This month in our March issue, Money Fund Intelligence revisits Western Asset Management, the ninth largest money fund manager worldwide and the 10th largest in the U.S. We interview money fund veteran and Lead Liquidity Portfolio Manager Kevin Kennedy, and Head of New York Operations & Client Service/Marketing Michael Van Raaphorst. We excerpt from the full article below.
Crane Data's flagship newsletter writes, "Western Asset Management was formed in December 2005 following the swap of Citigroup's asset management for Legg Mason's brokerage unit. The core liquidity management team, which manages over $140 billion, has been in place since the early 1990's. The funds will complete their rebranding by June, shedding the last vestiges of their former Citi monikers."
We first asked, "Q: What are the biggest challenges managing a money fund historically, and today? Kennedy, who has been in the business roughly 30 years, responds, "Historically, it has been managing effectively your average maturity throughout varying interest rate environments. That emphasis is shifting. There is more concern about liquidity and spread risk in today's environment. Some of those risks have been addressed by the amended 2a-7 guidelines, specifically the new liquidity requirements and the new Weighted Average Life (WAL) limitation for money market funds."
He continues, "Today's zero interest rate environment presents an unprecedented industry challenge. Coupled with the more restrictive 2a-7 rules, it certainly makes it more difficult as the industry could become more commoditized. Some of the fund strategies have been implemented in the past -- for instance using a longer Weighted Average Maturity (WAM) -- won't be available to us or our competition any longer."
Kennedy adds, "More recently, the markets have been working very well. Liquidity is plentiful and spreads are very narrow. Volatility remains a concern. Everybody, obviously, will remember what we've gone through. We are still extremely cautious when it comes down to various exposures. We believe that this will be viewed as the bigger risk going forward, not necessarily the Fed. Although when the Fed starts tightening, that will also be a significant challenge across the industry."
We also asked, "Q: Is the zero rate environment survivable? Kennedy comments, "It is. To tell you the truth if I thought the Fed would be on hold this long, I would've had my doubts.... But despite the fact that the industry has lost a sizeable chunk of assets, it's still a huge industry. I think that's a tribute to the confidence that investors have in money market funds in general. Retention has been good. Fee waivers are something that will continue for the next several months and that certainly strengthens the hand of the bigger players in the industry. Thankfully, we are one of those bigger players."
He tells us, "We think that the Fed will be more active in draining reserves, whether it be interest on deposits, reverse repos, or the issuance of SFP Treasury bills. All these things will be the first step towards bringing the fund's rate a little bit higher. Initially that'll just mean that it'll trade closer to the upper end of the 0 to 25 basis point target range. But that alone will provide a little bit of relief to the money fund industry."
Look for more excerpts from our Western Asset interview in coming days, or e-mail Pete to request the full article in the March issue of Money Fund Intelligence.
