Investing Liquidity in a Total Rate of Return World

Transcription

1 Investing Liquidity in a Total Rate of Return World April 2016 Not FDIC insured. May lose value. No bank guarantee. Not NCUA or NCUSIF insured. May lose value. No credit union guarantee.

2 Agenda 1. Regulatory Reform and Higher Rates Impact Liquidity Markets 2. Not All Prime Funds are the Same What Should Investors Consider 3. Alternative Investments for Strategic Liquidity 4. Interest Rate Outlook You could lose money by investing in the fund. Although the fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Fidelity Investments and its affiliates, the fund s sponsor, have no legal obligation to provide financial support to the fund, and you should not expect that the sponsor will provide financial support to the fund at any time. Interest rate increases can cause the price of a money market security to decrease. A decline in the credit quality of an issuer or a provider of credit support or a maturity-shortening structure for a security can cause the price of a money market security to decrease. 1

3 Multi-Dimensional Environment Impacts Liquidity

4 Regulations and Fed Impact Liquidity Management Rule 2a-7 Modifications FOMC Hikes Rates BASEL III Flows LIQUIDITY 3

5 Potential Impact on Liquidity Markets FOMC Rate Hike 2a-7 Modifications BASEL Flows YIELDS NAVs 4

6 SEC Final Rule on Money Market Mutual Funds Floating NAV and fees & gates compliance date is October 14, 2016 Fund Type Net Asset Value (NAV) Liquidity Fee Redemption Gate U.S. Treasury & Government Stable No No Retail Prime & Municipal Stable Yes Yes Institutional Prime & Municipal Floating Yes Yes Institutional Prime & Municipal MMFs 1. Retain cash & cash equivalent status for accounting and settlement 2. Exempt from 60-day wash-sale rule 3. Exempt from individual tax lot reporting requirement MMF Reform Final Rule Implementation Date Floating NAV Liquidity Fee Redemption Gate Institutional Prime and Muni Funds will price and transact at a net asset value out to four decimal places ($1.0000) Fund s board may impose a 2% fee on redemptions if weekly liquidity were to fall below 30%; must impose at least 1% fee if less than 10%, unless not in shareholders best interest Fund s board may suspend redemptions for up to 10 days if weekly liquidity were to fall below 30% October 14, 2016 October 14, 2016 October 14, 2016 Retail Fund Definition Shareholders limited to natural persons (individuals) October 14,

7 BASEL III Financial measures to manage bank liquidity risk Liquidity Coverage Ratio (LCR) Ensures HQLA to fund 30 days of stressful conditions High Quality Liquid Assets Net Outflows over 30 days Net Stable Funding Ratio (NSFR) Encourages longer-term stable funding sources Stable Funding Required Amount of Stable Funding Leverage Ratio Enhanced capital improves banks ability to absorb stocks supplemental 3% Tier 1 Capital Total Exposure 6

8 Following Liquidity Flows BASEL III Bank Regulations $ B in excess deposits GSIB Concerns: Short Term Wholesale Funding Preferences: Safety, Liquidity, Yield, Diversification Money Market Funds Direct Investments Private Pools SMAs Prime MMFs SEC MMF Regulations $1.46T in prime MMFs Gov t MM Funds Direct Investments Private Pools SMAs Concerns: VNAV, Gates & Fees, Operations, Accounting Preferences: SNAV, No Gates & Fees, Known Operations and Accounting 7

9 Net Yield Spread (%) AUM (Billions) Institutional Prime & Government Yield Spreads 0.20 $1, $1, $ $ $ $600 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Prime/Govt Net Yield Spread (LS) Prime AUM (RS) Government AUM (RS) 8 Source: imoneynet as of 3/31/2016 Notes: MMF yields shown are average month end net 7-day annualized yields reported by imoneynet for institutional prime and institutional government money market funds. In the chart, spread refers to the difference between prime and government money market yields. Past performance is no guarantee of future results.

10 Evaluating Prime Funds You could lose money by investing in the fund. Although the fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Fidelity Investments and its affiliates, the fund s sponsor, have no legal obligation to provide financial support to the fund, and you should not expect that the sponsor will provide financial support to the fund at any time. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks. Interest rate increases can cause the price of a money market security to decrease. A decline in the credit quality of an issuer or a provider of credit support or a maturity-shortening structure for a security can cause the price of a money market security to decrease

11 Evaluating Prime Money Market Funds The Priorities Have Not Changed: 1. Preservation of Principal 2. Liquidity 3. Yield Total Return Enhanced Disclosures Help to Evaluate Funds: 1. NAVs shall be Disclosed Daily 2. Liquidity Levels shall be Disclosed Daily 3. Flows shall be Disclosed Daily 4. Yield has been Provided Daily 10

12 Understanding Money Market NAV Calculation Stable NAV Amortized Cost of Investments + NOA* Total Shares Outstanding Floating NAV Market Value of Investments + NOA* Total Shares Outstanding The net asset value (NAV) of a fund is the dollar value of one share The NAV is calculated daily and is the price at which a fund will be transacted Floating NAV funds can float based on pricing the underlying holdings Floating NAV transactions are executed at four decimals ($1.0001) Even a stable NAV does not guarantee a $1.00 value and may lose value *NOA or net other assets include payables, receivables and cash 11

13 Count of Funds Evaluating NAV Volatility Market price NAVs vary across industry Prime MMF NAV Distributions /31/2015 3/31/ Source: imoneynet as of March 31, 2016, data includes each fund s share class 12

14 Value of a Basis Point NAV Volatility is Asymmetric Theoretical Value Theoretical Loss 1 Basis Point Decline $99,990,000 $10, Basis Point Decline $99,900,000 $100, Basis Point Decline $99,750,000 $250, Basis Point Decline $99,500,000 $500,000 Yield Differential Between Prime & Government Investment Annualized Interest Income 10 Basis Points $100, Basis Points $250, Basis Points $500,000 Analysis based on a $100,000,000 initial investment 13

15 Selecting the Correct Money Market Fund to Purchase Scenario 1 Fund A Fund B Yield 0.37% 0.37% NAV Day Liquidity (Today) 50% 40% 14

16 Understanding Liabilities Improves Liquidity Management Volatile liabilities may impact NAV and liquidity PROMOTE GOOD BEHAVIORS PROMOTE STABILITY Does the Fund Sponsor: Understand your Business? Require Advance Notice? Build Sticky Balances? Instill Shareholder Confidence? Maintain a Direct Relationship? Discourage Arbitrage? Order Performance Expectations? Model and Quantify Behaviors? Maintain Retail Shareholders? Support Long-Term Relationships? FUND A FUND B 15

17 Fund AUM (Billions) 7-Day Liquidity (% of AUM) Fund AUM (Billions) Evaluating Liquidity Stable liquidity levels reflects effective management FUND A Fund B AUM Liquidity AUM Liquidity $80 80% $80 80% $70 70% $70 70% $60 60% $60 60% $50 50% $50 50% $40 40% $40 40% $30 30% $30 30% $20 20% $20 20% $10 10% $10 10% $ Months 0% $ Months 0% 16 For Illustrative Purposes Only

18 Selecting the Correct Money Market Fund to Purchase Scenario 2 Fund A? Fund B Yield 0.37% 0.40% NAV Day Liquidity (Today) 50% 40% 17

19 Selecting the Correct Money Market Fund to Purchase Scenario 3 Fund A Fund B Yield 0.37% 0.37% NAV Day Liquidity (Today) 50% 50% 18

20 Evaluating NAV Volatility FUND A NAV Range FUND B NAV Range Mean: Std. Dev: Mean: Std. Dev:

21 Selecting the Correct Money Market Fund to Sell Scenario 1 Need to Raise $500M, Which fund should you sell? Fund A? Fund B Yield 0.45% 0.45% NAV Day Liquidity (Today) 50% 50% Scenario 2 3 Months later, need to raise another $500M. Now which fund should you have previously sold? NAV (T+90) With the removal of amortized cost accounting the pull to par is only one factor impacting the NAV and funds with lower NAVs may continue to trend lower. In the scenario shown you would have to realize a loss of $350K instead of a $150K loss if you realized a smaller loss earlier. 20

22 Alternatives for Strategic Liquidity

23 Segmenting Liquidity is Critical Accurate Liquidity Forecasting May Enhance Returns and Lower Risks Operating Liquidity Key focus is capital preservation and liquidity with high cash flow volatility and a short term investment horizon Short Term Strategic Liquidity Equally focused on capital preservation and returns while maintaining a moderate investment horizon and moderate cash volatility Long Term Strategic Liquidity Trade-off liquidity and stability for enhanced return, low volatility and long term investment horizon 22

24 Investment Priorities Objectives drive investment strategy Different Objectives Different Investment Priorities Operating Cash Short-Term Strategic Liquidity Long-Term Strategic Liquidity Capital Preservation Liquidity Capital Preservation Return Return Capital Preservation Return Liquidity Liquidity Balancing safety, liquidity and returns 23

25 Liquidity Management Solutions A more diverse suite of alternative products Operating Cash Strategic Liquidity Deposits Gov t MMFs Pools/SMAs Direct Investments Prime MMFs Ultrashort Funds Pools/SMAs 24

26 Regulation Reduces Prime MMF Value Proposition Select ultrashort funds represent a better value for strategic liquidity Prime MMFs: Subject to gates and fees under stress NAV floats out four decimal places Conservative Ultrashort Bond Funds: Provide T+1 liquidity no gates or fees NAV floats at $10 out two decimal places 25 In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation, credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible. Foreign securities can be more volatile than U.S. markets due to increased risks of adverse issuer, political, regulatory, market or economic developments. Changes in government regulation, interest rates and economic downturns can have a significant effect on issuers in the financial services sector, including the price of their securities or their ability to meet their payment obligations. Prepayment of principal prior to a security's maturity can cause greater price volatility if interest rates change. The fund can invest in securities that may have a leveraging effect (such as derivatives and forward-settling securities) that may increase market exposure, magnify investment risks, and cause losses to be realized more quickly. Conservative Ultrashort Bond Funds are not money market funds and will have a fluctuating NAV.

27 Interest Rate Outlook

28 5y Real Yield (%) Fed Funds Target Rate (%) The Fed Has Hiked Rates After Two Years of Unconventional Tightening 6 5 Conventional Tightening 5.25% Conventional Easing Unconventional Easing Unconventional Tightening % 0.25% QE1 Jan QE2 Nov 10 Considerable Time Mar 14 Fed Hikes 25 bps Dec Mid-2013 Aug 11 QE3 Sep 12 Taper Talk May 13 Taper Dec 13 Meeting by Meeting Mar Source: Federal Reserve, Bloomberg as of 3/31/2016

29 % Fed Funds Rate (%) Forward Rate Guidance Trends Lower Probability of a June Fed Rate Hike Forward Fed Funds Futures FOMC Median (December) FOMC Median (March) Fed Funds Futures (3/31/16) /31/16 20% Source: Federal Reserve as of 3/16/2016 and Bloomberg as of 3/31/2016

30 Real GDP YoY ( %) Unemployment Rate (%) PCE YoY (%) Federal Reserve s Economic Projections Actual Inflation 1.7 Inflation Forecast Actual Unemployment Rate Unemployment Rate Forecast GDP Forecast 2.0 Actual GDP Dec-13 Jun-14 Dec-14 Jun-15 Dec-15 Jun-16 Dec-16 Jun-17 Dec-17 Jun-18 Dec-18 Source: Bloomberg and Federal Reserve Actual Inflation as of 2/29/2016, Actual Unemployment Rate as of 3/31/2016, and Actual GDP as of 12/31/2015 FOMC Forecast based on the central tendency (excludes the three highest and three lowest projections for each variable in each year) as of 3/16/2016

31 FOMC on Path Towards Higher Interest Rates Traditional Monetary Policy Change forward guidance Raise target range for the federal funds rate Adjust the interest rate paid on excess reserve balances Adjust the interest rate paid on reverse repo program Quantitative Easing Taper QE October 2014 Assessment of QE Cease reinvestment of proceeds from SOMA holdings Normalize the size of balance sheet over time 30 Source: Fidelity Investments and the Federal Reserve

32 Important Information Not NCUA or NCUSIF insured. May lose value. No credit union guarantee. The views expressed in this statement reflect those of the portfolio manager only through the end of the period of the report as stated on the cover and do not necessarily represent the views of Fidelity or any other person in the Fidelity organization. Any such views are subject to change at any time based upon market or other conditions and Fidelity disclaims any responsibility to update such views. These views may not be relied on as investment advice and, because investment decisions for a Fidelity fund are based on numerous factors, may not be relied on as an indication of trading intent on behalf of any Fidelity fund. Past performance is no guarantee of future results. Investment return will fluctuate, therefore you may have a gain or loss when you sell shares. Diversification does not ensure a profit or guarantee against a loss. In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation, credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible. Foreign securities can be more volatile than U.S. markets due to increased risks of adverse issuer, political, regulatory, market or economic developments. Changes in government regulation, interest rates and economic downturns can have a significant effect on issuers in the financial services sector, including the price of their securities or their ability to meet their payment obligations. Prepayment of principal prior to a security's maturity can cause greater price volatility if interest rates change. The fund can invest in securities that may have a leveraging effect (such as derivatives and forward-settling securities) that may increase market exposure, magnify investment risks, and cause losses to be realized more quickly. Conservative Ultrashort Bond Funds are not money market funds and will have a fluctuating NAV. Before investing, consider the funds and/or accounts investment objectives, risks, charges, and expenses. Contact Fidelity or visit advisor.fidelity.com for a prospectus or, if available, a summary prospectus containing this information, if applicable. Read it carefully. You could lose money by investing in the fund. Although the fund seeks to preserve the value of your investment at $1.00 per share, it cannot guarantee it will do so. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Fidelity Investments and its affiliates, the fund s sponsor, have no legal obligation to provide financial support to the fund, and you should not expect that the sponsor will provide financial support to the fund at any time. Foreign securities are subject to interest rate, currency exchange rate, economic, and political risks. Interest rate increases can cause the price of a money market security to decrease. A decline in the credit quality of an issuer or a provider of credit support or a maturity-shortening structure for a security can cause the price of a money market security to decrease. 31 Fidelity Investments Institutional Services Company, Inc., 500 Salem Street, Smithfield, RI Not FDIC insured. May lose value. No bank guarantee.