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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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May 21, 2007 12:01 AM ET
As the combined assets of money-market mutual funds reached an all-time high of $2.43 trillion last week, industry players are growing concerned over the increasing risk profile of prime money-market funds. That’s right: the words “risk” and “money market funds” in the same sentence. And helping feed this phenomenon are CFOs, who in the hunt for another basis point of yield are causing unseen volatility in the money-market world. Through the use of online portals, CFOs can flash in and out of money-market funds much more quickly than in the past, which may be driving providers to push the returns envelope. “With the click of a mouse, they make decisions often based on one-basis-point yield differentials and shift money around much more quickly than had previously been the case,” said Henry Shilling, senior vice president of global managed funds at Moody’s Investors Service. That’s made some money-market investors nervous. “If something happens to one fund, it will taint the whole industry,” said David Sylvester, head of money-market funds at Wells Capital Management, which oversees $80 billion in money-market fund assets. According to Moody’s, 47% of industry participants, including portfolio managers, credit analysts and money fund distributors, said they were worried that money funds have gotten riskier, up from 39% in 2005. That’s due to a wide range of factors, including the fact that the typical fund has been bulking up faster than an athlete on steroids. The average “prime” fund, which is an investment-grade rating, now stands at $32.8 billion in assets, up from approximately $25 billion two years ago. Size matters, in this case, because the more cash one must invest, the more likely one will make a blunder. “Funds have gotten so large today that companies have to cast about to find the number of securities they need in order to keep the portfolio invested,” said Mr. Shilling of Moody’s. Peter G. Crane, founder of money-market fund information supplier Crane Data, added that there aren’t enough Treasury bills and there isn’t enough commercial paper to keep money funds fully invested. “You’ve seen almost continuous financial engineering over the last decade, because with money-market mutual funds, the supply has been insatiable,” he said. Therefore, funds are turning to investments in instruments like structured securities, which include tranches of credit card debt or auto loans, and which now stand at a high of 52.3% of large prime fund assets. They are also investing in less liquid securities, like funding agreements, which are typically insurance contracts that pay floating rates of interest, and extendible securities, some of which have features so new they have yet to be fully tested in the marketplace. There are 146 money-market fund providers in the U.S., noted Mr. Shilling. All must be adequately staffed in risk management, credit research and analysis. But that requires a skill set some players might not have. “Quite frankly,” he said, “not all of them have the resources that are required given the new reality associated with the type of securities they’re buying. “If you look at some of these asset-backed programs, you literally have to be a rocket scientist to understand some of the structures,” Mr. Crane added. “It has the potential to be troublesome, and the people building better mousetraps always have the risk that something doesn’t work in practice the way it did in the lab.” Another cause for concern: the 92.4% of prime fund assets that are invested in the securities of financial institutions. More financial institution takeovers is another risk that money fund managers must be aware of, as witness the recent $25 billion bid for student loan provider Sallie Mae by a group that includes private equity shop J.C. Flowers. Prime funds that were invested in Sallie Mae’s loans sustained some price declines as spreads widened following the takeover announcement. Heretofore it’s been a non-issue for them, said Mr. Shilling. Jill King, senior portfolio manager at Horizon Cash Management, which manages $3 billion in short-term fixed-income products for hedge funds and other institutional investors, attributes a willingness to invest in riskier securities to a hunt for higher yields. “Increasingly because rates have been at fairly low levels,” she said, “the yield curve has been flat, and credit spreads have been so low, there are not a lot of places to capture yield.” Due to the flat federal funds rate, which has hovered around 5.25% for much of the past year, the average prime money fund has been yielding just under the intended rate over that time frame. Northern Trust, with over $250 billion in short-duration assets, is known for its conservatism and employs lower-risk strategies, such as ladders and barbells, which have a portion of assets invested in short-duration maturities and the rest invested longer term, and makes tactical cash instrument bets in short-term markets. That allows the bank to manage returns competitively. But Steven Everett, director of balance sheet and operating assets for Northern Trust Global Investments, the investment arm of Northern Trust, said the bank is aware of some of the riskier securities that money-market funds use as a way to boost yield, and it knows that Wall Street is actively promoting them. “Even if some players might be more aggressive, we tend not to make those types of bets in cash,” he said, adding that he doesn’t want to see those sorts of things happening in the industry. But due to the intensely competitive nature of money-market funds, the market will eventually weed the riskier lot out. “In the world of cash, you might attract some incremental assets based on yield in the short run,” said Mr. Everett. “However, maintenance of principal is paramount, so any kind of impairment problem could cause you to jeopardize your business franchise, particularly in cash.” Since so many corporations are flush with cash, they are increasingly turning to money funds. According to the Investment Company Institute, money-market mutual funds managed 27% of U.S. companies’ short-term assets in 2006, up from 22% in 2005. Corporations increased their money fund holdings 18% in 2006, to $392 billion, up from $331 billion in 2005. Other industry experts insist that money funds are as secure as ever. Bruce Bent, chairman of Reserve, which has $63 billion in assets under management and launched the world’s first money fund in 1970, isn’t worried about any potential money fund blowups: “The marketplace is doing the regulating, which is always best.”
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