Last month, Money Fund Intelligence interviewed Tom Nelson, Chief Strategist for Reich & Tang, manager of the Daily Income Funds, the new RNT Natixis Liquid Prime Portfolio, and Reich & Tang Insured Deposits, an FDIC-insured sweep program. Excerpts from the Q&A, which appeared in our June issue, follow. Q: How long has Reich & Tang been involved in running money funds? Reich & Tang has been managing money funds since 1974. It is one of the largest firms in the nation focused solely on liquidity and cash management services. From the beginning we have focused within the retail channel and were at the forefront of the brokerage sweep business, which continues to grow nicely today.
Through some natural synergies with our parent company, Natixis, we have executed on a logical business model to further penetrate the institutional market, which is growing at a strong pace. Natixis is one of the largest asset managers in the world, which is based in Paris and has its U.S. headquarters in Boston. We work closely with Natixis' U.S. investment banking group, which provides banking services to institutional clients throughout the country.
Q: Tell us about the new fund. Why launch an ultra-short money fund? To be blunt, it just makes sense. Since 1974, we have maintained a conservative strategy built on the foundation of careful and extensive credit research, a function that we maintain in-house. Our ultra-short money market fund, the RNT Natixis Liquid Prime Portfolio, is an extension of that philosophy -- but takes money funds to a level that is more current with the times. The fund is targeted to investors that have any concerns about their money fund liquidity, and is designed to withstand all types of market events, such as those witnessed in 2008. Essentially, we looked all the major issues that investors and regulators associate with money funds -- ability to provide liquidity, credit quality, inclusion of questionable investments, and transparency -- and from that built a fund that addresses all of these concerns.
By prospectus the fund must maintain a weighted average maturity of 9 days or fewer. As you know, the SEC requires money funds to maintain at least 10% of assets in overnight paper, our fund averages approximately 60%. While liquidity and return of capital is paramount, the fund is inherently designed to perform well in a rising interest rate environment. The fund is positioned to be a 'first responder' in being able to reinvest in higher yielding paper when the Fed eventually and inevitably moves to a tightening posture. Credit quality -- all investments in the fund are A1/P1, it does not invest in second tier paper. We have seen a flight to conservatism with many of our clients' investment guidelines, which has no tolerance for ABCP, ABS, collateralized loan agreements, and loan participations -- all of these are non-permissible investments in our fund.
Transparency -- the fund is arguably the most transparent fund in the business. We post fund holdings on a daily basis and even post our approved credit list for up to three days prior to inclusion in the portfolio. This is clearly an outlier in the industry, but one we are proud of because it enables clients and shareholders to know exactly what they are buying, and it epitomizes the concept of full disclosure. Debate about money market funds continues -- the talk of credit facilities, debate about floating NAVs, the President's Working Group on Financial Markets -- all of which have thus far failed to inspire the confidence of the majority. So while existing and new proposals are meticulously dissected, debated, and eventually woven into some type of legislation to address liquidity, credit quality, questionable investments for money funds, and transparency concerns, we will continue to offer clients and shareholders a product that addresses each of these areas. Clearly there is a market for investors concerned about what is in their portfolio and how it will behave if/when an adverse market event takes place.
Q: Can you talk about your recent acquisition and expansion into "bankerage"? Sure. One of Reich & Tang's core services is providing sweep solutions to broker-dealers and banks. It is clear that the appetite for FDIC insurance is growing and will play an increasingly important role in many firm's long-term product strategies. The expansion in ... January of this year [R&T purchased Double Rock Corporation's Liquid Insured Deposits] adds to our already significant presence in the FDIC sweep space and has strategically positioned us to further penetrate the expanded FDIC-insured market.
As customer demand for FDIC insurance continues to grow, we are very well-positioned to help both BDs and bankers attract new business, better compete, and provide a valuable service to their customers. The ability for a community bank or a broker-dealer to offer each of their customers millions of dollars in FDIC insurance through one account is a distinct competitive advantage -- one that attracts coveted HNW customers, business accounts, and municipal accounts, to name a few. Beyond that, it gives investors choice. We are pleased to be able to provide both FDIC-insured solutions as well as money market fund options to all investors.
Q: Can money funds coexist with FDIC-insured sweep products? They can and they do right now. The cash space is not unlike many other asset classes -- investors will go where they perceive the value to be, or where it meets their particular needs. Some will say the value is in FDIC insurance, others will say it is in active fund management of multiple disciplines, while others still will chase rates. None of these will ever go away, and the combination of money funds and FDIC insurance will ensure that investors have a choice. The smarter providers and sponsor firms will offer both. No one product meets the needs of all investors. While Reich & Tang Insured Deposits meets the needs of investors seeking a means to protect their cash up to $2.5 million of FDIC insurance, it doesn't meet their need for tax-free income that a money fund easily provides.
