Brent Callinicos, Google's VP & Treasurer, recently told Bloomberg that Google's $26.5 billion in corporate cash "isn't fast money, this is patient money." This sums up quite well what is on the minds of corporate investors these days, and new research supports this mindset. According to the 2010 AFP Liquidity Survey, money funds are the second-largest holding next to bank deposits. The new 2a-7 money fund changes that recently went into effect were designed to give money funds liquidity, transparency and more safety. As a result of these changes, yield will decrease since the portfolios will be shorter in maturity.
From the survey, sponsored by Promontory Interfinancial Network, the majority of respondents indicated they are "comfortable" or "very comfortable" with most of the specifics associated with these specific rule changes to MMFs:
- 30 percent weekly liquidity requirement
- 10 percent overnight liquidity requirement
- Decrease from 10 percent to 5 percent of portfolio holdings for illiquid securities
- Decrease WAM from 90 days or less to 60 days or less
- Weighted average life of 120 days or less
- 0.5 percent maximum concentration per issuer for Tier 2
- 3 percent portfolio investment in A2/P2 paper with at 45 day limit.
Most notably, 65 percent of respondents were uncomfortable or unsure about the release of the 60 day shadow NAV. Thirty-eight percent of companies with revenues under $1 billion felt comfortable with this while only 31 percent of companies with over $1 billion in revenues were not. Larger companies also allocate more of their portfolios to money funds—34 percent versus 20 percent for companies with less than a $1 billion in revenue. Releasing the shadow NAV on a 60 day lag basis will have an impact on organizations investment decisions, especially if the NAV should show an indication that it might fall below a dollar. Money fund investments will be reported monthly so investors will be able to analyze them before the shadow NAV is released 60 days later.
At AFP Corporate Treasurer Roundtables around the country, treasurers and other corporate finance executives say the shadow NAV is the most significant of the changes. The main concern that treasurers have is the potential headline risk for a fund even after 60 days when the shadow NAV is released. Many corporate investors will want to avoid any funds and will want to move out of anything that might be at the slightest hint of trouble. Treasurers said it is much easier to explain to the board why they are being conservative in their investment selection than it is to explain why they might have lost value in their company's principal. If the incremental risk is not worth the incremental return, investors are unlikely to take the added risk.
The changes in 2a7 funds will add more liquidity and transparency at the expense of yield, but that is acceptable to corporate treasury executives in this uncertain environment that investors are feeling. Once the 2a-7 changes are fully phased in, many investors could face more of an administrative burden in checking the portfolio holdings for any indications of credit changes that could cause the NAV to shift. The SEC has not ruled yet on floating NAV's and there's no expectation as to when they will rule on that.