Below, we reprint from our most recent MFI monthly fund "profile". Crane Data sat down with Lu Ann Katz, Head of Global Liquidity at Invesco, the 13th largest U.S. money fund manager with $67 billion in assets (as of 10/31/14). She spoke about money fund reforms, the company's veteran 60‐day maturity money fund, new fund launches, global and European issues, and the space beyond money market funds. Our interview -- which originally appeared in the November issue of Money Fund Intelligence -- follows.
MFI: How long has Invesco been involved in money funds? Katz: We have deep roots in this industry and launched our first money market fund in 1980. That portfolio is called the Invesco STIC Prime Portfolio [previously AIM STIC Prime] and was launched as an institutionally priced product with a 60‐day maximum maturity. Invesco STIC Prime is still in existence today [and maintains its 60‐day maturity limit]. We have nearly 35 years managing prime, U.S. Treasury, government, and municipal funds, as well as separately managed accounts. We also manage offshore assets in multiple currencies.
MFI: What is your background? Katz: I came to Invesco in 1992 as a senior analyst after having worked in research and commercial banking. I've been in portfolio management and research for 35 years. I have primarily worked in the U.S., but did spend four years in London overseeing our global investment grade research efforts as well as our offshore fixed income products. In late 2012, I began overseeing what was then our Cash Management business. We have since changed our name to Invesco Global Liquidity as we saw the changing environment and our investor's desire for more comprehensive liquidity management solutions.
Additionally, we experienced demand for longer maturity portfolios in Europe as well as in the U.S., so we really felt the market was beginning to move in that direction. We also saw liquidity management going more global -- the disintermediation of money across boundaries. So we brought together all of Invesco's money fund businesses except for certain joint ventures. Invesco currently manages money funds in nine currencies, including three renminbi money funds in China and rupee money funds in India through our joint ventures. We've expanded our product line up to include private placements as well as SMAs, retail, and institutional. People view us as institutional, but we manage across an array of asset classes, currencies, and product types.
MFI: What are your biggest priorities? Katz: The biggest priority, despite many outside regulatory distractions, has always been and will continue to be our fiduciary responsibility to investors. Our mantra is 'safety, liquidity and yield', in that order, so credit risk and portfolio structure are really important to us on the safety side. Our conservative investment philosophy was validated during the financial crisis in 2007 and 2008. We honored all redemptions, we never had any securities downgraded, so our conservative approach really paid off.
MFI: Are you working on anything new? Katz: As it is with all money market managers in the U.S., our major focus right now is preparing for implementation of money market fund reform which was announced in July. In preparation for these changes, several years ago Invesco established a cross‐functional committee of over 50 people to deal with implementing money market reform on a global basis.... We are well prepared for the changes as a result of all that pre-work we did. We also created a world class fixed income investment hub in Atlanta. Our fixed income business is about 30% of Invesco's assets, and Global Liquidity is about 10% of Invesco's total assets. Our objective was to create new solutions together in the common location, and that's already borne fruit. We really feel it's a better way to serve our investors because we can leverage all of our resources across maturities, sectors, and currencies. By bringing a majority of Invesco's fixed income professionals together in a core location, our team members engage more often, exchange ideas, and share best practices.
MFI: What are your key challenges? Katz: Clearly, regulations are an issue, across the board, for asset managers as well as banks. With Basel III rules coming into play in 2015, banks are shrinking their balance sheets which will impact money markets. Many money market funds already have heavy concentrations in financial institutions, so making sure we have diversified counterparties while maintaining liquidity is clearly one of the challenges we're all going to face.
MFI: Does it help being a mid‐tier player? Can you do things that the giants can't? Katz: We actually consider ourselves as a major player as we have consistently ranked in the top 15 money fund managers. We provide scale and diversification for our counterparties. Our relationships with the top dealers are longstanding and they often want us to be available to provide funding to them. For investors, Invesco offers a long history focused on safety, liquidity, and yield. Our senior team has been together for more than twenty years. I think that positioning is quite good for Invesco as we move forward into this new world of liquidity constraints.
MFI: What are the issues/concerns that you hear from customers? Katz: I think the biggest concern for investors is low yields and how much longer are we going to have them. We're actively watching the Fed, we speak with investors as much as possible, but the likely probability is that rates are going to be lower for longer. In response to low money market yields, we introduced the Invesco Conservative Income Fund in July, which is a conservative ultra-short bond fund. It has about a half year duration, which should keep volatility relatively low compared to short‐term bond fund alternatives. We're starting to see interest in that fund. We basically employed a multi-sector allocation that included money market securities, investment grade credit, and asset-backed securities. This is what I was talking about in terms of our location -- we work jointly with our teams that manage investment grade and structured securities to leverage idea generation and trading opportunities. For investors, the Conservative Income Fund fills the void between money market funds and short‐term bond funds.
MFI: What impact have fee waivers had? Katz: Fee waivers are definitely impacting asset managers and intermediaries. Global Liquidity is a major business for Invesco and we consider this just part of the cycle, albeit a longer cycle, that you would normally go through in the business. It's just a fact of life that we have adapted to and live with today.
MFI: What are your thoughts on the SEC reforms? Katz: The fact that it was a 3‐2 vote is evidence of disagreement, or at least lack of consensus on what should or shouldn't have been done. However, the outcome wasn't any more stringent than we had expected. We were pleased that the industry preserved CNAV funds in the retail and Treasury and government space. We also worked jointly with other asset managers to encourage the SEC to use the natural person definition for retail, so we're really pleased that they did. Can we live with the new rules? Absolutely. We have been through reform before and we are taking these changes no differently. We plan to be consistent with our best practices to adapt current products to new regulation while providing new solutions to meet changing demand across all of the asset classes.
MFI: How are your funds positioned for the reforms? Katz: We have existing Treasury and Agency funds and expect to see demand in those products over time, but have not yet seen movement -- investors are sitting tight. Also, we believe our Invesco STIC Prime Fund, which has a 60‐day maximum maturity and a long, long track record, is perfectly positioned in the market. Invesco STIC Prime is priced at amortized cost so it will trade at $1 yet will be acknowledged as a VNAV fund. The volatility is, as you can imagine, extremely low. While other fund complexes are rushing to establish similar funds, we don't have to go to the SEC to move that forward, and we see this fund as a real feather in the cap of Invesco's product lineup.
MFI: What is your outlook for regulations in Europe? Katz: We are actively working with the ICI, with IMMFA, speaking to members of Parliament, attaches, and council members on the pros and cons. We support actively the continuance of CNAV. We have no problem with fees and gates, or not allowing money market funds to be rated, and we have no problem with requirements that we do our own credit research. But the fact that more recently they've raised the issue of capital, is very disturbing -- for a number of reasons. It's going to potentially cause disintermediation of money out of European money funds and we just think there's a more practical way to move the business forward. We think they should work to harmonize global policies in the U.S. and Europe. Out of our London office, Invesco has two VNAV reserve funds that we manage more like CNAV money funds. We could probably see a change in those funds at some point.
MFI: What is your outlook for the coming year? Katz: We are watching the Fed, we are watching the ECB, we are watching what's happening in all markets. While it has been difficult to peg a lift off date for the Fed, we believe we are getting closer to that point in time. However, we still think we're probably going to be lower for a little longer. Rates will be going up at some point and we'll be prepared for that, and we'll be delighted when rates do go up, as will our investors. In Europe, negative rates have really had an impact on investor flows and the maturity selection of managers. This is likely to continue into 2015.
MFI: How do you view the money fund business long‐term? Katz: You hear these Draconian comments about what's going to happen to money market funds, but we believe the market is going to need money market funds. You are going to need liquidity products, because there's always going to be demand for managing cash -- even more so now because of bank regulation and the immense amount of cash out there. Banks are likely to limit their deposits, so the money has to go somewhere. This business is very important because it's an established and proven business for Invesco. We are definitely committed as also evidenced by our name, Invesco Global Liquidity. We think of liquidity management on a global scale. From retail investors across countries to multinational corporations with multiple currency and strategy needs, this is where the market is moving. It's definitely a core business for Invesco.
