off topic : Barrons -- Why Your Money-Market Fund Isn’t as Safe as You Think .......................
July 2, 2020
Why Your Money-Market Fund Isn’t as Safe as You Think
By Lewis Braham
No one wants their money-market funds to be interesting. They are the cash-like income funds you buy when you’re waiting to buy something else, with a $1 share price that you always want to stay $1.
Unfortunately, during the coronavirus crisis, money funds became interesting. From March 2 to March 23, the assets under management of prime money-market funds, which buy high-quality corporate debt, dropped by $120 billion -- 15% of prime funds’ assets at the time. To prevent a stampede like in the 2008 financial crisis, the Federal Reserve established the Money Market Mutual Fund Liquidity Facility, or MMLF, on March 18 to provide loans to banks to purchase money funds’ underlying securities, thereby improving their liquidity.
Given the crisis, it’s time people stop thinking of money funds as risk-free. Professional investors don’t. “As a prudent financial advisor, in March, we were part of that selling pressure because we looked at corporate money markets, and we said, while the risk is lower than it used to be in 2008, there’s still a risk and the yield is just not that much higher [than Treasury bills],” says Andy Kapyrin, co-head of investments at RegentAtlantic, a financial advisor managing more than $4 billion. “So we swapped our holdings of corporate money-market funds into holdings of Treasury and government money-market funds.”
Kapyrin knows what many retail investors don’t -- that there’s another price behind the seemingly stable $1 per share that retail investors see. The other price is ominously known as the shadow net asset value, or NAV. If that NAV dips below 99.5 cents a share, it ceases to be a shadow and the fund has officially “broken the buck,” in Wall Street terms, and fund must redeem shares at less than $1. (Institutional money funds have different rules, so the NAV floats -- in other words, the shadow NAV is the real one.) If a fund’s shadow NAV crosses below the 99.75 cents threshold, it must file with the Securities and Exchange Commission that there has been a “deviation between current net asset value per share and intended stable price per share” for the fund.
On March 20, the Bank of New York Mellon’s General New Jersey Municipal Money Market (ticker: DNJXX) filed that its share price had dipped to 99.68 cents. Meanwhile, Goldman Sachs and Bank of New York Mellon subsidiary Dreyfus filed N-CR forms indicating that they were providing financial assistance to multiple money funds by buying their underlying securities. The NAV of some 10% of prime and muni money funds dropped below 99.99 cents a share.
A Bank of New York Mellon spokesperson stated that its money funds’ security purchases were “in order to provide additional liquidity to the markets before the [Fed’s] MMLF facility was up and running,” while the NAV dip at the muni money fund was “not a result of the quality of the securities held in the portfolio.” Goldman Sachs declined to comment.
While the last fund to break the buck was 2008’s Reserve Primary, liquidity in 2020 proved a greater problem, ironically because of regulations the SEC created in 2014 as a result of the Reserve fund debacle. After the financial crisis, the SEC issued two rounds of reforms: The first, in 2010, tackled liquidity, mandating that a larger portion of the securities a fund owns must be easily sold. The second, in 2014, separated money-market funds into two categories -- retail funds, which were allowed to keep the $1 per share value so long as they held only government-issued securities, and institutional prime money-market funds, which have a floating NAV.
“As a manager of a prime money-market fund, you must maintain 30% in liquid assets, which are predominantly assets that mature within seven days and Treasury bills,” says Jeff Weaver, who manages $200 billion in money-market funds for Wells Fargo Asset Management. “If you drop below that 30%, then the [fund’s] board of directors must consider fees and gates.”
The 2014 rules allow the board to impose as much as a 2% exit fee on shareholders and/or gate the fund completely so investors can’t sell their shares for 10 days. As liquidity levels dropped in March, selling begot selling because institutional investors became afraid that they could get slapped with exit fees or locked into funds, Weaver says. The creation of the Fed’s MMLF facility and private bank purchases allayed these fears.
But think about it: In a zero interest-rate environment like today, losing up to 2% is significant. Currently, the average fund in the Crane 100 Money Fund Index of the 100 largest taxable money funds yields only 0.12%. And that minuscule payout is only possible by money funds waiving part of their fees. “About half of all money funds currently yield 0.01%,” says Peter Crane, president of money fund tracker Crane Data. “And those are the ones that are waiving the most fees. They account for about a third of all money fund assets -- your smaller, higher-expense funds.” Total U.S. money-market fund assets were $5.2 trillion at the end of May.
Such waivers can be costly even for the lowest-fee managers. “By my calculation, between 2010 and 2015, Vanguard waived about $122 million in fees [on its money funds],” says Dan Wiener, editor of the Independent Adviser for Vanguard Investors.
Wiener says waivers are “irrelevant” to yield-seeking investors, with one crucial exception -- that money managers don’t try to recoup or “claw back” waived fees later. Regarding waivers, Vanguard’s money-market prospectus states that the funds aren’t “obligated to repay this amount to Vanguard.” Vanguard declined to comment. Other managers, such as TIAA-CREF, have clawback provisions that could lead to negative yields in the future.
Fees could make money yields negative if the Fed embraces a negative interest-rate policy like Europe’s or Japan’s, though experts say that’s unlikely. Still, this March, the market priced Treasury bills at negative yields without Fed influence, and the SEC is already considering a way for money funds to “pay” negative yields called reverse distributions: Funds would gradually reduce their investors’ shares without officially breaking the buck.
While such risks are minimal, investors should consider them, given that money funds currently pay nothing to take them.
Email: editors@barrons.com
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