Yesterday, the Securities and Exchange Commission (SEC) Chairman, Mary Schapiro, aborted her effort to impose new laws on money-market mutual funds. Some asset managers are shooting up on the news. Federated Investors, which mostly manages cash, is up over 6% at the time of this writing. Fidelity and Federated Investors Inc (NYSE:FII) fought hard against the changes, arguing that it would deny companies a cheap source of capital. Many money market funds buy commercial paper, which is lent to them by large corporations.
Mary Schapiro’s proposal was to give fund managers a choice between a floating net asset value, which reflected the market value of the fund’s holdings, or to establish a capital buffer to protect against losses. Currently, money market funds have a net asset value of $1, unless a fund ‘breaks the buck’, as happened during the financial crisis to a large money market fund, which held Lehman Brothers debt. Mary Schapiro and other agencies want a plan which will prevent a repeat of that event.
Everyone is calling this a big victory for the asset management business. But is it really? Does it create long term value for asset managers which hold cash, like Federated Investors Inc (NYSE:FII), or private firms like Fidelity?
Stifel Nicholas has some interesting points on this topic. Stifel thinks that the defeated effort at the SEC actually increases the chances of regulation on the mutual fund industry, noting that the next move will likely come from the FSOC between now and November.
However, not all asset managers are created equally. Stifel notes that while Federated Investors Inc (NYSE:FII) and BlackRock, Inc. (NYSE:BLK) could be at risk from either non-bank SIFI designation, or additional money market regulation, (Affiliated Managers Group, Inc. (NYSE:AMG), Invesco Ltd. (NYSE:IVZ)) and other large asset managers (T. Rowe Price Group, Inc. (NASDAQ:TROW), Franklin Resources, Inc. (NYSE:BEN),) face little to no risk from these issues. Some more specific details:
Between November 1 and November 30 – FSOC will label which Financial Companies are Non-Bank SIFIs. This list will likely include large insurance companies (American International Group, Inc. (NYSE:AIG), MET, PRU), but could also include large independent asset managers. Due to its total size (including its advisory/solutions and money market business), we think BLK’s selection is likely, but this list could contain only 1, or up to 5 more selections. Due to their large money market operations, we think FII could also be included. We view the likelihood of large public managers like T. Rowe Price Group, Inc. (NASDAQ:TROW), Franklin Resources, Inc. (NYSE:BEN), and Invesco Ltd. (NYSE:IVZ) to be included as low, due to smaller sizes (specifically in money market).
Many different regulators and economists have put forth ideas to better regulate the money market industry. Stifel believes that any new law should contain the following: (1) capital charges, (2) floating NAV, and (3) restriction on redemptions.
Many have argued that floating NAVs could cause a run, as this would mean that money market prices would not be at $1, but could go down somedays depending on profit & loss.
Finally a chart on the massive asset management industry below:
Disclosure: No positions