Expect lower yields from money market mutual funds in the coming months as a result of reforms being contemplated by the SEC and Investment Company Institute, according to a white paper released this month and announced today by Capital Advisors Group Inc. of Newton, Mass.
Proposals from the Washington-based ICI to reduce average portfolio maturities, increase near-term liquidity and satisfy additional reporting requirements “may result in higher operating-fund expenses and higher percentages of lower-yielding securities,” the report said.
“Changes Are Coming to Money Funds,” is by Lance Pan, director of investment research at Capital Advisors, an institutional advisory firm that specializes in the cash investment needs of venture-backed, public and non-profit organizations.
New product reviews and more stringent credit criteria also may result in higher average portfolio credit quality, along with lower yields, according to the report.
“If the [Securities and Exchange Commission] mandates more dramatic measures, such as a permanent government guarantee, private insurance funds, or holding a subordinate class of capital, fund costs may be materially higher,” the report said.
The Department of the Treasury temporarily offered government guarantees in September 2008 in the wake of the Reserve Primary Fund’s breaking the buck, due to its exposure to Lehman Brothers Holdings Inc. of New York, which went bankrupt.
The SEC should have final money fund regulations in place by the time the Treasury Department’s guarantee program ends in September, according to the report.
Allowing corporate investors to look into the holdings of money-fund portfolios to assure compliance with corporate investment guidelines may be required by regulators and accountants, the report concluded. “Investors need to examine the underlying securities of the funds they own in order to evaluate their overall credit exposure,” since many funds use similar strategies and have similar credit exposures, the report said.
If such a “look-through provision” takes effect, either through regulation or through practice, Capital Advisors expects government funds to become more popular at the expense of prime funds “because of the hassle factor,” the report said.
SEC Chairman Mary Schapiro has instructed SEC staff to present a proposal to the full commission in June to reform regulation of the $4 trillion money market mutual fund market. The regulator is considering whether floating-rate net-asset values for money funds would better protect investors from potential abuses and runs on funds.
The money fund industry needs to address concerns that remain about contingent liquidity to satisfy large redemptions, as well as potential fund freezes, before institutional investors can determine how money funds can meet their needs in the future, the report said.
It also called for institutional investors to “look inward and return to their roles as responsible consumers.” That means staying away from “fund hopping,” as well as expressing concerns if fund managers’ credit policies or market practices become “overly aggressive.”
The report also suggested considering industry consolidation to increase operating efficiencies, or limited fund sizes to promote liquidity and stability.