Friday, September 02, 2011

Peering into a US money market fund

There’s been a lot of talk about how the US money market mutual funds are pulling their money out of the eurozone. And generally chopping and changing the nature of their investments.
But how exactly do the mechanics of that work, and what are the exposures?
As FT Alphaville discussed on Wednesday one trend has been for all types of prudent money managers to engage in long-dated repos or collateral swaps with the shadow banking community and/or cash-strapped investment banks in a bid to enhance the yields being received on their investments (and most importantly to avoid negative yields).
In the case of the money market funds — especially those aimed at institutions — they’re handing over cash in return for ‘quality’ collateral for the best yield possible. But there are some major trends evolving. Since these institutions report filings to the Securities and Exchange Commission, it’s easy enough to get a look into the style and nature of their investments.
Take the Dreyfus Funds as an example (we stress example). Their recent filing describes the current situation very nicely.
Above all, here’s the challenge they are facing (highlighted):
Annualized effective yield is based upon dividends declared daily and reinvested monthly. Past performance is no guarantee of future results.  Yields fluctuate. Yields provided for the fund reflect the absorption of certain fund expenses by The Dreyfus Corporation pursuant to an undertaking in effect that may be extended, terminated or modified at any time. Had these expenses not been absorbed, fund yields would have been lower, and in some cases, 7-day yields during the reporting period would have been negative absent the expense absorption.
In other words, had the Dreyfus Corporation not absorbed certain expenses generated by the management of these funds, the yields would have been negative. It’s essentially a potentially loss-making business for Dreyfus.
It’s notable that the one fund that broke the buck in 2008, didn’t have a profitable parent to absorb expenses on its behalf.
It’s significant then that that disclosure has been carried on the Dreyfus filings since at least 2009, but it’s only recently that the liabilities have really been creeping up.
There are two points worth highlighting about the composition of the Dreyfus Institutional Reserves Money Fund’s holdings in June, 2011, as compared to December, 2010– revealed in their latest filing released on August 26.
The overall holdings are now not only generating liabilities, rather than cash and receivables, but the duration of the repurchase agreement component is being reduced sharply (especially for collateralised repos). The fund’s general exposure to repurchase agreements is also falling (from over 9 per cent to 1.2 per cent).
For example, note the filing from December 2010 (for the full filing see here, we’re just showing the repo section and the total investment summary):

And compare with the June filing:

So whereas the fund’s longest repurchase exposure was up until 2029 in December, the longest duration repo it’s now holding is up until 2012.
A similar trend is noticable in Dreyfus’ Treasury fund, though the repurchase duration here hasn’t been cut in the same way.
First December 2010:

And now June, 2011:

Overall, the priority for the funds currently appears to be liquidity rather than duration. As the management notes this goes across the board:
The low federal funds rate kept yields of U.S. Treasury bills near zero percent throughout the reporting period, and with narrow yield differences along the market’s maturity spectrum, it continued to make little sense to us to incur the additional risks that longer-dated securities typically entail. Therefore, we maintained the fund’s weighted average maturity in a range that was roughly in line with industry averages.
The first half of 2011 ended with a cloudy outlook for the second half of the year and no signs that the Fed was prepared to raise short-term interest rates. Until we see clearer indications of an impending shift to a less accommodative monetary policy, we currently intend to maintain the fund’s focus on liquidity.
A similar scenario (in which even expense absorption is not preventing the funds from generating liabilities) is also evident for:
  • Dreyfus’ Worldwide dollar money market fund – in which repos are collateralised with Treasury bills
  • Institutional Cash Advantage fund — in which repos are collateralised with everything from corporate bonds dated as far forward as 2054, Treasury notes, TIPs,  US Treasury Strips, Federal Farm Credit Bank, Federal Home Loan Bank, Federal Home Loan Mortgage Corp,  Government National Mortgage Association,  Student Loan Marketing Association, Resolution Funding Corp, and Tennessee Valley Authority securities.
Though there may be more (we haven’t done an exhaustive search).
Meanwhile, as far as Dreyfus’ Money Market Instruments series goes, it’s clear the nature of the collateralisation for its repurchase agreements is getting more diversified. Repos now make up 23.7 per cent instead of 19.2 per cent, and while they were mostly collateralised with US Treasury securities back then, they’re now collateralised with securities ranging from Federal Home Loan Mortgage, Federal Agricultural Mortgage and Federal Home Loan Bank as well as US Treasuries.  The duration remains lengthy.
Lastly, when it comes to its purest Money Market Fund, Dreyfus’ 100 per cent US Treasury Money Market Fund is also absorbing expenses. As much as 59 basis points worth.
One last point worth noting overall — the number of European banking names reflected among the counterparty agreements (and not just for repos).
All in all, these are all trends which are worth watching.

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Lunch is for wimps

Lunch is for wimps
It's not a question of enough, pal. It's a zero sum game, somebody wins, somebody loses. Money itself isn't lost or made, it's simply transferred from one perception to another.