Money Market News
As we mentioned in yesterday afternoon's "Link of the Day," BlackRock's Mark Rimmer just posted an article on European Treasury website GTNews, entitled "Guide to Money Market Funds - Part I: The Current Landscape". The piece describes events and asset growth in the U.K., European and "offshore" money market fund space, but we particularly enjoyed Rimmer's comparison of money market mutual funds vs. bank deposits.
Rimmer writes, "When the money market turbulence first erupted in August 2007, many European investors favoured bank deposits because they felt that they understood exactly where their risk lay and that the associated risk would be lower than if they invested in a triple-A rated money market fund (MMF). Some investors were nervous about MMFs without really understanding them and the benefits of the fund structure. The tide has since turned, as the recent flurry of write-downs from banks has made investors wary of the concentration risk of having their precious cash invested with a small number of banking names, preferring instead to invest in a triple-A rated MMF that spreads their exposure over a very large number of issuers (50-100)."
He adds, "As the market turbulence spread, investors looked for more secure and effective ways to manage their cash and short-term investments. This resulted in a 20% increase of assets invested in triple-A rated, treasury-style MMFs in the second half of 2007 alone."
When comparing bank deposits and money funds, Rimmer cites the following differences: "Concentration risk: Bank deposits concentrate risk 100% in one banking name while MMFs diversify risk across at least 50-100 highly rated, short-term issuers. Credit risk: An IMMFA MMF is triple-A rated by one or more credit rating agency; most banks are rated AA or lower. The credit crisis has exposed significant risk on banks' balance sheets.... The market has witnessed billions of dollars of write-downs, and expects total write-downs related to the sub-prime problem to be at least US$400-500bn, split between both investment and deposit-taking commercial banks."
In addition, Rimmer also cites these differences: Ring-fencing of assets: Most MMFs are Undertakings for Collective Investment in Transferable Securities (UCITS) compliant and are thus standalone entities in their own right. Their assets are entirely ring-fenced from their parent investment manager and from the custodian. In contrast, by investing in a bank deposit, an investor is effectively placing its cash on a bank's balance sheet." And, finally, "Independent scrutiny of portfolio: The rating agencies scrutinise a money fund's portfolio on a frequent basis to ensure the mark-to-market value could support a full redemption of assets. They also ensure that certain other investment requirements (minimum of 50% of the portfolio invested in A1+/P1, the balance in A1/P1, maximum maturity of any one security of 13 months and issuer concentration limited to 5-10%) are being followed to attain or retain a triple-A rating."
Today, Clearwater Analytics announced the availability of the its new Money Fund Transparency platform, which "provides risk analytics, holdings and performance metrics online in a standardized format" and "provides detailed qualitative information on the fund, the manager, and the organization as a whole." When the program goes live in early August, information will be available on Clearwater's website, on several money fund portals, and on participating fund manager's websites, says the company.
The press release says, "While money market funds do provide information on their holdings, the information is not made available in a standardized format and it is difficult and time consuming to evaluate. Clearwater's Money Fund Transparency platform presents risk analytics, holdings and returns in an easily accessible, legible, and consistent format permitting efficient fund analysis, comparison, and selection. The risk analytics include exposure to issuers, sectors, asset classes, credit ratings, duration and other critical measures."
"[I]t is difficult to collect and compare risk and return information in an efficient manner," says Tim Muindi, assistant treasurer of VeriSign. "A fund that participates in this initiative is addressing an important need and is sending a strong signal about their confidence in the fund's holdings and risk profile, which in turn provides me with an enhanced level of understanding and confidence in my investment decision."
Antoine Hamelin, treasury manager at eBay, adds, "Clearwater's platform will change the way in which Money Funds share and publish their information. The platform consolidates the information and research I need into one comprehensive view so that I can make informed decisions."
Invesco Aim becomes the second company, following Deutsche's DB Advisors, to sign on with Clearwater. EVP Bill Hoppe says, "The ability to better communicate and provide customers with essential investment information is central to our success. The introduction of Clearwater's Money Fund Transparency platform provides a dynamic channel to publish meaningful, timely, and comprehensive fund analytics and holding information on our funds to the investing public."
Clearwater will host a series of Money Fund Transparency Webinars to demo the new reports on July 24, 28 and 29 at 2:00 pm EDT.
This article is excerpted from the July issue of Money Fund Intelligence. As most are aware by now, the trend towards online money market trading "portals" has been one of the major new developments in money fund investing over the past decade. While many of the early portals focused on fund lineups and trading, a second wave of entrants is adding compliance, reporting, and fund transparency in order to create a more efficient user experience. A major driver behind this latest wave of technology is Denver-based Cachematrix.
Cachematrix now "powers" custom trading solutions for 10 different money fund portals, and is preparing to launch at least two more trading systems in coming months. Managing Director Jim Etten tells us, "Cachematrix now provides portfolio holdings reports alongside existing monthly fact sheets, prospectuses, SAI's, annual and semi-annual reports, as well as other critical money fund information." On frequency, Etten says most portfolio holdings ("over 90%") are updated monthly, but some are twice monthly and some are quarterly.
On technology, Etten says, "Our software is built and deployed in a modular fashion. When we sit down and talk to a prospect, they can build systems based upon the software modules that are needed for their client base.... In addition, once a system is built, Cachematrix provides the hosting, data security and the necessary software upgrades to meet the ever increasing market needs.... Over the last couple of years, we've built up our inventory of software modules." These include "a Compliance Trading module, Future Dated Trading, Dual Authorized Trading, Portfolio Analytics, and Batch Trading modules.
How did Cachematrix come about? Etten says, "Well it started with Comerica. Financial institutions were seeking a competitive advantage in growing and retaining their corporate client base and, especially with Sarbanes Oxley, corporate demand for portals was heating up. Banks were calling us and saying, 'Would you be interested in doing a white label of this technology as we need it for our client base?' We looked at the market and set our goal to become the leading technology provider in the space. We still see tremendous growth in this market."
"For mutual fund families, specifically those that have not yet built a system, it's a costly proposition to build internally from scratch. Over the years we have developed the infrastructure and experience to deploy and continually upgrade the software needed for these firms, and in most cases we can do it in half the time and for half the costs they would incur themselves. We definitely have found our niche in the market." Etten says. Contact Pete to request a copy of the full MFI article.
Deutsche Bank's DB Advisors hosted its second quarterly conference call yesterday, entitled, "Today's Money Market Environment and the Importance of Transparency." Head of Americas Institutional Liquidity Management Kevin Bannerton and Head of Liquidity Portfolio Management, Americas, Joe Benevento discussed current market events, such as the GSEs, regional banks, and ABCP, but the presentation focused on "Money market transparency," or "Providing investors with additional disclosure regarding money market fund holdings so that they can make more informed decisions about the risk characteristics of a fund."
Benevento told listeners, "Any asset with contingent or headline risk seems to have trouble funding in the short-term market." On GSEs, he says, "Without question, you're going to see agency spreads widen" and "shortening portfolios." Finally, on ABCP, he says, "What we're witnessing this year is a lot of tiering and sorting and a recovery in this market.... Transparency is driving tiering and pricing. Just as our customers are asking us for detail, we're asking ABCP [issuers] for details."
Bannerton says its clients are asking for: more tools to understand risk, a need for evidence of greater surveillance, more confidence in managers, standardization, and a user friendly format for categorizing holdings. The company is the first to partner with Clearwater Analytics to attempt to build an industry standard for fund holdings reporting and risk analytics. (See our article "DB Advisors, Clearwater Going Live With Fund Transparency Initiative".)
Deutsche says the solution must be free and web-based, "leveraging the expertise of various stakeholders." Examples of attributes investors might want to see included: sector, security, maturity and CP breakdowns, fund sizes, credit quality and maturity, repo collateral, NRSRO distributions, country allocations, program sponsors, ABCP credit and liquidity support, and performance. DB adds that initially it will be disclosing holdings twice a month, because they "don't want to put their portfolio at a disadvantage" by revealing it too frequently. To listen to conference call replay, click here.
State Street Global Advisors has filed to launch SPDR S&P Commercial Paper ETF, we just learned from Strategic Insight's SimFundFiling. Once live, this product likely will become the first true "cash" or "money market" ETF offering, as well as the first cash "index fund". The ETF will be advised by SSgA Funds Management and distributed by State Street Global Markets. The full filing may be seen here, and more information may be found at www.SPDRETFs.com once the fund is launched.
The SEC EDGAR filing says, "The Fund, using an 'indexing' investment approach, seeks to replicate as closely as possible, before fees and expenses, the price and yield performance of the S&P Commercial Paper Index.... The S&P Commercial Paper Index measures the performance of the U.S. one-to three-month commercial paper market. The Index includes commercial paper issued by corporate issuers with a maximum program size of at least $2 billion. Asset-backed issuers are not eligible. To be included ... commercial paper must: (1) be priced by the Interactive Data Corporation; (2) have a remaining maturity of between 31 and 91 days; and (3) have a current rating from at least" S&P, Moody's or Fitch."
The new ETF will be run by Todd Bean, SSgA principal and portfolio manager in the U.S. Cash Management Group, Steve Meier, senior managing director of SSgA and a member of the firm's Global Fixed Income portfolio management team, with responsibility for U.S. cash, cash collateral and short-duration portfolio management, and Jeff St. Peters, vice president and senior portfolio manager within the Global Cash Management unit of SSgA's Fixed Income group. The fund will pay dividends and will fluctuate in value. It may also invest in repo and money market funds.
Previous short-term, fixed-income ETFs, such as Bear Stearns Current Yield (YYY), Wisdom Tree U.S. Current Income Fund (USY), and Barclays 1-3 Year Lehman Treasury ETF, have turned out to be enhanced cash funds with longer maturities and/or invested in lower quality securities than permitted by money market funds. SPDR S&P Commercial Paper ETF appears to be the closest ETF yet to a money market fund, though it too likely won't be able to use the moniker. For more on "near-cash" ETFs, see our previous stories: "Bond ETFs Benefitting As Customers Seek Better 'Sweeps'", "More Ultra-Short ETFs on the Way: SPDR Lehmans from SSGA", "Bear Stearns Files to Launch First 'Cash' ETF, Current Yield Fund".
Since the Subprime Liquidity Crisis began almost a year ago in the money markets, mutual fund companies have been steadily increasing their already substantial disclosure and communications with investors. We're now seeing another wave of communications with several firms launching one-off or quarterly conference calls, some adding weekly e-mail updates, and all increasing their output of information in general.
Portfolio holdings and portfolio composition remain a focus. This morning, Deutsche Bank's DB Advisors is hosting a conference call entitled, "Quarterly Liquidity Management Webcast Series: Today's Money Market Environment and the Importance of Transparency," where Kevin Bannerton and Joe Benevento are giving an "update on developments in the short-term fixed income markets and discuss the recent challenges." (Like many, the call is open to institutional investors only.) The call should also mention Deutsche's recent initiative with Clearwater Analytics (see Crane Data's May 15, 2008 News "DB Advisors, Clearwater Going Live With Fund Transparency Initiative") to provide "money fund transparency".
Federated Investors has also announced that it will host another "Institutional Money Market Update" and will provide these "updates on a quarterly basis throughout 2008". Subtitled "Pursuing stability, liquidity and relative safety in turbulent markets," the July 30 call is also open only to institutional investors. Federated and CIO Debbie Cunningham have been in the forefront of the open communications movement, hosting conference calls, speaking with media, and posting numerous articles and updates on their website.
Reserve is sending e-mail alerts and hosting confercence calls "to reassure investors" who are asking, "Is my money fund safe?" "Real basic stuff," MD Eric Lansky tells us. Dreyfus have also been hosting regular client conference calls.
Oppenheimer Funds recently announced a "Weekly Dose" PDF e-mail update with yields, assets, and a portfolio composition breakout. HSBC too has been sending frequent economic and market updates to investors. Also, Goldman Sachs recently posted an update on Fannie and Freddie.
The increase in communications of course corresponds to the heightened level of scrutiny in the "cash" sector following a wave of fund support actions and following troubles with enhanced cash, auction rate securities, and now bank deposits. With new questions over Fannie Mae, Freddie Mac, and now regional bank holdings, money funds now know the drill. They're disclosing holdings more frequently, telling investors why their current investments are still safe, and discussing steps they're taking, and have taken, to assure investors that their $1.00 is still $1.00.
As we've written on www.cranedata.com and in our monthly Money Fund Intelligence newsletter, the Association of Financial Professionals recently released the results of its "2008 AFP Liquidity Survey," the third annual study of large corporations' cash and short-term investment behavior. Today, we take a more detailed look at their section on Investment Policies.
AFP found that 81% of organizations have a written "cash" investment policy and that most review their policies once a year. As we mentioned in our previous article, "AFP Survey Shows Money Funds Main Beneficiary of Flight-to-Safety," bank deposits and treasury bills are allowed by all organizations, and money funds are the third most popular allowable investment with 82% permitting. CP is permitted by 66%, agency securities by 59%, repo by 55%, eurodollar deposits by 49%, municipal securities by 36%, ABS by 31%, ARS by 18%, VRDNs by 17%, SMAs by 17%, and enhanced cash vehicles are allowed by just 15%.
AFP's survey says, "Most organizations have a written document that defines their policies for short-term investments. Written cash investment policies outline the acceptable investment vehicles and the percentage of an organization's portfolio that may be invested in those vehicles, along with the maximum maturity allowed and the minimum credit rating necessary for each investment vehicle. Maintaining a written investment policy is considered a best practice and often is used as part of an organization's efforts to comply with regulations under Sarbanes-Oxley. More recently, a number of organizations have reviewed their written investment policies in response to the turmoil in the credit markets over the past year."
It continues, "Eighty-one percent of organizations have a written document that outlines the organization's policies on cash investments. But the likelihood of an organization having such a written guideline is more pronounced among large organizations, those that are net investors and those with investment grade ratings. Significant percentages of smaller organizations, along with those that are net borrowers and those with non-investment grade credit ratings do not have a written investment policy. Thirty-five percent of organizations with annual revenues under $1 billion do not have a written cash investment policy compared to just five percent of those with annual revenues greater than $1 billion. Just over a quarter of net borrowers (27 percent) do not have a written cash investment policy while 29 percent of organizations with non-investment grade ratings do not have one."
Finally, AFP's Liquidity Survey says, "In devising their cash investment policies, most organizations look to balance their desire for safety and liquidity with their desire to generate a competitive rate of return. Still, for most organizations, the most important objective for their cash investment policy is safety of principal. Three-quarters of financial professionals indicate that the primary focus of their organization's cash investment policy is to protect their investment principal. For 23 percent of organizations, the primary objective of cash investment policies is to optimize liquidity." For the full survey results, click here.
The following is excerpted from the July issue of Money Fund Intelligence. Los Angeles-based TCW Group celebrates its 20th anniversary running TCW Money Market Fund this year. This month we interviewed Portfolio Manager Barr Segal, who has been involved with the Trust Company of the West's money fund since its inception in 1988 and has been running the fund since 1999.
Segal says, "I think that the biggest challenge in managing a money market fund is always providing protection of principal and liquidity while resisting the temptation to take too much risk. The trick is providing a decent yield while you're still meeting the two major reasons investors want a money market fund -- they want their money back in full and they want it available every single day. You can't violate either of those two requirements."
He continues, "The other big challenge, particularly since the SEC put Rule 2a-7 into effect, is differentiation, because a lot of money funds over time have started to look more and more like each other. There's a desire to, of course, raise assets. How do you do that? Well you have to differentiate yourself somehow."
"These two challenges are like high tide and low tide. When the credit cycle is in good shape, there's a tendency to differentiate. Of course that's exactly what happened the last several years. Many funds decided to go get extra yield by investing in things like SIVs and asset-backed commercial paper backing CDO's, etc. That then leads to the next challenge which is still protecting principle and providing liquidity when you have a credit crisis, which of course happens after a credit bubble," says Segal.
Segal adds, "We resisted that temptation and did not get involved in any of these structures which became quite illiquid and quite a problem. So our investors have slept very well at night. The nature of the business is that many funds will try to drive the yield higher by taking what will turn out to be excessive risk. It goes in market cycles."
E-mail info@cranedata.us for a full copy of the interview.
Friday saw a flurry of money fund ratings moves from agencies Standard & Poor's and Moody's. The two biggest moves: Moody's withdrew its Aaa/MR1+ rating from offshore Standard Chartered Global Liquidity Fund USD, as Standard Chartered exits the money fund business, and S&P rated Federated Money Market Management Fund AAAm. Federated's new 13 bps, $100 million minimum Premier Share Class had been put on hold for a number of months, but the fund is now live.
S&P also withdrew the AAAm rating on AMF Money Market Fund, run by Shay Assets Management, and downgraded ratings on AMF Ultra Short Mortgage Fund (to Af from AAAf). It also withdrew ratings on AMF Short U.S. Govt Fund and AMF Ultra Short Fund. The AMF website says, "However, in response to the unprecedented turmoil and dislocation in the mortgage securities market, the Fund has temporarily discontinued accepting new purchase orders for the AMF Ultra Short Fund, AMF Ultra Short Mortgage Fund and the AMF Short U.S. Government Fund. Given these circumstances, the Board believes that the benefits derived from having ratings no longer justify the cost, and the decision was made to terminate the rating." (Crane Data does not track AMF Money Market Fund.)
Moody's also downgraded the market risk ratings on two offshore enhanced yield funds, Morgan Stanley US Dollar Enhanced Yield Fund and MS Euro Enhanced Yield Fund. It affirmed the funds' Aa ratings, but cut the USD Enhanced Yield's MRR from MR1 to MR5 and cut the Euro Enhanced's MRR from MR1 to MR2 "to reflect the very high level of price volatility ... as a result of their sizeable investment in asset-backed securitities at a time of extreme market turbulence."
Finally, Capital One Funds have filed to reorganize and merge into corresponding Fidelity funds. If approved, Capital One Cash Reserve Fund would merge into Fidelity Inst MM: Prime MMP III, and Capital One U.S. Treasury MMF would merge into Fidelity Inst MM: Treasury Port III.
Concerns about the formerly-government sponsored mortgage giants Freddie Mac and Fannie Mae took center stage in the financial markets this week, but initial reporting indicates that money market fund managers continue to have faith in Fannie and Freddie. While short-term debt rates rose, the modest 5-10 basis point jumps in rates indicates that the money markets are far from in a panic mode, and sources tell us that investors continue to view the agencies' debt as money fund-worthy. (See also today's Federal Reserve announcement, "Board grants New York Fed the authority to lend to Fannie Mae and Freddie Mac if necessary" and Treasury's "Paulson Announces GSE Initiatives".)
JPMorgan's Alex Roever writes in his latest "Short-Term Fixed Income" report, "It's also true that money market and other short-term investors are running out of places to put their prodigious portfolios. There are few, if any places to hide. In any case, we see no reason to duck discos, or any other short-dated senior level agency debt. We would continue to be buyers at current levels."
Government agency debt represents the third-largest holding of money market mutual funds (11.6%), following commercial paper (CP) at 25.0% and repurchase agreements (repo) at 19.2%. Freddie Mac and Fannie Mae account for about 20% of all agency issuance, according to estimates, though this debt is also used to back a portion of repo holdings. Thus, money funds likely hold in the range of $340 billion of the over $850 billion in agency discount ("disco") debt, and approximately $70 billion in Fannie and Freddie debt (primarily discount notes).
Saturday's Wall Street Journal discusses the issue in, "Better Debt Than Stock?" The Journal says, "[E]ven as the stock market panicked, investors were more sanguine when it came to Fannie and Freddie's debt. Sound crazy? Actually, it makes perfect sense.... Debt investors, meanwhile, haven't been as worried by the capital conundrum because they remain confident the government will, if necessary, back the companies' liabilities. They are probably right to think that a worst-case scenario would run along the lines of the Bear Stearns bailout: The stock gets creamed, but debtholders are all right."
The agencies continue to hold the highest short-term ratings, though there have been minor signs of weakness in government-only money fund assets. Our Money Fund Intelligence Daily shows Government Institutional Money Funds declining by $858 million on Thursday, though they remain up $2.9 billion over the past week. Overall money fund assets rose $7.04 billion Thursday, and have risen $47.68 billion in the week through July 10.
Friday's New York Times features the article "Rethinking Money Market Funds". The piece discusses support actions taken by money fund advisors to date, saying, "During the last year, big banks and investment companies have committed more than $10 billion to shore up money market funds that were tainted by the mortgage mess." It says at least 17 companies "have moved to bolster funds" and adds, "Regulators say six or seven other investment firms have orchestrated bailouts that have not been made public."
The Times continues, "Money market funds have not experienced such turmoil since 1994 , when about 50 of them had to be rescued because of gyrations in interest rates." It cites disclosures, support actions and/or securities purchases by the following companies: Legg Mason, Credit Suisse, Bank of America, SunTrust, Morgan Stanley, Dresdner Bank, Janus, Lehman Brothers, Wachovia, U.S. Bancorp and TD Waterhouse, HSBC, Northern, SEI, and Wells Fargo.
The piece says, "Experts say fund investors are unlikely to lose money." It also cites the massive recent growth of money fund assets, saying, "The upshot is that assets of money funds have swollen to a record $3.5 trillion since the credit crisis began last year, according to Investment Company Institute data. That is an increase of $900 billion, or 35 percent."
Finally, the Times quotes: Alex Roever, "I think the damage has been done;" Bruce Bent, "Wall Street will respond by offering the next iteration of the questionable paper. If there is demand, we will come;" and Peter Crane, "There is still an awful lot of walking wounded investment money out there. Money funds should be a big beneficiary of that."
Denver-based Community Bank Funding Company, which is affiliated with Republic Financial, is seeking to expand the investor base in its Capital Markets CD (CMCD) product to include money market mutual funds. The company has been packaging FDIC-insured certificates of deposit issued by community banks into AAA-rated, 144A medium-term notes programs with a floating rate, 1-year term.
CBFC President Rich Marshall tells us, "We are actively targeting money market funds and are contemplating inserting a 7-day put to ensure liquidity.... The notes are backed by FDIC-insured CDs -- [so it's] U.S. Government risk. The investor is getting 'full faith and credit' at a 25 bps pickup." He says the company uses Wilmington Trust as its as trustee and just completed a joint-marketing deal with SunGard STN for an eTN (electronic trading network) platform for institutions to purchase CDs.
Marshall says, "The structure allows money funds to buy CDs that are FDIC insured." CBFC, he says, owns a patent to this process, and they hope "securitized CDs" to become a new asset class. Marshall notes that community banks represent $3 trillion out of the $13 trillion in the banking system. He also expects the product's yield to be very competitive. "The reason we're having to pay the increased yield, we're the new kid on the block," he tells us.
While it remains to be seen whether the product will find a home in money market funds, it's clear that funds are actively seeking new, ultra-safe diversified sources of supply. Over the past year, money funds have shifted their investment allocations to compensate for the drop in asset-backed commercial paper supply. Though Treasury, government agency and repo have filled the void, bank CDs have also been popular.
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