What are the major money fund issues of 2014? A panel of experts explored this question in detail at Crane's 6th Annual Money Fund Symposium and some themes emerged -- uncertainty, perseverance, and optimism. "If you had told me 6 years ago that we'd still have $2.6 trillion sitting in money market funds in 2014 at the rates that we've had, I would certainly not have predicted that," said panelist Charlie Cardona, president of Dreyfus Corp. and CEO of BNY Mellon Cash Investment Strategies. "I think it's an immensely strong testament to all the things that people like about money market funds." Cardona sat on the panel alongside Andrew Linton, executive director, J.P. Morgan Asset Management, and Matt Steinaway, senior managing director, State Street Global Advisors. The session, called "Major Money Fund Issues 2014" was moderated by Roger Merritt, managing director, Fitch Ratings.
One of the big issues discussed was the yield environment. "It goes without saying that the environment remains challenging for yield," said Steinaway. "We have seen a broad range of regulations that have impacted our markets, everything from Basel III to Dodd-Frank to the pending 2a-7 regulations. There has clearly been a storm of regulations that have come into play and impacted our ability to access collateral. It is more on the issuer side where we are seeing most of our challenges. As we look across the landscape at opportunities to invest on our clients behalf, we are increasingly restrained as all of our counterparties one by one start to comply with some of the new rules that are in place. What we were hoping perhaps was more of a '15 or '16 event, has clearly become more of a '14 event. We're starting to see significant impact on our ability to access supply on the front end."
"On the repo side, we are also seeing the same impact with tri-party reform. Tri-party reform, the Federal Reserve initiative to reduce risk in that system, has also had the effect of lowering the amount of repo outstanding and changed the mix of repo outstanding. What was largely a liquidity product is evolving slowly to become more of a yield product where we are seeing more unique structures and more unique collateral types. We do think that is a good opportunity set, however it does detract from our ability to source liquidity product for our clients."
On the topic of fee waivers, Cardona said: "We all define our time in the business as pre-2008 and post-2008 and I look back fondly on pre-2008 because clearly we have all been under significant stress due to interest rates and regulatory assault. Fee waivers are a fact of life that we've all lived with for 6 years now. It's painful for us as an advisor, it's painful for our distribution partners to share in the waivers, and it's very painful for savers, those that save and manage finances prudently who can earn nothing on their cash and are forced to take on risk to earn any yield."
"We certainly waive as much if not more in fees than we keep today. But the business remains profitable, everybody is sharing in the pain. But we have a long-term commitment, as does many of my colleagues in the industry. The longer it goes on, the more determined we are to ride it out and see it through. Hopefully, a year from now we're in a better space. I don't think the model is broken -- it is severely challenged, but it is not broken. There is always going to be cash to manage, the way we do it today may look different from the way we do it tomorrow, depending upon the outcome of reform. But we certainly are committed to riding out the environment. The worst days are hopefully behind us and the better days are coming."
Linton shared his thoughts on the growing interest in separate accounts. "We have a separate account business that has seen over the past 5 years significant inflows. It is very customizable to clients guidelines where we can look at their liquidity needs, their credit requirements, how much risk they are willing to accept and customize a portfolio for them." Linton added: "Clients are really getting more focused on how much liquidity they actually have to have and how to segment out their cash into what needs to be liquid and what needs to go to a separate account where they can customize the guidelines, get as much yield out of that money that needs to be less liquid. That's the big trend we have seen from our clients over the past couple of years."
Steinaway talked about risk clients appetite for risk. "I don't think that many of our clients are looking for us to take inordinate risk to generate yield in portfolios. We live in this very weird world where there are clients who are very happy generating zero percent returns in their funds, so we have had inflows in a range of products and continue to take inflows. As one of our clients said, I wouldn't be in cash if I didn't need to be. So the balances that we see are stable balances. Not necessarily strategic allocations, but a core fundamental balance of cash."
Cardona added: "With respect to portfolios, we've all been homogenized a bit more under the 2010 reforms, which I think have been good and meaningful for the industry as far as mandating liquidity levels, weighted average life, and shorter weighted average maturities. There really isn't much of a premium that we see at this point to go out very long in our funds."
On pending reforms, Linton said: "I can't wait for them to come out -- let's get it over with. The SEC itself said it’s like being 10 months pregnant and I kind of agree with them." Regarding reforms, Cardona said, "We're an advocate of choice among those options. Let the buyer decide if they want a fluctuating NAV product. We can certainly structure it, but it would need to be accompanied with tax relief. We do believe there is a portion of our client base that would use a product like that. There are others that would not and would be more a proponent of a stable NAV product and, with a better understanding of how fees and gates might work, would probably be more amendable to using that type of product. But clients are just plain weary of the conversations, and it's been going on so long that we're all just anxious to get closure to it."
Finally, the panelists were asked to take out their crystal balls and predict what the money fund industry will look like in 5 or 10 years. "I'm an optimist by nature," said Steinaway. "I think the industry is healthy and is growing. We've proved over the last several years with low rates that there is a fundamental need for the services that money markets provide. There may be fundamental challenges in how we meet our investors demand and they may have to think about the risk they take and how they structure portfolios, how they use guidelines, how they use ratings, and how much liquidity they need. But fundamentally, the service that they need, we provide. As rates rise, innovation re-enters the marketplace. When we get some yield, I can assure you there will be a lot more innovation from the street."
Added Linton: "This industry is full of very intelligent, innovative people. No matter what the regulations throw at us, we will find a way to serve our clients." Concluded Cardona: "I'm very proud of to be part of an industry that has always approached this business with a tremendous degree of integrity and fiduciary capacity. There is going to be cash to manage -- whether it's for retail individuals or institutions, and having lived through and survived what we've been through, I too am an optimist. Regardless of how we may need to restructure and retool it, it may look a little different. But you will be here for Peter Crane's 10th, 15th and 20th annual conference."
