SEI Consolidates Classes; Trillion Dollar Shift?

SEI Investments is the latest fund family to consolidate its fund lineup and liquidate share classes, shifting all of its outstanding share classes into A shares, according to recent SEC filings.” The July 6 Prospectus Supplement says that for each of the following funds, SEI Prime Obligations Fund, SEI Money Market Fund, SEI Government Fund, SEI Government II Fund, SEI Treasury Fund, and SEI Treasury II Fund, the B, C, and H shares will be converted into the A shares. Specifically, it says, “At a meeting held on June 22-23, 2015, the Board of Trustees of the Funds approved the conversion of each Fund’s Class B Shares into Class A Shares.” Additional filings say the same for the B, C, H and Sweep shares, merging them into A shares. (See also our latest brief on share class consolidations, Crane Data’s July 2 “Link of the Day,” “JPM MMFs Abandon B Shares; Federated Liquidates S-T Euro Prime MMF.”)

The filing continues, “Like Class B Shares of the Funds, Class A Shares are able to charge a contractual shareholder servicing fee equal to 0.25% of the average daily net assets of the share class. Also like Class B Shares of the Funds, Class A Shares do not charge any distribution (12b-1) fees. In addition to the shareholder servicing fee, Class B Shares of the Funds also are able to charge an administrative servicing fee up to 0.05% of the average daily net assets of the share class. (Class A Shares of the Funds do not charge any administrative servicing fee). However, due to the current low yield environment, most of the Class B shareholder and administrative servicing fees have been waived for the last several years. After voluntary fee waivers, the actual fees for Class B Shares are currently the same as Class A Shares of the Funds.”

Finally, the SEI Supplement adds, “The Board’s approval of the conversion of each Fund’s Class B Shares into Class A Shares was based on these and other factors. Accordingly, effective on or about the close of business on September 4, 2015 (the “Conversion Date”), all Class B Shares of each Fund will automatically convert to Class A Shares of the same Fund. No contingent deferred sales charges will be assessed in connection with this automatic conversion. This automatic conversion is not expected to be a taxable event for federal income tax purposes or to result in the recognition of gain or loss by converting shareholders, although shareholders should consult their own tax advisors. For your convenience, we have included a side-by-side comparison of the current contractual fees and expenses of both Class B and Class A Shares of the Funds, as disclosed in the respective Prospectus dated May 31, 2015. Actual fees incurred by shareholders of the Funds have been lower than those set forth below due to voluntary fee waivers.” The language is similar for the C and H class conversions.

In other news, for the first time since 2007, money market funds showed inflows for the month of June this year, up $15.5 billion. So far in July, assets are up $34 billion compared to last year when they were down $18 billion. As these two months are typically down months for the MMF industry, one wonders where the flows might be coming from. One possibility is bank deposits. Case in point, in its 2Q earnings call earlier this month, JP Morgan’s CFO Marianne Lake said the company had succeeded in its goal of shedding $100 billion of non-operating deposits in the second quarter. The company announced this initiative in February citing new banking regulations that made it more expensive for large banks to hold deposits.

Did some of this cash find its way into money funds? Money in motion is the theme of a white paper released last week called “Looking Beyond Bank Deposits and Money Market Funds,” by Capital Advisors Group. The piece looks at the impact of new bank deposit and money market fund rules on the cash landscape. With the potential for a trillion dollar shift within the world of cash investing, Capital Advisors Director of Investment Research Lance Pan examines “cash investment strategies in a new era.” One of the major beneficiaries, they say, may be Separately Managed Accounts.

In Capital Advisors’ white paper, Pan writes, “As the economy improves and interest rates move higher, a new and different world awaits treasury investment professionals. Money market fund reforms may make liquidity less reliable and yields less predictable than in the past. And stricter regulations on bank deposits might lead corporate treasuries to find new homes for their cash. In short, the good old days of decent yields in safe investments are gone. By the time new regulations are fully implemented in 2016, bank deposits and money market funds alone may no longer be sufficient cash management tools for many corporate treasuries.”

The paper continues, “It’s now clear that the recent bank and money market fund regulations should have a long-lasting structural impact. As interest rates and yields start to rise, managers are considering new strategies that were delayed in the years since the financial crisis. In this new era, higher risk awareness, greater sensitivity to liquidity costs and stricter systemic regulation will require new approaches to corporate cash investment. Therefore treasury investment managers are looking for alternatives. For many, direct purchases of marketable securities in separately managed accounts (SMAs), beyond bank accounts and money market funds, may become a primary alternative cash strategy.”

Pan comments, “Money market fund reforms going into effect between now and October 2016 — including implementation of floating net asset values (NAV), liquidity fees, and redemption gates — are already transforming money funds as vehicles for short-term cash management. Recent banking reforms are also directly impacting corporate cash investors. Capital requirements in the Basel III accords and other regulations designed to secure the global banking system are creating disincentives for banks to hold non-operating deposits. Capital Advisors Group estimates these rule changes could provoke more than a trillion dollars in asset shifts in 2015 and 2016, impacting the liquidity, yield and utility of most cash instruments.”

He tells us, “Stratifying cash balances into several sub components and applying associated strategies helps to delineate the three objectives of cash management. As it becomes increasingly difficult to deliver on all three objectives with money market funds, a stratified approach may allow cash managers to pick the best strategies suited for each. At the aggregate level, they may continue to use deposits, money market funds, and direct purchases in a comprehensive approach.”

On Separately Managed Accounts, Pan says, “With a greater proportionate focus on direct purchases, certain treasury organizations may find it appropriate to use separately managed accounts (SMAs). On the one hand, SMAs allow organizations to maximize direct purchase strategies that are not feasible in bank deposits and money market funds. On the other hand, they have the benefit of professional expertise, risk diversification, customized liquidity, and counterparty risk oversight. For many organizations, separate accounts may afford higher income potential without sacrificing principal stability and liquidity.” He concludes, “In the final analysis, separately managed accounts do not represent a new strategy, but rather a return to the more traditional way of corporate cash management, which may be more versatile and durable than other alternatives.”

https://cranedata.com/archives/all-articles/5686/