Fitch says floating NAV hasn’t floated around too much; spreads are attractive, too.
Money is trickling back to institutional prime money market funds, pulled in by stablenet asset values and widening spreads. That’s the latest take from Fitch Ratings, whichnotes that while cash has flowed back into prime MMFs, government funds—thedestination for cash following new MMF regs implemented last October—sawoutflows of nearly double the prime inflows.
The driver of the outflows from governments is a “victim of their own success”story. That is, governments were the most popular destination for cash fleeing prime,mainly because they were keeping the stable NAV. The mass push into governmentsended up suppressing yields. “The surge in demand for government assetsdampened yields in that market segment while the reduced demand for prime assetsboosted their yields,” Fitch says in a research note. As of March 31, Fitch says thespread between prime and government funds rose to 0.33%, “significantly higherthan the post-crisis average of 0.09%.”
That some money is trickling back to prime was recently noted at a NeuGroupTreasury Investment Managers’ Peer Group 2 (TIMPG2) meeting. About half the membersof the group were testing the waters by going back into prime. Most others werestaying in recently established separately managed accounts (SMA), bank deposits orother short-term vehicles. Notably, many members at the meeting were putting a lotof cash into European prime money market funds; this even though European MMFswill in a few months have some of the same rules applied to them as the US.
One member of the TIMPG2 said the gates and fees for US prime were anon-starter for his company, which forced him out of the funds. He was heavilyinvested in European MMFs funds and indicated he may take cash out of them whenthe European rules kick in. The destination will be SMAs that he currently was developingwith an external cash manager. But gates and fees haven’t been a huge barrierfor investors going back to US prime, Fitch says. That’s because prime fund managers”continue to employ conservative liquidity management strategies, maintainingweekly liquidity buffers above the 30% regulatory threshold to assuage investorconcerns about the liquidity fees and redemption gates features.”
At the same time, managers seem to have solved the VNAV conundrum, allowingprime funds to exhibit “significant stability in NAV since moving to a floating NAV, akey consideration for investors.” And this has been despite two Fed rate hikes.
“In the six months post-reform implementation, investors have had the opportunityto observe two Fed hikes and how managers have weathered the new operatingenvironment,” Fitch says in its note. “Since reform implementation, 95% of observationsin daily changes in institutional prime fund NAVs have shown no movement; 5%of observations showed that NAV moved up or down by 1 basis point (bp) and inalmost no instances NAV moved by 2 bps or more in one day.”
Fitch expects the movement back to prime to continue “as investors continue togain comfort with the new regime although the small size of many existing institutionalprime funds will restrict the rate at which money is able to return.” Still, Fitchgoes on to note, prime funds “will not recover all that was lost, as some flows intogovernment funds were the result of structural changes such as fund conversions orinvestor mandates requiring a constant NAV.”