Fitch says the amount of funds shortening their weighted average maturities is growing; funds with longer WAMs disappearing.
Anticipating uncertainty when higher interest rates and new SEC regulations kick in, money market fund managers are shortening durations in their products to reduce risk and ostensibly, keep customers. According to Fitch Ratings, since January 2015, the number of prime and government funds with weighted average maturities beyond 41 days has plummeted.
“Anticipated increases in US interest rates are pushing money funds across the board to shorten portfolio maturities to take advantage of higher rates” as well as reduce their duration risk, said Fitch.
“Between Jan. 15 and July 27, the number of prime and government funds with WAMs between 41 and 60 days decreased to 112 from 192, while the number with WAMs between one and 40 days increased by 81 funds,” Fitch said. Prime funds were particularly busy shortening durations, Fitch said, with WAMs longer than 40 days declining to 48 from 102. Meanwhile, government funds have been slower to reduce maturities, Fitch said.
In addition to making the funds less risky, managers, in response to coming changes to the current fixed net asset value regime, have been putting money behind their funds to make sure they stay at $1. This “topping up” will cost millions, Fitch speculated. Citing one example Fitch said Northern Trust might have spent millions to make sure its funds stayed pinned to a buck. Fitch cited a report from Crane Data that Northern Trust “took a $45.8 million charge in the second quarter over a capital injection used to top up the shadow NAVs of four funds, citing legacy losses from the financial crisis as the cause of the shortfall.”
In one instance, Fitch determined that the Northern Trust may have spent several million on its Northern Trust Money Market Fund, after seeing the value of it increase from $0.9989 on July 9, 2015 to $1 the next day. “If the increase in the fund’s shadow NAV was a result of a capital infusion, it would have cost approximately $8 million,” Fitch estimated. “Although the fund is considered a retail fund and, therefore, will not convert to a floating NAV like institutional funds, Northern Trust will still have to post the fund’s shadow NAV on its website, which may have been one of the reasons for the top up. As of June 30, 2015, there were 63 funds with shadow NAVs below $1, with a cumulative shortfall between the funds’ shadow NAVs and $1 of approximately $35 million.”
The SEC’s new rules for MMFs, including a floating NAV for prime funds and gates and fees, will go into effect in October 2016.