The latest issue of our flagship Money Fund Intelligence newsletter features the article, "Wells Fargo's Weaver Says Clients Still Want Yield Too," which profiles Wells Capital Management's new head of money market funds, Jeff Weaver. We reprint our Q&A below... When Dave Sylvester, the long-time head of money market funds at Wells Fargo, announced his retirement at the end of 2014, the reins were handed over to Jeff Weaver, who now wears two hats. Weaver, the head of Wells Capital Management's short-duration team, also become head of the money market fund team effective January 1, 2015. We sat down with him to get his thoughts on not just money funds, but on separate accounts and the short‐duration bond fund space. He also discussed how Wells is evaluating its money fund lineup to prepare for the upcoming rule changes.
MFI: How long have you been involved in the money fund space? Weaver: Wells Fargo has been offering money market funds for 30 years. The oldest fund is the Wells Fargo Advantage Treasury Plus Money Market Fund, which has an inception date of Oct. 1, 1985. Our funds and our talent are really the result of various mergers and acquisitions. Currently, we're the 9th largest money fund provider with more than $112 billion. As for me, I joined the firm in 1994. I started my career at Bankers Trust in 1991. For the majority of my career I have been involved in the short duration and money market space. Since 2002, I've overseen the short-duration fixed-income team at Wells Capital Management. My team specializes in managing separate accounts for corporations, municipalities, and other institutional accounts. Our clients typically have large exposures to money market funds and deposits, but they also look to separate accounts and short‐term bond funds to add diversification, customization, and yield.
There's a lot of cooperation and coordination that goes on between the short duration fixed-income team and the money market team. Matt Grimes and his group of analysts are the primary taxable credit research resource for both of these teams. In the past when Dave [Sylvester] headed up money funds, our teams were very much aligned, much like they are today. Over the years, he's been a great advisor and mentor. Today, I'm working very closely with a tremendous core of senior fund managers that includes Laurie White, Mike Bird, Jim Randazzo, Vlad Stavitskiy, and our head of short‐duration municipal credit research, Ken Anderson.
MFI: What is your biggest priority now? Weaver: Our biggest priority is -- and has always been -- our clients. We want to ensure that we are providing them with the best solutions for their liquidity management needs. We aim to offer liquidity and preservation of capital while maintaining a stable NAV. But certainly, we do all of this against the backdrop of money market reform, as the new rules are officially coming into place in October 2016. Here at Wells Fargo, we have a large team dedicated to complying with these new rules with members from operations, fund administration, IT, portfolio management, legal, compliance, and sales. From the operation side, these new rules will take a tremendous effort to implement. When looking at money fund reform through a portfolio management lens, however, the news rules won't prompt a dramatic change from what we've done before. For example, consider our government funds -- we've always complied with them being at least 99.5% invested in government securities.
MFI: Can you tell us about supply? Weaver: We are seeing a consistent lack of supply. Money fund reform is practically at odds with the increased bank regulations we have seen put into effect since the financial crisis in 2008. Money funds rely on extremely short-term funding. Yet, banks are being pressed to move away from short-term debt and to issue longer-term funding. This lack of supply is consistent when you look across each type of money fund (prime, municipal, government). For example, much of the issuance that is available to prime funds is bank originated, creating an endless supply and demand struggle. [We see this], too, in government funds. Bank funding via repurchase agreements comprises a major asset class in government money funds. Also impacting supply is the increase in demand of bills. Banks now are required to hold more high quality liquid assets (HQLA) so bank demand for bills is increasing. This all adds up to a big challenge when managing money funds today.
MFI: Will you make any lineup changes? Weaver: We remain committed to offering retail and institutional prime, government, and municipal funds -- particularly if that's what our clients want -- and we believe they do. Many of our clients are in a wait-and-see mode until that October 2016 deadline approaches. Right now, we're evaluating our product lineup. We're speaking with clients with the goal of developing product solutions that best meet their needs. Our client base is largely institutional -- 90% institutional versus 10% retail -- so that is always front of mind as we're making these changes. Once we finalize a plan of action, we will present it to our Funds' board. We will not make any announcements until the board has seen and approved those changes.
MFI: What concerns are you hearing? Weaver: When the rule changes were first announced, clients initially were quite concerned about the floating NAV. There's still some concern about how that's going to work for same day settlement and sweep type mechanisms, but not as much as before. Clients remain concerned about the capital preservation portion of a variable NAV, although we believe that they will find the NAV changes to be negligible. Lastly, our clients are now having more of a concern around fees and gates. We continue to keep them apprised of our portfolios and regulatory matters through our monthly commentary and education primers.
MFI: How have you handled fee waivers? Weaver: Fee waivers are definitely impacting us, our competitors as well, in this low interest rate environment. We've been waiving fees now for some time, yet we remain convinced that money market funds are an important investment option for our clients. We believe fee waivers to be a temporary factor which will be best solved by an increase in interest rates. Generally speaking, institutional fund yields will react more quickly to increased rates because there are a lot less waivers involved.
MFI: Are you seeing interest in "enhanced cash"? Weaver: We always advise our client to tier their liquidity management strategy. Many of our clients in the money fund space are already customers of our enhanced cash and short-term bond offerings. It certainly is a compelling time to consider other options other than money funds, and that's one of the reasons we have aligned our money market fund and short duration capabilities. In short duration fixed-income funds and separate accounts we have over $60B in assets -- about $40B of that is in separate accounts while the remainder is in ultrashort and short‐term bond funds.
In the ultra‐short space, we have four differentiated offerings -- the Adjustable Rate Government Fund, the Ultra Short-Term Income Fund, the Ultra Short-Term Municipal Income Fund, and the one we get really excited about is our Conservative Income Fund. We feel like it is a natural extension for money fund customers. We launched the Conservative Income Fund in 2013, and utilized the separate account team's track record. The fund has a one-year maximum average duration, and a limit of 3 1/2 years' duration for any one security. Securities purchased are limited to an A-rating or better and are diversified between money market securities, governments, corporate bonds, and asset-backed securities. The fund was designed to look a lot like the institutional investment policies that we've become quite accustomed to seeing over the past three decades. We think that the Conservative Income Fund is a low volatility NAV option, and an extension beyond the money market fund universe that allows clients to pick up additional yield. It can perhaps be a solution for the next step beyond money market funds.
MFI: Tell us about separate accounts. Weaver: The benefits of using separate accounts are that you can get beyond the money market universe and pick up additional yield, but also you have the ability to customize to your preferences and cash flows. We can customize a separate account to reflect each customer's unique return objectives, risk tolerance, biases, and cash flow needs. We manage separate accounts that range from money market fund-like accounts out to benchmarks that are in the one-to-five-year range ... to pick up the additional yield.
We refer to separate accounts just beyond money market funds as "enhanced cash." They tend to have portfolio durations less than one year and keep their maturities at three years or less. They tend to be invested in single-A or better credits although increasingly we've seen clients willing to go lower in credit quality. That's why we created the Conservative Income Fund; it's representative of those enhanced cash separate accounts. We also offer products in the limited duration space. These tend to have durations right around the two‐year mark. We have many variations of these in the separate account side, in addition to our short‐term fund offerings, the Short‐Duration Government Bond, Short‐Term Bond, and Short‐Term Municipal Bond funds.
MFI: Are you launching any new products? Weaver: We're certainly aware of the 60‐day [maximum maturity] money fund option. We have not ruled out anything. We'll certainly consider it. If we feel like that is what is going to help our clients the most, then we will look to pursue it. However, we do get concerned about supply, and wonder if the 60-day fund is going to offer the yield that clients want given the supply/demand dynamics we just discussed. In the end, clients want liquidity, they want capital preservation, but they want yield as well. That's why you haven't seen a shift away from prime funds yet, because for the time being they can continue to earn the additional yield in institutional prime funds.
MFI: What is your outlook for rates? Weaver: We expect the Fed to raise rates this year albeit at a slower pace than we've been accustomed to seeing in previous tightening cycles. The March FOMC meeting, despite the removal of "patient," had a very dovish tone to the comments and perhaps that pushes off the first increase to later in the year. Now, the increased demand for government securities -- not only from a shift from prime to government, but also from banks with their increased HQLA holdings -- could cause the spread between prime and government to increase. Where we are today with government vs. prime, it's only a modest pickup in yield. But it's quite possible that in the future we could see spreads of 25, 40, or even 50 basis points. All of a sudden, it becomes a much different decision for our clients and, at that point, prime funds could be quite attractive.
