The nearly $3 trillion money market mutual fund industry is in the process of adopting crisis-related regulatory reform from the Securities and Exchange Commission (SEC). The reforms are intended to reduce investor risk and increase transparency during periods of market stress. Money market funds are required to be in full compliance by October 14, 2016. Traditionally, the sector has served as a tool for investors looking to gain returns above those typically offered within bank cash accounts. However, as we outline below, reform has triggered changes to typical money market fund offerings that may cause institutional investors to alter their investment strategies.
Summary of Key SEC Rules for Institutional Funds
|Reform Measure||Rule Summary||Reasoning|
Floating NAV (Net Asset Value)
Certain institutional funds must move from a stable price-per-share to a price that fluctuates (floats) on a basis-point amount
Requiring the fund price to fluctuate more often may reduce the potential for panic if the NAV falls when markets are volatile
Restrictions on Redemptions
|Certain money market funds will be subject to mandatory and discretionary liquidity feeds (up to 2%) and may halt withdrawals for up to 10 business days, given certain criteria||Providing mutual funds more control over redemptions may reduce “runs” on funds during periods of market stress|
Consequences of New Rules
New SEC reforms will likely impact institutional money market funds in a variety of ways. US Treasury and Government funds remain exempt from the many provisions of the reforms, and as a result, many institutional money market funds are moving to higher-quality, shorter-duration securities in order to avoid new regulation. Several funds have even moved to Treasury-only strategies in the wake of the SEC’s announcement, reducing yield potential for institutional investors. Conversely, institutional money market funds that comply with the new redemption rules may constrain investors with immediate cash needs during stressed environments, reducing the fund’s practicality as a cash equivalent.
Due to the new regulations, we believe institutional investors are likely to embrace a more robust approach to liquidity and cash management. For instance, some institutions may adopt tiered approaches to cash management, separating working capital from less immediate cash needs. Using a segmented approach may create opportunities for yield enhancement on the front- end of the curve, with money market funds employed for immediate cash needs, and short-term fixed income utilized for second and third tier cash. By diversifying outside of money market funds, investors may have the opportunity to generate a higher overall yield.
Illustration of Tiered Approach to Institutional Cash Management
What IR+M has to Offer
IR+M’s short-duration strategies can offer alternatives to traditional liquidity management. We invest our portfolios in both the government and high-quality spread sectors to add diversification and yield. In a traditional short portfolio, we include allocations to: corporate bonds, ABS, SBAs, Agency ARMs, CMBS, and Fannie Mae DUS bonds. By limiting duration exposure, these strategies place an emphasis on liquidity, safety of principal, and income, without sacrificing total return. Qualified clients can gain access to our short strategies through fund offerings or separately managed accounts that allow for client-specific customization.
IR+M Short Investment Strategy
- Exclusively US fixed income management
- Target duration neutral to benchmark
- Emphasize undervalued investment-grade sectors
- Introduce incremental risk to portfolios when compensation is attractive
- Reduce risk when spread sectors are rich
- Capitalize on our strengths: experience and security selection
- Seek securities with embedded, often over-looked value
- Take what the market gives you
- Invest in markets that offer structural and price advantages
IR+M Strategy Characteristics vs. Traditional Money Market Vehicles
*Equivalents includes certificates of deposit, financial company commercial paper, repurchase agreements, asset-backed commercial paper, and other time deposits.
While new SEC regulation promotes increased transparency, the changes will likely drive institutional investors to re- assess their cash and liquidity needs. Applying a segmented approach to cash management and exploring multi- sector short duration strategies may create opportunities to increase yield and manage risk. Since inception, IR+M’s 1-3 year strategy has never posted a negative quarterly trailing 1-year return4. We have a long track record of managing short duration strategies, running nearly $8 billion in short assets. We look forward to working with clients to help them understand the evolving regulatory environment and identify the optimal strategy for their portfolio.
1Morningstar as of 8/31/15
2Representative portfolio characteristics as of 8/31/15. Some statistics require assumptions for calculations which can be disclosed upon request. A similar analysis can be provided for any portfolio we manage.
3Yields are represented as of the above date and are subject to change.
4Inception: 12/31/88 – 8/31/15
The views contained in this report are those of IR+M and are based on information obtained by IR+M from sources that are believed to be reliable. This report is for informational purposes only and is not intended to provide specific advice, recommendations for, or projected returns of any particular IR+M product. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission from Income Research & Management.