Prime Perspectives

The Prime Paradox: Reexamining Your Perspective on Prime Money Market Funds 

In fall 2016, U.S. Money Market Fund Reform (“MMFR”) prompted a paradigm shift for cash investors.  The result was a highly publicized approximately $1 trillion1 exodus from prime money market funds.  Many investors cited at least one of three key areas of uncertainty related to the new product structures as their motive for leaving: liquidity fees and redemption gates, total return complexity, and diminished category size.

1 Source: iMoneyNet, as of October 2018.

We take a look at those same factors today and, with the support of two years of data, discuss why we believe now may be the right time for prime:

Liquidity Fees and Redemption Gates

MMFR included provisions for liquidity fees and redemption gates for certain money market fund categories under certain circumstances. Many clients were uncomfortable with the idea of any diminished access to their money when needed. Many clients cited this as the reason to move into government money market funds as this fund type was not subject to these provisions.

Liquidity fees and redemption gates can be triggered by a fund’s weekly liquidity levels crossing a prescribed threshold. Since MMFR, no institutional prime money market fund has employed a fee or gate (Source: Crane Data). In fact, most fund complexes - including BlackRock - have opted to maintain a meaningful liquidity buffer above the prescribed regulatory thresholds.

One may argue that market liquidity has remained intact because the markets have been devoid of many challenges. However, in just the last two years, the short-term markets have been faced with a number of technical factors that could have been disruptive: a series of interest rate hikes, a ramp-up in Treasury bill issuance, a pullback by corporate cash investors in the face of tax reform, and two debt ceiling showdowns. Through it all, we believe market liquidity has been well-managed and prime money market fund liquidity buffers have remained intact.

For BlackRock, the strategy of our flagship institutional prime money market fund, TempFund (“TempFund”), a series of BlackRock Liquidity Funds, is to maintain liquidity levels well in excess of the 10% daily liquid assets and 30% weekly liquid assets regulatory requirements. TempFund has adhered to this every day since long before the implementation of the new rules.

Graph of TempFund liquidity levels September 2014 to October 2018

Sourced: iMoneyNet as of October 2018, using all available historical data.

Total Return Complexity

Several complex factors must be considered when weighing total return….

1.  NAV Volatility.  MMFR also introduced a requirement for prime institutional money market funds to float their net asset value per share (“NAV”) to four decimal places.  This has created regular, small fluctuations in prime money market funds’ NAVs day-over-day. While NAV volatility was more pronounced initially following the implementation of MMFR, it has been more stable of late, which is noteworthy considering many of the technical market disruptions mentioned above. 

Graph depicting TempFund Market NAV October 2016 through October 2018

Source: BlackRock as of October 2018.

2.  Spread.  Prime money market funds may purchase a broader universe of securities than government money market funds, particularly credit instruments.  This expanded investable universe has manifested a spread difference between the two product types.  Since the implementation of MMFR, we have seen an industry average of 28 bps outperformance of prime money market funds over government money market funds.                

Graph of 7 day net yield spread of government and prime funds between October 2016 through October 2018

Source: iMoneyNet as of October 2018. Past performance is no guarantee of future results.

TempFund has averaged 29 basis points over our flagship institutional government fund, FedFund (“FedFund”), a series of BlackRock Liquidity Funds.        

Graph of 1 and 7 day net yields of TempFund and FedFund from October 2016 through October 2018

Source: iMoneyNet as of October 2018. Past performance is no guarantee of future results. 

Investment return and principal value of an investment will fluctuate so that an investor's shares, when sold or redeemed, may be worth more or less than the original cost. The performance data quoted represents past performance.  Past performance is no guarantee of future results. Current performance may be lower or higher than the performance quoted, and numbers may reflect small variances due to rounding.  Please read the prospectus carefully before investing.

 

Disclosures related to BlackRock Liquidity Funds TempFund: You could lose money by investing in the Fund. Because the share price of the Fund will fluctuate, when you sell your shares they may be worth more or less than what you originally paid for them. The Fund may impose a fee upon sale of your shares or may temporarily suspend your ability to sell shares if the Fund's liquidity falls below required minimums because of market conditions or other factors. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund's sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time.

Disclosures related to BlackRock Liquidity Funds FedFund: You could lose money by investing in the Fund. Although the Fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. An investment in the Fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. The Fund's sponsor has no legal obligation to provide financial support to the Fund, and you should not expect that the sponsor will provide financial support to the Fund at any time.

 

Investors should now consider whether the spread differential presents adequate compensation for the additional NAV volatility.  This should always be done in addition to weighing any other risks. We believe the first step to making this assessment is to carefully consider your cash needs and determine what portion of a cash portfolio may be appropriate for a total return solution.  Next, do the math: weigh the spread differential against NAV volatility over a certain length of time.

This exercise may seem complex. To aid in this discovery, we are pleased to provide a new tool, the Total Return Calculator

                                                           

EXPLORE TOTAL RETURN NOW

Diminished Category Size

$1 trillion leaving prime funds may seem like the result of investor concern, not a cause. However, scale is important in money market funds. After bottoming out in late 2016, assets under management in prime money market funds have been steadily rebuilding.

More investors putting more assets into a fund category can contribute to more diversification opportunities and the added benefits of scale for portfolio managers.

Of course, diversification does not assure a profit and may not protect against market declines, however, diversification can serve as a first line of defense for cash investors and those reconsidering prime money market funds will find that the category has shown significant growth in 2018.

Institutional prime money market funds dropped to $122 billion after MMFR, but since then have steadily ticked up to $222 billion where they are today. In fact, prime money market funds have gathered net positive assets for 75 weeks since the final implementation of MMFR in October of 2016 (according to ICI data as of October 2018).

Graph of prime assets under management from October 2016 through October 2018

Source: iMoneyNet as of October 2018.

  • BlackRock’s TempFund has grown AUM $5.2 billion, or 56%, to $14.3 billion (as of October 12, 2018) since hitting an AUM low following MMFR implementation.

Graph of TempFund assets from October 2016 through October 2018

Source: BlackRock as of October 2018.

There is no longer a one-size-fits-all solution in the money market fund space. When was the last time you considered how prime money market funds could contribute to your cash investment goals?

We are here to help.  Please review the additional Transparency Information available elsewhere on the site via the individual product pages and contact us to discuss your needs.