Two years ago, in the wake of the financial crisis, the Securities and Exchange Commission (SEC) voted to implement new rules to strengthen money market funds. These rules attempt to limit risk, increase protection of investors, improve fund operations and enhance disclosures.
In an upcoming article in the January-February issue of Exchange magazine, BlackRock discusses the SEC's requirement that money funds file mark-to-market, or "shadow" NAVs of their portfolios every month, as opposed to semi-annually.
BlackRock welcomed the changes to Rule 2a-7, determining that a strengthened regulatory framework for money market funds better protects both the managers and the investors from the risks associated with short-term investing in either normal or turbulent market conditions.
Using one of its own funds as an example, BlackRock's study showed how the mark-to-market NAV fluctuated over the past eight years. Even in late 2008, this fluctuation was quite modest. While some might feel that this analysis shows that more regulation is unnecessary, Rich Hoerner, CFA, Managing Director and Co-Head of Cash Management at BlackRock, cautions that these results were BlackRock's own and are probably representative of most funds, but not of the entire market. "As we saw with the Reserve Primary Fund in September of 2008, it only took one fund having a problem to trigger problems for everybody else," said Hoerner, in an exclusive interview with AFP.
Additionally, money funds are required to regularly use market values and calculate an NAV, and as long as they are between $0.995 and $1.005, they round to $1.00. "It takes a movement in the market value of half a percent to change the NAV of the fund, from $1.00 to $0.99 or $1.01," said Hoerner, who co-authored the Exchange article with Simon Mendelson, Managing Director and Co-Head of Global Cash Management and Securities Lending at BlackRock.
The SEC had several key reasons for tightening regulations, Hoerner added, such as helping investors to make more-informed decisions on money funds and determine which funds to invest in, increasing investors' awareness of risks in money funds, and discouraging fund managers from taking risks that could impact the mark-to-market NAV. "I can tell you firsthand as a fund manager, that you will manage your portfolio a bit differently, knowing that every month, investors are going to see that mark-to-market NAV," he said. Hoerner advised investors to keep several factors in mind regarding money funds:
- Small changes in the mark-to-market NAV are normal and should be expected. These changes have little to no effect.
- The NAV can be slightly above or below $1.00 for a lengthy period of time - even years.
- Mark-to-market NAV movements are most commonly caused by changing interest rates. They are rarely created by credit events.
Hoerner encourages prospective investors to perform a due diligence review on their money fund providers. "This increased transparency (the mark-to-market NAV) is a good starting point for investors," he said. "Looking at the data by itself is not going to provide answers as to whether you should invest or not invest in a particular fund, but it is a way to start a dialogue with money fund providers. By asking the right questions, an investor should be able to get a pretty good understanding of a money fund manager's capabilities, processes and philosophy on managing a fund."
Hoerner recommends that investors get some education on the SEC's form N-MFP before this new data is posted to the SEC website at the end of January, as it will likely be somewhat confusing. "Take a look at the revised 2a-7 on the SEC website and go to the very end of the document. It has the information that money funds have to provide on form N-MFP; it tells you the line item number and what the information is."
Prospective investors are also going to get some additional help in educating themselves on money funds. The increase in transparency is leading to the development of new tools that will allow investors to make better assessments. BlackRock itself is currently working on a product that uses information filings to help investors aggregate data and compare funds, and/or simply determine what exposure they are taking. "The way we feel at BlackRock—and I think most money fund providers feel this way—is that the best customers are the ones that are educated, and understand the product and how we manage it," said Hoerner.