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| Friday, November 20, 2009 |
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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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Steve Smith
VISION THING Tyler Haws, head of Clearwater Analytics' initiative to provide more timely reporting of money fund holdings, received maydays last summer from a score of corporate treasurers worried about the credit markets burning a hole in their cash.
February 4, 2008 12:01 AM ET
Treasurers became all too familiar with the acronyms for asset-backed commercial paper and structured investment vehicles last summer, when they found out that their previously ultra-safe money market mutual funds had invested in some dubious paper. Despite their plain-vanilla image, money-market funds turned out to be downright murky. A frequent complaint among treasurers was that they didn’t know their funds were invested in questionable ABCP or SIVs until the fund parent announced it was taking the bad paper off the fund’s books. Now one investment reporting firm has come up with a way to restore money funds’ good image by making their holdings more transparent. But to do so, it needs the cooperation of the money fund industry, which some say may be challenging. Clearwater Analytics, which has offices in New York and Boise, Idaho, and specializes in daily portfolio reporting for more than 1,500 investors, got the idea for money fund transparency last summer after being approached by one corporate treasurer. The treasurer had become concerned after several money fund providers rushed to issue notes to clients assuring them that their money was safe, said Tyler Haws, who works in customer solutions at Clearwater and is heading up the initiative. As the treasurer complained, “‘I know what I hold in my separately managed accounts. But I have half my money in two money-market funds and have no visibility whatsoever. For money-market funds, all I get is yield, credit rating and a prospectus,’” Mr. Haws recounted. All of a sudden, Clearwater was hearing the same complaints from 20 different clients. The Securities and Exchange Commission dictates that money funds report a list of their holdings quarterly, although some funds choose to post lists of holdings on a monthly basis or even more frequently. Even so, said Mr. Haws, those holdings are often out of date, and it can be difficult for an investor to distinguish the kosher investments from the sketchier ABCP and SIVs. Clearwater can use the same technology it implements for client reporting to drill into a fund’s specific holdings, including credit ratings and sector exposure. The firm would provide the information to the public. Investors interested in their fund’s holdings could click a button that says “transparency” on Clearwater’s website, the fund’s website or via the portal through which they invest in funds. A pop-up screen would appear that would contain the fund’s components and a risk analysis. That way, an investor could tell right away if a fund held any SIVs, for instance. Clearwater believes the information will be valuable for all investors, but particularly for treasurers; currently, when they want to do a risk analysis of a money fund portfolio, they have to load the holdings from a prospectus into an Excel file or a software program and dissect the holdings on their own. “Treasurers get a limited view,” said Mr. Haws. “What good does a list of holdings do when you’re invested in 10 different funds? There is no value-added reporting today.” It’s a sentiment echoed by Tom Knight, senior vice president of business development and treasurer at Institutional Cash Distributors, a division of brokerage Merriman Curhan Ford. ICD recently signed on as the first portal to participate in the Clearwater transparency project. Mr. Knight would know: He has been in treasury for 18 years, serving most recently at tech firms BEA Systems and Credence Systems. “For the longest time, treasurers have relied on the ratings agencies to do due diligence to make sure their cash was safe,” said Mr. Knight. “There was no need for them to do a deep dive into what portfolio managers were buying. With recent events, those days are long gone.” The fund holding information could prove particularly valuable on portals, which have simplified the trading of money-market funds so treasurers can move in and out of funds with the click of a mouse. But the information available today on a portal’s screen is minimal, containing yield, weighted average maturity, amount of assets, credit rating and expense ratio. Sometimes there is a link to a prospectus. “So what is an investor going to look at? Yield,” said Mr. Haws. “We’re getting clients saying, ‘We can’t make yield-based decisions anymore.’” Often, the highest-yielding funds are the ones invested in the most suspect paper—as were most of those that ran into trouble over the summer. Clearwater has yet to secure any deals with the fund companies themselves, who hold the key to their funds’ holdings, and thus, transparency. And even then, the funds would dictate how frequently they want information about their holdings to be refreshed. But Mr. Haws believes that once one fund gets on board, it will cause a sea change in the industry. “The first mover is going to have a huge advantage,” he said. Tom Newton, co-founder of ICD, says that uncertainty about the idea of transparent money funds is similar to investors’ misgivings when money fund portals first hit the scene a few years ago. Eventually, transparent funds will become the norm, he predicts. “A lot were hesitant to let others, aside from their own individual sales groups, sell their product until a couple of folks did it. It opened the door for everybody,” he said. “The trend will go toward full transparency.” ICD is also reaching out to fund companies on behalf of Clearwater, and Mr. Newton said that he had spoken to a few funds that are very interested in participating. At least one money fund firm polled by Financial Week sounded enthusiastic about the Clearwater project. The Reserve, which has $87 billion under management, $35 billion of which came in last year, says in its money fund prospectuses that a daily list of holdings is available to any investor who asks for it. “There’s no reason why other funds shouldn’t participate,” said Bruce Bent, chairman of the Reserve and creator of the money-market fund. “Although I hope they all refuse,” he said, acknowledging that the first firm to participate could have a head start on asset inflows. Other money fund experts say that it will be an uphill battle to convince the fund companies to provide holdings on a daily basis. “Certainly it represents that the need for more information and analytics probably isn’t going away, that’s clear,” said Peter G. Crane, founder of money fund researcher Crane Data. “But a list of daily holdings is going a little overboard.” For one, said Mr. Crane, it would be a massive undertaking for fund companies, which would have to characterize, database and archive holdings. Many money-market investments, Mr. Crane said, are private placements and don’t have CUSIP identification numbers. Clearwater’s Mr. Haws said he doesn’t expect funds to provide daily transparency from the outset. “We’re not going to go from nothing to daily transparency.” He hopes that funds would choose to ease into it, perhaps providing holdings semi-monthly, then weekly, before going daily. Secondly, Mr. Crane said, money funds will be hesitant to share their fund holdings with their investors—and competitors. “Lists of holdings are the second most valuable asset a money fund company has besides its people,” he said. “Giving away lists of holdings daily would be tantamount to opening up trade secrets to your competition.” Moreover, the money funds that corporate treasurers really have to worry about will be the ones most reluctant to expose their holdings. “The ones willing to give a list of holdings to you are the ones you don’t need. The ones that won’t give it to you are the ones that you need,” said Mr. Crane. ICD’s Mr. Knight disputes that notion and predicts that the money funds that don’t want to fess up to their holdings will lose business. “Those who are first to market are likely to see assets increase,” he said. “On the other end, those who say ‘we can’t provide that or don’t want to because we feel it provides a competitive disadvantage’ are likely to see some of that money walk away, because the days of non-disclosure are gone.” But Mr. Crane wonders whether suspicious money funds will even be an issue in 2008. For one, because Rule 2a7 dictates that money fund securities mature in 13 months or less, any remaining SIV investments in money funds will likely soon mature, and therefore disappear from money fund portfolios. Second, although the Federal Reserve’s collective 125-basis-point cut last month, along with any forthcoming cuts, will eventually lower yields on money-market funds across the board, there is a lag effect, which temporarily makes the value of their portfolios rise above their $1 net asset values. “Money-market securities are nothing but short-term bonds. So when the Fed cuts rates, all the older, higher-yielding bonds become worth more,” explained Mr. Crane. “They are invested in Treasury bills and CDs paying 4.5% or 5%. It puts to rest any concerns about money funds breaking the buck.” FW
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