US money market funds: the gain isn’t worth the pain [Financial Times]

Next month the new rules of the Securities and Exchange Commission (SEC) will become effective for money market funds (MM funds).

Most importantly, MM funds with any assets from institutional shareholders – e.g., corporations, pension plans and insurance companies – will no longer maintain a constant net asset value per share of $1. Instead, the net asset value of institutional MM funds will fluctuate on a daily basis – for example, 99.8 cents per share on one day, and $1.01 per share on the next.

The new SEC rules apply to institutional MM funds investing in short-term debt of cities and states – called “municipal” MM funds. The new rules also apply to institutional MM funds investing primarily in short-term debt of banks and top-rated companies – called “prime” MM funds.

However, the new rules do not apply to institutional “government “ funds — investing almost all their assets in short-term debt issued by the US Treasury or federal agencies, loans backed by such debt or cash.

Read the rest at ft.com…

The Role of Institutional Investors in Curbing Short-Termism [Financial Analysts Journal]

Across the world, a clamor is rising against corporate short-termism—the undue attention to quarterly earnings at the expense of long-term sustainable growth. In one survey of chief financial officers, the majority of respondents reported that they would forgo current spending on profitable long-term proj- ects to avoid missing earnings estimates for the upcoming quarter.

Critics of short-termism have singled out a set of culprits—activist hedge funds that acquire 1% or 2% of a company’s stock and then push hard for measures designed to boost the stock price quickly but unsustainably.2 The typical activist program involves raising dividends, increasing stock buy- backs, or spinning off corporate divisions—usually accompanied by a request for board seats.

Read the rest at cfapubs.org…

Actively managed exchange traded funds are the NextShares big thing [Brookings Institution]

Co-authored with Theresa Hamacher

Actively managed exchange traded funds are a hot topic in the asset management industry these days. To date, most ETFs have been structured as passively managed index funds, because of concerns that the daily portfolio disclosure requirements of ETFs are inappropriate for actively managed funds. Regulators have rejected proposals that would allow active ETFs to keep their portfolio holdings confidential.

However, Eaton Vance Management recently received approval from the US Securities and Exchange Commission for a new type of fund, branded as NextShares, which addresses these disclosure concerns. Yet NextShares are not the same as ETFs; they are hybrid vehicles that combine elements of traditional mutual funds with certain features of passively managed ETFs. In other words, NextShares are a compromise, but one that stands a good chance of success.

On the plus side, NextShares preserve one of the main features of ETFs in the US, namely their tax efficiency compared with traditional mutual funds. ETFs normally generate fewer capital gains for investors, a result of their approach to handling investor purchases and redemptions.

Investors in an ETF do not deal directly with the fund. Instead, transactions go through intermediaries, called authorised participants. Only these intermediaries may purchase shares from the fund, which they then resell in the public market to investors. Therefore, when investors want to cash in their ETF holdings, they sell them on the exchange. To keep supply and demand for shares in balance, authorised participants may purchase the shares in the open market and redeem them with the fund.

Read the rest at brookings.edu

Has the Death Knell of Active Management Been Rung Too Soon? [Financial Times]

Coauthored with Theresa Hamacher

The death knell of active portfolio management has been rung. But with recent studies suggesting that the costs of passive management are rising, has the bell tolled too soon?

Last year, Charles Ellis seemed to predict the imminent demise of active management when he wrote that “the costs of active investment are so high and the incremental returns so low that, for clients, the money game is no longer a game worth playing”. Mr Ellis, a longtime commentator on asset management trends, suggested that investors would be better served if investment professionals shifted their focus toward financial planning and away from stock picking.

Mr Ellis’s comments only reflected what was happening in the investment world. Investors have been steadily shifting assets from actively managed funds into passive. At the end of 2013, index funds accounted for one dollar of every five invested in U.S. mutual funds overall and, stunningly, more than one-third of the assets in US equity funds.

While the interest in index funds is understandable, the disdain for active management is ironic. Active management is what makes index funds attractive in the first place.

How is that? Proponents of passive investing argue that index funds are the only logical alternative when markets are efficient, meaning that asset prices accurately reflect all information. Active managers have a tough time making money in efficient markets because asset mispricings are rare. In efficient markets, index funds generate the same returns while costing less.

Read more at ft.com

Hits and Misses On Money Market Reforms [Real Clear Markets]

Many U.S. regulators view money market funds as a key source of systemic risk because of what happened to the Primary Reserve Fund during the 2008 financial crisis. When that Fund’s holdings in the commercial paper of Lehman Brothers went south, the Fund “broke the buck” — leading other investors to redeem the shares of similar money market funds, even if they did not hold any Lehman paper.

Read the rest at RealClearMarkets.com.

Reform needed in China’s fund business [Financial Times]

I recently returned from a trip to Beijing, where I launched the Mandarin translation of a book that I co-authored with Theresa Hamacher entitled The Fund Industry: How Your Money is Managed.

 

The book was translated because the Chinese fund industry is expanding rapidly; Chinese mutual funds were introduced in 2001 yet held over $340bn in assets by the end of 2011.

Read the rest at FT.com (possibly behind paywall)

Most Likely to Succeed:
Leadership in the Fund Industry
[Financial Analysts Journal]

 

What is the critical factor for success in the U.S. mutual fund industry? Is it top-ranked investment performance, innovative products, or pervasive distribution? In our view, it is none of these factors, despite their obvious importance. Instead, the best predictors of success in the U.S. fund business are the focus and organization of the fund sponsor. We believe that the most successful managers over the next decade will be organizations with two characteristics: dedication primarily to asset management and control by investment professionals.

Read the rest (PDF)