A trio of money market fund portfolio managers shared their thoughts on what they're buying (and not buying), the impact of pending regulations, and the effect of rating agency rules during a lively and informative panel discussion at the 6th Annual Crane Money Fund Symposium in Boston (June 23-25). "Senior Portfolio Managers Perspectives," moderated by Joel Friedman of Standard & Poor's Ratings, featured comments from Rich Mejzak, co-head of portfolio management at BlackRock, Rob Sabatino, MD at UBS Global Asset Management, and John Tobin, MD at J.P. Morgan Asset Management. (Note: The full conference binder, session recordings and Powerpoints from last week's Money Fund Symposium are available to Attendees and Subscribers here and via our "Content" center.)
One hot topic during the 50-minute session was on how pending money market reforms impact the job of portfolio manager. "We've all become experts in the regulatory environment, spending a lot of time talking to different officials, discussing it within our organization and ultimately, where the product is going to migrate towards," said Sabatino. "It seems like clients as well as us in the industry just want to get it over with. We've been talking about this for so many years, we just want to know what our fate is going to look like. Several months ago we thought we were getting closer to a resolution, but now it seems there is really no magic bullet. Unfortunately we're not going to have an answer in the next several months, it seems."
Added Mejzak: "Regarding the increase in the reporting requirements and the increased transparency, while many of the reports that are required now are automated internally via our systems, they still need to get reviewed. Our entire team spends a lot off time reviewing the reports that go out."
Sabatino said the reforms will likely be different from the 2010 regulations. "It's not just about safeguarding the industry as it was in 2010. Now they are really looking at changing the product, and with that comes a lot of spillover impact, not only for us managing the products, but for the investors and the issuers in the space. There's really no silver bullet. If you really want to strengthen the product, it needs to be a process that safeguards the products and looks out for the investors rather than just takes away the options for investors -- that's really where it seems like regulations are headed."
When reforms do occur, Mejzak expects to see money move from prime funds to government funds. "Initially, I think they are waiting until: one, the Fed repo facility gets to the capacity they want it to get to; and, two, short term rates are at least stabilized or trending higher so the market can absorb the demand for the government product that would be anticipated by such a shift. They don't want this to be disruptive. Until the market demonstrates that it's able to absorb that shift, I don't expect them to do anything as far as the regulations goes."
Another discussion centered on what the portfolio managers are buying and avoiding. "One of the things that been a good story is the improvement in bank quality over the last 6 months to a year," said Tobin. "That's had an impact on our approved list. Names that we were only buying out to 3 [months], we're now buying out to 6 [months] and 1 year. That allows us to buy floating rate product. We like to have 25% of our fund in floating. It was virtually impossible to do when we had names approved after 3 months. So given the improvement in our approved list, we've been adding 1 year. In terms of what we haven't bought, we haven't played in the Treasury floater yet. It looked expensive in the last two go-rounds."
Tobin added: "Certainly, the Fed having the reverse repo facility has helped a lot, and you can see that given the utilization. The Treasury and agency funds are super-reliant on it. It's also a key strategy for us -- we're big players in the space."
Mejzak offered his thoughts on repos. "Clearly, the market is migrating towards more alternative collateral and longer term structures, away from the GC and the overnight structure. We're a big player in alternative repo, specifically in our securities lending portfolio, where we're finding it one of the few places we can generate any alpha right now. We deem it to be one of the best opportunities in the marketplace right now. We recognize where the market is going -- it's going longer in structure and certainly much more towards the alternative collateral. It's a place where we intend to remain very active."
The panelists also commented on challenges related to credit ratings. "The banks have done a phenomenal job of terming out their liabilities. But I think there's another stress that's lying on top of that -- it relates to rated funds," said Tobin. "If you think about how each of the agencies approaches their ratings -- two use more of a threshold approach, and one uses more of an analytical framework, where they are assessing the credit piece and the liquidity piece in a stress scenario. That particular one [Moody's] becomes very painful as you try and add mid- to high-single A names at 3 months or longer. I think issuers are probably hearing push-back that we're full to your name because you're a mid- to high- single-A, and we really need double-A names in order to hold the triple-A rating. That's been an added stress on top of the limited supply that we find in the marketplace."
Added Sabatino: "That's going to be a huge challenge for our industry. The rating agencies as a whole need to look at their practices, reassess some of the criteria, and hopefully we'll have an active dialogue with them to ensure that we can continue to hold these ratings. The fact is, we feel from a research perspective that many of these credits have improved dramatically. Their balance sheets look better, [and] profitability, while stressed in some areas, continues to remain robust. From a credit standpoint, we're more confident. Yet from a rating agency standpoint they are lower rated. We're at a point where it's going to be hard to find the double-A bank credits, and the space is going to migrate to triple-B plus. `That's going to be an issue for money market funds in general."
Mejzak commented on new products, "Over the last 12 to 18 months, anticipating money fund reform at some point, we have launched 3 short duration floating NAV products to fill out our entire product set in the cash space and at the same time, [and to] offer an opportunity for additional yield in this environment. Then last December we launched the cash ETF. We just realized that cash as an asset class is going to be different -- how different and what it will look like we can guess. But we don't know, and we think it's important to have a full array of products that can satisfy our investor base."
Sabatino added: We really don't know which product is going to be the one that's going to take off because we don't know what the environment is going to look like. Many investors want to know what their options are. They like money market funds, they still like the stable NAV. Regardless of the low rate environment, you see the assets continue to stay in stable NAV money market funds. The fact is, money funds will still be around for quite some time as we know them currently, and there will be a transition period for all of us to figure out what the mousetrap will look like."
