In the first of our in-person interviews I speak with Peter Crane, founder of money market and mutual fund information company Crane Data. As a perennial commentator on the industry he was a great place to start as we look to shed light on how the industry is changing, what money market investors are looking for and how fund providers / portals can make a real difference.
With money market funds experiencing huge turbulence during the early part of the Covid-19 crisis as companies everywhere focused on liquidity and cash preservation – how is this asset class, which is critical for corporate funding market, looking as we start 2021?
What were the big lessons for you of the market crisis in March?
People still haven’t decided what the big lessons of the financial crisis were in 2007 and 2008. The real lesson is stuff happens and the overriding message for individuals and companies – which is self-serving for near-cash assets like money market funds – is to hold more cash. You need an extra buffer. The last 30 years have been a story of just-in-time inventory and streamlining. Pension funds that told investors they held 5 per cent in cash have been laughed at for decades. Now we know why they did it: because the world economy may freeze for two months or two years.
There’s no way to prevent a once-in-100-years flood, whatever you do. It’s the circle of life – it’s going to happen again. But it’s always the run, never the blow-up, that causes the issues. When you’re investing in a higher yielding option, it’s not just the investment risk, it’s the fact that it attracts hot money looking for yield. And the hottest money is going to bring extra risk because people may run faster.
Are people moving up the risk curve in search of yield, even within these really solid, safe areas of the money market fund universe?
Everybody talks about safety, but their actions always show they chase yield. Yield doesn’t need a PR team – it sells itself. And oftentimes the risk is worth it. The Fed and the European Central Bank cut rates or push rates negative because they want people to take more risk. But the key is knowing what risks you’re taking and being able to handle those rare losses and freezes when they do occur. That’s where the big companies, the big, sophisticated investors have the advantage – they don’t have to sell when something is down or freezes. They have a long enough time-horizon and deep enough pockets to ride it out. And those are the investors that always make more money over time.
Do zero rates threaten money market funds’ viability or survival?
People fear negative yields because they don’t know them. But the question for money market funds is whether they’re covering their costs or subsidising. One of the misunderstandings is that with zero yield they must be waiving fees. But in general, fee waivers are almost always partial fee waivers, so they’re making less money – which is not good, but it’s not the end of the world. That’s what you saw in the US from 2009 through 2015, when rates were supposedly zero but were actually 15 or 20 basis points. Investors were seeing zero, but there was this little bit of fee income to sustain the funds. And of course, once rates go negative, as they have with Euro money market funds, they still charge their fee on the assets invested. And in fact, assets in Euro funds have had a surprising bump up recently. They are at record levels, which is just shocking considering they’ve been negative 0.4%, negative 0.5%, for over five years.
But the thing that’s really underappreciated about super-low rates is what they do to corporations’, institutions’ and individuals’ income streams. Everybody thinks lower rates are good in general, and of course they presumably help entities that are borrowing on the other side. But higher rates have a real upside – which is the income that pours out. The dividends alone that money funds generate normally are hundreds of billions of dollars: huge numbers.
Aren’t all money market funds of each type essentially the same – why choose one over another?
Most people think all prime funds are the same, all treasury funds are the same, all government funds are the same. But there are differences between the funds in each group and tiers of safety even among the safest type of funds. Checking each fund’s prospectus or offer documents to find out what it can or can’t buy is important, as a matter of due diligence.
What improvements are investors looking for in this market?
Money market funds have got to where they are because of convenience. They’ve solved more problems than they have created. But certainly, some investors are pushing for faster, cleaner, more efficient information across the board. Money market funds are restricted by historical conventions on trading hours and some investors want 24/7 global trading.
Things are often slow to change, but even so investors have clearly endorsed the concept. There’s over $1 trillion dollars in European money funds and $5 trillion in US money funds. Despite all the struggles and turmoil in March and April, the cash is still there. Oftentimes it’s because there’s no other place to go, but sometimes it means it’s a better option.
Money funds became big news in the financial crisis because one fund broke the buck, meaning it traded below its net asset value. Has regulation done anything to improve matters since then?
It’s pretty clear to anybody who followed the discussions from 2008 through 2014 that there are no good solutions, but we’re going to have the conversation again over the next year or two in the US and Europe. The time for radical change has passed because money funds are too big and too mature to kill. What we ended up with last time, and what we’ll most likely end up with this time, is a series of tweaks. Everybody says, ‘we’ve got to do something’. But there’s nothing clean and obvious to do, so it’ll be window dressing again. We’re going to increase the liquidity buckets. We may try to separate the 30 per cent weekly liquid assets with gates and fees. But more regulation and compliance certainly isn’t going to make money funds more palatable or easier to use. We’re going to make them a little bit more expensive, a little bit harder to use. And thus, we’re going to shrink their attractiveness slightly.
Aren’t money market funds now just too big to fail, like banks?
Money funds turned 50 last month – the first one was the Reserve Fund that back in 2008 broke the buck. In general, they’ve had very rare periods of needing support. In 2008, the US Fed and Treasury stepped in and stopped the run, and everything was fine. It didn’t cost them a dime. This time, they stepped in, threw all the money in the world at the problem, stopped the run and it didn’t cost them a dime. People were saying ‘well, next time we should do anything else but that’. But it worked like a charm. Why would you seek another solution?