Better if brief days are ahead for sponsors of money market funds. That’s because with a rate rise, money market fund returns should improve, negating the need to reduce fees, according to a report from Moody’s Investors Service. This means sponsors could see up to $5bn in new cash as fees come back.
Since the financial crisis and amid the low-interest rate environment, MMFs have sought to ease the pain of low returns by waiving fees for investors and reimbursing fund expenses. For funds, changing fees throughout a given year helps managers because they can react to changes in the investment environment and relative performance that affect the assets under management.
But lately, Moody’s says, rates on short-term assets have begun to inch up, foretelling the possibility that when the Fed raises rates, which could be as soon as September, yields will increase even more. “Over the first five months of 2015, interest rates on short-term securities, such as CDs and commercial paper, have begun to rise, increasing the yield on money market fund portfolios, allowing managers to reduce fee waivers,” Moody’s says. “With the recent increase in rates, and in anticipation of a higher rate policy from the Federal Reserve, we anticipate that, across the industry, up to $5 billion of gross fees will be potentially available for fund sponsors to collect as fee waivers are reduced.”
Moody’s says beneficiaries include MMF sponsors BlackRock, Fidelity, Invesco, and Federated. Moody’s reports that in the first half of 2015, Federated’s “gross annualized fee waivers declined $54 million, or 13 percent, versus calendar 2014.”
Despite the windfall, MMFs are still not out of the woods, what with new regulations set to kick in in October 2016. These regs include a variable net asset value (VNAV) for prime funds, fees and gates. But the reduction in fee waivers might mitigate the sting of the new regs. Meantime, a force working against the lessening of fee waivers lays waiting in the regulations. This is the fact that to government funds, which won’t have the VNAV and will be able to stick with the current constant net asset value of a buck, could create rush into treasuries, which would hold interest rates down, Moody’s says.
“A large shift into government MMFs from prime institutional MMFs could lower yields on the government funds, making it more difficult for fund managers to reduce fee waivers,” Moody’s says. “On the other hand, investors could also shift into competing liquidity products with higher yields and fewer regulatory restrictions, which could help increase fund managers’ fees, offsetting any foregone revenue from waivers.”
The days following the October 2016 reg implementation will tell all.