Money Market Funds
Operations and Technology
Conducting Business in a Rapidly Changing World
By Jeanne Arnold
June 1, 2016
The global operating environment is evolving and it is critical for corporations to understand the changes afoot if they are to succeed in the 21st century, said Kevin Kajiwara, co-president of Teneo Intelligence, a division of global advisory firm Teneo. Speaking on the final day at ICI’s 58th General Membership Meeting (GMM), Kajiwara gave an overview of the economic and political shifts taking place around the world during his session, “Geopolitical Risks and the Global Economy.” After the overview, he engaged in an insightful question-and-answer session with Tom Faust, chairman and CEO of Eaton Vance Corp.
It’s the End of the World (as We Know It)
The post–Cold War world that most CEOs of multinational corporations are accustomed to—one where the United States is the dominant power and calls the shots—no longer exists, said Kajiwara. That unipolar world has been replaced by one where no single country can meet the challenges of global leadership. This is not the result of the actions of any one U.S. president or the results of a single world event, he said, but of a number of other forces, including:
- the inability and unwillingness of the United States to be the world’s policeman;
- the increasing inability of such institutions as the International Monetary Fund and UN Security Council to adjudicate global disputes;
- the rising number of countries looking to increase their influence, especially China; and
- the changing nature of globalization.
This last force is especially important for businesses to understand, Kajiwara said. Though globalization has benefitted both developed and emerging markets, the primary beneficiaries have been the United States and its multinational corporations, because “globalization wasn’t really global,” he explained. “It wasn’t the adoption of a universal set of norms, but instead the spread and imposition of Western market values and of the regulated free market on other countries and systems.”
In a world where there is no single leader, he continued, countries such as China and Russia are pushing back on the traditional concept of globalization. In looking to exert influence on the world stage, some of the key tools they’re using are state-owned enterprises or sovereign wealth funds—organizations that actually may be more focused on achieving their country’s political and economic goals than on maximizing profits and investor returns. This makes it difficult for U.S. businesses—which operate within a free-market paradigm—to take advantage of the opportunities in these emerging economies, given the threat that the interests of investors could be subsumed by the interests of the state.
As Goes China and the United States, So Goes the World?
Moving from the changing global operating environment to individual countries, Kajiwara began by examining one of the most influential countries in the world: China. “Make no mistake—China has gotten very rich under the current global order, so it doesn’t want to completely upend it,” he explained. “Yet the message the country is sending is that it intends to be a rule maker as much as a rule taker.” The big question, he said, is does the United States push back or does it become stakeholder in China’s success as well?
So far the indications for cooperation are not that great, he said. For example, the Trans-Pacific Partnership, which is a large trade agreement being negotiated by a U.S.-led 12-nation regional trade bloc, involves many countries within the Asia-Pacific region—but it doesn’t include China. Meanwhile, China is working to create the Asian Infrastructure and Investment Development Bank, which is essentially a competitor to the World Bank—but it did not invite the United States to participate, though some U.S. allies, such as the United Kingdom, have joined.
“The China-U.S. relationship is the most important bilateral relationship of the 21st century,” Kajiwara stated, “and however that plays out will have ramifications for the region and the world.”
Risks in the Middle East and Europe
Shifting to the Middle East, Kajiwara started off with some good news for the region. Despite the plethora of geopolitical risks in the area, he said, there is bright spot: Iran. The country, he said, presents a “unique opportunity that won’t come along again in our lifetime—the emergence of a young, educated middle-class market of 80 million people who have a pent-up demand for ‘stuff,’ in a country that is the most democratically disposed.”
Despite this, the country also is full of political risks, ranging from existing sanctions on financing activities suspected of supporting terrorism, to counterparty risk, to questions about the rule of law. But, he insisted, it’s not a question of whether businesses want to get in—it’s a question of how and when.
Continuing his focus on the Middle East, Kajiwara spoke about the strained relations between the United States and Saudi Arabia, as well as some of the ramifications of the Syrian civil war—and its effect on Europe. “We’re seeing the biggest humanitarian and security crisis since World War II developing in Europe” because of ISIS and the Syrian civil war, he said.
The mass migration from the Middle East northward was one of the two political risks in Europe that Kajiwara discussed. The other one was “Brexit”—the possibility that the people of Great Britain will vote on June 23 to leave the European Union. “Ultimately, I think Britain will vote to remain,” predicted Kajiwara. But expect some fallout on the continent as a result of the vote, he warned: “The European Union has a huge incentive to play hardball with Great Britain because it doesn’t want it to look like other EU states can get a better deal by leaving the European Union.”
Russia and the United States: It’s Complicated
In the question-and-answer portion of the session, Faust asked Kajiwara about the future of U.S.-Russian relations. “If you ask any U.S. general what the United States’ number-one threat is, he or she would say Russia,” stated Kajiwara, who added that the ability to take any measures against Russia is restricted by Europe’s dependence on Russian natural gas. The world has an interest in making sure Russia doesn’t collapse, he explained—not only because stability is in everyone’s best interest, but because having a fairly strong Russia is a good counterbalance to an increasing Chinese military presence through central Asia. Kajiwara added that the future of its relations with the west is further complicated by the fact that “Russia has a president, but not a presidency. If Vladimir Putin was hit by a bus tomorrow, it is unclear who would take over. And any country that has been dependent upon one genius supplanting another genius doesn’t do well.”
United States Is Still the Best Bet—for Now
Despite the instability that surrounds it, said Kajiwara, “I would ultimately make more of a bet on the United States than any other country in the world, because we have a unique set of values.” The United States is the only country founded on an ideal, he explained, and its free-market approach has a history of providing opportunity for those who take chances. “It is okay to drop out of Harvard at 19 years old if you have a great idea,” he said, “because we have a phenomenal capital markets ecosystem that will find, champion, and finance you.” The United States also has a number of other advantages, including solid rule of law, strong intellectual property protections, bankruptcy provisions that enable people to fail and try again, and a large consumer market, which provides “the scale to experiment.”
Kajiwara ended the session with some words of advice: as the United States looks toward the future, its people need to ask what they want to achieve and prevent. The United States doesn’t seem to have a clear sense of purpose now, he said, which is “creating uncertainty, [so] other countries are hedging and acting accordingly,” explained Kajiwara. America’s allies and adversaries need to know that the country stands behind its promises, he concluded. “Otherwise, China, Iran, and others might decide that defying the United States is a lot less risky.”
Jeanne Arnold is a senior writer and editor for ICI.
All Pain and No Gain for Fund Investors
By Paul Schott Stevens
February 5, 2016
The following is a letter submitted to the editor of the New York Times. A financial transaction tax (FTT) (editorial, The Need for a Tax on Financial Trading, Jan. 28) is a terrible idea that would harm all investors, especially American workers saving for retirement. We have yet to see an FTT proposal that would not hurt Main Street nor weaken our capital markets.
Liquidity Risk Management Must Be Done Right
By Paul Schott Stevens
January 15, 2016
The following ICI Viewpoints is a lightly edited version of a letter that ICI President and CEO Paul Schott Stevens sent to U.S. Securities and Exchange Commission (SEC) Chair Mary Jo White, as part of the Institute’s overall response to the SEC’s liquidity risk management proposal.
How the SEC’s Six-Bucket Approach Could Provide a False Picture of Liquidity
By Brian Reid
January 14, 2016
As I explained in a previous post, I filed a letter on January 13 with the U.S. Securities and Exchange Commission (SEC) in response to its liquidity risk management proposal and to Liquidity and Flows of U.S. Mutual Funds, a study by the Commission’s Division of Economic and Risk Analysis (DERA). My letter was one of four components of ICI’s multipart response to the SEC proposal.
The SEC’s Liquidity Proposal: Good Goals, Unintended Consequences
By Brian Reid
January 13, 2016
On January 13, I filed a letter with the U.S. Securities and Exchange Commission (SEC), in response to the SEC’s liquidity risk management proposal and to Liquidity and Flows of U.S. Mutual Funds, a study by the SEC’s Division of Economic and Risk Analysis (DERA). My letter was one of four components of ICI’s multipart response to the SEC proposal.
High-Yield Bond Mutual Fund Flows: An Update
By Sean Collins
December 23, 2015
In an ICI Viewpoints on December 16, we debuted new weekly data on flows to high-yield bond mutual funds, presenting data through December 9. In light of continuing developments in the high-yield market, we have had requests to provide an update this week, taking into account the flows through December 16. Here is our overview.
High-Yield Bond ETFs: A Source of Liquidity
By Shelly Antoniewicz
December 22, 2015
The high-yield bond market has been buffeted recently, as market participants reassessed the risks of this sector and sent prices for many such bonds tumbling.
High-Yield Bond Mutual Fund Flows: Some Perspective
By Sean Collins
December 16, 2015
Recent conditions in the high-yield credit markets have raised questions about the impact of market turmoil on mutual funds investing in that segment of the bond market.
Mutual Fund Investments in Private Placements: an Overview
By Gregory M. Smith
November 23, 2015
Given recent media interest in mutual fund investments in private placements, it might be helpful to review mutual fund disclosure and valuation obligations. How do funds handle securities that are not publicly traded?
Opinion: The Tax Threat to Your Mutual Fund
By Mike McNamee
May 7, 2015
Vanguard Chairman and CEO Bill McNabb sent “an open letter to all mutual fund investors” in the opinion pages of Thursday’s Wall Street Journal. His message: fund investors face a clear threat of higher costs, weaker returns, and a bailout tax to salvage other failing financial institutions—all if regulators get their way in imposing new rules on funds or their managers.
2015 Investment Company Fact Book: Letter from the Chief Economist
By Brian Reid
May 4, 2015
A version of this letter by ICI Chief Economist Brian Reid was released today in our 55th edition of the Investment Company Fact Book.
This year marks the 75th anniversary of the Investment Company Act and the Investment Advisers Act—the key statutes under which mutual funds, exchange-traded funds (ETFs), closed-end funds, and unit investment trusts are regulated and governed. In 1940—the same year that Congress enacted these laws—the fund industry formed the National Committee of Investment Companies, the trade group that became the Investment Company Institute (ICI).
ICI Global Welcomes the Announcement of More Stock Connects in Asia Pacific
By Qiumei Yang
April 22, 2015
In response to the announcement about a launch date for the Taiwan Stock Exchange and Singapore Exchange trading link, and recent reports of a possible Shenzhen–Hong Kong Stock Connect, ICI Global’s Qiumei Yang offers the following comment:
More Unfounded Speculation on Bond ETFs and Financial Stability
By Shelly Antoniewicz and Mike McNamee
April 13, 2015
A recent column in the Financial Times warns of “another accident in waiting” in the growth of fixed-income exchange-traded funds (ETFs)—described as “financial alchemy” that converts illiquid bonds into “baskets” that “trade moment to moment on the stock exchanges.” This “illusory” ETF liquidity will disappear, the author warns, when investors “want to move en masse, and quickly, when the going gets less good.”
Once Again, Information Moves Markets
By Sean Collins
March 18, 2015
Treasury yields fell sharply today and the stock market jumped. Wouldn’t it be nice if mutual funds could take credit? Unfortunately, they can’t. Any orders that mutual fund investors place to buy or sell shares anytime today before 4:00 p.m. won’t hit the market until 4:00 p.m., just like any other day. And, if you are reading this blog post at the time of its posting, 4:00 p.m. is still 10 minutes away.
Does Liquidity in ETFs Depend Solely on Authorized Participants?
By Shelly Antoniewicz and Jane Heinrichs
March 16, 2015
ICI recently conducted a survey of its members that sponsor exchange-traded funds (ETFs) to collect information on authorized participants (APs)—typically market makers or large institutional investors with an ETF trading desk that have entered into a legal contract with an ETF to create and redeem shares of the fund.
Plenty of Players Provide Liquidity for ETFs
By Shelly Antoniewicz
December 2, 2014
A recent article in the Financial Times’ FT Alphaville blog (“Lies, Damned Lies, and Liquidity Expectations”) focused on a paper published by the Committee on the Global Financial System, an organization that monitors developments in global financial markets for central bank governors.
Bloomberg Ignores the Evidence on Bond ETFs
By Mike McNamee
September 26, 2014
In response to “Pimco ETF Probe Spotlighting $270 Billion Market Vexing FSB,” we posted the following comment on Bloomberg News’ website:
A Look Inside ETFs and ETF Trading
By Rochelle Antoniewicz and Jane Heinrichs
September 23, 2014
Investors in exchange-traded funds (ETFs) are trading shares with each other far more than they are turning to authorized participants to create or redeem shares.
The Real Lessons to Be Learned from 1994’s Bond Market
By Brian Reid
July 29, 2014
A recent “Heard on the Street” column in the Wall Street Journal (“Heeding 1994's Bond-Market Lesson,” July 27, 2014) is correct in saying that there’s a lesson to be learned from the 1994 bond market—but it draws the wrong lesson.
SEC Chair White Stresses Need for FSOC to Consult Sources for Necessary Expertise
By Rachel McTague
May 22, 2014
Securities and Exchange Commission (SEC) Chair Mary Jo White today called for the U.S. Financial Stability Oversight Council (FSOC) to use outside expertise to the degree necessary in its process of designating systemically important financial institutions (SIFIs). She asserted that it is “enormously important for FSOC, before it makes any decision of any kind, to make sure it has the necessary expertise on any of those issues.”
“Market Tantrums” and Mutual Funds: A Second Look
By Sean Collins and Chris Plantier
May 19, 2014
Over the past year, policymakers who are focused on financial stability have pursued a theory that mutual fund investors can destabilize financial markets by redeeming from funds when markets decline. According to this theory, redemptions by fund investors lead fund managers to sell securities; those sales drive asset prices down further and, in turn, spur more investor flight, redemptions, and price declines.
ETFs Don’t Move the Market—Information Does
By Shelly Antoniewicz
March 11, 2014
There they go again.