Reich & Tang warns institutions about dangers of cash fund variable NAV
The universe of money markets, once a fairly sedate corner of financial markets, has been jolted recently on various fronts, and managers are emphasising the importance of adapting to the new conditions.
The climate that emerged since 2008 for cash funds is in many ways unprecedented.
To mention but a few of the seismic changes on the investment side, the security of ‘risk-free’ investments in Treasuries vanished with America’s downgrade; the prominent Reserve Primary cash fund in the US ‘broke the buck’ as its price slid below $1 per share as positions in Lehman Brothers failed and redemptions mounted; and Eurozone nations’ creditworthiness was shown to be widely divergent, despite central banks and many investors believing otherwise.
On the client side during the Eurozone debt crisis, many funds focused on European markets have stopped taking subscriptions – at a time of very strong demand – because all-time low yields on core debt, plus near-zero official rates, make return targets difficult, if not impossible, to achieve.
Amid all this turbulence, fund manager Reich & Tang is cautioning another shift in industry practice – only proposed by regulators at present – could effectively bar some large investors from the fund sector at exactly the time they most need professional stewards for their allocations.
The proposal from the Securities & Exchange Commission in the US is to allow wider use of variable NAVs, seeing instruments priced at below par, in contrast to much present practice of accepting constant NAV as a given.
The proposal for floating NAVs – meaning funds could not round their values to $1 per share – was one of many from the SEC, and constant-NAV funds that did not adopt this flexibility would have to establish capital reserves combined with redemption restrictions.
Other of the plans were to decrease portfolios’ average maturities, increase liquidity, enhance transparency, and improve credit quality. Since being made, all the proposals have been batted between the SEC and the Financial Stability Oversight Council.