The New “Prime” Directive

Lookout Star Trek fans, there’s a new Prime Directive in town. The old Prime Directive, as Trekkies know, prohibited Starfleet personnel from contacting or interfering with undeveloped alien civilizations – like those without warp technology. But the new Prime Directive, which has to do with money market mutual funds, means get out of Prime while you can.

According to iMoneyNet, institutional prime money funds fell $36.45 billion for the week ended September 13 to $469 billion. Meanwhile government institutional gained $48 billion to $1.3 trillion. iMoneyNet said this marks the 9th week in a row that prime institutional funds have reported a decline. 

It’s been an ugly year for prime: reports suggest investors have pulled upwards of $733 billion from all prime funds since October 2015 and TD Securities thinks another $200 billion to $300 billion could flow out in the next few weeks. To prep for the continuing drainage, prime funds are holding 76% of their assets in highly liquid assets like cash or short-term treasuries, as of the end of last week, according to research by Fitch Ratings.

The reason for the outflows is simple, said Brandon Semilof, managing director at StoneCastle Cash Management. With new SEC regulation coming October 14, which will give prime funds the “Scarlet V” – as in variable net asset value (along with possible gates and fees) – it’s just not worth it to stay in prime funds. Companies can do better elsewhere for less risk, Mr Semilof says. “If people spend a little time researching they’ll discover assets that will enhance returns without adding more risk,” Mr. Semilof said. “And in some cases they’ll reduce risk.”

These assets include ultra-short funds from the likes of Black Rock or PIMCO, short-duration government funds, or even StoneCastle’s own FICA, which is a federally insured product that offers next-day liquidity and no exit fees or redemption gates. Separately managed accounts are also growing in popularity.

And as for companies that are still in prime funds, they might hang in there til the end of September, just a couple weeks ahead of the rules implementation. According to a survey of 76 corporate treasurers by StoneCastle, 45% of respondents still in prime funds said they would allocate out of them by September 30. Government money market funds, which are required to have 99.5% of their assets in government securities, will keep the fixed net asset value and have neither gates nor fees and have the most popular destination for funds fleeing prime.

“Prime funds as of today are appropriate,” Mr. Semilof said. “But in four or five weeks, they will no longer be appropriate.”