Money Market Funds in a Changing World: A Portal Perspective
by Justin Meadows, Founder and Chief Executive, MyTreasury
The money market fund (MMF) industry is about to go through a period of significant transition driven by both impending regulatory change and a sustained period of very low interest rates. However, whilst the main options for change have been widely publicised and debated, both fund providers and investors remain unclear about precisely how they will impact the future MMF landscape. They don’t yet know which options will be implemented, when they will be introduced and how consistent they will be across US onshore and offshore funds domiciled within the EU. Nor do they know how long low interest rates will be around and how much and how quickly they will rise when this does eventually happen. In this climate it is not surprising to find that funds and investors have engaged in both short-term tactical behaviour and more long-term strategic planning to ensure that they have managed the recent difficulties as well as they could and are properly prepared for any anticipated and unexpected changes that are finally implemented. These changes inevitably have knock on consequences for MMF portal providers who have to make sure they will continue to be able to support the needs of both investors and participating funds in a changing world.
Changes to existing funds
Impending regulatory change and the sustained low interest rate environment – particularly in the Eurozone – have led to a number of changes to existing funds over the past two years.
In the short term perhaps the most dramatic response was the complete (hard) closure of some EUR funds by some providers who could not see how they could continue to deliver a sustainable and attractive investment opportunity in such a difficult environment. Hard fund closures do not pose significant problems to portals as they simply require the removal of the relevant funds from market view and switching off the ability of investors to trade them through the platform. Other changes however have presented more significant challenges to the portal providers.
Many of the EUR funds that were not hard closed were subject to soft closures with either no new investments being allowed for specific periods or maximum trade values being set for new investments. This kind of dynamic investment framework creates considerably more difficulties for portals as it requires the ability to provide up to date information on changing investment guidelines for each fund as well as ensuring that investors do not inadvertently breach these, or attempt to do so, through their use of the portal. Whilst this involved some portals in new development work it probably gave all of us an insight into the more heterogeneous fund landscape that we may all be dealing with in future and hence the need for greater flexibility and configurability to adapt quickly and easily to emerging requirements.
Once the immediate pressures had been managed through hard and soft closures those fund providers who had been required to take these measures, and some others who hadn’t, began to take a slightly more strategic look at how they were going to handle what it was rapidly becoming clear was going to be a much more sustained low interest rate environment than everybody had hoped. In some cases this involved introducing new funds, not the typical AAA-rated CNAV funds, but the relatively unknown VNAV funds. In other cases more creative solutions were introduced such as what has now become almost the standard alternative to converting to VNAV, the ‘flexible distributing’ share class, a neat way to allow the CNAV status of a fund to be protected whilst avoiding the potentially damaging effects of negative yields on both investors and fund managers.
Perhaps surprisingly the change to the new flexible share type is easier for portals to handle than the change from CNAV fund type to VNAV. Whilst some portals have always been able to handle both VNAV and CNAV funds a number of them have only been used to offering the latter and hence were unable to handle the new funds, particularly given the different and varying settlement arrangements for VNAV funds. The only real issue with flexible distributing share classes is similar to that surrounding the reporting of accrued interest on portals. Investors ideally want to have daily information about their actual accrued interest month to date rather than estimated interest calculated by applying the published truncated daily dividend factors to daily account balances. In the same way, investors want to know the exact number of shares they are holding and not have an estimate of this calculated by the platform that then requires reconciliation with the fund’s own numbers at the end of each month. This can only be provided by those portals which are fully automated and receive nightly information from each fund, covering actual balances, accrued interest and share holdings.
Introduction of new types of funds
Other slightly more strategic responses to the mounting pressures facing the MMF industry have been based on attempts to introduce new types of funds, principally focused on trying to deliver better returns in a very low interest rate environment. Obviously there are a limited number of ways to achieve such an objective, principally focused on extending the maturity profile or reducing the credit quality of a fund’s portfolio holdings.
Attempts to gain improvements from extending duration have included the development of fixed return funds where by agreeing to leave their money invested for a guaranteed period of time investors have benefited from the increased yields that fund managers were able to achieve by investing a higher proportion of assets further down the curve. However, whilst liquidity is ranked second behind security in the investment priorities for most corporate treasurers it is still ranked ahead of yield and it appears that most treasurers are still uncomfortable with sacrificing liquidity for a relatively small uptick in yield. This situation probably wasn’t helped by the fact that these types of funds could not be easily added to MMF portals given their fundamentally different operational processes and hence they were not available for electronic trading. In the case of fixed return funds it is likely that this had only a limited impact but as the use of portals continues to grow at such a fast pace there will almost certainly come a point when the ability to trade particular funds on portals will be a significant factor in ensuring the success of new offerings.
Those with a good memory will remember the rise of the ‘enhanced cash funds’ in the period running up to the 2008 financial crisis. Due to some difficulties with these funds at the time they disappeared from sight and in many cases from the fund ranges of most providers. However, the growing dissatisfaction of investors with the continuing low yields being delivered from their current investments has recently given an added impetus to the reappearance of ‘enhanced’ funds offering higher returns by investing in assets of slightly reduced credit quality and in some cases longer duration. At MyTreasury we are increasingly being asked whether we know of any enhanced funds and whether we have any plans to make them available on the platform. The answer is that we are aware of an increasing number of these funds and we bring them on board where there is sufficient client demand.
This particular development has been reinforced by a substantial increase in the number of approaches we have received from providers of other types of funds that have typically not appeared before on any MMF portals. Particularly interesting is the fact that the pending regulatory change in Europe has encouraged the providers of the unrated French Fonds Commun de Placement (FCPs) to consider putting them onto MMF platforms for the first time to take advantage of what they see as the possible break up of the hegemony of AAA-rated CNAV MMFs for institutional investors outside France. There is a perception amongst many fund providers in the offshore space that a combination of both regulatory change and the continuing low interest rate environment is encouraging investors to look more widely for improved performance whilst reducing the perceived barriers to considering anything other than the AAA-rated CNAV funds. The growing interest in ultra-short bond funds and even some ETFs are other examples of this shift in thinking. There is a long and sometimes difficult path between investors commencing market research on alternative fund offerings and securing board approval to begin investing in new types of funds with different risk profiles. However, the emerging view amongst investors appears to be that if they are going to have to secure board approval for using the new version of their traditional MMFs they might as well look at alternatives and seek approval for these as well.
Whatever the outcome of the current developments, MMF portal providers have to be prepared for significant changes that may come along and investors want to select portals that are going to be fit for purpose in a few years’ time and not just today. In view of this the MMF portal industry is currently awash with technology and business development activity designed to allow a broader range of fund types to be offered. It has already reached the position where it doesn’t really matter what the outcome of regulatory change will be as investors have already started to look at broader potential investment opportunities and now have alternative fund types firmly in their focus.