How much cash will move out of prime money market funds before the October deadline? This is a question I’m often asked by reporters. It’s hard to say, but what I can tell you is much of the money invested in prime funds has left and probably isn’t coming back. ICI reported that institutional prime fund balances have decreased to $990 billion—the first time since 1999 that it was lower than $1 trillion. Where are these flows coming from?
Based on AFP’s Annual Liquidity Survey, in 2008, the combined allocation to money market funds was 39 percent vs. 25 percent in bank deposits. Fast forward to 2016, the balance has shifted tremendously—55 percent in bank deposits, 7 percent in in government funds, and 9 percent in prime funds (16 percent combined). 2015 was the first year AFP reported prime and government funds separately (6 percent government, 9 percent prime).
Not much movement from AFP Members
So, based on a stable declining trend of money market balances, the low interest rate environment, and the SLY approach (safety, liquidity, yield—in this order, with safety being absolutely paramount), it is unlikely that there will be a large change in balances from prime from our short-term/operating cash investors. More of the movement will come from other types of short-term institutional investors and according to ICI, these represent: “primarily businesses, governments, institutional investors, and high net worth households.” I would also add, these include other FIs—hedge funds, insurance companies, broker dealers, and others.
Let me elaborate with a specific example of why AFP members won’t move that much cash from prime funds.
FactSet publishes a quarterly Cash & Investment Summary for the Fortune 500, the most recent version being in June, 2016. FactSet excludes financials in its numbers—and this is a good proxy for comparison purposes to our Liquidity Survey. The cash and short-term investment balance was $1.45 trillion at the end of April this year. This represented a 5.7 percent increase year-over-year for cash, cash equivalents and investments with less than a year maturity remaining. If we take the Liquidity Survey allocation of 9 percent in prime funds and multiply it times the $1.45 trillion amount, we get $130.5 billion. Taking into consideration that approximately 60 percent would either move into government funds or move money out of prime funds, the amount would be $78 billion. Of that, 37 percent or $48 billion would move from prime to government funds. This is not an exact measurement, but a good approximation. Furthermore, the S&P 500 doesn’t include privately held companies, which 40 percent of our survey is represented by and they tend to be less risk averse than publicly held companies when it comes to prime funds.
Industry estimates range from $200-$800 billion will move from prime to government funds, but our data shows that segment will not be from cash invested in cash equivalents and short-term investments from companies. It will be from other institutional investors and which have different risk tolerances for the most part.
For more insight on this topic and to hear leading market experts discuss this, tune into our Liquidity Survey Results webinar on August 25 by registering here.