OREANDA-NEWS. With approaching interest rate hikes and money fund reform, fund managers continue to make changes to their product line-ups and portfolios, according to a new Fitch Ratings report. Anticipated increases in U.S. interest rates are pushing money funds across the board to shorten portfolio maturities to take advantage of higher rates. Furthermore, underlying data indicate that prime funds are adjusting their weighted average maturities (WAMs) more aggressively than government funds due to additional reform-related pressures.

Many money funds have migrated to shorter WAMs since the beginning of the year and, in doing so, have reduced their duration risk. Between Jan. 15 and July 27, the number of prime and government funds with WAMs between 41 and 60 days decreased to 112 from 192, while the number with WAMs between one and 40 days increased by 81 funds.

Prime funds have been more proactive than government funds in reducing portfolio average maturities and building liquidity, as these funds have to contend with potential reform-related redemptions, in addition to rising rates. The number of prime funds with WAMs longer than 40 days declined to 48 from 102, while government funds have been slower to reduce maturities.

The looming conversion to floating net asset values (NAVs) for institutional prime and municipal funds is leading fund managers to focus on funds' current shadow NAVs, which reflect market pricing. As money funds currently transact at a stable $1 NAV, a key implication is that funds with a shadow NAV of less than $1 will immediately crystalize losses for investors upon conversion to a floating NAV.

To avoid losses for investors, some fund managers have taken steps to bring shadow NAVs up to $1 through capital injections, and others may follow in the coming months. For example, Crane Data reported that Northern Trust took a $45.8 million charge in the second quarter over a capital injection used to top up the shadow NAVs of four funds, citing legacy losses from the financial crisis as the cause of the shortfall. Northern Trust did not specify the affected funds, but Fitch's review of data from Crane shows that the shadow NAV of the Northern Trust Money Market Fund increased from $0.9989 on July 9, 2015 to $1 the next day. If the increase in the fund's shadow NAV was a result of a capital infusion, it would have cost approximately $8 million. Although the fund is considered a retail fund and, therefore, will not convert to a floating NAV like institutional funds, Northern Trust will still have to post the fund's shadow NAV on its website, which may have been one of the reasons for the top up.

The full report, 'U.S. Money Market Funds Quarterly 2Q15', is available at 'www.fitchratings.com' or by clicking on the link above.

Opt-in to receive Fitch's forthcoming research on money market funds:
http://pages.fitchemail.fitchratings.com/FAMMMFBlankOptin/