Introduced in 2016, Form N-CEN is an annual filing that focuses on providing census type information and an overview of an entire fund complex - funds, strategies, associated service providers, turnover rates, etc.
NCEN also provides detailed information on other activities, such as interfund lending, that are an important indicator of the performance and liquidity of funds.
Interfund lending is a tool that provides a liquidity cushion to a fund when it faces investor outflows, and mutually benefits both the lending and borrowing parties.
Data on interfund borrowing can help investors and fund managers gather detailed information on the liquidity and risk metrics of any fund. Under the Interfund Lending Program, funds may lend or borrow money for temporary purposes directly to or from one another (an Interfund Loan), subject to meeting the conditions of the SEC exemptive order.
Using the NCEN data available on RADiENT, a few characteristics of fund families engaging in ILP were observed:
HETEROGENEITY
More heterogeneous Fund families (or diversified fund companies) have greater flexibility in the timing of liquidity supply and are thus more likely to engage in the ILP.
An example of a diversified fund company is AMG Funds LLC. The funds of this company hold assets across sectors in different combinations, therefore enabling flexibility in terms of interfund borrowing and lending.
|
Fund Name |
Interfund lending Amount ($) |
Top 3 Sectors |
Lending Amount as a proportion of Net Assets |
|
2,094,556
|
Consumer Discretionary, Financials, Information Technology) |
0.80% |
|
|
14,996,045
|
Financials, Industrials, Consumer Discretionary |
3.1% |
|
|
3,275,164 |
Medical, Transportation |
1.21% |
( Data as per the latest NCEN filing )
“Interfund Lending Program is more effective for fund families with high style diversity under exogenous negative return shocks.” Apart from sectoral differences, even distinct fund investment styles allow such families to leverage ILP.
ILLIQUID NATURE
Fund families are more likely to apply for ILP if they face liquidity problems and have “funds that are restricted from borrowing, less restricted from investing in illiquid securities, and charge load fees”
SIZE
Larger funds are more likely to apply for ILP since they have better monitoring systems. Recent filings on RADiENT show some large fund families such John Hancock Funds, Touchstone Strategic Funds, USAA Mutual Funds Trust engage in ILP across the fund complex.
| Fund Company | Total number of funds | Funds employing ILP |
| Principal Funds Inc | 76 | 25 |
| Principal Variable Contracts Funds Inc | 34 | 9 |
| John Hancock Investment Management LLC | 150+ | 10 |
( Data as per the latest NCEN filing )
MANAGERS
Funds that are managed by fewer managers show a greater propensity towards ILP since they are less likely to have a free-rider problem.
Additionally, it is also found that fund managers with access to ILP tend to “front-run their distressed peers under coordination of the family fund”.
Cooperative managers are more likely to engage in ILP which indicates intensive cross-subsidisation for families and which subsequently affects the fund’s and families performance.
ILP majorly influences portfolio holdings and plays a mitigating role in stock fire sales following investor outflows. It helps ensure that the borrowing fund navigates through tumultuous markets and meets its liquidity requirements.
Mutual fund liquidity management using NCEN
Interfund lending along with other heads covered in Form N-CEN, can give us an understanding of the liquidity of the funds and holding strategies of the asset managers.
A study conducted in 2018, showed that “mutual funds with ILP had 0.33% higher returns than non-ILP funds in the week following a period of distress”. ILP has also shown to have a positive role in managing the short-term liquidity requirements
For anyone who wishes to analyze how well funds can survive during distressful times, needs to take into account the ILP.
You can now easily access fund data on security lending, lines of credit, brokers, administrators, etc via RADiENT’s NCEN tab!
i) Wu, Kai. “THREE ESSAYS ON CAPITAL MARKETS.” ecommons.cornell.edu/bitstream/handle/1813/59454/Wu_cornellgrad_0058F_10811.pdf?sequence=1&isAllowed=y.
ii) Agarwal, Vikas, and Haibei Zhao. Interfund Lending in Mutual Fund Families: Role of Internal Capital Markets . Georgia State University , 2016.
