New Money Market Rules (Pensions & Investments)

Don't delay moves on money market, investors warned

By: Rick Baert

Published: September 21, 2015

Among the issues with delaying, they warn, are the potential for investment losses and reduced liquidity from a last-minute rush to the exits that could negatively affect the nearly $1 trillion of assets now in institutional prime funds.New rules requiring floating net asset values and potential withdrawal restrictions on institutional prime money market funds won't take effect until October 2016, but some money managers and consultants are warning the time to move out of them is now.

“I understand why some people might have the perspective that it's too early. ... But it's not too early to have these conversations,” said Kimberly Gillett, manager research analyst-U.S. fixed income, Towers Watson & Co. LLC, New York. “Decisions will need to be made, and if you can already make the change to Treasury and government money market funds, it's an easy change to make.”

Prime funds are popular tools for pension funds, endowments and foundations, and custodians for cash sweeps and short-term transitions for rebalancing; they're seen as highly liquid with a set $1 NAV. But on Oct. 14, 2016, Securities and Exchange Commission rules will require floating NAVs on institutional prime money market funds, and the boards of money market funds will be allowed to impose fees and restrictions on investors that want to withdraw funds in times of financial crisis.

Retail prime funds will keep the fixed $1 NAV but their boards will be allowed to impose the same fees and restrictions as institutional funds; government money market funds will have the fixed NAV as well, but will have no fees or restrictions.

No exodus

Sources at money market fund managers interviewed for this story agree there's been no exodus by institutional investors.

“In the institutional prime market, there's about $900 billion now, about the same as in July 2014” when the SEC approved the rule change, said Thomas Callahan, managing director, co-head of BlackRock Inc.'s global cash management group, New York. “There's been a lot of talk about a grand shift from prime to government funds, but industry flows haven't indicated that it has happened — yet.”

Brandon Swensen, senior portfolio manager, co-head of fixed income at RBC Global Asset Management (U.S.), Minneapolis, argued that now's the time to make the change as the maximum allowable maturity for securities in prime funds is 13 months. “We're at 13 months before the regulations take effect, so the composition of prime funds means that people should act now,” Mr. Swensen said. “There's no perception of any risk before October 2016. ... But through time, as more money moves, there could be dislocation, a large-scale liquidation of securities at the same time. That could cause some potentially serious problems.”

Bud Person, executive vice president, wealth management and cash division, Federated Investors Inc., Pittsburgh, said the shift in assets to government from prime funds could affect spreads. “We do think with any meaningful shift, a couple hundred billion dollars or more, that you could see as a result that spreads would widen. It's just supply and demand. If you have some investors selling out of prime funds and into government funds, government yields will stay lower and prime yields could go up.”

That could make prime funds attractive even with a fluctuating NAV, said Mr. Person, “so you may have some institutional investors staying with prime funds despite the new rules. Those fluctuating NAV prime funds could have the potential to outperform certain government funds in certain time periods and circumstances. Institutions will have to look at prime funds not just with their yield but on a total-return basis.”

Declining yields of government money market funds could make them off limits to many pension funds whose investment committees have limits on how low yields on approved investments can go, said Robert Zondag, co-managing partner, American Deposit Management LLC, Delafield, Wis.

“Many committees have investment policies that limit what they can use from both yield and safety perspectives,” Mr. Zondag said. “Such constraints could limit their options, especially close to the October (2016) date.” ADM is an institutional cash manager with about $5 billion in AUM.

'3 powerful market currents'

BlackRock's Mr. Callahan said that money market reform is one of “three powerful market currents colliding simultaneously,” along with the ramifications of Basel III banking regulations and future changes in the Federal Funds rate.

He said hundreds of billions of dollars being pushed by banks to government money market funds because of Basel III “could aggravate the shortage of government collateral and make government funds more expensive.” Also, the yield premium in institutional prime funds relative to government funds will be partially determined by the level of the Fed Funds rate. “Right now that spread is about 12 basis points,” Mr. Callahan said. “Is that enough premium to move from a (constant NAV) government fund to a (fluctuating NAV) prime fund? Probably not. But if rates go up, is 20 basis points enough compensation? 30? 50?”

Those uncertainties, not any foot-dragging, are the real reason asset owners aren't acting, Mr. Callahan said. “Those concerns make institutions uncertain, and when they're uncertain, they watch and wait. That's what you're seeing now.”

Mr. Swensen of RBC Global and Towers Watson's Ms. Gillett both warned that another unintended consequence of the new rules could be what Ms. Gillett called a “potentially interesting scenario” involving overall corporate bond liquidity. “There are definitely issues concerning liquidity if everyone tries to move assets all at the same time,” she said.

“There's an indirect aspect of this that's difficult to quantify, but there is linkage” between a large outflow from prime funds and corporate bond liquidity, Mr. Swensen said. “Prime money market funds are a sizable holder of corporate bonds. That will significantly shrink as a result of the outflows, and a sudden rush (to) exits could have a negative effect on corporate bond financing. Corporate bonds will price lower liquidity into spreads (on the secondary market). The sudden shrinking of prime money market funds will be another direct hit on corporate bond liquidity.”

However, Messrs. Person and Callahan disagreed, saying liquidity won't be an issue. “The repo markets are contracting rapidly, a lot of issuers are terming out their short-term debt, and Treasury bill supply is shrinking,” Mr. Callahan said. “With large demand and limited supply in the front end, we are confident liquidity will be substantial for prime funds.”

Peter Yi, senior vice president and head of short-duration fixed income, Northern Trust Asset Management, Chicago, said he expects institutions to make the move from prime funds starting early next year.

“It all depends on what's the right liquidity solution,” Mr. Yi said. “If a balanced solution exists today, then we encourage them to move when they are ready. If not, we want to start working with them now to think about all the enhancements they think they need to improve their liquidity management experience. ... I'd say in early to mid-2016, we think that's a good time frame to conclude our final discussions and put this all together with thoughtful recommendations.”

Original Story Link: http://www.pionline.com/article/20150921/PRINT/309219981/dont-delay-moves-on-money-market-investors-warned

Making Money from Volatility (WSJ)

Playing The Market Plunge
The Return of Volatility Has Investors on Edge. Here's What to Do Next
By JEFF D. OPDYKE, JANE J. KIM, ELEANOR LAISE and LAURA SAUNDERS

Lest anyone had thought the rally of the past 14 months had restored calm to the stock market, Thursday's trading action was a reminder that the investing game is as dicey as ever.

During one brief afternoon spasm in which the Dow Jones Industrial Average plunged nearly 1,000 points, happy assumptions about the markets' solid footing and the U.S. economy's enduring recovery were wiped away. More selling on Friday reinforced the growing sense of unease.


"People had been thinking, 'Oh, that [global financial crisis] thing; I'm glad that's over,' and we're back to the races again," says Rob Arnott, chairman of Research Affiliates, a Newport Beach, Calif., investment firm. "But when expectations are that everything is fine again, a bolt from the blue can come from anywhere to send this market lower very quickly. It's a wake-up call that risk remains in the system."

Most unsettling was the apparent lack of an explanation for Thursday's violent swing. With the Greek debt crisis as a backdrop, some pointed to glitches in computer-trading programs. But upsets in a mechanism as complex as the global financial markets have no simple causes. Regulators and economists are poring over the trading tape in search of an answer.

It wasn't only individual stocks that were whipsawed. Several exchange-traded funds—portfolios that are listed on stock exchanges—traded at zero for a spell on Thursday. One, Vanguard Industrials, a basket of 372 stocks, fell from $54.66 to zero at 2:46 pm, then shot back up around $40 by 2:48 pm, then crashed right back down to 20 cents at 2:54 pm, then leaped back up by $54 by 3:06 pm.

The good news was that many of the trades that took place during those perilous few minutes are being canceled. The bad news is that the Dow still lost 5.7% for the week, its worst performance since March 2009.

Greece has investors the world over fretting that an economic contagion will sweep through Europe, which could, in turn, undermine major U.S. companies that sell into the European market. And although the U.S. economy is looking a bit healthier these days, fund managers say analysts' earnings estimates for U.S. companies are inflated by unrealistic profit-margin expectations; if earnings later this year start to arrive lighter than expected, the stock market could again see a sell off.


This week's instability and the possibility of more troubles have prompted investors like Maureen Green to rethink their portfolios. The 62-year-old retired nurse in Sarasota, Fla., estimates she lost about $40,000 on Thursday and is now planning to sell a chunk of her stocks. She says that until this week she had considered herself an aggressive investor, with 65% to 75% of her investments in stocks. Now, she's planning to bring that equity allocation closer to 55%.

"After having gone through the last two years," Ms. Green says, "there was such a lump in my stomach. It's too scary, especially when you're retired and this is what you're living on."

At times like these it is important to remember that the soundest investment strategies are built on level-headed stability and long-term execution. Not only can periods of high volatility be tamed—they can even create opportunities for profits.

Investors concerned with safety needn't flee stocks entirely to tone down their portfolio's risk. Lou Stanasolovich, president and chief executive of Legend Financial Advisors in Pittsburgh, offers clients several low-volatility portfolios that combine bond holdings with stock-focused funds that can also trade options or sell stocks short. Shorting involves selling borrowed shares in the hopes of buying them back later at a lower price.

Legend's most conservative portfolio, designed to have less volatility than an intermediate bond fund, has a 75% bond allocation. But it also includes mutual funds like Hussman Strategic Growth, which can use options and index futures to reduce exposure to market swings, and Caldwell & Orkin Market Opportunity, which uses short-selling and other strategies to neutralize the negative impacts of falling stock prices.

Investors who simply want to insure against a big market tumble can buy "put" options that rise in value as a broad-market index like the S&P 500 declines because they allow the owner to sell the index at a higher level.

Another options strategy that can help tamp down volatility: covered-call writing, which involves selling call options on stocks you already hold. (Selling a call obligates you to sell the shares at a predetermined price on or before a predetermined date.) The "premium" you receive—the price of the option that the buyer pays to you—tends to rise along with market volatility, and that income can provide some buffer against modest stock declines. In market rallies, however, this strategy lags because, amid soaring prices, stocks get called away by the buyer of the call options.

People who don't want to dabble directly in options trading can pursue this strategy through a fund such as the PowerShares S&P 500 BuyWrite ETF.
Investors seeking insulation from the market's ups and downs might also consider a counterintuitive step: buying direct exposure to market volatility. The iPath S&P 500 VIX Short-Term Futures exchange-traded note, for example, seeks to mimic the Chicago Board Options Exchange Volatility Index, or VIX.

Since volatility spikes tend to coincide with stock-market crashes, such an investment should zig when stock holdings zag and provide "a way to smooth out the entire portfolio," says Paul Justice, associate director of ETF research at investment-research firm Morningstar Inc.
Matthew Tuttle, a financial adviser in White Plains, N.Y., actually made money on one of his portfolios during Thursday's wild ride. He had a 15% position in the iPath exchange-traded note. That position, which gained 12% on Thursday, helped Tuttle's portfolio—which also holds gold and is short Treasurys—eke out a 1% gain for the day.

"Initially, when we put the trade on, it was a protection strategy," says Mr. Tuttle, who added the VXX in March. But he says he's also been able to profit from the position, which is up 31% since he bought it.

People can also invest in "bear market" funds, which aim to move in the opposite direction from specific market indexes. Though these funds do well in down markets, "their long-term returns haven't been very good,' says Russel Kinnel, director of fund research at Morningstar. ProFunds' UltraBear ProFund, for example, posted total returns of 65% in 2008, lost 52% last year and is down about 7% so far this year.
Meanwhile, so-called long-short, market neutral and absolute-return mutual funds, which follow hedge-fund strategies in hopes of generating returns in any market environment, can help pare losses in a down market, but often lag during a bull run.

A market plunge is also a good opportunity for investors to evaluate their diversification strategies. Diversification isn't only about owning a broad mix of drug stocks, retailers and energy companies. The practice takes many forms—across asset types, time and credit profiles, among others.

Over the last decade, even a strategy as simple as holding 60% stocks and 40% bonds beat the Standard & Poor's 500-stock index by more than six percentage points, and with far less risk. Over long periods, owning exposure to multiple types of assets, from stocks, bonds and cash to alternative assets like real estate, gold and commodities, can smooth the ride and boost returns.

In shorter time periods, diversification is less of a cure-all. An extreme downdraft can pull many asset classes down at once. During the financial crisis, notes financial planner Dean Barber in Lenexa, Kan., 38 of 41 asset classes declined at once—everything but cash, gold, and short-term Treasurys. So investors should be mindful of their time horizon: the sooner they need their money, the more of it should be in cash.
The strategy known as dollar-cost averaging is an easy way to diversify away the risk of time: by buying stocks in regular intervals rather than all at once, investors can lower the risk that they're jumping in at a short-term market top.

Grant Gardner, research director at Russell Investments, recommends investors also diversify across credit risks. How sound, for instance, is the insurance company that sells an annuity, or the municipality backing your local-government bonds? Concentrating too many of your assets in a single financial-services company can expose a portfolio to the risk that a major upheaval disrupts that firm's operations.

Finally, investors should marshal their cash smartly. For a decade or more, Wall Street's financial-planning machinery has claimed to have optimized the investing equation and boiled it down to simple calculations encouraging investors to abide by asset-allocation models heavy reliant on stocks, bonds and alternative assets. Cash was generally limited to a small fraction of an overall portfolio.

Yet cash serves a useful purpose, even if it earns paltry yields. It's emotional ballast.
In moments of unexpected market convulsions, low-cash portfolios are more painful both financially and psychologically. During Thursday's meltdown, for example, Christopher Schons, an aviation-policy analyst in Arlington, Va., watched nearly 10% of his family's wealth vanish on paper in just minutes. "I felt like I was in a Dali painting," he says.

Mutual-fund firm Invesco takes a "barbell" approach in its Charter Fund that is easily applicable to individual investor portfolios: 80% to 85% of its assets in investments on one side and 15% to 20% in cash on the other.

"Cash doesn't have market risk," says Ron Sloan, chief investment officer of Invesco's U.S. core equities group. "Don't be afraid to leave money on the table for your own sleeping comfort."

—Jason Zweig contributed to this article.
Write to Jeff D. Opdyke at jeff.opdyke@wsj.com, Jane J. Kim at jane.kim@wsj.com, Eleanor Laise at eleanor.laise@wsj.com and Laura Saunders at laura.saunders@wsj.com

Printed in The Wall Street Journal, page B7

Taking Advantage of Mortgage Rates Now (New York Times)

March 19, 2010
When Not to Pay Down a Mortgage
By RON LIEBER

This week, the Federal Reserve reaffirmed its intention to stop buying mortgage-backed securities, signaling the likelihood that the mortgage rates you can get today are as good as they’re going to be for a long while. Once the Fed stops buying, after all, rates are likely to go up.

And current rates are quite good. At about 5 percent, in fact, they’re so good that they’ve helped change the age-old debate over whether homeowners should make extra mortgage payments to pay off their debt well before their loan periods are up.

Back when rates ran at 7 or 8 percent, making extra payments offered what amounted to a guaranteed return on your money. When you’re ridding yourself of debt that costs you much less, however, it’s easier to imagine a future when you could more easily earn a higher return by investing those potential extra mortgage payments someplace else.

Meanwhile, at a time when just about everyone knows someone who is unemployed or who owes more on a home loan than the house is worth, keeping extra cash someplace more liquid than a mortgage seems like a safer approach.
So is the case against extra payments closed for good, given that so many people have locked in rock-bottom mortgage rates for the long haul?

The answer depends on two things: how likely you are to leave the extra money in savings and how good it would feel to wipe your debt out years earlier than your mortgage requires.

THE BASICS First, let’s dispense with the standard boilerplate. Don’t even think about making extra mortgage payments unless you’ve paid off higher-interest debt. Credit card debt is the easiest win here.

Also, if you’re not saving enough to get the full match from your employer in a 401(k) or similar account, increase your savings there first. And don’t make extra mortgage payments if you don’t already have a decent emergency fund set aside.

YOUR REAL INTEREST RATE Now, take a look at the interest rate on your mortgage. That 5 percent? It’s not your real rate if you get some of the interest back each year in the form of a tax deduction.

Let’s say you have a household income of $175,000 and are paying 35 percent of that in total to the state and federal tax collectors. If you pay $20,000 in mortgage interest each year on a loan that charges 5 percent, the deduction effectively brings your taxable income down to $155,000.

As a result, you’re paying $7,500 (35 percent of $20,000) less in taxes than you would have without the deduction. So ultimately, you’re not really paying $20,000 in interest at all; your net cost is $12,500 after you subtract the $7,500 tax savings.

And that makes your effective, after-tax interest rate on your loan just 3.25 percent, which is simply 35 percent (your tax rate) less than the original 5 percent.

BETTER RETURNS? So any money you set aside in lieu of making extra mortgage payments would need to earn more than 3.25 percent annually. That seems like a reasonable possibility in the future.

In fact, you could have done that well during the supposedly lost decade we just finished. Vanguard Wellington, for instance, a popular low-cost mutual fund that holds about 65 percent stocks and 35 percent bonds and other short-term securities, earned an average annual return of 6.15 percent in the 10 years ended Dec. 31, 2009.

The Vanguard Balanced Index Fund would not have outperformed our 3.25 percent benchmark, however, as it only returned 2.64 percent over the same 10-year period.

STORING THE SAVINGS Wouldn’t taxes eat into the returns from the money you’d save instead of making extra mortgage payments? Not if you place it into an account shielded from taxes. A Roth individual retirement account would fit the bill here, as would a 529 college savings account or health savings account.

Bruce Primeau, whose note to his financial planning clients at Wide Financial Group in Minneapolis on this topic inspired me to re-examine it, adds that this isn’t simply about keeping more assets under his watch so he can earn a better living. “I’m not telling them that the money has to come to me,” he said. “A 401(k) match beats the return on paying a mortgage off automatically. There’s real estate and buying employer stock through a purchase plan at a 15 percent discount and all kinds of things.”

Then you need to preserve those savings. When extra money goes toward a mortgage, it’s hard to get at it when the urge strikes to flee to an Asian beach for a few weeks of playtime. If the money is not locked up in retirement or college savings, however, you may be tempted to spend it.

THE LIQUIDITY PROBLEM Capital-gains taxes might eventually come due with some of these investments, and the rate could well rise above the current 15 percent long-term rate before too long. Still, having some of your savings in a taxable account makes sense for several reasons.

If you hit a stretch of long-term unemployment after having plowed most of your extra cash into paying down your mortgage, your bank probably won’t pat you on the back for being a good saver and give the money back to you. Nor is it likely to let you borrow it through a home equity loan if you have no income with which to repay it.

Elaine Scoggins, who had the mortgage department chief reporting to her at a bank before she became a financial planner, suggests imagining a situation where you need to move quickly but can’t sell your home or extract equity to use as a down payment in your new town. Given that possibility, why create more home equity through extra mortgage payments than you have to?

“The whole housing debacle has reminded us all, including me, that real estate is not liquid,” said Ms. Scoggins, who is the client experience director for Merriman, a planning firm in Seattle. “And it takes cash to support it.”

Those who have used their cash in an attempt to be conscientious have learned some tough lessons, meanwhile. Imagine people who scraped together a 5 percent down payment and bought a home in Florida or Arizona in 2005 and then made extra mortgage payments the first two years to try to increase their equity. Now, post-collapse, they owe, say, 30 percent more than their homes are worth and need to seriously consider walking away from the loan — and all of those extra payments.

REASON AND EMOTION So the reasoned case for making no extra payments is very strong. But there’s one counterpoint that almost always carries the day, even when there’s only a mild risk with the financial strategy of putting extra money elsewhere.

And it’s this: I need to be able to sleep at night.

Even Mr. Primeau concedes here. “Emotionally, you’re right, and financially I’m right, and emotionally, you win,” he said. “If emotionally, people want to pay down their debt, then that’s what I help them to do.”

If you’ve just started paying down your mortgage, any extra payments should go toward principal (make sure your mortgage company is applying it properly). That will have the effect of shortening the term of your loan from, say, 30 to 25 years, depending on how many extra payments you make. The extra payments won’t lower your monthly payment, but they will reduce your balance.

Many people who are years into their mortgages — and perhaps paying less in interest and getting less of a tax break as a result — tend to develop stronger feelings about making extra payments. Those feelings are often even more acute as retirement approaches and homeowners become determined to quit work with no debt to their names.

Those who do retire their debt rarely regret it or wring their hands over the big gains they might have scored by investing the money elsewhere. Tim Maurer, a financial planner and co-author of “The Financial Crossroads,” describes the feeling that washes over people who have paid their last mortgage bill as “beholden to no one.”

So he doesn’t feel as if it’s his business to separate people from their emotions if they feel strongly about working toward a debt-free existence. “The whole point of planning is to make life better,” he said. “It’s not to have more dollars at the end of the day.”

Preparing for a Layoff (or other Cash Squeeze) from the WSJ

Take Seven Steps So You Survive A Cash Crunch

By BRETT ARENDSApril 12, 2008; Page B1

No one wants to get caught in a cash crunch. Look at what happened to Bear Stearns.
Investors can't go running to the Fed.
Sometimes all it can take is a surprise bill, or a sudden loss of a job, to put your family's liquidity in peril. And these are treacherous times. The economy is rocky. Employers are cutting jobs. And some investments -- including home values -- are turning wobbly just when you may need them most.
The Federal Reserve, alas, isn't going to bail you out if you get hit by a liquidity crisis.
So where can you turn? If you're worried, check out your emergency lines of credit now, before there's a crisis.
Here are the seven habits of highly liquid people.

1. Refinance your mortgage over 30 years. Just switching your remaining debt from, say, a 20-year schedule will slash your monthly outflows by nearly a fifth. Borrowing against your home is the cheapest form of consumer debt.

2. Set up a home-equity line of credit. They're usually cheap to arrange, and you can draw on it when you need it. Right now, rates are as low as 5.25%.

3. Get a free float from a new credit card. Some still offer zero-percent interest on balances transferred from your current card. As always with the credit-card sharks: Watch out or they'll find a way to sock you with fees anyway.

4. Get your money back early from the IRS. Most Americans prepay too much tax, and the average refund is nearly $2,500. File a new W-4 with your employer to cut your monthly withholding. You have to estimate your likely bill in good faith. If you end up prepaying too little, you can make it up by Dec. 31. If you don't, you will have to pay 7% or so in penalties. The rate fluctuates, but it's a lot cheaper than an unsecured loan.

5. Set up unsecured financing sources now, while you don't need them. Ask your bank for an overdraft facility, of course. And apply for some emergency credit cards. Yes, the rates are usurious, so don't use them unless you have to. But someday you may have to.

6. Check out how to borrow from your 401(k) retirement plan. Most plans allow this, though the rules vary. The limits are often 50% of your balance, up to $50,000. It can take anywhere from a few days to a few weeks to get the money. Note: You may end up paying taxes, plus a 10% penalty, if you don't repay the money when you leave your employer, or within a specified period. It is usually five years. Check the rules ahead of time.

7. And, most obvious: Start saving. Most middle-class families can save thousands a year just by paring back on discretionary bills. This is a good time to slash those bills to the bone.
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