"Shadow" NAVs for Money Funds Available in 2011
By American Century Investments
December 7, 2010
“Shadow” NAVs for Money Funds Available in 2011
Weekly Market Update: Week of November 29, 2010
In January 2011, so-called “shadow” net asset values (NAVs) for money market funds (MMFs) will become available publicly for the first time. They will be posted by the Securities and Exchange Commission (SEC) on the SEC’s Web site 60 days after they are filed monthly with the commission by fund management companies, including American Century Investments®.
This monthly reporting and posting of shadow NAVs is part of an SEC “enhanced reporting” objective for MMFs, one of several goals that guided the SEC’s package of permanent changes in its MMF regulations announced in February 2010.
As one of the investment industry's MMF pioneers, American Century Investments supports the new regulations. The five MMFs managed by American Century Investments have been and will continue to be in compliance with these reforms, including the shadow NAV reporting.
Removing the Mystery from Shadow NAVs
What’s a shadow NAV? It’s the MMF equivalent of the market value-based NAVs published daily for most open-end, variable-price mutual funds. Calculated out to four decimal places, the shadow NAV’s daily fluctuations simply reflect the small daily portfolio net gains or losses that are typically "rounded out" when a money fund's reported $1 NAV is calculated on an amortized costs and values basis to maintain the stable share price.
Unless a MMF is invested 100% in securities that mature overnight, MMFs will report shadow NAVs between $0.9950 and $1.0050 on most days. These shadow NAV fluctuations, as long as they stay between $0.9950 and $1.0050 (as they typically do), are rounded to $1 for shareholder reporting purposes.
Shadow NAVs and Daily MMF Market Value Fluctuations Have a Long History
Shadow NAVs have been an integral part of standard MMF operating procedures for years. They have been calculated and reported to MMF boards of directors for decades, and have also been reported semiannually by each MMF to the SEC.
Daily fluctuations in the priced-to-market NAVs of MMFs also have a long history. MMFs have always invested in securities that can fluctuate modestly in price on a daily basis. That’s normal investment behavior. Because they were only reported to fund boards and the SEC, these small, normal daily rises and falls in MMFs' market-based NAVs have been mostly invisible to fund shareholders and the financial media in the past.
Now, our industry is offering a more “nuts and bolts” view of MMF operations to investors. In 2011, shadow NAVs will become available publicly for the first time, 60 days after they are filed monthly with the SEC. So, for example, the Nov. 30, 2010, shadow NAVs reported to the SEC by Dec. 7, 2010, will become publicly available at the end of January 2011.
Shadow NAV Reporting Just Latest in 2010 MMF Reforms
Looking to further protect MMF investors and the broad financial markets from money market disruptions such as those experienced during the 2008 financial crisis, the SEC issued permanent changes in its MMF regulations in February 2010. A partial list summarizing some of the key changes issued and implemented this year is provided in the “2010 Key Amendments” table below. The amendment resulting in the increased and public reporting of shadow NAVs is highlighted.
When reviewing the table, it’s important to recognize the SEC’s goals (listed in the left column of the table), which included:
- Improved Liquidity—tightening portfolio requirements so assets can readily be converted to cash
- Shortened Maturity Limits—reducing exposure to certain risks, such as interest-rate risk
- Higher Credit Quality—lowering default risk by limiting exposure to lower-tier eligible securities
- Enhanced Reporting—requiring more detailed and timely portfolio holding disclosure to investors and the SEC.
The five MMFs managed by American Century Investments have been and will continue to be in compliance with these reforms. Anticipating the changes, we adopted several proposals in all of our MMFs prior to them becoming mandatory, including:
- Reporting the weighted average life on a monthly basis
- Posting monthly fund holdings online
- Lowering the funds’ maximum weighted average maturity
Key 2010 Amendments to SEC MMF Regulations (not a complete list) |
|||
Goal |
Revised Rules |
Compliance Date |
|
Improved MMF Liquidity |
Daily |
For all taxable MMFs, at least 10% of assets must be in cash, U.S. Treasuries, or securities that convert into cash (e.g., mature) within one day. |
May 28, 2010 |
Weekly |
For all MMFs, at least 30% of assets must be in cash, U.S. Treasuries, certain other government securities with remaining maturities of 60 days or less, or securities that convert to cash within one week. |
May 28, 2010 |
|
Illiquid Securities |
MMFs may not purchase illiquid securities if, after the purchase, more than 5% of the fund's holdings will be illiquid. |
May 28, 2010 |
|
Portfolio Maturity Limits |
Weighted Average Maturity (WAM) |
Restrict WAM of a MMF portfolio to 60 days. |
June 30, 2010 |
Weighted Average Life (WAL) |
Restrict the WAL of a MMF to 120 days. This limits the ability of MMFs to invest in long-term floating-rate securities. |
June 30, 2010 |
|
Higher Credit Quality |
MMFs may not invest more than 3% of assets in 2nd Tier securities, and not more than 0.5% in any single issuer of 2nd Tier securities. MMFs may not invest in 2nd Tier securities that mature in more than 45 days. (2nd Tier securities are any eligible money market securities that are not 1st Tier. Typically, an eligible security must have a remaining maturity of 397 days or less and be in one of the two highest short-term credit rating categories from a nationally recognized statistical rating organization (NRSRO). Typically, 1st Tier securities are in the highest category, and 2nd Tier are in the 2nd highest.) |
May 28, 2010 |
|
Periodic Stress Tests |
MMF portfolio managers are required to examine the fund's ability to maintain a stable net asset value (NAV) per share in the event of shocks, such as interest rate changes, higher redemptions, and changes in the credit quality of the portfolio. |
May 5, 2010 |
|
Know Your Investors |
MMFs must hold liquid securities sufficient to meet foreseeable redemptions. Funds must develop procedures to identify investors whose redemption requests may pose risks for funds. |
May 5, 2010 |
|
Public Web site Posting of Portfolio Holdings |
MMFs must post a schedule of investments on their websites as of month-end, within 5 business days. Each month-end posting must be maintained for 6 months. |
Oct. 7, 2010 |
|
Increased Reporting to SEC |
New Rule 30b1-7 requires MMFs to electronically report detailed portfolio holdings, including the "shadow" NAV, to the SEC as of month-end, using new Form N-MFP. The report must be filed within 5 business days, and will be available to the public 60 days later. |
Dec. 7, 2010 |
|
Source: Compiled by American Century Investments from external sources considered reliable, including the SEC and industry analysts.
Our Long-Term, Historic Link to MMFs
American Century Investments manages five MMFs, including the oldest Treasury-only MMF in the U.S., created in 1972. For the past 38 years, we have believed MMFs are an important part of an investor’s portfolio, for liquidity and capital preservation.
We take seriously how we manage our MMFs. You can rely on our experience, expertise and high standards in managing them. They are fully in compliance with SEC requirements. We take pride in being able to say that no shares of any MMFs issued by American Century Investments have ever been redeemed at a loss to investors during an era spanning nearly four decades, including several recessions and financial crises.
Click here for more complete information about the SEC’s MMF reform proposals and actions.
American Century Investments® offers five money market funds, as well as a variety of a wide variety of stock, bond and asset allocation funds. Visit americancentury.com for more information: U.S Investment Professionals
Money Market Funds: An investment in the fund is neither insured nor guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in the fund.
The opinions expressed are those of American Century Investments and are no guarantee of the future performance of any American Century Investments portfolio. This information is not intended to serve as investment advice; it is for educational purposes only.
You should consider a fund’s investment objectives, risks, and charges and expenses carefully before you invest. The fund’s prospectus or summary prospectus, contains this and other information about the fund, and should be read carefully before investing. Investments are subject to market risk.
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