Hear why investors are reconsidering prime money market funds with Jeff Weaver, head of money market funds and short-duration strategies at Wells Capital Management, Inc.
Laurie King: I’m Laurie King, and you are listening to On the Trading Desk®. There’s a changing landscape in the prime money market space. Today, I’m bringing you Jeff Weaver, head of money market funds and short-duration strategies at Wells Capital Management who addressed an invite-only audience to discuss why it might be time for investors to give prime funds a fresh look.
2016 was a time of significant change for the money market industry—$1 trillion shifted from prime to government money market funds. Now in 2017 year to date, industry stats show institutional prime money market funds have increased 30% or by $37.3 billion. Jeff explained why he thinks investors are becoming interested in prime funds again.
Jeff Weaver: Investors are getting more comfortable with the floating NAV, post reform implementation. They’re also being attracted by the spread. If you look at the Wells Fargo Heritage Fund Select shares (click here to view standardized performance for the fund), that fund currently has a yield of 1.2%; whereas, the Wells Fargo Government Select shares (click here to view standardized performance for the fund) are at .86%. So, there’s a 34 basis point pick up there in yield.
Laurie: Despite moving back into prime money market funds, some investors still have some reticence.
Jeff: The biggest investor concern, we believe, was about the possibility of fees and gates. We believe the possibility of fees and gates is very remote. What money fund reform did is it added conditions for the redemption gate and so it put this 30% threshold in place, and it also limited the amount of time that the redemption gate could be in place up to 10 days. Before it was indefinite.
One of the concerns as well is perhaps at this point has been the scale of prime funds. Of course, with the dramatic decrease in the assets overall in prime funds, they have become much smaller. Recently, we’ve looked at a money fund portal and only three of those are over $10 billion. But as these funds continue to gain scale, they’ll become more and more attractive to institutional clients.
With regard to accounting for floating NAV funds, the IRS allows for the use of simplified accounting known as the NAV method. Now this allows shareholders and floating NAV money market funds to measure net gains and losses rather than calculate transaction-by-transaction gains and losses. This is another thing that is perhaps comforting clients and they’re becoming accustomed to.
And then finally, I think the spread that’s offered over government money market funds is compelling. With the current yield advantage of around 30 basis points, some investors are taking advantage of what they believe are attractive yields, some offered by prime funds.
Laurie: So, given these perceptions, Jeff explains how he’s managing the Wells Fargo Heritage prime portfolio to address those concerns, as well as positioning for the changing landscape.
Jeff: In the Heritage Fund, we are currently targeting 45 percent liquidity. We arrive at this level of liquidity given our experience with the historical liquidity needs of the different types of clients and the distribution sources in the fund. From a positioning standpoint, the WAM (weighted average maturity) of the Heritage Fund is still relatively short at 20 days. We find that fixed rate investments beyond three months are not overly attractive as they don’t adequately reflect the possibility of future rate increases. We have seen (some variance) and shorter paper and some one to three month paper. But more importantly over the last quarter, we have increased our weighted average life of the fund from approximately 45 days to 60 days by adding six-month to one-year LIBOR based floaters which take advantage of higher current yields and capture possible target rate increases from the FOMC. So the fund does have a competitive yield.
Laurie: Here on the On the Trading Desk® podcast, managers speak to their ideas on what’s happening in the investment space they manage and how they’re approaching it. But there’s much more to these stories, like what you heard from Jeff Weaver today—performance of funds, the more granular details behind their portfolio management and the like. So please visit wellsfargofunds.com to access that information. For now, we thank Jeff Weaver for his insight and we thank you for listening. Until next time, I’m Laurie King. Take care.
Figures quoted represent past performance, which is no guarantee of future results, and do not reflect taxes that a shareholder may pay on a fund. Yields will fluctuate. Current performance may be lower or higher than the performance data quoted and assumes the reinvestment of dividends and capital gains.
Figures listed are as of the most recent quarter-end (June 30, 2017).
Carefully consider a fund’s investment objectives, risks, charges and expenses before investing. For a current prospectus, and, if available, a summary prospectus containing this and other information, visit wellsfargofunds.com. Read it carefully before investing.
For floating NAV money market funds: 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.
For government money market funds: 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.
100 basis points equal 1.00%.
Weighted average maturity (WAM): An average of the effective maturities of all securities held in the portfolio, weighted by each security’s percentage of total investments. The maturity of a portfolio security is the period remaining until the date on which the principal amount is unconditionally required to be paid, or in the case of a security called for redemption, the date on which the redemption payment is unconditionally required to be made. WAM calculations allow for the maturities of certain securities with demand features or periodic interest-rate resets to be shortened. WAM is a way to measure a fund’s sensitivity to potential interest-rate changes. WAM is subject to change and may have changed since the date specified.
Weighted average life (WAL): An average of the final maturities of all securities held in the portfolio, weighted by their percentage of total investments. The maturity of a portfolio security is the period remaining until the date on which the principal amount is unconditionally required to be paid, or in the case of a security called for redemption, the date on which the redemption payment is unconditionally required to be made. The calculation of WAL allows for the maturities of certain securities with demand features to be shortened but, unlike the calculation of WAM, does not allow shortening of the maturities of certain securities with periodic interest-rate resets. WAL is a way to measure a fund’s potential sensitivity to credit spread changes. WAL is subject to change and may have changed since the date specified.
Any tax or legal information in this program is merely a summary of our understanding and interpretations of some of the current income tax regulations and is not exhaustive. Investors should consult their tax advisor or legal counsel for advice and information concerning their particular situation. Wells Fargo Funds Management, LLC; Wells Fargo Funds Distributor, LLC; or any of their representatives may not give legal or tax advice.
LIBOR stands for Intercontinental Exchange London Interbank Offered Rate. It is a benchmark rate that some of the world’s leading banks charge each other for short-term loans and it serves as the first step to calculating interest rates on various loans throughout the world.