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The Big Shift: Investors Move Billions Out of Money Funds

  • By Andrew Deichler
  • Published: 9/26/2016

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There has been a debate among asset managers and corporate treasury executives alike about how much money will move out of money market funds before the Securities and Exchange Commission’s new rules kick in on October 14. But as the deadline draws near, the rumored “mass exodus” from prime funds appears to finally be coming to fruition.

The Office of Financial Research revealed that prime funds have decreased by $700 billion since the beginning of the year. The OFR noted that the trend accelerated towards the end of August. And earlier this year, ICI reported that institutional prime fund balances have decreased to $990 billion—if so, it would be the first time since 1999 that the total was lower than $1 trillion.

Regardless of how much money ends up moving, if corporate treasury professionals are still putting off making changes to their investment policies, they can’t afford to wait any longer. Some time has passed since AFP spoke with multiple asset managers about money market fund reform for our latest Executive Perspective earlier this year, but at the time, the general consensus was that many companies simply hadn’t come around to making any concrete decisions about their investment policies.

“When they announced the date of October 2016, it seemed so far away,” said Tony Wong, head of global liquidity and global credit research for Invesco, and one of the sources AFP spoke to for the Executive Perspective. I think clients are looking at it and saying, ‘It’s round four; we’ll look at it, but there are other things going on in the world.’”

Fortunately, both Wong and Joe Sarbinowski, managing director, global head of liquidity investments for Deutsche Asset Management, also said that they were seeing corporate clients beginning to pay more attention as the reforms drew nearer. “As the heat rises and starts to be felt, that’s when action starts to be taken,” said Sarbinowski. “We’re starting to see a much greater pick-up in activity amongst the corporate treasurers about this issue.”

No going back?

According to the 2016 AFP Liquidity Survey 47 percent of corporate practitioners anticipate that their organizations will discontinue investing in prime funds altogether or at least move some of their holdings out of those funds. During a series of recent treasury roundtables, the sentiment was very much the same—treasury executives said they have moved money into government funds and are unlikely to move it back into prime. “Since the financial crisis, the allocation to money market funds has decreased to half of what it was,” said Tom Hunt, CTP, AFP’s director of treasury services. “It’s likely that money won’t be coming back into prime.”

However, once the impacts of the floating net asset value (FNAV) have been assessed, Hunt believes we could potentially see corporate treasurers move some of their money back into prime funds. “Treasurers are taking a wait and see approach—if the FNAV shows it won’t fluctuate much especially as ST rates increase, then we could see more inflows back into prime—ultimately the FNAV has to prove itself,” he said. “For now, the industry is gearing up as more investors vote with their feet.”

Download AFP’s Executive Perspective on reassessing your investment policy here.

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