Some investment advisors already believe that cash is an active investment decision. This week, it may become even more active.
On Friday, a set of sweeping U.S. Securities and Exchange Commission reforms on prime money market mutual funds will take effect, making them less attractive as an analogue for cash holdings within a portfolio.
The most important changes will require institutional prime money market funds to move from a fixed $1 per share net asset value (NAV) to a floating NAV and adopt rules to manage liquidity out of the fund. Retail prime money market funds will retain their stable NAV.
“Previously, these funds were able to use amortized costs to price their securities, which allowed them to maintain a $1 per share NAV,” says Brandon Swensen, vice president and head of U.S. fixed income at Toronto-based RBC Global Asset Management. “Now, the NAV is going to depend on the price that you strike at the end of the day for your fund. That’s not even the biggest issue, though.”
Both institutional and retail prime money market fund managers will have to establish liquidity fees and redemption gates that will penalize any investor for attempting to sell shares of a money market fund under certain conditions, or make investors unable to redeem shares at all at other times.
If a prime money market fund’s daily liquidity falls below a certain threshold, it’s board of directors has to be informed by the fund managers, who then have to establish either a liquidity fee or a redemption gate to limit flows out of the fund.
“A money market fund shareholder expecting daily liquidity with their cash may end up with an unpleasant surprise,” Swensen says. “If the fund runs into trouble, they could lose access to their cash for a time, or they could be assessed a fee — if they happen to be trying to purchase securities, it could delay or prohibit the settlement of their trades.”
U.S. Treasury and other federal government money market funds will retain both their stable NAV and be exempt from liquidity fees and redemption gates.
In anticipation of the changes, many companies are launching government alternatives to their prime money market funds, including RBC.
“We closed our prime money market fund earlier this year, but we’re still managing our government money market fund,” says Swensen. “We think government funds are the future of money market funds.”