Prime Money Market Funds Set to Lose Assets

A recent survey conducted StoneCastle throughout the end of July shows the potential for considerable additional flows of cash out of prime money market funds.

Money market fund reform from the Securities and Exchange Commission (SEC) requires providers to establish a floating net asset value (NAV) for institutional prime money market funds, which will allow the daily share prices of these funds to fluctuate along with changes in the market-based value of fund assets. The rule updates also provide non-government retail money market funds with new tools, known as liquidity fees and redemption gates, to address potential runs on fund assets. 

Sixty-eight percent of survey respondents used prime funds as part of their cash strategy in their retirement plans, but 38% of these noted they will move entirely out of prime funds, and 24% will move a percentage. Only 8% do not plan to make additional re-allocation.

Of the respondents currently invested in prime funds, 21% expect to reallocate out of prime funds by the end of August, while a significant 45% plan to reallocate by the end of September. Underscoring the uncertainty that prime fund managers contend with, more than one-quarter of survey respondents needed to determine their cash strategy post reform.

Some industry experts believe retirement plan sponsors will switch to government money market funds. And, according to StoneCastle, so far government money market funds have been the primary recipients of cash leaving prime money market funds, and this trend is expected to persist.

Investors also indicated interest in other alternative products such as structured bank deposits and separately managed accounts. However, in an effort to attract prime fund flows, fund managers have also been launching ultra-short bond funds, and other cash alternatives like private and short maturity MMFs that investors are considering.

The survey was completed by 76 corporate treasurers from a wide array of sectors and company sizes.