow or lend cash on a collateralized basis for a short time period. Based on the Fed's most recent primary dealer financing data, the gross size of the repo market is around $5.1tn (reverse repos: $2.3tn, repos: $2.8tn). However, these balances are a far cry from where they were pre-crisis in 2008 as post-crisis regulations have limited the amount of repos dealers can do with clients by significantly increasing the cost of bank balance sheets.... As a result, dealers are unable to offer as much financing/collateral, and consequently as much liquidity to the fixed income markets, relative to pre-crisis."
Ho, et. al., write, "Sponsored repo seeks to alleviate these pressures by better aligning the economics of repo with net exposure. By allowing netting members to sponsor non-dealer counterparties onto FICC's centrally clearing platform, dealers are able to provide balance sheet to end users without incurring as much capital. For end users, they get the benefit of obtaining another type of financing/collateral from dealers.... As its name suggests, sponsored repo is a type of transaction whereby the dealer sponsors a non-dealer counterparty in a cleared bilateral repo trade with FICC (Fixed Income Clearing Corporation)."
They add, "Currently, access to sponsored repo is limited given eligibility requirements. First, a sponsoring member must be a Bank Netting Member of FICC's Government Securities Division (GSD).... Second, the sponsoring member must demonstrate that it is "well-capitalized".... Third, the sponsoring member must have at least $5bn in equity capital. Fourth, to be sponsored, the end user must be a qualified institutional buyer client of a sponsored member (previously it was only available to registered investment companies). As a result, sponsored repo transactions have so far been mostly limited to large US banks that have been willing to sponsor their clients onto the FICC platform.... However, over the course of this year, more counterparties are expected to gain access to sponsored repo."
Federated Investors hosted its Fourth Quarter earnings call Friday morning and discussed a number of topics involving money market funds. President & CEO J. Christopher Donahue commented, "As the Federal Reserve raised short-term interest rates four times in 2018, Federated's wide range of liquidity products offered competitive yields for investors seeking cash-management solutions. Federated's money market assets [funds and SMAs] increased nearly $38 billion in the fourth quarter, crossing the $300 billion threshold." Federated reported, "Money market mutual fund assets were $208.5 billion at Dec. 31, 2018, up $23.0 billion or 12% from $185.5 billion at Dec. 31, 2017, and up $25.5 billion or 14% from $183.0 billion at Sept. 30, 2018."
Donahue added, "We saw positive money market fund flows from a variety of our institutional and intermediary clients during the quarter. Prime money fund assets increased about $7 billion or 18% from about $38.2 billion in Q3 to $45.1 billion in Q4. Our money market fund market share, including sub-advised funds, at year-end was 7.9%, up from 7.3% at the end of the third quarter." (See the earnings release here and the earnings call transcript from Seeking Alpha here.)
When asked what's been driving gains, Donahue responded, "What it really represents is repeating the sounding joy of many, many decades in the money market fund business and a long-term, steady commitment to it. Over the years we really don't lose clients, we just have clients move money. When you're set up this way and you get a confluence of factors in the marketplace, like for example increased volatility, like for example risk off, like for example banks aggressively managing their betas on their deposits, you have a situation where money market fund flows come in. But if you haven't developed the relationships and the products in advance, it doesn't come to the home team like it did here."
Debbie Cunningham, Money Market CIO, elaborated, "I would just emphasize three specific reasons. Chris hit on all of them -- rates are above inflation at this point, so interest rates are something that are earning something for the underlying client; volatility in the longer term, fixed income and equity markets [means it] is a great place to have a safety point in the liquidity markets; and the preponderance of bank products that are now paying something that's grossly under what is being earned in money market funds."
On the "huge quarter for the money market business," she stated, "I think to some degree, the volatility in the longer-term fixed income and the equity markets drove a substantial amount of the sales that occurred in the fourth quarter, and the allocations that customers were making to liquidity products were higher than necessarily they had historically been. Add to the fact that [we're now] two-plus years post the reforms that took place to the money market funds in 2016, and I think that they were happy to have that additional allocation in these products. Having said that, there was substantial amounts of what I'd call recurring types of sales also, but definitely the volatility in the marketplace is something that was driving certain clients to increase those allocations."
Asked about the Fed reducing its balance sheet, Cunningham noted, "Given the supply that is needed from a Treasury perspective to continue to fund the deficit, with the expectation of continued issuance once we're ... past the issue with the debt ceiling in the end of the first quarter, early parts of second quarter, ... we'll continue to see supply increase in the Treasury sector. Obviously that is impacting then not only the Treasury sector but commercial paper or other types of credit sectors.
"What would potentially change the equation a little bit more than the balance sheet would be if Treasury decided to change their funding model. The additional funding that they've done in 2018 was substantially in the money market sector, Treasury bills. They added a new bill, they increased settlement [to] two settlements per week in the Treasury bill market, and ultimately if they change that strategy and go back to something that's longer-term issuance, that may have some impact, although still that could be used as collateral in the repo market, which has also been growing in 2018 and '19. So, the outlook is still pretty good even if the Fed cuts back their balance sheet, not as attractive but still pretty good."
When asked about LGIPs and SMAs, Cunningham said, "I think Chris mentioned our 2a-7 assets are a little over $200 billion, our total liquidity assets are a little over $300 billion. A substantial portion of that is in the local government investment pool sector, separate accounts, and in the end of the fourth quarter and during the first quarter, generally speaking, those types of accounts are gathering assets. So they are collecting taxes, they are collecting receipts from the various constituents within their pools, and it's not until late in the first quarter, into the second quarter and third quarter that they actually start to pay those out. It's a very seasonal business, and if you look historically, that seasonality has been there since we started our first government investment pool management, which was back in early 2002 with Texas."
She added, "What has basically changed over the course of the last several years has been with interest rates now above zero in that sector, you've got more municipalities, more school districts participating in those pools. Even though the seasonality is identical as it's been historically, the overall base and the volume has actually increased because of the higher rate environment."
In response to a question based on the Fed being on hold and potentially easing, Cunningham shared these insights: "From the Fed's perspective, we're actually not in the camp of them being on hold at this point. We think their processes may ... scrutinized.... But we are still of the thinking that ... they are likely to add two more moves to their tightening schedule, bringing them to what we think would be clearly in their neutral rate zone for 2019.... We probably think it's more second, maybe third or fourth-quarter related, and for that reason we're not real excited with what the yield curve is giving us right now. We're keeping our weighted average maturities a little bit shorter. We have generally the longer end of our barbell situated in the shorter end, not all the way out at 12- and 13-months sector, which is as far out as we can go."
She explained, "Generally, the first quarter is, from an industry perspective, one that is a negative volume quarter. I don't know whether we'll see that this year or not. We didn't last year. But traditionally it is a negative volume quarter, not necessarily related to rates or what's happening on an expectation basis. I don't know that we see anything different, though, based on the Fed moving two times in 2019 or being on hold."
Finally, Federated was asked about changes in advertising and marketing strategies to raise awareness about the higher rates now available. Raymond Hanley, President of Federated Investors Management Co., jumped in to field that one. "We have a couple things there. We have a PR effort where our friend Debbie here spends a pretty significant amount of time on the airwaves, and then we have a lot of other portfolio managers and client portfolio managers out and about, talking about rates and talking about the market and talking about whatever else is going on, so that's from a PR standpoint."
Donahue commented, "Well over time, there have been dramatic shifts from what would be regular advertising to digital and social media advertising. It's been a dramatic shift inside of how we’re allocating those dollars." Hanley added, "It's not exactly on your question of advertising, but we have maintained and expanded a sales force dedicated to the growth of that business. So a lot of that promotion and contact and growth happens due to the good efforts of the sales force."
Charles Schwab Corporation as well as several other brokerages and asset managers recently released fourth quarter earnings. Their statements and calls contained several mentions of cash, money market funds and brokerage sweep deposit accounts, which we excerpt from below. Schwab CFO Peter Crawford, commenting on shifting cash out of sweep money funds and into Schwab banks, says, "Net interest revenue set a record at $5.8 billion, up 36% year-over-year due to the Fed's rate normalization and higher interest-earning assets, which reflect growth from both client cash allocations and the transfer of sweep money market funds to bank and broker-dealer sweep. As we progressed with these transfers, the corresponding money fund revenue naturally declined, yet positive flows in our advice solutions kept asset management and administration fees at $3.2 billion, down just 5% from last year."
He adds, "We grew our consolidated balance sheet 22% to end the year at $297 billion, reflecting client cash allocations through the year -- including a December surge in the midst of heightened market volatility -- and $72 billion of sweep transfers. We ended the year with $30 billion remaining in sweep money market fund balances. Even with these transfers, we continued to generate more than enough capital to support our ongoing business growth and began accelerating returns to our stockholders."
For more on Schwab's shifting of brokerage cash from money funds into FDIC sweeps, see these Crane Data's News stories: Schwab Keeps Shifting to FDIC (10/18/18), Schwab Liquidating Cash Reserves, Shift to Sweeps; Rates Inch Higher (10/2/18), Schwab KOs Another (6/18/18), Schwab Money Market Fund Liquidates, Shift to Bank Deposits Continues (5/29/18) and Schwab Moves 25 Billion from MMFs to Deposits in Q1 (4/17/18).
Morgan Stanley, which also shifted assets from its money funds into bank deposits in 2018, reports total U.S. bank deposits of $187 billion, an increase of 7% versus the third quarter, driven by higher-than-expected deposit sweep balances. CFO Jonathan Pruzan, comments, "We did see a nice uplift in the deposits. Some of that is seasonal. But some of that was activity driven by asset allocation, the primary driver of what people do with their money in our system. And we did see people change their behavior a bit. We saw redemptions and mutual funds going into cash and cash-like products, as well as some of the dividends that they received not going back into the market." (See to our June 6, 2018 News, "Morgan Stanley to Sweep More to Banks from MMFs.")
TD Ameritrade also discussed cash on its call. When asked about "deposit beta," CFO Steve Boyle responds, "I'd be extremely surprised if we changed any pricing on deposits that we passed anything through to the customers in a flat rate environment. And we're really not seeing anything dramatic on the money moving out of cash either. So we saw a little bit of movement a quarter or two ago, that's been pretty steady.... We feel really good about betas, both in terms of how our customers are reacting in this environment. They consider this operational cash and how our competitors are reacting, they seem to be pretty rational here. So we don't expect any big changes."
He adds, "I think rates moved up pretty well over the last couple years. We saw an increase in movement over the last couple of quarters. It seems to pretty much normalize this quarter, as you said, folks are more focused on volatility. So, I don't know that we want to call the end, but my sense is that with rates leveling off here and whatnot that it's going to be a phenomenon that's sort of past us here."
CEO Tim Hockey comments on investors' recent preference for money funds, explaining, "So money market fund balances are pretty modest for us.... I think we ended the period still under like $6 billion in money market borrowing, money market suite fee balances and then money market – money market funds overall are, not sure.... Yeah. As we said, we've seen some money move into money market funds, but nothing pronounced this quarter relative to the other quarter. So I wouldn't say anything really different." (See our Oct. 15, 2018 Link of the Day, "TDAM Liquidating Money Funds.")
Interactive Brokers, which has been advertising a 1.68% sweep rate and which began a multibank FDIC sweep program in Q4, reported that "excess cash from customers' credit balances were invested primarily in reverse repos and short-to-medium-term Treasury securities, providing a continuing stream of higher interest income as clients' balances grew."
They add, "We are always looking for ways to improve what we earn on these balances, so we started an insured bank deposit sweep program, which our customers have shown interest in, and we continue to look at investing in agency securities though we did not have any of these at the end of the year. The rates we pay to our customers are indexed to the benchmarks. Accounts with over $100,000 of value in the U.S. receive interest on their cash holdings of 92 basis points, all but half of 1% of the benchmark Fed funds rate. Most competitors we know of pay practically nothing on excess overnight cash in brokerage accounts. They pocket your interest. We do not."
Bank of America revealed that Merrill Lynch's Global Wealth & Investment Management (GWIM) deposits grew by 3% year over year. It explains, "`GWIM's deposit balances benefited from market volatilities as customers moved from investments to cash. We also simplified client account structures for clients, which moved funds from off-balance-sheet sweep accounts to deposits. Global banking deposits continued to grow well, up 9% year over year.... We saw expected rotation from non-interest-bearing to interest-bearing deposits." (See our Dec. 4, 2018 Link of the Day, "BlackRock BIF Money Fund Liquidates" and our Aug. 22, 2018 News, "WSJ on Merrill Changing Sweeps.")
Finally, BlackRock barely mentions cash during its latest earnings call. But CFO Gary Shedlin notes, "BlackRock's cash-management platform continues to increase share by leveraging scale and delivering transformative distribution and risk-management technology through both Cachematrix and Aladdin. Global equity indices declined more than any year since the financial crisis, and almost every asset class but cash posted negative returns."
Note: Federated Investors released its Q4 earnings report last night and hosts its Q4 earnings call Friday morning (at 9am). Their release explains, "Investors interested in listening to the conference call should dial 877-407-0782 ... or visit `FederatedInvestors.com." Watch for our coverage of the Federated call, earnings and new filings on Monday.
This month, MFI interviews Jim Palmer, CIO of Minneapolis-based U.S. Bancorp Asset Management (USBAM), which manages the First American Funds, Inc. First American, the 14th largest money fund manager, is one of the few investment advisers focusing solely on cash and investment-grade fixed income. USBAM manages 34 money funds with $58.2 billion (as of 12/31/18), according to Crane Data. We discuss the fund manager's outlook for 2019, the Fed, SMAs and a number of other topics below. Our Q&A follows. (Note: The following is reprinted from the January issue of Money Fund Intelligence, which was published on Jan. 8. Contact us at info@cranedata.com to request the full issue.)
MFI: Tell us about your team. Palmer: I am the Chief Investment Officer of U.S. Bancorp Asset Management, which is a dedicated investment-grade, fixed-income manager. We have over $83 billion in assets under management as of the end of November 2018. We focus on three primary business lines. We are the investment adviser to the First American family of money market funds. We have a book of investment-grade, fixed-income SMA portfolios. Typically, these portfolios have maturity limits of five years and under, but we do have strategies going out to 15 years. We also manage the collateral reinvestment for the securities lending program. We run both taxable and tax efficient strategies.
MFI: What are your big issues for 2019? Palmer: From an investment standpoint, I think [the biggest is] accurately predicting Fed rate changes for 2019, which we believe will be far less telegraphed than in the recent past. Obviously, making accurate predictions around what the Fed will do is crucial for money market fund and SMA absolute performance as well as for relative performance versus peers. We believe predicting the Fed will be more challenging this year for a couple of reasons. One, the Fed will be holding live press conferences at each meeting going forward, implying each meeting is live for a policy rate adjustment. Whereas [in] 2018, it was well signaled and accepted that at every other meeting we would be getting a rate hike.
I'd also say the economic and financial market outlook is far more uncertain in 2019 than in 2018, which implies we may or may not be approaching the end of the rate hike cycle and the end of quantitative tightening. [So] the next policy adjustment will be more uncertain than it has been in the past. If you looked at 2018, certainly the direction was that rates were going up. Today, there are opinions suggesting the Fed should stop or perhaps even begin cutting rates in the coming year, even while the Fed's Dot Plot looks for two 2019 rate hikes.
MFI: What about managing late cycle credit risk? Palmer: With the solid economic growth we've seen, it has been a fairly supportive environment for credit, particularly financial credit. But we are clearly coming toward the end of the credit cycle and leverage has been increasing, especially in the industrial sector. That said, we still believe the highly-rated banks and financial credits which typically make up the majority of Prime fund investments are comfortably within minimal credit risk standards based on their fundamentals and strong capital and liquidity metrics. We look for most of the credit stress to be in the triple-B type names. Issuers you would find more in SMA or short fixed-income portfolios than in the higher quality Prime money market funds. I think every investment manager is sharpening their credit work to make sure they understand the direction and risks of the overall credit markets and in their Prime fund holdings as well.
MFI: What are the major issues from a business standpoint? Palmer: The money market fund industry is almost assuredly going to face greater competition for shareholder balances from increased U.S. Treasury issuance, particularly in T-bills. With growing federal budget deficits, all that new debt will require funding, and it's going to represent a real competitive headwind for money market fund asset growth. But from a supply and demand standpoint, all that new issuance should help push money fund yields up too. One tailwind for industry growth should be higher yields making money funds a more attractive asset class. Certainly, cash yielding over 2 percent is a far more viable investment option than during the days of ZIRP. Given the market volatility we have been experiencing, the concept of holding cash seems to be gaining more steam in the broad media and marketplace as a source of adequate return for your money, especially if you are in a defensive mode.
MFI: Is cash taking market share? Palmer: Right now, it is probably a little of both [stocks and bonds]. I think money funds are a great store of value if you are looking to preserve principal. So I think cash is probably reaping the benefits of the recent market turmoil.
MFI: What about Prime/Govt spreads? Palmer: Currently, the spread between Prime funds and Treasury and Government funds is around 20 basis points. I think that is probably a reasonable range going forward. I suspect any uptick in T-bill yields from the amount of forecasted Treasury issuance will offset any marginal increase you might see in bank spreads for shorter term bank paper. So I don't see much movement. I suspect the difference between Treasury and repo funds and Government and repo funds will basically be negligible going forward.
Right now, Treasury funds are actually out-yielding Government funds despite the perceived difference in credit quality. In the current environment, the yield advantage is probably driven by the different composition of floating-rate securities.... However, the difference between repo rates on Treasury versus agency collateral has shrunk to a basis point or two at best. Also, there is a greater amount of Treasury-backed repo in Government funds, which blurs the difference between the two funds.
MFI: Can you talk more about the Fed? Palmer: Sure. Looking back a few months, we expected, as most market observers did, that the Fed would raise rates in December. We have also been consistently taking the 'under' versus the Fed's Dot Plot which had been suggesting three 2019 rate hikes. We were in the 'one or two' camp and will probably remain there, with a bias leaning toward one 2019 rate hike right now. On the balance sheet, the Fed certainly seems adamant about shrinking its securities holdings. [But] I do think Chairman Powell's comments that quantitative tightening may be more on autopilot was really just a verbal gaffe, which is already being dialed back by Fed officials. In the end, I think the Fed will re-evaluate the pace of quantitative tightening and perhaps take measures to reduce the maximum monthly balance sheet reduction, if for no other reason than to let investors know they are observing and aware of current market conditions and are not restricted by their models.
MFI: Tell us about your SMA portfolios. Palmer: USBAM's SMA assets under management at the end of November 2018 were about a third of our money fund assets, so it is a significant but smaller portion of our overall business. The SMA assets are longer-term portfolios, which vary anywhere from enhanced cash to portfolios with durations out to four years. Many SMA portfolios invest in triple-B credits as well, though we do not manage any high-yield strategies. The dynamics for SMA portfolios are a little different than money market funds. We think repatriation and the tax code changes impacted the SMA business more so than money market funds. The late 2017 tax code changes caused companies to become more conservative and more liquid with their cash.... So, I think companies were prudently being more conservative, especially when you consider the opportunity cost for holding cash was much lower as the Fed raised rates. Then late in the year you saw volatility in the marketplace which made cash an even more attractive opportunity.
MFI: Do investors use SMAs in tandem with money funds? Palmer: Absolutely, combining money market funds and SMA portfolios is a core strategy for many large companies. These companies first invest a significant portion of their operating cash in highly liquid instruments such as money market funds and bank deposits to meet their day-to-day business needs. SMA portfolios play a role when these companies have large excess cash balances which may not be needed for an extended period, probably measured in years.
MFI: Talk about communications. Palmer: Our investors have access to our investment team to discuss markets and our strategies, but we also produce a fair amount of market commentary. We have just started posting weekly blogs on our USBAM website, which will help distribute our views not only on current market dynamics, but also on basic market fundamentals, investment terms and a little history as well. I write commentaries on a quarterly and monthly basis, which go a bit more into detail on the strategic thinking driving our portfolio decisions. Our credit analysts also produce commentaries on topical issues. There is no question as to the importance of investment advisers producing relevant content and education. We certainly have increased the amount of value-added content we produce for our clients and shareholders.
MFI: What about investment philosophy? Palmer: We seek to add excess returns utilizing yield-curve positioning, duration management, sector allocation and security selection. We consider ourselves to be an unbiased manager among these strategies as each may represent greater relative value in any given market cycle. Core to all our investment strategies is portfolio and sector diversification along with a strong focus on fundamental credit research. Those fundamentals are crucial in all markets, but are particularly important in periods of increased market volatility and as we approach the late stages of a credit cycle.
A press release entitled, "BlackRock Intends to Launch Environmentally-Aware Money Market Fund" tells us, "BlackRock Cash Management has filed an initial registration statement for the BlackRock Liquid Environmentally Aware Fund ('LEAF'), a series of the BlackRock Funds, with the U.S. Securities and Exchange Commission. LEAF is a prime money market fund that will seek to provide clients with as high a level of current income as is consistent with liquidity and preservation of capital, while giving consideration to select environmental criteria." We quote from the release, and also review recent briefs from Wells Fargo Funds and S&P Global Ratings, below. (See the new fund filing here and see also Reuters' "BlackRock Plans Environmentally Conscious Money Market Fund".)
The release explains, "LEAF will seek to invest in a broad range of money market instruments whose issuer or guarantor, in the opinion of BlackRock, at the time of investment has better than average performance in environmental practices. BlackRock will use data from independent ESG ratings vendors and may employ the use of its own models. The Fund will also prohibit any investments in companies that earn significant revenue from the mining, exploration or refinement of fossil fuels or from thermal coal or nuclear energy-based power generation."
It adds, "In addition to LEAF's environmentally-focused investment strategy, 5% of the net revenue from BlackRock's management fee from the Fund will be used to purchase and retire carbon offsets either directly or through a third-party organization. BlackRock has also entered into an agreement with World Wildlife Fund (WWF), a leading environmental non-profit with recognized expertise and experience in environmental protection. As part of this agreement, BlackRock will make an annual payment to help further the global conservation efforts of WWF."
For more on ESG Money Market Funds, see our Sept. 7, 2018 News, "DWS ESG Liquidity Goes Live; Federated Explains Prime Private Fund," and our Aug. 13 News, "DWS Converts Variable NAV to DWS ESG Money Fund, First ESG Offering."
In other news, Wells Fargo Asset Management poses the question: "What's Attracting Investors to Prime MMFs?" They tell us, "Prime MMF yields have become attractive compared with other asset classes. As the Federal Open Market Committee (FOMC) continues to remove its monetary policy accommodating, yields on prime MMFs have outpaced government MMF yields, thereby having created a wider yield differential. At the same time, prime MMFs have experienced minimal NAV movement, consistently high liquidity, and greater diversity of holdings within the funds. As a result, investors have become more comfortable with the operational aspects of prime MMFs."
Wells continues, "The stringent liquidity, maturity, and diversification requirements mandated by the most recent SEC rules have led to a more stable product, especially in terms of liquidity and minimal NAV fluctuations. At Wells Fargo, these rules are consistent with the conservative manner in which the Heritage Money Market Fund has always been managed, emphasizing preservation of capital and high levels of liquidity. The yield advantage presented by prime MMFs has given investors an economic incentive to invest in these funds."
They point out, "Investors appear to have become more comfortable with the idea of fees and gates now that they have had an extended period to observe weekly liquidity levels in prime MMFs. Fund managers have typically maintained weekly liquid asset levels well above the 30% threshold. The industry has done this, in part, to avoid triggering this event."
The piece explains, "At Wells Fargo Asset Management, we've consistently maintained substantial liquidity well in excess of the 30% threshold in our flagship prime MMF, the Wells Fargo Heritage Money Market Fund. We believe the most important aspect of liquidity management is understanding the liquidity needs of the different investors in the fund. We have established know-your-customer procedures that allow for ongoing and regular communication between the sales and investment teams. As a result, the portfolio management team is better able to understand the nature and timing of the fund's cash flows and manage the fund's liquidity accordingly."
Wells Fargo expects trends favoring Prime MMFs to persist, writing, "Because preservation of principal and daily liquidity have remained the most important aspects of prime MMFs, we believe investors will continue to reposition into them. Cash investors may be aided in their decisions about where to invest their short-term cash by considering three factors related to prime MMFs: the volatility of a fund's NAV, its liquidity level, and the size of the fund."
They conclude, "Investors reexamining prime MMFs now have two years of empirical data to review since the 2016 SEC rules were implemented. To recap, these rules included additional liquidity and diversification requirements as well as maturity restrictions. Investors may now see that the rules have made a difference in the construction of portfolios and, in response, liquidity levels have been consistently high and NAV volatility has been low even as the FOMC has continued to raise rates. In addition, prime MMFs still offer same-day liquidity and may be reported as cash."
Finally, S&P Global Ratings welcomed the implementation of the EU's money market regulation as "an important milestone" on Jan. 21 (the original compliance target deadline), but was quick to note that the finalization of the transition has been pushed back to March 21. The agency released the brief, "EU-Domiciled Money Market Funds Still Scrambling For Regulatory Approval Following Reforms," which reviews the regulatory delay granted to euro-denominated funds plagued by negative yields. (See yesterday's Crane Data News, "European MMF Reforms Going Live, or Not? Economist Swipes at RDM Kill.")
S&P writes, "Many euro-denominated funds had used share-cancellation mechanisms (also known as reverse-distribution mechanisms) to maintain their net asset value (NAV) per share when the value of their assets were affected by negative interest rates. The mechanism was favored by stable NAV MMF investors. It was recently announced, however, that such mechanisms are not allowed under the EUMMFR."
They explain, "Given the short notice, a number of money market fund sponsors have delayed the conversion of their MMFs by using Article 44 of the regulation. This will see them finalize their transition by March 21, 2019 instead. Numerous Ireland- and Luxembourg-domiciled money market funds that have had share-cancellation mechanism language in their prospectus since 2012 have used Article 44 as a backstop."
S&P comments that some of the largest European money market fund providers still await regulatory approval in Ireland and Luxembourg for revised prospectuses in time to meet the revised deadline. The update says, "The 91 Europe-domiciled funds recognized as MMFs under the EUMMFR and rated by S&P Global Ratings had approximately €711 billion in assets under management as of Dec. 31, 2018.... S&P Global Ratings ... supports a regulatory environment that promotes increased transparency, enhanced liquidity, safer investment products, and investor protection as well as a level playing field for the European money market fund industry. Our ratings on the money market funds domiciled in Europe have not been affected by the implementation of EU MMFR."
There seems to be some confusion about whether indeed European Money Market Fund Reforms will go live on Monday, January 21. Following a letter from the Irish Central Bank (and comments from fund managers), we wrote on Jan. 14 that "European Money Market Funds [Were] Granted [an] Extension for Reforms, March 21." But after hearing (and participating in) the session on "European MMF Reforms & Offshore Funds" at our Money Fund University in Stamford on Friday, we learned that Irish and Luxembourg regulators meant to only allow the extension until March 21 for Euro funds and funds using the RDM, or reverse distribution mechanism. We review the latest on European reforms below, and also quote from a new Economist article on the subject. (Note: Thanks to those who attended and supported our Money Fund University last week! Attendees and Crane Data subscribers may access the Powerpoints and recordings via our "Money Fund University 2019 Download Center.")
In our Jan. 7 News, we published, "BNY Mellon Converts for European MF Reforms; USD Assets Rise in 2018," which explained, "BNY Mellon's Liquidity Funds are the latest to formalize plans to operate under the EU Money Fund Reforms that take effect Jan. 21. The fund group revealed changes to its BNY Mellon U.S. Dollar Liquidity Fund and BNY Mellon U.S. Treasury Fund, which will actually occur seven days before the final deadline -- on Jan. 14. A number of firms have already converted their money funds to be compliant with the pending reforms, including Aviva (9/1/18), BNP Paribas (11/11/18), and JP Morgan (11/30/18). Several firms -- BlackRock, Federated, and SSGA -- will convert late this week, on Jan. 11, and Morgan Stanley and UBS will also convert on Jan. 14."
Our Jan. 14 News explained, "Money market funds in Europe, which had been scheduled to submit to new regulations starting January 21, have been given a 2-month extension by Irish and Luxembourg fund regulators. A press release entitled, "Statement on the treatment of share cancellation under EU Regulation" explains, "The Central Bank of Ireland ('Central Bank') and the Commission de Surveillance du Secteur Financier ('CSSF') are issuing this joint statement in the interests of supporting the orderly implementation of the Money Market Funds Regulation (MMF Regulation) by converging their respective supervisory approaches to share cancellation and advising the market accordingly." (See also, the Financial Times article, "Fund groups gain reprieve from EU money market rules.")"
The Economist writes in "Europe's safest funds lose a tool to cope with negative interest rates" that, "January 21st should have been a momentous day for the European Union's money markets. A package of reforms five years in the making, designed to make the bloc's safest funds even safer, was due to kick in. Blue-chip firms like BlackRock and Morgan Stanley, anxious to meet the deadline, planned to switch their funds to compliant structures a week early. Yet on January 11th regulators announced a surprise delay. Money-market managers, which together oversee €1.3trn ($1trn), now have until March to put their houses in order. The delay stems from a row between national regulators over whether managers should ditch the 'share-cancellation mechanism' (SCM), a tool that helps them deal with negative interest rates."
The article explains, "Money-market funds invest in very short-term safe assets, like government bonds and top-notch corporate debt, to provide clients with a liquid alternative to cash. They play a key role for pension funds and large companies, which need to park their cash somewhere safe before paying pensions or wages at the end of the month. The aim is to maintain their capital at a stable value, often €1 per share. Any interest on portfolio assets is distributed to investors on the day via dividend payments, leaving the share price unchanged."
It continues, "But the system does not work when interest rates are below zero, as they have been in the euro zone since 2014. Negative yields cannot be distributed. So in Ireland and Luxembourg, home to most European money-market funds, regulators allow funds to cancel shares to get around the problem. The assets of the cancelled shares are split among the remaining ones, ensuring that their value per share remains at par. The share price does not budge."
The Economist article explains, "The European Commission dislikes SCMs. Although most experts disagree, it reckons 'share destruction' can be used to mask a capital loss in the fund. After a long silence the European Securities and Markets Authority (ESMA), which co-ordinates regulation across the EU, eventually sided with the commission, confirming that SCMs would be stopped. It had initially hinted that national authorities could decide how to phase out SCMs, which led managers to expect a long transition period. But on Christmas Eve managers were told that no grace period would be allowed."
It adds, "When managers fumed at the lack of notice, regulators delayed the reform. But the two-month reprieve does not help much. Managers are scrambling to restructure funds -- without an obvious solution to the negative-yield headache. Most are likely to move to accumulative structures, where share prices fluctuate along with the yield. Some worry investors could move their money to bank deposits, depleting funds. That may lower demand for the safe short-term debt issued by banks and states."
For more on European Reforms, see the following Crane Data News stories: "Schwab USD LA Goes Govt Ahead of European Reforms; Weekly Holdings" (1/3/19); "Money Fund Average Breaks 2.0%, Yields Rise; BNP Splits European MMFs" (12/27/18); "Money Fund Assets Skyrocket, Break $3 Trillion; UBS on European MMFR" (12/14/18); "JPMorgan Now Live With European Money Fund Reforms; VNAVs SnP AAA" (12/4/18); and "Cash Will Be King in '19 Says GS; BlackRock Update; Europe Rejects RDM" (11/26/18).
Mutual fund news source ignites is the latest media source to signal that a "very good" 2018 for money funds is likely to foreshadow an "even better" year for them in 2019, based on conversations with market participants. Thursday's article, "You Ain't Seen Nothing Yet': Money Fund Flows Expected to Surge in 2019," cites "investors' growing awareness of the products' yields," as the principal reason behind fund leaders' optimism. Ignites writes, "Money market fund assets grew by 7% last year, adding $209 billion -- more than the previous five years of inflows combined." We quote from the piece, and also cover the ICI's latest money fund asset totals below.
They explain, "Industrywide, money fund assets reached $3 trillion in mid-December for the first time since early 2010, according to Investment Company Institute data. That comes after hovering around $2.7 trillion for several years. And thanks to four Federal Reserve rate hikes during the year -- on top of five previous increases since late 2015 -- money fund yields cracked 2% mid-year and have continued rising."
The ignites news continues, "Money funds' higher yields have snuck up on many investors, says Peter Crane, president and CEO of Crane Data. The Federal Reserve's single rate hikes in 2015 and 2016 didn't have a big impact on the product's yields. But seven subsequent increases have pushed the target federal funds rate to between 2.25% and 2.50% -- returns that are now getting investors' attention." "It's like boiling the frog slowly," says Crane, referring to yields continuing to rise above 2% for the first time in years.
"In fact," the article noted, "significant 2018 increases in money fund assets at Vanguard and Fidelity show that more retail investors are moving out of lower-yielding bank deposit products and into money funds, says Crane, who adds that he thinks this shift will increase in 2019." The piece quotes Crane, "You ain't seen nothing yet.... I'll eat my hat if money fund assets don't grow more in 2019 than they did in 2018."
Finally, the piece adds, "The extreme market volatility of December and January could impact investors' 2019 asset allocation decisions, says Michael Morin, head of liquidity management solutions for Fidelity Investments. 'That's another possible tailwind [for money funds],' he says, noting that the yield the products offered is attractive when compared to losses by most equity and bond indexes. 'Perhaps they feel like their allocation to cash should continue to increase.'"
In other news, the ICI released its latest "Money Market Fund Assets <i:https://www.ici.org/research/stats/mmf/mm_01_17_19>_" report, which shows that `only Prime MMFs showed asset gains in the latest week. MMFs have now posted 11 weeks of gains out of the past 13 weeks <b:>`_, during which time they've risen by $177.1 billion. ICI's weekly series showed Retail MMFs decreasing $3.6 billion, or -3.0%, while Institutional MMFs declined $13.8 billion, or -7.4%, since the previous week.
They write, "Total money market fund assets decreased by $17.36 billion to $3.05 trillion for the week ended Wednesday, January 16, the Investment Company Institute reported <b:>_. Among taxable money market funds, `government funds decreased by $20.44 billion and prime funds increased by $4.55 billion. Tax-exempt money market funds decreased by $1.47 billion." Total Government MMF assets, including Treasury funds, stood at $2.313 trillion (75.9% of all money funds), while Total Prime MMFs reached $590.5 billion (19.4%). Tax Exempt MMFs totaled $145.5 billion, or 4.8%.
ICI explains, "Assets of retail money market funds decreased by $3.56 billion to $1.19 trillion. Among retail funds, government money market fund assets decreased by $3.73 billion to $703.43 billion, prime money market fund assets increased by $1.29 billion to $353.12 billion, and tax-exempt fund assets decreased by $1.11 billion to $136.28 billion." Retail assets account for over a third of total assets, or 39.1%, and Government Retail assets make up 58.9% of all Retail MMFs.
The release adds, "Assets of institutional money market funds decreased by $13.80 billion to $1.86 trillion. Among institutional funds, government money market fund assets decreased by $16.71 billion to $1.61 trillion, prime money market fund assets increased by $3.26 billion to $237.33 billion, and tax-exempt fund assets decreased by $354 million to $9.18 billion." Institutional assets accounted for 60.9% of all MMF assets, with Government Institutional assets making up 86.7% of all Institutional MMF totals.
Crane's Money Fund Symposium, the largest gathering of money market fund managers and cash investors in the world, will take place June 24-26, 2019 at The Renaissance Boston Waterfront Hotel, in Boston, Mass. The preliminary agenda is now available and registrations are now being taken. Our previous MFS in Pittsburgh attracted 575 attendees, and we expect another record turnout for our 11th annual event in Boston this summer. Money Fund Symposium attracts money fund managers, marketers and servicers, cash investors, money market securities dealers, issuers, and regulators. We review the agenda, as well as Crane Data's 2019 conference calendar, below. (Welcome to those of you attending Crane's Money Fund University, which starts today in Stamford, Conn., and runs through Friday. Attendees and Crane Data subscribers may access our conference materials at the bottom of our "Content" page or our via our Money Fund University 2019 Download Center. Feel free to drop by!)
Our June 24 Symposium Opening (afternoon) Agenda kicks off with a "Welcome to Money Fund Symposium 2019" and keynote on "Money Funds, Cash Comeback" from Peter Crane, President of Crane Data. The rest of the Day 1 agenda includes: "The State of the Money Fund Industry & MMFs," with Crane, Yeng Butler of SSgA, and Alex Roever of J.P. Morgan Securities; "Risks & Ratings: Credit Liquidity, & NAV Moves," with Robert Callagy from Moody's Investors Service, Greg Fayvilevich from Fitch Ratings, and Guyna Johnson from S&P Global Ratings; and, a "Major Money Fund Issues 2019" panel with Tracy Hopkins of Dreyfus/BNY Mellon Cash Investment Strategies, Jeff Weaver of Wells Fargo Asset Management, and Peter Yi of Northern Trust Asset Management. (The evening's reception is sponsored by Bank of America Merrill Lynch.)
Day 2 of Money Fund Symposium 2019 begins with "Strategists Speak '18: Fed & Rates, Repo & SOFR," which features Mark Cabana of Bank of America, Joseph Abate of Barclays, and Chris Chadie of Credit Suisse, followed by a "Senior Portfolio Manager Perspectives" panel, including Laurie Brignac of Invesco, Deborah Cunningham of Federated Investors, and Nafis Smith of Vanguard Group. Next up is "Government & Treasury Money Fund Issues," with moderator Priya Misra of TD Securities, Adam Ackerman of J.P. Morgan Asset Management, and Ed Dombrowski of AB Funds. The morning concludes with "Muni & Tax Exempt Money Fund Update," featuring Colleen Meehan of Dreyfus, Sean Saroya of J.P. Morgan Securities, and John Vetter of Fidelity.
The Afternoon of Day 2 (after a Dreyfus-sponsored lunch) features the segments: "Dealer's Choice: Supply, New Securities & CP" with Stewart Cutler of Barclays, John Kodweis of J.P. Morgan Securities, and Nick Ro of Toyota Financial Services; "Analysts Roundtable: Concerns in Credit" with Jimmie Irby of J.P. Morgan AM, Keith Lawler of Bank of America Merrill Lynch, and Matthew Plomin of DWS; "SMA & Ultra-Short Update; Bond Fund Regs," with Dave Martucci of JPMAM, Kerry Pope of Fidelity, and Steve Cohen of Dechert. The day’s wrap-up presentation is "Corporate Liquidity & Investor Issues" involving Lance Pan of Capital Advisors and Tom Hunt from AFP. (The Day 2 reception is sponsored by Barclays.)
The third day of the Symposium features the sessions: "Treasury & NY Fed Update; Agency Issuance" with Tom Katzenbach from the U.S. Dept. of Treasury, Dave Messerly of the FHLBanks - Office of Finance, and Josh Frost of the Federal Reserve Bank of NY; "European Money Funds After Reforms," with Kim Hochfield of Morgan Stanley Investment Management and Dan Morrissey of William Fry; and concludes with "Brokerage Sweep: Deposits vs. Money Funds" with Rick Holland of Charles Schwab Investment Management, Joe Hooker of Promontory Interfinancial Network and Tuyen Tu of Raymond James; then "Technology, Software & Data in Money Funds" ends the program with Peter Crane and Greg Fortuna of State Street Fund Connect.
Visit the MF Symposium website at www.moneyfundsymposium.com) for more details. Registration is $750, and discounted hotel reservations are available. We hope you'll join us in Boston this June! We'd like to encourage attendees, speakers and sponsors to register and make hotel reservations early. Note that a couple of our speakers have yet to confirm their participation, and the agenda is still in the process of being finalized. E-mail us at info@cranedata.com to request the full brochure, or click here to see the latest.
In other conference news, preparations are being made for the third annual Crane's Bond Fund Symposium, which will be held at the Loews Philadelphia Hotel March 25-26. (Click here to see the PDF agenda.) Bond Fund Symposium is the first conference devoted entirely to bond mutual funds, bringing together bond fund managers, marketers, and professionals with fixed-income issuers, investors and service providers. The majority of the content is aimed at the growing ultra-short and conservative ultra-short bond fund marketplace. (As a reminder, please register for BFS and make hotel reservations for BFS soon if you plan on attending!)
Crane Data, which recently celebrated the fourth anniversary of its Bond Fund Intelligence publication and BFI XLS bond fund information service and benchmarks, continues to expand its fixed income fund offerings with the recent launch of Bond Fund Wisdom product and Bond Fund Portfolio Holdings dataset. Bond Fund Symposium offers attendees a concentrated and affordable educational experience, as well as an excellent networking venue. Registration for Bond Fund Symposium is $750; exhibit space is $2,000 (includes 2 tickets); and sponsorship opportunities are $3K, $4K, $5K and $6K. Our mission is to deliver the best possible conference content at an affordable price to bond fund professionals and investors.
Finally, mark your calendars for Crane's 7th annual "offshore" money fund event, European Money Fund Symposium, which will be held in Dublin, Ireland, September 23-24, 2019. This website (www.euromfs.com) will be updated with the 2019 information soon. (Contact us to inquire about sponsoring or speaking.)
Crane Data's latest MFI International shows total assets in "offshore" money market mutual funds, U.S.-style funds domiciled in Ireland or Luxemburg and denominated in USD, Euro and GBP (sterling), up overall year-to-date in the early days of 2019 after rising in 2018. Through 1/14/19, MFII assets are up $5.4 billion to $851 billion. (They rose $15 billion in 2018 after rising $100 billion in 2017.) Offshore USD money funds are up $4.1 billion YTD, continuing to defy predictions of repatriation-related outflows (they rose $29B last year). Euro funds are still feeling the pain of negative rates and pending European MMF reforms; they're down E5.4 billion YTD (following 2 flat years). GBP funds are up L5.7B. U.S. Dollar (USD) money funds (174) account for over half ($458 billion, or 53.8%) of this "European" money fund total, while Euro (EUR) money funds (100) total E93.6 billion (11.0%) and Pound Sterling (GBP) funds (104) total L215 billion (25.3%). We summarize our "offshore" money fund statistics and Money Fund Intelligence International Portfolio Holdings below.
USD MMFs yield 2.31% (7-Day) on average (as of 1/14/19), up from 2.29 % on 12/31/18, 1.19% at the end of 2017 and 0.56% at the end of 2016. EUR MMFs yield -0.48 on average, up from -0.49% at year-end 2018, -0.55% on 12/29/17 and -0.49% on 12/30/16, while GBP MMFs yielded 0.65%, up from 0.64% on 12/31/18, from 0.24% at the end of 2017 and 0.19% at the end of 2016. (See our `latest MFI International for more on the "offshore" money fund marketplace.)
Crane's MFII Portfolio Holdings, with data (as of 12/31/18), show that European-domiciled US Dollar MMFs, on average, consist of 27% in Commercial Paper (CP), 20% in Certificates of Deposit (CDs), 15% in Treasury securities, 22% in Repurchase Agreements (Repo), 14% in Other securities (primarily Time Deposits), and 2% in Government Agency securities <b:>`_. USD funds have on average 37.5% of their portfolios maturing Overnight, 12.0% maturing in 2-7 Days, 18.0% maturing in 8-30 Days, 12.4% maturing in 31-60 Days, 7.5% maturing in 61-90 Days, 8.8% maturing in 91-180 Days, and 3.7% maturing beyond 181 Days. USD holdings are affiliated with the following countries: US (28.4%), France (13.8%), Japan (11.4%), Canada (13.1%), United Kingdom (5.6%), Germany (4.5%), Sweden (3.8%), Australia (3.9%), The Netherlands (3.2%), Switzerland (3.5%), Singapore (2.2%), and China (1.8%).
The 10 Largest Issuers to "offshore" USD money funds include: the US Treasury with $76.5 billion (15.1% of total assets), BNP Paribas with $22.0B (4.4%), Wells Fargo with $16.6B (3.3%), Mitsubishi UFJ Financial Group Inc with $15.3B (3.0%), Bank of Nova Scotia with $15.1B (3.0%), RBC with $14.0B (2.8%), Mizuho Corporate Bank Ltd with $13.3B (2.6%), Toronto-Dominion Bank with $13.2B (2.6%), Societe Generale with $11.9B (2.4%), and Barclays PLC with $11.6B (2.3%).
Euro MMFs tracked by Crane Data contain, on average 45% in CP, 27% in CDs, 20% in Other (primarily Time Deposits), 6% in Repo, 1% in Agency securities, and 1% in Treasuries. EUR funds have on average 20.7% of their portfolios maturing Overnight, 12.5% maturing in 2-7 Days, 22.3% maturing in 8-30 Days, 17.0% maturing in 31-60 Days, 12.5% maturing in 61-90 Days, 12.3% maturing in 91-180 Days and 2.5% maturing beyond 181 Days. EUR MMF holdings are affiliated with the following countries: France (29.7%), Japan (15.0%), the US (9.2%), Sweden (7.3%), Netherlands (5.1%), Germany (6.6%), U.K. (4.4%), China (3.1%), Switzerland (2.6%) and Belgium (2.9%).
The 10 Largest Issuers to "offshore" EUR money funds include: Credit Agricole with E6.1B (6.3%), BNP Paribas with E4.4B (4.5%), BPCE SA with E3.5B (3.7%), Mizuho Corporate Bank Ltd with E3.5B (3.6%), Sumitomo Mitsui Banking Co with E3.3B (3.5%), Svenska Handelsbanken with E3.2B (3.3%), Credit Mutuel with E3.0B (3.1%), Nordea Bank with E2.9B (3.0%), Procter & Gamble Co with E2.5B (2.6%), and Societe Generale with E2.5B (2.6%).
The GBP funds tracked by MFI International contain, on average (as of 12/31/18): 34% in CDs, 27% in Other (Time Deposits), 23% in CP, 10% in Repo, 6% in Treasury, and 0% in Agency. Sterling funds have on average 22.7% of their portfolios maturing Overnight, 9.7% maturing in 2-7 Days, 20.4% maturing in 8-30 Days, 20.4% maturing in 31-60 Days, 13.2% maturing in 61-90 Days, 9.5% maturing in 91-180 Days, and 4.1% maturing beyond 181 Days. GBP MMF holdings are affiliated with the following countries: France (16.3%), Japan (17.3%), United Kingdom (16.7%), Canada (8.6%), Netherlands (6.8%), Australia (2.2%), Germany (5.3%), United States (4.0%), Sweden (4.7%), and Singapore (3.2%).
The 10 Largest Issuers to "offshore" GBP money funds include: UK Treasury with L15.6B (9.5%), Mizuho Corporate Bank Ltd with E7.7B (4.7%), Mitsubishi UFJ Financial Group with L6.4B (3.9%), Sumitomo Mitsui Trust Bank with L5.7B (3.5%), BNP Paribas with L5.5B (3.4%), Sumitomo Mitsui Banking Co with L5.4B (3.3%), BPCE SA with L5.4B (3.3%), Nordea Bank with L4.9B (3.0%), Toronto-Dominion Bank with L4.8B (2.9%), and Rabobank with L4.4B (2.7%).
In other news, the Investment Company Institute released its latest "Money Market Fund Holdings" summary on Tuesday (with data as of Dec. 28, 2018). This monthly update reviews the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds. (See also Crane Data's Jan. 11 News, "Jan. MF Portfolio Holdings: Treasuries, Repo Jump; FICC Biggest Repo Zero.")
The MMF Holdings release says, "The Investment Company Institute (ICI) reports that, as of the final Friday in December, prime money market funds held 29.1 percent of their portfolios in daily liquid assets and 43.1 percent in weekly liquid assets, while government money market funds held 62.6 percent of their portfolios in daily liquid assets and 77.9 percent in weekly liquid assets." Prime DLA increased from 28.5% in November, and Prime WLA grew from 41.6% the previous month. Govt MMFs' DLA increased from 61.0% in Nov. but Govt WLA decreased from 78.9% that month.
ICI explains, "At the end of December, prime funds had a weighted average maturity (WAM) of 30 days and a weighted average life (WAL) of 64 days. Average WAMs and WALs are asset-weighted. Government money market funds had a WAM of 31 days and a WAL of 89 days." Prime WAMs were down two days from last month, and WALs shortened by seven days. Govt WAMs were unchanged from Nov. levels and Govt WALs added two days in December.
Regarding Holdings By Region of Issuer, ICI's release tells us, "Prime money market funds' holdings attributable to the Americas rose from $226.86 billion in November to $275.16 billion in December. Government money market funds' holdings attributable to the Americas rose from $1,779.61 billion in November to $1,977.67 billion in December."
The Prime Money Market Funds by Region of Issuer table shows Americas-related holdings at $275.2 billion, or 48.5%; Asia and Pacific at $118.0 billion, or 20.8%; Europe at $168.2 billion, or 29.7%; and, Other (including Supranational) at $5.5 billion, or 1.1%. The Government Money Market Funds by Region of Issuer table shows Americas at $1.978 trillion, or 83.4%; Asia and Pacific at $122.5 billion, or 5.2%; and Europe at $264.9 billion, or 11.2%.
The January issue of our Bond Fund Intelligence, which was sent out to subscribers Tuesday, features the lead story, "Top Stories & Funds in '18; Outlook for '19; BFI Turns 4," which looks at the biggest stories and top-performing funds of 2018, and the profile, "FPA New Income's Atteberry: Staying Short But Flexible," our latest Portfolio Manager interview. BFI also recaps the latest Bond Fund News and includes our Crane BFI Indexes, which show that bond fund yields and returns rose again in December. We excerpt from the new issue below. (Contact us if you'd like to see our Bond Fund Intelligence and BFI XLS spreadsheet, or our Bond Fund Portfolio Holdings dataset, and mark your calendars our 3rd annual Bond Fund Symposium, which will take place March 25-26, 2019 in Philadelphia.)
The lead BFI story says, "A strong year for bond funds was interrupted by a period of outflows in the late stages of 2018 as bond investors sought the safety of lower-risk vehicles, including money-market funds. Bond fund assets and returns ended the year almost flat, with the former up slightly and the latter down slightly. We briefly review last year, including top stories from BFI, which celebrates its 4th birthday this month, and we list the top-performing funds in 2018."
It continues, "Bond fund assets remained above $4 trillion and bond ETFs broke above $600 billion in late 2018. According to ICI, bond fund assets stood at $4.087 trillion as of Nov. 30, 2018, up $51.0 billion, or 12.6%, from a year earlier. Bond ETFs totaled $614.1 billion on 11/30/18, up $66.4 billion, or 12.1%, over the past year."
Our "Fund Profile" says, "This month, BFI interviews Thomas Atteberry, co-manager of the $5.6 billion FPA New Income Fund and partner at the Los Angeles-based First Pacific Advisors. He discusses the fund's strategy, investor base and focus on preservation of capital. He also tells us why ultra-short may be too short in the coming year and why short-term is likely the 'sweet spot.'"
BFI asks Atteberry to, "Give us some background on the fund." He answers, "The FPA New Income Fund was originally run by Bob Rodriguez. FPA purchased the fund from Transamerica in 1984, so that's how we acquired a bond fund. Bob hired me in '97 to come to work for him as the first analyst on the fund.... I was made co-manager of the fund in 2004 and was put in charge in 2010."
We also ask him to, "Tell us about the fund. He responds, "We have two objectives we try to reach. One is a positive return in a 12-month period; and then we're trying to get CPI plus 100 basis points over a rolling five-year period. So, because of that, we're indifferent to a benchmark of any kind. We're merely looking for securities that help us accomplish those two objectives. So it's a very bottom-up, security specific, one idea at a time sort of approach. It has a fairly broad set of parameters to it. It's not very restrictive. In order to qualify, it just needs to be a bond. So we can look at any bond we want. It's a very broad mandate." (Watch for more excerpts from this article later this month, or see the latest issue of BFI.)
Our Bond Fund News includes the brief, "Yields Rise Again, Returns Jump in Dec. Bond fund yields and returns rose last month for almost all categories. The BFI Total Index returned 0.46% for 1-month and -0.08% over 12 months. The BFI 100 returned 0.65% in December and 0.03% over 1 year. The BFI Conservative Ultra-Short Index returned 0.19% over 1 month and 1.75% over 1-year; the BFI Ultra-Short Index averaged 0.12% in Dec. and 1.35% over 12 mos. BFI Short-Term returned 0.31% and 0.82%, and BFI Intm-Term Index returned 1.15% and –0.34% for 1-mo and 1-year. BFI's Long-Term Index returned 1.51% in Dec. and –1.37% for 1-year; BFI's High Yield Index returned -2.01% in Dec. and –2.00% over 1-year."
Another brief, entitled, "ICI Publishes Papers on Bond Fund Flows." It tells us, "Last month, ICI published, 'Debunking Assumptions About Bond Mutual Funds' Flows and Bond Sales,' which says, 'Recent outflows from bond mutual funds have drawn press attention and revived concerns among regulators about the impact of bond fund investors' actions on the broader bond market. Unfortunately, this attention is rooted in misconceptions -- as we'll show using ICI's comprehensive data covering 98 percent of mutual fund industry assets."
A third News brief, "WSJ Says '`Individual Investors Try Not to Panic Over Big Market Gyrations,'" explains, "Noninstitutional net inflows into U.S. ultrashort-duration bond funds rose to over $65 billion in the first 11 months of 2018, a record high for that period since 2000, according to data estimates from Morningstar Inc. At the same time, retail net inflows into money-market funds for that period were the highest in a year since 2008."
Finally, a sidebar entitled, "World BF Assets Flat," comments, "Bond fund assets worldwide slipped slightly but remained above the $10 trillion level in the latest quarter. Two of the three largest bond fund markets -- the U.S. and Ireland -- showed gains in the latest quarter (Q3'18) according to the Investment Company Institute's 'Worldwide Open-End Fund Assets and Flows, Third Quarter 2018.'"
It adds, "ICI's report shows worldwide bond fund assets declined $908 million, or 0.0%, to $10.253 trillion in the third quarter. Bond funds represent 20.5% of the $50.09 trillion in worldwide mutual fund assets. Globally, bond funds posted outflows of $294 billion in Q2 of 2018, after an inflow of $174B in Q1."
Money market funds in Europe, which had been scheduled to submit to new regulations starting January 21, have been given a 2-month extension by Irish and Luxembourg fund regulators. A press release entitled, "Statement on the treatment of share cancellation under EU Regulation" explains, "The Central Bank of Ireland ('Central Bank') and the Commission de Surveillance du Secteur Financier ('CSSF') are issuing this joint statement in the interests of supporting the orderly implementation of the Money Market Funds Regulation (MMF Regulation) by converging their respective supervisory approaches to share cancellation and advising the market accordingly." (See also, the Financial Times article, "Fund groups gain reprieve from EU money market rules.")
It continues, "Article 44 of the MMF Regulation provides that money market funds existing prior to 21 July 2018 shall submit an application for authorisation to its competent authority by 21 January 2019 together with all documents and evidence necessary to demonstrate compliance with the MMF Regulation. This application should include details of arrangements for the cessation of the use of the share cancellation mechanism in accordance with the MMF Regulation and the opinion of the European Commission expressed in its letters dated January 2018 and October 2018 that share cancellation is not compatible with the MMF Regulation."
The update adds, "Article 44 of the MMF Regulation also provides that no later than 21 March 2019 (being the date falling 2 months after 21 January 2019), the Central Bank or CSSF (as applicable) shall assess whether or not each fund is compliant with the MMF Regulation and shall issue a decision and notify it immediately to the fund."
It says, "With that in mind, and without prejudice to the functions and powers of the Central Bank and CSSF respectively, with effect from 21 January 2019, the Central Bank and the CSSF will as part of their supervisory strategy for the enforcement of the MMF Regulation, require relevant funds to: provide a copy of this notice to investors and notify such investors that they are invested in a fund which is the subject of this notice; ensure all necessary and appropriate facilities are available for investors or prospective investors to get such information as they may require from the fund with respect to the subject matter of this notice; take such steps which in the opinion of the fund are appropriate to avoid a disorderly sale of fund assets; and confirm to the Central Bank or CSSF (as applicable) in writing by no later than 21 March 2019 that all use of share cancellation mechanisms has ceased."
BlackRock released a letter to European fund investors which states, "We previously communicated our intention to migrate all our funds to the new post-reform structures on Monday 14 January 2019. At that time, we were awaiting final approval of the ICS Funds' prospectus by the Central Bank of Ireland (CBI), which was contingent upon their clarification of the use of the 'Reverse Distribution Mechanism' (RDM) for our Euro funds."
They write, "On 24 December 2018, the CBI provided clarity to the industry stating that they are not able to approve RDM in MMF prospectuses for post-reform use. Instead, they have granted a two-month period (to 21 March 2019) for resubmission of new documentation, including fund prospectuses, without the inclusion of RDM language."
BlackRock adds, "Accordingly, we have divided the sub-funds of the ICS fund range into two different implementation timelines: 1. Our existing US Dollar and Sterling ICS Funds, along with our Institutional Euro Assets Liquidity Fund and Institutional Euro Ultra Short Bond Fund will migrate as planned, effective 14 January 2019. 2. For our Institutional Euro Liquidity Fund and Institutional Euro Government Liquidity Fund we are now enacting our contingency plan to amend the dividend policy of the distributing T+0 share classes within these funds to act as accumulating T+0 share classes. We plan to utilise the two-month extension granted by the CBI to provide shareholders of the impacted funds as much time as possible to prepare for the change from stable to non-stable net asset value (NAV) shares."
They conclude, "Therefore, our new planned migration date for our Institutional Euro Government and Institutional Euro Liquidity Funds is March 2019 (we anticipate 18 March but will confirm this in due course). Until this March migration date, the Institutional Euro Liquidity Fund and the Institutional Euro Government Liquidity Fund will continue to operate as CNAV Funds (not yet authorised under the European Money Market Fund Reform), using RDM for those share classes that do so today."
HSBC Global Asset Management also commented on the "European Money Market Fund Reform changes earlier this week. They wrote, "New rules for Money Market Funds in Europe will apply from January 2019. HSBC has been actively keeping clients informed of the details of the new rules, and the changes they mean for our funds in Europe."
Their update says, "A key part of the new rules is the creation of a 'Low Volatility' Net Asset Value (LVNAV) fund, which we believe will be welcomed by most investors, in part due to the features which are similar to existing Constant Net Asset Value (CNAV) prime funds that many investors use today. By 21 March 2019, HSBC Global Liquidity Funds plc expects to transition its full spectrum of CNAV Prime Funds denominated in USD, EUR, GBP, CAD and AUD to the new LVNAV Prime Funds. The HSBC US Treasury Liquidity Fund will remain CNAV as a Public Debt Fund."
Finally, a footnote explains, "On 24 December 2018 the Central Bank of Ireland wrote to all fund providers requesting them to submit their plan outlining how they will be fully compliant with the new regulation by no later than 21 March 2019. We will provide investors with further updates as those plans are finalised with the Central Bank of Ireland, including the removal of the Reverse Distribution Mechanism for the Euro Liquidity Fund specifically. As a result the HSBC Global Liquidity Funds conversion will now take place by 21 March 2019 at the latest, in line with the new regulatory guidance."
For more on European Reforms, see the following Crane Data News stories: "BNY Mellon Converts for European MF Reforms; USD Assets Rise in 2018" (1/7/19); "Schwab USD LA Goes Govt Ahead of European Reforms; Weekly Holdings" (1/3/19); "Money Fund Average Breaks 2.0%, Yields Rise; BNP Splits European MMFs" (12/27/18); "Money Fund Assets Skyrocket, Break $3 Trillion; UBS on European MMFR" (12/14/18); "JPMorgan Now Live With European Money Fund Reforms; VNAVs SnP AAA" (12/4/18); and "Cash Will Be King in '19 Says GS; BlackRock Update; Europe Rejects RDM" (11/26/18).
Crane Data released its January Money Fund Portfolio Holdings Thursday, and our most recent collection of taxable money market securities, with data as of Dec. 31, 2018, shows big increases in Treasuries, Repo and Agencies. Money market securities held by Taxable U.S. money funds (tracked by Crane Data) increased by $98.0 billion to $3.124 trillion last month, after increasing $41.7 billion in Nov. and $61.0 billion in Oct. Repo continued to be the largest portfolio segment, after breaking over $1.0 trillion the previous month, followed by Treasury securities, then Agencies. CP remained fourth ahead of CDs, Other/Time Deposits and VRDNs. Below, we review our latest Money Fund Portfolio Holdings statistics. (Visit our Content center to download the latest files, or contact us to see our latest Portfolio Holdings reports.)
Among taxable money funds, Repurchase Agreements (repo) rose $29.6 billion (3.0%) to $1.031 trillion, or 33.0% of holdings, after increasing $18.1 billion (1.8%) in Nov., $17.3 billion in Oct. and $16.0 billion in Sept. Treasury securities rose $70.2 billion (8.1%) to $933.3 billion, or 29.9% of holdings, after gaining $33.5 billion (4.0%) in Nov., rising $21.7 billion in Oct. and falling $29.6 billion in Sept. Government Agency Debt rose $25.9 billion (4.1%) to $660.8 billion, or 21.2% of holdings, after declining by $8.3 billion (-1.3%) in Nov., rising $4.4 billion in Oct. and falling $11.5 billion in Sept. Repo, Treasuries and Agencies totaled $2.625 trillion, representing a massive 84.0% of all taxable holdings.
Money funds' holdings of CDs, CP and Other (mainly Time Deposits) all declined in December. Commercial Paper (CP) was down $12.1 billion (-5.1%) to $226.2 billion, or 7.2% of holdings after dropping by $1.7 billion (-0.7%) in Nov., and adding $0.7 billion in Oct. and $6.1 billion in Sept., respectively. Certificates of Deposits (CDs) fell $5.1 billion (-2.6%) to $191.5 billion, or 6.1% of taxable assets, after rising by $4.1 billion (2.1%) in Nov., which followed increases of $15.1 billion in Oct. and $3.6 billion in Sept. Other holdings, primarily Time Deposits, fell by $10.5 billion (-12.5%) to $73.9 billion, or 2.4% of holdings. VRDNs were unchanged at $7.8 billion, or 0.3% of assets. (Note: This total is VRDNs for taxable funds only. We will publish Tax Exempt MMF holdings separately later today.)
Prime money fund assets tracked by Crane Data declined by $3 billion to $745 billion, or 23.8% of taxable money fund total taxable holdings of $3.124 trillion. Among Prime money funds, CDs represent over a quarter of holdings at 25.7% (down from 26.3% a month ago), while Commercial Paper accounted for 30.3% (down from 31.9%). The CP totals are comprised of: Financial Company CP, which makes up 19.2% of total holdings, Asset-Backed CP, which accounts for 7.3%, and Non-Financial Company CP, which makes up 3.8%. Prime funds also hold 4.2% in US Govt Agency Debt, 10.6% in US Treasury Debt, 6.4% in US Treasury Repo, 1.6% in Other Instruments, 8.3% in Non-Negotiable Time Deposits, 5.6% in Other Repo, 6.4% in US Government Agency Repo, and 0.8% in VRDNs.
Government money fund portfolios totaled $1.605 trillion (51.4% of all MMF assets), up from $1.559 trillion in Nov., while Treasury money fund assets totaled another $774 billion (24.8%), up from $719 billion the prior month. Government money fund portfolios were made up of 39.2% US Govt Agency Debt, 19.9% US Government Agency Repo, 20.0% US Treasury debt, and 20.7% in US Treasury Repo. Treasury money funds were comprised of 68.9% US Treasury debt, 30.5% in US Treasury Repo, and 0.5% in Government agency repo, Other Instrument, and Investment Company shares. Government and Treasury funds combined now total $2.379 trillion, or 76.2% of all taxable money fund assets.
European-affiliated holdings declined by $167.4 billion in Dec. to $480.9 billion among all taxable funds (and including repos); their share of holdings fell to 15.4% from 21.4% the previous month. Eurozone-affiliated holdings fell $131.9 billion to $277.7 billion in December; they account for 8.9% of overall taxable money fund holdings. Asia & Pacific related holdings increased by $9.1 billion to $278.0 billion (8.9% of the total). Americas related holdings rose $256.0 billion to $2.364 trillion and now represent 75.7% of holdings.
The overall taxable fund Repo totals were made up of: US Treasury Repurchase Agreements (up $6.0 billion, or 1.0%, to $616.8 billion, or 19.7% of assets); US Government Agency Repurchase Agreements (up $23.4 billion, or 6.7%, to $372.1 billion, or 11.9% of total holdings), and Other Repurchase Agreements (up $0.3 billion from last month to $41.7 billion, or 1.3% of holdings). The Commercial Paper totals were comprised of Financial Company Commercial Paper (down $9.0 billion to $143.2 billion, or 4.6% of assets), Asset Backed Commercial Paper (up $3.6 billion to $54.5 billion, or 1.7%), and Non-Financial Company Commercial Paper (down $6.7 billion to $28.5 billion, or 0.9%).
The 20 largest Issuers to taxable money market funds as of Dec. 31, 2018, include: the US Treasury ($933.3 billion, or 29.9%), Federal Home Loan Bank ($526.3B, 16.8%), Fixed Income Clearing Co ($138.3B, 4.4%), RBC ($127.0B, 4.1%), Federal Farm Credit Bank ($82.1B, 2.6%), BNP Paribas ($76.9B, 2.5%), JP Morgan ($68.3B, 2.2%), Wells Fargo ($61.2B, 2.0%), Mitsubishi UFJ Financial Group Inc ($59.1B, 1.9%), Barclays ($52.2B, 1.7%), HSBC ($48.1B, 1.5%), Sumitomo Mitsui Banking Co ($45.8B, 1.5%), Bank of Montreal ($43.9B, 1.4%), Bank of America ($41.3B, 1.3%), Nomura ($41.1B, 1.3%), Federal Reserve Bank of New York ($39.6B, 1.3%), Societe Generale ($38.1B, 1.2%), Toronto-Dominion Bank ($38.0B, 1.2%), Citi ($37.5B, 1.2%), and Bank of Nova Scotia ($37.3B, 1.2%).
In the repo space, the 10 largest Repo counterparties (dealers) with the amount of repo outstanding and market share (among the money funds we track) include: Fixed Income Clearing Co ($138.3B, 13.4%), RBC ($100.6B, 9.8%), BNP Paribas ($69.3B, 6.7%), JP Morgan ($57.0B, 5.5%), Wells Fargo ($51.1B, 5.0%), Barclays PLC ($47.3B, 4.6%), Mitsubishi UFJ Financial Group Inc ($42.1B, 4.1%), Nomura ($41.1B, 4.0%), HSBC ($40.4B, 3.9%), and Federal Reserve Bank of New York ($39.6B, 3.8%). Fed Repo positions among MMFs on 12/31/18 include: Fidelity Inv MM: Treasury Port ($9.5B), Schwab Value Adv MF ($9.4B), Schwab Govt MMkt ($5.0B), Fidelity Govt Cash Reserves ($3.7B), Fidelity Govt Money Market ($2.4B), Schwab Cash Reserves ($1.4B), Fidelity Treasury Fund ($6.0B), Morgan Stanley Inst Liq Govt Sec ($0.7B), Franklin IFT US Govt MM ($0.6B), and Columbia Short-Term Cash Fund ($0.5B).
The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: RBC ($26.4B, 6.1%), Toronto-Dominion Bank ($26.2B, 6.1%), Mizuho Corporate Bank Ltd ($18.3B, 4.2%), Bank of Nova Scotia ($17.6B, 4.1%), Mitsubishi UFJ Financial Group Inc. ($17.0B, 3.9%), Credit Suisse ($15.9B, 3.7%), Bank of Montreal ($15.7B, 3.7%), Sumitomo Mitsui Banking Co ($15.7B, 3.6%), Australia & New Zealand Banking Group Ltd ($14.4B, 3.3%), and Canadian Imperial Bank of Commerce ($13.9B, 3.2%).
The 10 largest CD issuers include: Bank of Montreal ($15.4B, 8.0%), Mitsubishi UFJ Financial Group Inc ($11.7B, 6.1%), Sumitomo Mitsui Banking Co ($11.4B, 5.9%), Svenska Handelsbanken ($10.7B, 5.6%), RBC ($10.6B, 5.6%), Mizuho Corporate Bank Ltd ($10.3B, 5.4%), Wells Fargo ($9.9B, 5.2%), Sumitomo Mitsui Trust Bank ($9.1B, 4.7%), Toronto-Dominion Bank ($8.7B, 4.5%), and Nordea Bank ($8.5B, 4.5%).
The 10 largest CP issuers (we include affiliated ABCP programs) include: Toronto-Dominion Bank ($16.2B, 8.1%), RBC ($11.4B, 5.7%), JPMorgan ($11.2B, 5.6%), Bank of Nova Scotia ($8.8B, 4.4%), Credit Suisse ($8.5B, 4.3%), UBS AG ($7.6B, 3.8%), Societe Generale ($6.7B, 3.4%), Canadian Imperial Bank of Commerce ($6.7B, 3.4%), Westpac Banking Co ($6.5B, 3.2%), and National Australia Bank Ltd ($6.3B, 3.2%).
The largest increases among Issuers include: US Treasury (up $70.2B to $933.3B), Fixed Income Clearing Co (up $54.3B to $138.3B), Federal Home Loan Bank (up $23.6B to $526.3B), JP Morgan (up $14.1B to $68.3B), RBC (up $13.7B to $127.0B), Nomura (up $8.2B to $41.1B), Sumitomo Mitsui Banking Co (up $7.9B to $45.8B), Citi (up $7.2B to $37.5B), Goldman Sachs (up $6.7B to $19.4B), and Bank of Nova Scotia (up $5.4B to $37.3B).
The largest decreases among Issuers of money market securities (including Repo) in Dec. were shown by: BNP Paribas (down $34.1B to $76.9B), Credit Agricole (down $31.9B to $31.6B), Natixis (down $16.2B to $29.6B), Mizuho Corporate Bank Ltd (down $14.1B to $27.0B), Barclays PLC (down $12.2B to $52.2B), Societe Generale (down $7.2B to $38.1B), Deutsche Bank AG (down $6.2B to $16.4B), Lloyds Banking Group (down $6.2B to $6.3B), Skandinaviska Enskilda Banken AB (down $5.0B to $6.4B), and Wells Fargo (down $4.5B to $61.2B).
The United States remained the largest segment of country-affiliations; it represents 66.4% of holdings, or $2.074 trillion. Canada (9.2%, $288.6B) moved into second place and Japan (7.1%, $220.2B) moved up to third. France (6.0%, $186.4B) dropped down to the No. 4 spot. The United Kingdom (4.0%, $125.3B) remained in fifth place. Australia (1.4%, $44.2B) moved ahead of the Netherlands (1.3%, $41.6B). Germany (1.2%, $38.8B) fell to 8th place, and Switzerland (1.2%, $37.1B) and Sweden (1.1%, $33.4B) ranked 9th and 10th, respectively. (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 Dec. 31, 2018, Taxable money funds held 37.0% (up from 33.4%) of their assets in securities maturing Overnight, and another 11.6% maturing in 2-7 days (down from 15.6% last month). Thus, 48.6% in total matures in 1-7 days. Another 20.4% matures in 8-30 days, while 14.1% matures in 31-60 days. Note that over three-quarters, or 83.1% of securities, mature in 60 days or less (up slightly from last month), the dividing line for use of amortized cost accounting under SEC regulations. The next bucket, 61-90 days, holds 8.7% of taxable securities, while 6.9% matures in 91-180 days, and just 1.4% matures beyond 181 days.
Wells Fargo Asset Management says money market funds ended 2018 in a celebratory mood, as four Fed rate hikes and a "miserable fourth quarter for risk assets" cleared the way for "cash" to seize "the crown (as) king of returns." Their latest "Portfolio Manager Commentary" comments, "The upshot is that after eight years of near-zero yields (and a few hikes in 2017), Prime money market funds garnered attention as a real asset class again in 2018, with the path of money market rates generally following the pace of the four Fed rate hikes. In addition, the bear flattening of the U.S. Treasury curve, the underperformance of credit products, and U.S. equities approaching bear market territory have brought favorable attention back to money markets."
The Wells Overview observes, "The rise in short rates has brought not only attention but perhaps also nontraditional money market investors (those that typically invest in longer-term debt or equities) into the short end of the market. The Crane Prime Institutional Money Market Index was up over $71 billion this year, with all prime assets up over $139 billion."
Though the money fund industry fought hard against certain aspects of the latest rounds of re-regulation, sunbeams are now apparently piercing the doom and gloom once presented. They write, for example, "Investors reexamining prime money market funds are realizing the changes implemented from the 2010 money market reform have made a material difference in the construction of prime money market fund portfolios. The added liquidity requirements and maturity restrictions have had a beneficial impact on dampening net asset value (NAV) volatility even as the FOMC continues to raise rates, as well as in the face of widening credit spreads."
Wells notes, "Going forward, money market rates should continue to look toward the FOMC and other market indicators for future rate guidance. As we get closer to the end of the tightening cycle, money market participants may look to extend weighted average maturities to capture higher yields. Our strategy of emphasizing highly liquid portfolios, relatively short WAMs, and a position in securities that reset frequently allows us to capture future FOMC rate moves with minimal NAV pricing pressures and affords us the flexibility to add longer-dated securities as opportunities arise."
The piece concludes, "[M]oney market funds were the place to be, with higher returns than other segments of the market, in the final quarter of the year. The positive returns on money market funds was not just the story of the quarter -- we feel it was the story of the year. On average, yields are up 97 to 100 bps, in line with the Fed moves. Did investors vote with their dollars? Yes, they did. Money market funds ended the year with net inflows of more than $219 billion, topping out at $3.15 trillion."
Finally, the Wells piece adds, "With increasing volatility in risk assets, we would anticipate money market funds may continue to offer investors a port in the vortex. But, as we have seen in the past, increases in demand, plus an approaching end to the tightening cycle, usually temper further rises in yields, which may have an offsetting effect on funds' assets. Our best expectations at this point is that the money market fund assets will remain relatively stable for the very near term before typical tax-related cyclical events take their toll."
In other news, Crane Data's latest monthly Money Fund Portfolio Holdings statistics will be published today (Thursday), and we'll be writing our normal monthly update on the Dec. 31 data tonight for Friday's News. But we've also been generating a separate and broader Portfolio Holdings data set based on the SEC's Form N-MFP filings. (We continue to merge the two series, and the N-MFP version is now available via Holdings file listings to Money Fund Wisdom subscribers.) Our summary, with data as of Dec. 31, includes holdings information from 1,179 money funds (down from 1,193 on Nov. 30), representing assets of $3.344 trillion (up from $3.242 trillion). We review the latest data below.
Our latest Form N-MFP Summary for All Funds (taxable and tax-exempt) shows Repurchase Agreement (Repo) holdings in money market funds totaling $1,057.8 billion (up from $1,019.3 billion on Nov. 30), or 31.6% of all assets. Treasury holdings total $945.1 billion (up from $880.6 billion) or 28.3%, and Government Agency securities total $680.1 billion (up from $656.2 billion), or 20.3%. Commercial Paper (CP) totals $237.6 billion (down from $250.2 billion), or 7.1%, and Certificates of Deposit (CDs) total $194.7 billion (down from $200.2 billion), or 5.8%. The Other category (primarily Time Deposits) totals $115.7 billion or 3.5%, and VRDNs account for $112.6 billion, or 3.4%.
Broken out into the SEC's more detailed categories, the CP totals were comprised of: $149.1 billion, or 4.5%, in Financial Company Commercial Paper; $54.7 billion or 1.6%, in Asset Backed Commercial Paper; and, $33.8 billion, or 1.0%, in Non-Financial Company Commercial Paper. The Repo totals were made up of: U.S. Treasury Repo ($638.5B, or 19.1%), U.S. Govt Agency Repo ($376.9B, or 11.3%), and Other Repo ($42.4B, or 1.3%).
The N-MFP Holdings summary for the 215 Prime Money Market Funds shows: CP holdings of $232.8 billion (down from $245.5 billion Nov. 30), or 30.5%; CD holdings of $194.7B (down from $200.2B), or 25.5%; Repo holdings of $140.3B (up from $124.4B), or 18.4%; Other (primarily Time Deposits) holdings of $73.6B (down from $84.8B), or 9.6%; Treasury holdings of $82.4B (up from $77.1B) , or 10.8%; Government Agency holdings of $32.5B (up from $29.6B), or 4.3%; and VRDN holdings of $6.6B (down from $6.7B), or 0.9%.
The SEC's more detailed categories show CP in Prime MMFs made up of: $149.1 billion, or 19.5%, in Financial Company Commercial Paper; $54.7 billion, or 7.2%, in Asset Backed Commercial Paper; and, $29.0 billion, or 3.8%, in Non-Financial Company Commercial Paper. The Repo totals include: U.S. Treasury Repo ($50.0B, or 6.6%), U.S. Govt Agency Repo ($47.9B, or 6.3%), and Other Repo ($42.3B, or 5.5%).
Crane Data's latest Money Fund Market Share rankings show assets were higher again for most U.S. money fund complexes in December. Money fund assets rose by $69.7 billion, or 2.2%, last month to $3.243 trillion, and assets have climbed by $161.7 billion, or 5.2%, over the past 3 months. They have increased by $215.5 billion, or 7.1%, over the past 12 months through Dec. 31, 2018. The biggest increases among the 25 largest managers last month were seen by Fidelity, Federated, Vanguard, and Schwab, which increased assets by $25.8 billion, $14.5B, $13.8B, and $13.6B, respectively. We review the latest market share totals below, and we also look at money fund yields in December.
The most noticeable declines in assets among the largest complexes in December were seen by SSGA, whose MMF assets dropped by $5.8 billion, or -6.9%, JP Morgan, down $5.7 billion, or -1.9%, Dreyfus with a decline of $3.8 billion, or -2.3%, and Invesco, off $2.5 billion, or -4.2%. BlackRock, whose MMFs fell by $5.1 billion in November moved down another $1.2 billion, or -0.4% in December, having liquidated its BIF money funds. Our domestic U.S. "Family" rankings are available in our MFI XLS product, our global rankings are available in our MFI International product. The combined "Family & Global Rankings" are available to Money Fund Wisdom subscribers.
Over the past year through Dec. 31, 2018, Fidelity (up $94.7B, or 16.5%), Vanguard (up $66.5B, or 23.5%), JP Morgan (up $37.9B, or 15.0%), Federated (up $33.8B, or 16.8%), Goldman Sachs (up $27.1B, or 15.1%), and UBS (up $14.2B, or 33.2%) were the largest gainers. These complexes were followed by Northern (up $9.1B, or 8.6%), First American (up $8.2B, or 16.3%), Wells Fargo (up $4.3B, or 4.0%), and Franklin (up $3.9B, or 20.7%).
Fidelity, Federated, Schwab, Vanguard, JPMorgan, Morgan Stanley and Goldman Sachs had the largest money fund asset increases over the past 3 months, rising by $61.9B, $30.7B, $24.9B, $21.8B, $11.6B, $8.8B and $7.6B, respectively. The biggest decliners over 3 months include: BlackRock (down $9.3B, or -3.2%), SSGA (down $4.1B, or -5.0%), T Rowe Price (down $3.3B, or -9.4%), DWS (down $2.9B, or-11.8%, and DFA (down $2.3B, or -9.7%).
Our latest domestic U.S. Money Fund Family Rankings show that Fidelity Investments remains the largest money fund manager with $670.6 billion, or 20.7% of all assets. That was up $25.8 billion in December, up $61.9 billion over 3 mos., and up $94.7B over 12 months. Vanguard ranked second with $349.1 billion, or 10.8% market share (up $13.8B, up $21.8B, and up $66.5B for the past 1-month, 3-mos. and 12-mos., respectively). JPMorgan was third with $291.3 billion, or 9.0% market share (down $5.7B, up $11.6B, and up $37.9B). BlackRock ranked fourth with $278.8 billion, or 8.6% of assets (down $1.2B, down $9.3B, and down $18.2B for the past 1-month, 3-mos. and 12-mos.), while Federated remained in fifth with $234.9 billion, or 7.2% of assets (up $14.5B, up $30.7B, and up $33.8B).
Goldman Sachs remained in sixth place with $206.6 billion, or 6.4% of assets (up $5.1B, up $7.6B, and up $27.1B), while Dreyfus held seventh place with $164.4 billion, or 5.1% (down $3.8B, down $1.6B, and down $18.1B). Schwab ($151.5B, or 4.7%) was in eighth place (up $13.6B, up $24.9B and down $9.9B), followed by Northern, which occupied ninth place ($114.8B, or 3.5%, up $5.9B, up $5.3B, and up $9.1B). Wells Fargo was in 10th place ($111.7B, or 3.4%, up $3.3B, up $5.2B, and up $4.3B).
The 11th through 20th-largest U.S. money fund managers (in order) include: Morgan Stanley ($111.2B, or 3.4%), SSgA ($78.2B, or 2.4%), Invesco ($58.4B, or 1.8%), First American ($58.2B, or 1.8%), UBS ($57.2B, or 1.8%), T Rowe Price ($31.4B, or 1.0%), Franklin ($23.2B, or 0.7%), Western ($22.0B, or 0.7%), DWS ($21.7B, or 0.7%), and DFA ($20.9, or 0.6%). Crane Data currently tracks 70 U.S. MMF managers.
When European and "offshore" money fund assets -- those domiciled in places like Ireland, Luxembourg, and the Cayman Islands -- are included, the top 10 managers match the U.S. list, except JPMorgan and BlackRock move ahead of Vanguard, Goldman moves ahead of Federated, and Morgan Stanley moves ahead of Wells and Northern.. Our Global Money Fund Manager Rankings include the combined market share assets of our MFI XLS (domestic U.S.) and our MFI International ("offshore") products.
The largest Global money market fund families include: Fidelity ($680.8 billion), J.P. Morgan ($450.2B), BlackRock ($423.4B), Vanguard ($349.1B), and Goldman Sachs ($315.2B). Federated ($243.3B) was sixth and Dreyfus/BNY Mellon ($181.3B) was in seventh, followed by Schwab ($151.5B), Morgan Stanley ($150.5B), and Northern ($139.2B), which rounded out the top 10. These totals include "offshore" U.S. Dollar money funds, as well as Euro and Pound Sterling (GBP) funds converted into U.S. dollar totals.
The January issue of our Money Fund Intelligence and MFI XLS, with data as of 12/31/18, shows that yields were up again in December across all of our taxable Crane Money Fund Indexes. The Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 753), was up 15 bps to 2.04% for the 7-Day Yield (annualized, net) Average, and the 30-Day Yield was up 9 bps to 1.95%. The MFA's Gross 7-Day Yield increased 15 bps to 2.47%, while the Gross 30-Day Yield rose 9 bps to 2.39%.
Our Crane 100 Money Fund Index shows an average 7-Day (Net) Yield of 2.23% (up 17 bps) and an average 30-Day Yield of 2.14% (up 10 bps). The Crane 100 shows a Gross 7-Day Yield of 2.50% (up 17 bps), and a Gross 30-Day Yield of 2.41% (up 10 bps). For the 12 month return through 12/31/18, our Crane MF Average returned 1.48% and our Crane 100 returned 1.68%. The total number of funds, including taxable and tax-exempt, remained at 944. There are currently 753 taxable and 191 tax-exempt money funds.
Our Prime Institutional MF Index (7-day) yielded 2.23% (up 16 bps) as of Dec. 31, while the Crane Govt Inst Index was 2.11% (also up 16 bps) and the Treasury Inst Index was also 2.11% (up 16 bps). Thus, the spread between Prime funds and Treasury funds is 12 basis points, while the spread between Prime funds and Govt funds is 12 basis points, the same as last month. The Crane Prime Retail Index yielded 2.09% (up 16 bps), while the Govt Retail Index yielded 1.78% (up 13 bps) and the Treasury Retail Index was 1.87% (up 16 bps). The Crane Tax Exempt MF Index yield rose in December to 1.25% (up 2 bps).
Gross 7-Day Yields for these indexes in December were: Prime Inst 2.62% (up 16 bps), Govt Inst 2.41% (up 16 bps), Treasury Inst 2.43% (up 16 bps), Prime Retail 2.61% (up 16 bps), Govt Retail 2.38% (up 13 bps), and Treasury Retail 2.45% (up 17 bps). The Crane Tax Exempt Index increased 2 basis points to 1.75%. The Crane 100 MF Index returned on average 0.18% over 1-month, 0.51% over 3-months, 1.68% YTD, 1.68% over the past 1-year, 0.88% over 3-years (annualized), 0.54% over 5-years, and 0.31% over 10-years. (Contact us if you'd like to see our latest MFI XLS, Crane Indexes or Market Share report.)
The January issue of our flagship Money Fund Intelligence newsletter, which was sent out to subscribers Tuesday morning, features the articles: "Highlights of '18; Rising Yields, Retail Drive Assets Higher," which looks at rising money fund yields and asset growth in 2018; "U.S. Bancorp's Jim Palmer: Staying Focused on Cash," a Q&A featuring Jim Palmer, CIO of U.S. Bancorp Asset Management; and, "Top Money Funds of 2018; 10th Annual MFI Awards," which salutes the top-performing money funds for 2018, ranked by total returns. We've also updated our Money Fund Wisdom database with Dec. 31 statistics, and sent out our MFI XLS spreadsheet Tuesday a.m. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our January Money Fund Portfolio Holdings are scheduled to ship on Thursday, January 10, and our January Bond Fund Intelligence is scheduled to go out Tuesday, January 15.
MFI's "Highlights of '18," article says, "Rising yields pushed money fund assets over $3 trillion to their highest level in nearly a decade in 2018. Prime funds continued their gradual recovery, and returns more than doubled for the third straight year. Below, we take a backwards look at 2018 highlights and also provide a brief outlook for what may happen in 2019."
It continues, "Crane Data's numbers showed assets rose by $203.2 billion, or 6.7%, to $3.244 trillion in 2018. The Investment Company Institute's narrower asset collection settled at $3.047 trillion, up by $209.0 billion, or 7.4%. In 2017, assets rose slightly following five years of flat assets."
Our U.S. Bancorp "Profile", reads, "MFI interviews Jim Palmer, CIO of Minneapolis-based U.S. Bancorp Asset Management (USBAM), which manages the First American Funds, Inc. First American, the 14th largest money fund manager, is one of the few investment advisers focusing solely on cash and investment-grade fixed income. USBAM manages 34 funds with $58.3 billion (as of 11/30/18), according to Crane Data. We discuss the fund manager's outlook for 2019, the Fed, SMAs and a number of other topics below."
MFI says, "Tell us about your team." Palmer tells us, "I am the Chief Investment Officer of U.S. Bancorp Asset Management, which is a dedicated investment-grade, fixed-income manager. We have over $83 billion in assets under management as of the end of November 2018. We focus on three primary business lines. We are the investment adviser to the First American family of money market funds. We have a book of investment-grade, fixed-income SMA portfolios. Typically, these portfolios have maturity limits of five years and under, but we do have strategies going out to 15 years. We also manage the collateral reinvestment for the securities lending program. We run both taxable and tax efficient strategies."
We also ask, "What are your big issues for 2019? Palmer comments, "From an investment standpoint, I think [the biggest is] accurately predicting Fed rate changes for 2019, which we believe will be far less telegraphed than in the recent past. Obviously, making accurate predictions around what the Fed will do is crucial for money market fund and SMA absolute performance as well as for relative performance versus peers. We believe predicting the Fed will be more challenging this year for a couple of reasons. One, the Fed will be holding live press conferences at each meeting going forward, implying each meeting is live for a policy rate adjustment. Whereas [in] 2018, it was well signaled and accepted that at every other meeting we would be getting a rate hike."
MFI includes a sidebar, "Robinhood & Fintech." It notes that "Last week, Barron's took another shot at Robinhood and financial technology startups that have drawn the ire of regulators and consumers in their entry in to the savings and money market space. Their article, 'Fintech Takes the High Road, Only to Trip Up,' tells us, 'Robinhood, a start-up that offers no-fee stock and options trading, came out with a product on Dec. 13 that took direct aim at penny-pinching banks -- 'checking and savings' accounts that yield 3%.... But these were not checking and savings accounts."
Another sidebar, "European Reforms Go Live," explains, "BNY Mellon's Liquidity Funds are the latest to formalize plans to operate under the EU Money Fund Reforms that take effect Jan. 21. The fund group revealed changes to its BNY Mellon U.S. Dollar Liquidity Fund and BNY Mellon U.S. Treasury Fund, which will take place Jan. 14. A number of firms have already converted their money funds to be compliant with the pending reforms, including Aviva (9/1/18), BNP Paribas (11/11/18), and JP Morgan (11/30/18). Several firms -- BlackRock, Federated, and SSGA -- will convert late this week, on Jan. 11, and Morgan Stanley and UBS will also convert on Jan. 14."
Our January MFI XLS, with Dec. 31, 2018, data, shows total assets rising $72.6 billion in December to $3.244 trillion, after increasing $64.3 billion in November, $34.5 billion in October, $1.6 billion in Sept., and $29.2 billion in August. Our broad Crane Money Fund Average 7-Day Yield rose 15 bps to 2.04% during the month, while our Crane 100 Money Fund Index (the 100 largest taxable funds) was up 17 bps to 2.23% (its highest level since Oct. 2008).
On a Gross Yield Basis (7-Day) (before expenses are taken out), the Crane MFA rose 15 bps to 2.47% and the Crane 100 rose to 2.50%. Charged Expenses averaged 0.43% (unchanged) and 0.27% (unchanged), respectively for the Crane MFA and Crane 100. The average WAM (weighted average maturity) for the Crane MFA and Crane 100 was 28 and 29 days, respectively (up 1 day). (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
BNY Mellon's Liquidity Funds are the latest to formalize plans to operate under the EU Money Fund Reforms that take effect Jan. 21. The fund group revealed changes to its BNY Mellon U.S. Dollar Liquidity Fund and BNY Mellon U.S. Treasury Fund, which will actually occur seven days before the final deadline -- on Jan. 14. A number of firms have already converted their money funds to be compliant with the pending reforms, including Aviva (9/1/18), BNP Paribas (11/11/18), and JP Morgan (11/30/18). Several firms -- BlackRock, Federated, and SSGA -- will convert late this week, on Jan. 11, and Morgan Stanley and UBS will also convert on Jan. 14. We review BNY Mellon's move below, and we also look at "offshore" money fund assets, which have surged in recent weeks, contrary to expectations related to "repatriation."
Dreyfus/BNY Mellon writes, "The EU's new regulations are aimed at making money market funds (MMFs) more robust, ensuring the smooth operation of the short-term funding market. Regulators set out to maintain the essential role that MMFs play in financing the European economy and recognize the importance of providing short-term options for investors. The rules have received final sign-off by the European Parliament and were published in the Official Journal on June 30, 2017. They came into force on July 20, 2017 with the effective date for compliance January 21, 2019."
Their USD Liquidity Fund will operate as a "Short-Term Low-Volatility Net Asset Value" (LVNAV) product, allowing investors to purchase and redeem shares at a stable NAV to two decimal places, "provided the fund is managed to certain restrictions," involving use of amortized-cost valuation with limits based on its mark-to-market valuation. A deviation greater than 20 basis points would necessitate a switch to a market-to-market value to four decimal places as required by the new rules.
BNY's U.S. Treasury Fund, which will be classified as a Short-Term Public Debt (Government) fund, will feature a constant net asset value per share, based on amortized cost, and will be required to "invest at least 99.5% of the fund's assets in cash, government securities, or repurchase agreements that are fully collateralized," according to the company's announcement.
Each fund will continue to offer the same share classes as before, namely Participant Shares, Investor Shares, Institutional Shares, Service Shares, Administrative Shares and Advantage Shares. The Treasury Fund additionally offers Agency Shares. Such funds, of course, are not available for investment by "U.S. persons".
Crane Data's Money Fund Intelligence International statistics show that U.S. Dollar money funds jumped $29 billion in 2018 to $454 billion, with most of the gain coming in the last week of the year. Outflows had been expected from these funds as U.S.-based corporations began to repatriate cash following the U.S. tax-reform package approved in 2017.
Garret Sloan of Wells Fargo Securities sized up the approaching finalization of fund reform in Europe in his Jan. 3 "Daily Short Stuff," and provided his insights about asset flows impacting prime funds operating there versus those in the States. Sloan wrote, "The 'go-live' date for existing European money market funds to convert to the new fund categories: CNAV, LVNAV, and Short-Term VNAV, is Jan. 21. The question is how much have assets flowed, and how much do we expect to see going forward?"
We explained, "Thus far, the universe of assets in offshore USD denominated money market funds has actually been quite stable, showing a net increase since the time that European money fund reform was first implemented for 'new' funds in July 2018. Since July 31, offshore prime money market funds have risen from $318.4 billion to $335.9 billion in AUM, Treasury funds have increased from $100.4 billion to $111.2 billion, and government funds have increased from $5.2 billion to $6.8 billion."
Sloan continued, "In total, the IMMFA US Dollar Index of money fund assets has risen from $418 billion to $451.4 billion, an increase of $33.4 billion, or 7.9 percent. The rise has been concentrated in a few fund families, however. HSBC has added $5.4 billion, an increase of 20 percent. JPMorgan added just over $3 billion, an increase of 2.6 percent, and Morgan Stanley added $2.5 billion, an increase of 9.2 percent. But by far the largest increase in holdings has been by Western Asset Management's USD Liquid Reserves Fund, which has grown by $18.9 billion, a 181.4 percent increase."
Note that the WAMCO fund is domiciled in the Cayman Islands, so Sloan observed that "the growth of the fund is almost certainly disconnected from anything to do with European money fund reform, despite it being an offshore fund." He added, "Still, even after adjusting for Cayman-domiciled funds, the trend in European domiciled funds shows that they have added almost $15 billion in assets, or approximately 3.8 percent."
"This trend has run completely counter to the trend we saw in U.S. institutional money market funds, which lost more than 80 percent or just over $622 billion in assets under management in the 5 months leading up to U.S. money market fund reform implementation," said Sloan.
He concluded, "The takeaway, at least from this data point, is that European money market fund investors are just not that concerned with the changes that are coming to their funds, and that they will be able to live within the new framework just fine. Absent some dramatic last-second tsunami of fund flows, we anticipate that the overall impact of European money market fund reform will come with much less bluster than U.S. reform. Issuers and repo counterparties are likely relieved."
For more on European Reforms and fund transitions, see these recent Crane Data News stories: "Schwab USD LA Goes Govt Ahead of European Reforms; Weekly Holdings" (1/3/19); "Money Fund Average Breaks 2.0%, Yields Rise; BNP Splits European MMFs" (12/27/18); "Money Fund Assets Skyrocket, Break $3 Trillion; UBS on European MMFR" (12/14/18); "JPMorgan Now Live With European Money Fund Reforms; VNAVs SnP AAA" (12/4/18); and "Cash Will Be King in '19 Says GS; BlackRock Update; Europe Rejects RDM" (11/26/18).
The Investment Company Institute released its latest weekly tally of "Money Market Fund Assets," reporting that MMF assets rose again during the period ended Jan. 2. The latest asset totals show MMFs posting their 10th week of gains out of the past 11 weeks, during which time they've risen by $175.4 billion, or 6.1%. Retail assets jumped in the past week and have led the surge since mid-October, but Inst assets declined. Government, Prime and Tax Exempt MMFs all increased. We review the latest asset totals below, as well as the most recent yield statistics. (See also the FT's "Investors pile into money market funds amid market turmoil".)
Overall fund assets reached $3.05 trillion, after climbing $209 billion, or 7.4% overall in 2018, according to ICI, their strongest showing in 10 years. Retail MMFs pushed up by $179 billion, or 17.6%, while Institutional MMFs were up just $31 billion or 1.7%. We review the latest asset figures below. In 2017, money fund assets increased by $113 billion, or 4.1%, following 4 years of flat assets. Assets fell slightly in 2011 after falling sharply in 2010 and 2009. Assets haven't grown this fast since 2008, when they rose by $685 billion, or 21.8%.
ICI writes, "Total money market fund assets increased by $8.51 billion to $3.05 trillion for the week ended Wednesday, Jan. 2, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $2.14 billion and prime funds increased by $4.28 billion. Tax-exempt money market funds increased by $2.09 billion." Total Government MMF assets, including Treasury funds, stood at $2.331 trillion (76.5% of all money funds), while Total Prime MMFs reached $569.54 billion (18.7%). Tax Exempt MMFs totaled $146.76 billion, or 4.8%.
ICI further explained that "Assets of retail money market funds increased by $20.01 billion to $1.19 trillion. Among retail funds, government money market fund assets increased by $11.92 billion to $706.34 billion, prime money market fund assets increased by $6.53 billion to $347.96 billion, and tax-exempt fund assets increased by $1.56 billion to $137.97 billion." Retail assets account for over a third of total assets, or 39.1%, and Government Retail assets make up 59.2% of all Retail MMFs.
The ICI release added, "Assets of institutional money market funds decreased by $11.50 billion to $1.86 trillion. Among institutional funds, government money market fund assets decreased by $9.78 billion to $1.62 trillion, prime money market fund assets decreased by $2.25 billion to $221.58 billion, and tax-exempt fund assets increased by $529 million to $8.79 billion." Institutional assets accounted for 60.9% of all MMF assets, with Government Institutional assets making up 87.6% of all Institutional MMF totals.
According to Crane Data's separate MFI Daily series, assets increased by $69.4 billion to $3.154 trillion in the month of December through 12/31, the largest monthly asset increase since December 2014 (and Dec. 2012 before that). MFI Daily shows $19.3 billion of the increase was from from Prime MMFs and $35.2 billion came from Govt MMFs. Retail MMFs jumped $52.5 billion while just $2.0 billion was from Inst MMFs.
Money fund yields moved higher for the second week in a row following the Fed's 9th quarter-point rate hike on Dec. 19, pushing our Crane 100 Money Fund Index above the 2.25% level for the first time in 8 years. The Crane 100, which tracks the 100 largest taxable MMFs, broke over 2.0% in late October (w/the Fed's last hike); it rose 8 basis points over the past week (after rising 8 bps the prior week too) to 2.27%, its highest level since June 2008. Yields for the Crane 100 have increased from 1.12% on Dec. 31, 2017, from 0.43% on Dec. 31, 2016, and from 0.13% on Dec. 31, 2015.
The Crane Money Fund Average, a simple average of all taxable money market funds (655) tracked by Crane Data, rose 8 basis points over the past week (after rising 7 bps the prior week) to 2.11% as of Wednesday, Jan. 2. Yields for the Crane Money Fund Average have increased from 1.80% on 10/31/18, from 0.92% on Dec. 31, 2017 and from 0.26% on Dec. 31, 2016.
Prime Institutional MFs now (as of 1/2/19) yield 2.23% on average, while Government Inst MFs yield 2.15%, a spread of a mere 8 basis points. (Treasury Inst MFs yield 2.11%.) Prime Retail MFs yield 2.13% vs. 1.82% for Govt Retail MFs (a much more generous spread of 31 bps). Tax Exempt MFs average a 7-day yield of 1.26% currently. (See our Money Fund Intelligence Daily for the latest yields and averages.)
The top-yielding money funds are currently paying annualized rates of well over 2.50% with some poised to hit 2.75%. Internal (not available to outside investors) fund Fidelity Money Market Central Fund (FID03) is yielding 2.68%, while DWS ESG Liquidity Cap (ESIXX) yields 2.67%. Morgan Stanley Inst Liq MMP Inst (MPUXX) is yielding 2.62% as of Wednesday (1/2/19), while Goldman Sachs FS MM Inst (FSMXX) is yielding 2.61%. Federated Inst Prime Obligs IS (POIXX) yields 2.58%, while Wells Fargo Heritage Sel (WFJXX) yields 2.57%. Among Retail funds, the highest-yielding offerings include: Fidelity Inv MM: MM Port Inst (FNSXX), which yields 2.56%, JPMorgan Liquid Assets Capit (CJLXX), which yields 2.55%, and UBS Prime Preferred Fund (UPPXX), which yields 2.54%.
Unlike when Money Fund Reforms were implemented in the U.S. in October 2016, the vast majority of European money market funds have opted to remain "Prime" and convert into the new LVNAV, or Limited Volatility NAV, structure. But we learned yesterday that one has chosen to "go Government," changing into the Public Debt CNAV option ahead of the European reform implementation date of January 21, 2019. Charles Schwab Investment Management tells us, "Effective today, January 2, 2019, the Schwab U.S. Dollar Liquid Assets Fund is lowering its Expense ratio from 1.00% to 0.65% and will be classified as a Government Fund as described in Section 6 - Investment objectives & policies section." According to our Money Fund Intelligence International, which tracks money funds domiciled outside the U.S., Schwab US Dollar Liquid Assets is $1.94 billion as of Dec. 31.
Schwab's updated offering document says, "This Prospectus describes Charles Schwab Worldwide Funds plc, an investment company with variable capital incorporated in Ireland as a public limited company. The Company is constituted as an umbrella fund insofar as the share capital of the Company will be divided into different series of Shares with each series of Shares representing a separate investment portfolio of assets. Shares of any Fund may be divided into different classes to accommodate different subscription and/or redemption provisions and/or dividend and/or charges and/or fee arrangements, including different total expense ratios."
It explains, "The Company has currently established one Fund, the Schwab U.S. Dollar Liquid Assets Fund. The Fund is authorised pursuant to the MMF Regulations by the Central Bank as a Public Debt constant NAV (CNAV) money market fund and a short-term money market fund. The Fund seeks to maintain a stable Net Asset Value per Share of U.S. $1.00. There is no assurance that the Fund will be able to maintain a stable Net Asset Value per Share of U.S. $1.00 or otherwise meet its investment objectives."
Schwab adds, "The Fund may, but is not obliged to, seek to maintain a credit rating. Such ratings, if obtained, will be solicited by the Manager and financed by the Manager or the Fund. Details of the current rating for the Fund, if any, can be obtained from the Manager. There is currently one class of Shares available for subscription in the Fund, the Class A Shares. The base currency of the Fund is U.S. dollars."
We continue to watch the announcements and change our MFII product to reflect the new fund types, names and metrics, and we expect more news in the coming weeks. On Dec. 27, we announced that "BNP Splits European MMFs," on Dec. 14, we quoted, "UBS on European MMFR," and on Dec. 4, we published, "JPMorgan Now Live With European Money Fund Reforms." Other recent Crane Data News updates include: "SF Chronicle on Brokerage Sweeps; Bloomberg on Europe Rejecting RDM (11/28/18), "Cash Will Be King in '19 Says GS, JPM; BlackRock on European Reforms (11/26/18), and "JPMorgan on European MMF Reforms; Aviva First to Convert to LVNAV" (9/5/18).
For more on European Money Market Fund Reforms, see these additional Crane Data News stories: SSGA Podcast on European Money Fund Reforms Discusses PM Strategies (8/29/18), Goldman on Repatriation, European Reforms; Federated Plans; Assets (8/24/18), BlackRock Details European Money Fund Reform Plans; Love the LVNAV (8/17/18), SEC Shows Private Liquidity Funds Up in Q4; HSBC's European MF Plans (8/14/18), Morgan Stanley European MMF Reform Plans; Offshore Port Composition (7/17/18), JPMAM European MMFs Plan for Nov 2018 Conversion; MF Assets Plunge (3/16/18), and JP Morgan To Offer All European Fund Options; ICI MMF Holdings Update (11/16/17).
In other news, Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics and summary Wednesday, which tracks a shifting subset of our monthly Portfolio Holdings collection. The latest cut, with data as of Dec. 28, includes Holdings information from 43 money funds (down from 82 on Dec. 21), representing $718.4 billion (down from $1.423 trillion) of the $3.026T (23.7%) in total money fund assets tracked by Crane Data. (For our latest monthly Money Fund Portfolio Holdings numbers, see our Dec. 13 News, "Dec. MF Portfolio Holdings Break 3.0 Tril; T-Bills Up, Repo Breaks 1.0T.")
Our latest Weekly MFPH Composition summary shows Government assets dominating the holdings list with Repurchase Agreements (Repo) totaling $271.0 billion (down from $527.1 billion on Dec. 21), or 37.7% of holdings, Treasury debt totaling $195.4 billion (down from $460.1 billion) or 27.2%, and Government Agency securities totaling $162.0 billion (up from $269.7 billion), or 22.6%. Commercial Paper (CP) totaled $37.3 billion (up from $67.1 billion), or 5.2%, and Certificates of Deposit (CDs) totaled $28.6 billion (up from $44.3 billion), or 4.0%. A total of $13.4 billion or 1.9% was listed in the Other category (primarily Time Deposits), and VRDNs accounted for $10.8 billion, or 1.5%.
The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $195.4 billion (27.2% of total holdings), Federal Home Loan Bank with $114.2B (15.9%), RBC with $41.7 billion (5.8%), Federal Farm Credit Bank with $35.2B (4.9%), Fixed Income Clearing Co with $31.2B (4.3%), BNP Paribas with $16.9B (2.4%), Fidelity $16.7B (2.3%), Mitsubishi UFJ Financial Group Inc with $13.7B (1.9%), Nomura with $11.6B (1.6%) and Credit Agricole with $11.6B (1.6%).
The Ten Largest Funds tracked in our latest Weekly Holdings update include: Fidelity Inv MM: Govt Port ($113.7B), Wells Fargo Govt MMkt ($73.7B), Dreyfus Govt Cash Mgmt ($57.0B), Morgan Stanley Inst Liq Govt ($48.8B) Fidelity Inv MM: MMkt Port ($45.1B), State Street Inst US Govt ($44.0B), First American Govt Oblig ($40.1B), Dreyfus Treas Sec Cash Mg ($31.1B), Fidelity Inv MM: Treasury Port ($25.7B), and Morgan Stanley Inst Liq Trs Sec ($23.0B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary.)
This past weekend, Barron's took another shot at Robinhood and a handful of financial technology startups that have drawn the ire of regulators and consumers in their entry in to the savings and money market space. Their article, "Fintech Takes the High Road, Only to Trip Up," tells us, "From hawking shoddy mortgage securities to nickel-and-diming retail customers, banks have squandered the public's trust over the past decade. Financial-technology start-ups have seized on those failures, making it cheaper and easier to transfer money or invest in stocks even if you don't have much money. These young companies not only have better technology than the entrenched giants, but they pitch themselves to customers as being more ethical, as well. Now, some of that good will has been erased because of missteps by promising fintech companies. Will the new guard be any different than the old guard?" (See Crane Data's Dec. 23 News, "Robinhood Withdraws 3 Percent Offer; MF Assets Stay Over $​3 Trillion.")
It explains, "Robinhood, a start-up that offers no-fee stock and options trading, came out with a product on Dec. 13 that took direct aim at penny-pinching banks -- 'checking and savings' accounts that yield 3%. It promised free ATM withdrawals at 75,000 locations, and no minimum balances or other gotchas. But these were not checking and savings accounts as commonly understood."
Barron's continues, "Robinhood is a broker, not a bank, so they were what is known as cash management accounts, a common product offered by traditional firms like Fidelity. Such accounts tend to be protected by the Securities Investor Protection Corporation, or SIPC, a nonprofit member organization funded by brokers, not the Federal Deposit Insurance Corporation, or FDIC. Robinhood said the products would be insured by SIPC."
They state, "In this case, however, the SIPC was unwilling to insure the assets. Stephen Harbeck, the head of the SIPC, told Barron's that it would only protect money held for 'purchasing securities' and said he had never been contacted by Robinhood before the product's launch. By the end of that week, Robinhood changed the branding to make it clearer that they were cash management accounts, posting a letter from its founders acknowledging that the 'announcement may have caused some confusion.'"
Barron's adds, "Seven U.S. senators wrote to the Securities and Exchange Commission, saying they were concerned that the Robinhood rebranding 'may simply be a way to circumvent regulatory scrutiny without offering full transparency to its customers.' ... Dan Egan, the director of behavioral finance at robo-advisory firm Betterment, says that the Robinhood episode hurts the industry."
Betterment also may be headed for scrutiny, as it too seems to substitute a higher-risk bond fund option for "cash" or "cash management." It's Smart Saver product appears to be a portfolio of ultra-short bond fund ETFs masquerading as a money market account. Their site says, "Betterment's Smart Saver account offers income through a managed portfolio of ultra-low-risk bonds. As of Dec. 3, 2018, the expected yield for Smart Saver is 2.09%. Other options, discussed below, typically have lower yields." (Note: The average money market fund currently yields 2.20%, as measured by our Crane 100 Money Fund Index.)
Their offering appears to turn a higher-yielding and higher-risk bond fund yield into a money market yield, offering more risk and lower yield due to added fees. The disclosure tells us, "References to a 2.09% yield for a Smart Saver account correspond to the asset-weighted blend of the 30-Day SEC Yield as of Dec. 3, 2018 of the ETFs that comprise this portfolio net of Betterment's 0.25% management fee for its Digital Plan. Clients who are in Betterment's Premium Plan pay an advisory fee of 0.40%, reducing the net yield by an additional 0.15%."
In other news, MarketWatch writes, "This is how much money is sitting 'on the sidelines' waiting to come in to the market." They say, "It is as reliable as your alarm clock. Every time the stock market suffers a swoon, slump or downright rout, financial experts appear in the media to reassure investors that a charging knight is about to ride to their rescue. That knight? Billions or even trillions of dollars that are being held 'on the sidelines' in the form of cash, and are 'waiting to come into stocks.'"
The piece explains, "The basis of the argument: Investors -- including households, the rich, the nervous, and big institutions -- are holding big reserves in the form of cash, money market funds, short-term bonds and the like. When stock prices fall, they will be tempted to convert some of that money into stocks, 'putting it to work,' and that will start driving the market higher."
MarketWatch continues, "But is it correct? How much money are we really talking about? And how much effect will it have? The U.S. Federal Reserve reports that at the last count, everyone across the financial system, from grandmothers to hedge funds, was holding a total of $2.9 trillion in overnight money market funds (see Table L.206, line 1 on p. 115 of this report), $4.4 trillion in checking accounts and currency (Table L.204, line 1, p. 114), and another $12.1 trillion in savings account and Certificates of Deposit [Table L.205, line 1, p. 115)."
They tells us, "That comes to $19.4 trillion in gross 'cash' and equivalents that is 'on the sidelines' of the stock market. Meanwhile, says, the Fed, the total market value of all U.S. stocks at the same time came to $41.7 trillion (Table L.223, line 1. p. 130).... Alas not, say experts. For every stock that is bought, one is sold, financial analysts observe sadly. Every time someone invests, someone else cashes out, they lament."
Finally, the article adds, "Those pushing the argument about the money on the sidelines, say experts, are either being dishonest, or falling for one of the oldest tricks in the book -- the 'fallacy of composition.' It's comparable to the idea that everyone at the poker table can win. There may be trillions of dollars on the sidelines, but they cannot come into the market. The net figure for the amount of money that is going to come into the market is $0.00."
