Fund Times

Fund Times: Industry Leaders Want Money Market Reform

Katie Rushkewicz Reichart, CFA

A group of fund industry leaders is advocating immediate reform to bolster money market fund regulation, including new liquidity and credit quality standards and better disclosure. The Money Market Working Group, led by Vanguard chairman John Brennan, was formed in November 2008, shortly after the Reserve Primary Fund's NAV dropped below $1.00 per share. As only the second fund to ever "break the buck," this anomaly shook investors' confidence in money market funds, leading to $210 billion in outflows in the next two days. The rush of redemptions added to the market's woes because money market funds provide low-cost financing to businesses, banks, and the government. With investors pulling out of money market funds, liquidity dried up, and lending came to a halt. To slow redemptions, the government was forced to temporarily guarantee money market funds that applied to its Treasury Temporary Guarantee Program for Money Market Funds.

The Money Market Working Group set out to examine the current challenges facing money market funds and develop regulatory reforms so that they will continue functioning effectively in any economic climate. In a report submitted to the Investment Company Institute board, they propose several new standards they would like all money market funds to voluntarily implement by Sept. 18, 2009.

Many of the recommendations are sound and could help money market funds better cope with redemption pressures like those that occurred in late 2008. The group proposes minimum daily and weekly liquidity requirements for all money market funds along with regular portfolio stress testing to gauge whether they're able to deal with sudden changes in shareholder redemptions, interest rates, and credit risk. They also suggest shortening portfolio maturity levels.

The group also wants to raise credit quality standards and guard against trendy funds. They recommend that Tier 2 securities--those with the second-highest short-term rating--be eliminated from money market eligibility. While that's a good idea, it's somewhat limited by the fact that there's no assurance that Tier 1 securities, as currently defined, are actually safer. The group also proposes all money market funds establish "new product" committees to protect investors against the dangers of untested products. Finally, the group suggests all money market advisers monitor credit quality by using at least three rating agencies. The group believes this would drive competition among rating agencies and presumably improve credit analysis across the industry. However, it's not clear whether this would have any noticeable effect on ratings quality, and one could imagine firms cherry-picking agencies with reputations for looser standards as a way to allow higher-yielding securities into their portfolios to boost yields.

Finally, the report calls for funds to better understand their client base. Many investors consider money market funds completely safe and don't understand the potential risks, which can backfire for investors and funds alike if trouble arises and redemptions peak. Monthly disclosure of portfolio holdings is one easy way to keep investors informed. It will likely be harder for funds to truly understand the risk tolerances of all of their investors, but better investor education can help.

Encouraging money market funds to follow the recommendations listed in the report is a great first step. Hopefully these regulatory standards will eventually be required for all money market funds rather than simply followed on a voluntary basis.

Looming Layoffs
Cost-cutting is still in full force at investment firms that are reeling from the market downturn and a drop in assets. Capital Group, the advisor of American Funds, has seen assets plunge to $637 billion, down from $1.1 trillion a year ago. The firm, which is the second largest in terms of assets under management, recently froze all pay raises and indicated that another round of layoffs could happen within the next few months. The first round affected roughly 500 employees worldwide.

Oppenheimer Retools its Bond Squad
After a disastrous 2008 in which  Oppenheimer Core Bond (OPIGX) lost a staggering 36% and lead taxable-bond manager Angelo Manioudakis abruptly departed, the firm is starting to repair its broken bond team. Krishna Memani, a veteran of Deutsche Bank, Putnam, and Credit Suisse, has been named head of the high-grade fixed-income team and will take over manager responsibilities for Oppenheimer Core Bond and  Oppenheimer Limited-Term Government (OGSBX).

The announcement comes two months after Art Steinmetz, one of the longest-tenured managers at Oppenheimer, was named director of fixed income. Steinmetz will continue to run Oppenheimer Strategic Income (IOSIX) and  Oppenheimer International Bond (OIBAX). Meanwhile, former director of fixed income Jerry Webman will now focus exclusively on his role as chief economist.

The firm is also centralizing its fixed-income team in New York, with managers, analysts, and traders in the Boston office relocating within the next few months.

Janus Reopens Two Funds
Janus is once again welcoming new investors into the retail share class of  Perkins Small Cap Value (JSCVX) and Janus Adviser Perkins Small Company Value JDSAX. Months of outflows at Small Cap Value have caused its asset base to plummet to $697 million, down from $2.5 billion in early 2006. The Adviser fund, launched in 2004, is fairly small, with $31 million in assets.

Along with the reopenings comes a change in leadership. Jakob Holm, manager of the Adviser fund, has left the firm. Robert and Todd Perkins, a father/son team that has produced a great long-term record at Small Cap Value, have taken over. Also, Justin Tugman has been promoted to comanager on both funds.

Federated's New Funds
The $407 billion Federated Investors, Inc. will soon offer three new value funds. Federated Clover Value, Federated Clover Mid Value, and Federated Clover Small Value will invest in undervalued companies that have strong competitive advantages and catalysts for change. The funds will be advised by Rochester-based Clover Capital Management, which Federated purchased in December 2008 and rebranded under the Federated Clover name.

Large-value fund Federated Clover Value will be run by Matthew Kaufler and Paul Spindler, who have racked up a decent record at Touchstone Value Opportunities CCETX. Lawrence Creatura and Stephen Gutch, who have successfully run  Touchstone Diversified Small Cap Value TCSVX for several years, will take the reins at the Small Value fund, and Michael Jones and Albert Yu will manage the Mid Value fund.

Neuberger Adds Loads
Neuberger Berman is becoming a load-focused shop. Going forward, all Neuberger equity funds will now have A and C shares, with the A shares charging a 5.75% front-end load and the C shares levying a 1.00% deferred sales charge. These new shares will be more expensive than the existing investor shares. For example, the investor shares of  Neuberger Berman Guardian (NGUAX) currently have an expense ratio of 0.88%, but the A and C shares will cost 1.11% and 1.86%, respectively, according to the prospectus. The firm will stop selling no-load shares to the public soon, except to grandfathered shareholders who bought before March 1, 2008. The change is not a huge shock because the firm's recent fund launches have had a similar fee structure. Neuberger Berman isn't the only shop reworking its fund platform. In the coming months, Janus will add load share classes and close their direct-sold no-load funds to new investors.

Open and Shut Cases
Vanguard FTSE All-World ex-US Small-Cap Index is now available for purchase. As previously reported, this is Vanguard's first international small-cap index fund. Investor shares cost 0.60%, and institutional shares are sold for 0.35%.

Goldman Sachs Concentrated Emerging Markets Equity GSAEX will liquidate on April 29. The tiny diversified emerging-markets fund launched in mid-2007 and brought in only $22 million in assets.

Editor's Note: The section regarding Neuberger Berman has been updated to correct information about the new A and C shares. Click here to read more.

Katie Rushkewicz Reichart, CFA does not own shares in any of the securities mentioned above. Find out about Morningstar's editorial policies.