This is part 2 of my blog series on Money Funds. See part 1 here.
The current state of money markets reminds me of that old Robert Frost quote: “Two roads diverged in a wood and I—I took the one less traveled by, and that has made all the difference.” I just got back from the Crane Money Fund Symposium, and the view from the event is that money market deposit accounts (MMDAs) have largely supplanted money market funds, at least for the time being.
Rise of the MMDA
The utilization of MMDAs has outpaced money funds. While investment in prime money funds has fallen dramatically since the global financial crisis, deposits in MMDAs have skyrocketed. Over the past 10 years, MMDAs have increased by $5.2 trillion.
AFP’s liquidity survey shows this to a certain extent. The drivers behind this rise are:
- Regulations, such as Basel III
- ECR on comparable investments
- Bank relationship management through share of wallet, and the changes in money fund reform inflows out of prime funds to some extent.
There is more emphasis on the banking industry now more than ever—perhaps an unintended consequence of Dodd-Frank in the post-financial crisis environment.
Many in the industry wonder whether we will ever see a move back to prime funds. Should the stable NAV be restored, a shift back to prime would be a no-brainer for many corporates. Under the Consumer Financial Choice and Capital Markets Protection Act (S. 1117/H.R. 2319), money funds could elect to be stable value funds if they meet certain criteria.
Some managers favor adopting a mix of prime funds and their similar counterparts (ultrashort bond funds) as a viable alternative to achieving pre-money fund reform investment options. But others favor only investing in stable NAV products—namely government/treasury money market funds.
Depending on which investment manager you ask, you will get a variety of opinions on the best way to proceed. AFP members indicated that prime funds will need to “prove themselves” over time to show there is still safety in the product, given the added hurdle of gates and fees on top of the floating NAV.
Separately managed accounts (SMAs) and ultrashort bond funds were highly discussed at the symposium. Many investment managers are having conversations with their clients regarding these as viable alternatives to money funds. This is because these options offer full transparency of investments and customizable investment styles. Ultimately, clients determine their best course of action, given their investment directives, the amount of cash they have to invest, and how much they want to segment that cash.
One thing is for sure—treasury departments have become more skilled at understanding and determining their cash and liquidity needs. Having this information better prepares them to be more advantageous and prudent with liquidity management for their organizations.
Still, it never hurts to brush up a bit. It may be a good idea for treasurers to revisit last summer’s AFP Executive Perspective on investment policy. Although it was written prior to money fund reform kicking in, there’s still a lot there that practitioners can get out of it. AFP spoke with multiple asset managers about investment alternatives to prime funds, as well as how to handle the fees and gates if you’re keeping your money in prime.
Lastly, if what you really want is for prime funds to go back to the way they once were, it’s time to get involved. Read up on S. 1117/H.R. 2319 and if you agree with it, then join the Coalition for Investor Choice. AFP, the Coalition and the Government Finance Officers Association have already met with the National Economic Council on the proposed bill, and we’ll soon be meeting with the Treasury Department on it as well. Stabilizing the NAV is the key to bring prime funds back—so if you want to see it happen, we need your help too.
Check out additional results from the 2017 AFP Liquidity Survey, underwritten by State Street Global Advisors.