Daily Links Archives: April, 2008

Dow Jones writes in "Institutional Money Funds See Big Flows", "With problems in the credit markets spooking corporate treasurers, many are rediscovering a sturdy investment long popular on Main Street: the money-market fund."

It quotes Bob Deutsch head of global liquidity at JPMorgan Chase & Co. (JPM), "What they are doing is pulling cash out of those investments they perceive as risky and moving it to those they see as good. They are willing to give up yield." The article also mentioned recent growth and money funds' advantage during periods of falling rates.

It quotes Simon Mendelson, chief operating officer of BlackRock Inc.'s (BLK) Global Cash Management Group, "As the Fed lowers rates, money-market funds look favorable (relative) to direct investments. Money-market yields fall more slowly than those on individual securities."

Money Management Executive, formerly Mutual Fund Market News, writes "Money Funds Seeing Huge Inflows, Opportunities". The article brief says, "A flood of retail and institutional investors have hit the sidelines and settled comfortably into money market funds in light of the equity market roller coaster and credit market stumble. As of March 31, money fund assets topped $3.27 trillion, according to data from Crane Data of Westboro, Mass. Over the past 52 weeks, money funds have pulled in over $1 trillion in assets." The piece quotes Federated's Debbie Cunningham, JPMorgan's Robert Deutsch, and Reserve's Bruce Bent, and includes a Crane Data table on the 10 largest asset gainers among money funds complexes.

It's official. Crane Data's Peter Crane will speak at the upcoming Annual TMA Dinner sponsored by the San Francisco Treasury Management Association, Peninsular Treasury Management Association, and the Silicon Valley TMA. The event will be Wednesday, May 14, at 5:30 p.m. in San Mateo, California, at the Left Bank Restaurant. Crane will present "Is Your Money Fund Safe? Examining The Crisis in Cash." He will address current topics involving money market mutual funds, including the "silly" shift into Treasury funds.

Money fund giant Federated Investors reported first quarter 2008 earnings, saying money fund assets in funds and separate accounts hit a record $278 billion, up $91.5 billion, or 49%, from a year ago. "As investors sought havens from market volatility in the first quarter, Federated's asset flows were driven by a demand for our money market and fixed-income offerings," said J. Christopher Donahue, president and CEO. The company's conference call from Friday, April 25, is accessible under the "About Us" section of http://www.federatedinvestors.com.

BankRate surveys 20 brokerages (with assistance from Crane Data's Brokerage Sweep Intelligence) on their cash sweep options. The article says that just 4 of the 20 "automatically sweep customers' excess cash into higher-yielding money market mutual funds. The result is that brokerages are able to borrow billions from customers while paying little more than 0.5 percent interest." It adds, "The average annual yield paid on amounts up to $100,000 is 0.56 percent in these [FDIC insured] cash accounts, according to Bankrate's survey. Compare that with the average 2.78 percent paid by the four institutions -- Banc of America, Muriel Siebert, ShareBuilder and Vanguard" that use money funds. (See rates from BankRates Cash Sweeps Study here.) See also, BankRate's "Cash sweep controversy spurs lawsuit".

Bloomberg writes "Northern Rock Downfall Boosts Member-Owned Building Societies", which discusses the popularity of savings accounts in the U.K.'s building societies, which are similar to credit unions. The article says, "U.K. building societies from Swindon-based Nationwide, the largest, to Century of Edinburgh, the smallest, are gaining because of depositor concerns about the security of money held at banks weakened by the global credit crisis. Owned by their customers, building societies get about 70 percent of their funds from deposits, compared with 30 percent at Northern Rock.

MarketWatch's Chuck Jaffe writes "New exchange-traded bond fund doesn't fail ... to disappoint". Jaffe beats up on the new Bear Stearns Current Yield Fund ETF (YYY), saying, "The trouble is, there's not a lot of value that an active manager can add to short-term bond funds and money market funds. In fact, studies have shown that the biggest determining factor between the top funds and the laggards has much less to do with the assets they choose than with the costs associated with the fund."

Kudos to Kiplingers, who in "Best Online-Broker Deals for Fund Investors" is the brokerage ranking to consider "where the brokers put your uninvested cash." The article says, "The better brokers -- Siebert among them -- automatically sweep your cash into a decent-yielding money-market fund. Fidelity gets a middling score because it requires investors to opt for a money-market fund; otherwise, cash goes into an interest-bearing account. We gave the least credit to firms that don't offer a money-market fund at all (Scottrade) or that impose restrictions."

AMR Corporation, parent of American Airlines, has announced an agreement to sell its American Beacon Advisors unit, manager of over $11 billion in money funds, including the top-performing American Beacon Money Market Select Fund. The advisor will be purchased by private equity firm Lighthouse Holdings, an affiliate of TPG Capital, for $480 million. AMR will retain a minority stake. The release says, "American Beacon currently provides a number of services for AMR and its affiliates, including cash management.... AMR anticipates that it will continue its relationships with American Beacon after the closing."

The Wall Street Journal writes "Bankers Cast Doubt On Key Rate Amid Crisis", which questions the accuracy of the London Interbank Offered Rate, published by the British Bankers Association. The piece references a "recent research report on potential problems with Libor by Scott Peng, an "interest-rate strategist" for Citigroup. It says, "In one sign of increasing concern about Libor, traders and banks are considering using other benchmarks to calculate interest rates, according to several traders. Among the candidates: rates set by central banks for loans, and rates on so-called repurchase agreements."

Bloomberg writes "Auction-Rate Bond Market Will 'Cease to Exist', Citigroup Says". The article says mutual funds and money funds may benefit at the expense of brokerage firms due to troubles in the auction-rate securities market. It quotes Citigroup analyst Prashant Bhatia, "Basically, clients could stop using the services of their brokerage and/or asset management firms as a result of a loss of trust.... Plain and simple, the money fund turned out to be a superior product and as the ARS crisis is resolved, we expect inflows into money funds." Bloomberg adds, "It will also benefit firms such as Federated Investors Inc., BlackRock Inc., and Charles Schwab Corp. that have large money-market funds."

MarketWatch writes "Follow the bouncing rate: Brokers play shell game with money-market yields". The piece, by former money fund guru Bill Donoghue, criticizes brokerages for "advertising that they pay six times -- and even eight times -- the 'national average'". He asks, "Why are brokers comparing supposedly competitive money-markets to bank savings accounts? Their regulator, the Office of Thrift Supervision, allows it." Donoghue cites E*Trade, Schwab and ING Direct advertisements, and says, "Such comparisons are inconsistent and inappropriate. [T]he comparison with absurdly low savings accounts, instead of with money funds or money-market accounts, is potentially misleading."

The website Mondaq features an article by law firm Goodwin Proctor LLP entitled "Turbulent Credit Markets Require Carefully Crafted Cash Management Policies. The piece advises companies to review or create investment policies and discusses options such as government securities, money market deposit accounts, money market mutual funds, and "money market-like" or "enhanced" funds. "[T]he time is now to reconsider best practices with regard to the establishment and maintenance of cash management and investment policies," says the article.

We learned from Financial Week about a recent study by Greenwich Associates entitled, "In U.S. Corporate Cash Portfolios, A Flight To Quality." The release from Greenwich says, "U.S. companies are reducing risk levels in their cash investment portfolios and cutting return targets on short-term investments." Expected returns on cash investments for the almost 300 large companies surveyed have been reduced from 4.9% to 3.7%, which "reflects a general flight to quality in the short-term investment portfolios".

Reuters writes "US muni funds top $500 bln for first time-iMoneyNet, saying, "U.S. taxable money market funds reported inflows of nearly $46 billion in the latest week, while tax-free funds took in $11.5 billion, pushing them above $500 billion for the first time, the Money Fund Report said on Wednesday.

The Wall Street Journal's Randall Smith discusses the relationship between buyout firm TPG, formerly Texas Pacific Group, which is currently investing in Washington Mutual, and SIV Axon Financial. It says, "The structured investment vehicle opened in March 2007 with an investment of $275 million, and the fund's assets peaked at $14 billion in the middle of last year. Soon after that it ran into trouble. It defaulted on its debt in November."

Bloomberg's "SIVs' Last Men Standing Entangled by Gordian Knot" discusses the recent downgrade and status of the last and the largest structured investment vehicles, or SIVs. It quotes us: "Sigma is the foremost concern among money-market funds right now," said Peter Crane, whose Westborough, Massachusetts-based Crane Data LLC tracks more than $3.3 trillion of money. "The money-market business is pulling for it." The piece also says, "Even so, money-market funds rated by S&P have reduced holdings in Sigma to under $5 billion, from $7.5 billion in November, said Peter Rizzo, a senior director at S&P in New York." Rizzo says, "Whenever maturities have rolled off, no one we've seen has looked to add.... Money funds have looked to roll any new money into more conservative programs."

Financial Week discusses the large inflows into money funds in general and into BlackRock, Federated, and Reserve in particular. The three companies have seen a combined increase of $200 billion over the past year. The article says, "Yet while this growth has been significant -- both BlackRock and Federated's total cash assets increased by about one-third last year, while the Reserve's cash assets nearly doubled -- some believe that even more corporations will continue to farm out large chunks of their cash management to third-party investment firms over the next several months."

The spring regional Treasury Management conference season is approaching. Trade shows of interest to the instutional cash investment community include: TEXPO (Texas Treasury) on April 13-15, Treasury Management of New England on May 21-23 (Peter Crane will present "Is Your Money Fund Safe? Examining The Crisis in Cash" at 9am on 5/21), and New York Cash Exchange May 28-30, 2008. At NYCE, Crane will lead a panel including Dreyfus' Lou Geser, Fidelity's Deb Watson, and BlackRock's Lynn Evans. It's entitled "Safety First in Money Market Fund Investing: Lessons Learned". Be sure to look for Crane Data's new exhibit booth at both TMANE and NYCE!

Moody's Investors Service downgraded Sigma Finance's short-term ratings from P-1 to P-2. S&P continues to rate the company A-1 (AAA). Money market funds holding Sigma commercial paper or medium-term notes aren't forced to sell yet, but many are undoubtedly preparing contingency plans should ratings be cut further. Bloomberg writes "Gordian Knot's $40 Billion Sigma Cut 5 Steps From Aaa", saying, "Sigma is the last and largest of the companies that financed themselves in the short-dated commercial paper markets to buy longer-dated assets. The so-called structured investment vehicles, or SIVS, were shut out when investors shunned all but the safest government securities because of contagion from the collapse in subprime mortgages." See also TimesOnline's "Solent's Mainsail II calls in the receivers".

Based on a rebound in the Federal Reserve's weekly totals, Bloomberg writes "Asset-Backed Commercial Paper Rises Most in 11 Weeks". The article quotes Miller Tabak & Co.'s Tony Crescenzi, "It's a market that's been put through the grinder.... It's been cleansed of mortgage-related instruments, mortgage-related exposures. What remains is a set of issuers that investors trust for the most part."

Also, The Wall Street Journal writes "Asset-Backed Market Is Starting to Recover" in its "Credit Markets" column. While ABCP participants are too shell-shocked to believe it could be over, the Journal says of the broader ABS market, "After the recent drought, the first tentative signs of life are emerging in the $2.5 trillion market for asset-backed securities, the main source of funding for all types of consumer debt. There is investor demand for new deals and supply has picked up".

Watch Federated Investors' Debbie Cunningham on Bloomberg TV. She discusses the limited nature of last week's Treasury fee waivers, past instances of temporary partial money fund fee waivers due to low yields, and recent events in the money markets. Cunningham expects Fed funds to decline to about 1.5% to 1.75% over the next quarter (Fed funds futures show the market expecting a cut to 2.0%) with a potential rebound to 2.0% in the 2nd half of 2008. On the huge cash buildup, she says, "I think institutional memory is not necessarily very long-lived, so as people get more comfortable with the economy ... they will again look at their cash component ... and what they want to take a little more risk in."

Today's Bloomberg piece features money funds, saying, "Investors are so scared of stocks and bonds that they have stashed a record $3.51 trillion in U.S. money-market mutual funds even as managers including Fidelity Investments waive fees to keep yields from falling to zero." It adds, "Money-market mutual funds, whose combined assets are greater than the gross domestic product of China, may only hold debt that matures in no more than 13 months. Under U.S. Securities and Exchange Commission rules, managers may buy Treasuries, commercial paper issued by large banks and corporations, repurchase agreements and short-term bonds. They can't buy equity or debt that doesn't carry one of the two highest short-term credit ratings."

The Wall Street Journal writes "Savers Feel Pinch Of Tight Credit" about banks cutting rates (mentions money funds). It says, "Another alternative for savers are money-market mutual funds. Yields are currently averaging 2.74% for the 100 largest funds, but are expected to drop to about 2.5% by mid-April, according to Peter Crane of Crane Data LLC. Although the securities aren't insured by the FDIC, no retail investor has ever lost money in a money-market fund, he says."

Also today: FT "Worried hedge funds move cash", BusinessWeek "From the Mail Bag: How Safe is Your Cash?", Bloomberg "Legg Mason Profit Cut by Pact to Support Money Fund", and WSJ: "Legg Mason to Cover Some Fund Losses".

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