This month, Crane Data's flagship newsletter, Money Fund Intelligence, profiles the leaders of the money fund team at UBS Asset Management, Joe Abed, Global Head of Distribution for Liquidity Management, and Rob Sabatino, Global Head of Liquidity Portfolio Management. They discuss how UBS is tackling the changing money fund environment, expanding its fund offerings and increasing its resources. Says Abed, "We're not just committed to the liquidity business, we're growing both our fund family and our distribution and investment team globally." (Note: The following article is reprinted from our March MFI. Contact us to request the latest issue or more info.)
MFI: How long has UBS been involved in the money market fund business? Abed: UBS Asset Management has been managing cash and liquidity assets for almost forty years. We launched our first money market fund in 1978 in the U.S. and 1988 in Europe. Over the years we have significantly expanded the money market fund platform. Our fund menu was initially created to serve clients of our wealth management business and then expanded further to serve institutional investors.
MFI: What is your top priority right now? Abed: [It is] assuring that our menu of offerings continues to meet the needs of our clients -- both in the U.S., with the changes in money market fund regulations, and globally, to serve the liquidity needs of our clients around the world.... And we're adjusting other funds to ensure we continue to serve all of our clients. Outside the U.S. we have an equally long history in the money fund business.... Last year we expanded our fund range, launching additional CNAV, short term money market funds in Euro and Sterling to sit alongside our existing short term US Dollar money market fund. We see a significant opportunity to grow our business outside the U.S., and under the leadership of James Finch, we will continue to expand our liquidity distribution team in Europe.
MFI: Can you tell us about recent lineup changes as a result of new US regulations? Abed: We announced a series of changes at the end of January, and we're going to have further changes ahead. Like many others in the industry, we are having to segregate the two types of clients, natural and non-natural.... We recently launched a family of prime retail money market funds with a CNAV structure, which are now available to natural persons. Likewise on the tax-exempt side, we'll be moving non-natural persons out of our Select Tax Free Funds to allow the funds to qualify as 'retail money market funds' [and] to use CNAV. Our Treasury and Government funds will continue to be CNAV without contingent gates or fees, and we're launching a new government master fund, with feeder funds, which will be available to all investors later this year. Our goal is to ensure that a complete product offering is available for investors once the reform-related changes are complete.
MFI: What's your biggest challenge in managing cash today? Sabatino: Low interest rates continue to be a challenge. Despite some relief in the U.S. with the rate hike at the December FOMC meeting, clients are still faced with near zero to negative rates across the globe. At the same time, regulation has created a difficult environment for liquidity. Dealers have limited balance sheets and banks are reluctant to print the very short dated securities we desire. This will become increasingly difficult as we get closer to final implementation of 2a-7 reforms in October. Uncertainty surrounding investor demand for prime vs. government funds will ultimately require prime funds to maintain higher levels of liquidity, resulting in an even more significant supply/demand imbalance. In Europe, the level of uncertainty is even greater due to the fact that regulatory change to money market funds has not yet been determined.
MFI: How are you positioning your portfolios for this market? Sabatino: We continue to focus heavily on maintaining large levels of liquidity given market uncertainty and general risk-off sentiment globally. This, coupled with reduced ability for counterparties to provide bids, requires us to have a more conservative maturity profile. In the U.S., much of our attention is on the evolving product lineup and positioning of our funds for these changes. The majority of the purchases in our prime fund remain inside of six months due to the potential for outflows later this year. We continue to be buyers of bank-sponsored ABCP, especially given the conduits' willingness to print short-dated maturities. We also like some of the floating rate put/call structures due to the yield pickup [and] the ability to limit the maturity exposure. We have avoided Chinese credits and are becoming more cautious on Japanese banks due to the potential impact of negative rates on profitability and their large reliance on wholesale funding. Also, we are large users of the Fed's Reverse Repo facility.
MFI: What about customer concerns? Abed: Certainly the low yields in the U.S., and in Europe the negative yields, are a major concern. The search for yield without taking undue risk is definitely a challenge that most clients are wrestling with. On top of that, regulatory uncertainty in the money market fund space is also causing some concern. Institutional clients are assessing whether they can get comfortable with the floating NAV and contingent fees and gates, and whether the spread differentials on prime vs. treasury and government funds are worth it. Some are assessing whether, if they are going to be in a floating NAV anyway, they should go out the curve to an ultra-short bond strategy, or even further.
MFI: Have you seen fee waiver relief? Abed: Fee waivers have certainly had a big impact on our business. The December Fed move absolutely helped and was very much welcomed, but the benefit of that hasn't been uniform. There are areas where we still have waivers in place. If you look at the tax exempt money market space, those rates really haven't moved much from near zero levels. In Europe where we see negative yields, waivers continue to be an issue.
MFI: Are you planning more changes? How do you think flows will react? Sabatino: Yes there are still more changes to the product lineup on the horizon, some of which will be based on client demand. While most of the focus has been on institutional investor sentiment, it's important to keep in mind that the "Insti-vidual" investor, who might remain eligible for CNAV prime funds, will also contribute to potential outflows from the institutional prime money market space. Investors potentially will face concentration issues as the size of some prime funds decline. There's quite a bit of uncertainty around asset flows ... we'll continue to see that evolve.
Abed: As the spread between government and prime funds widens, and as investors see the negligible volatility that to date that has existed on prime funds, I think they will get comfortable and start to come back to prime funds. But that's more likely to happen in 2017 and beyond, so I think it'll be somewhat of a "U" shape in terms of prime balances.
MFI: Do you offer alternatives to MMFs? Abed: We have a menu of short duration strategies -- both taxable and tax exempt. In the SMA space we have composites across the full menu and have seen recent growth in this space. We don't currently have an ultra-short fund, but we are evaluating and may launch one later in the year.
MFI: Will you be offering 7- or 60-day "maximum WAM" MMFs? Sabatino: We are currently evaluating them. Depending on the interest rate environment, these alternatives might look more attractive, or they may not offer enough yield to make it worth investors' time. For the most conservative investor, who likely has a large allocation to government funds, I'm not sure how much additional yield will be needed to take on the added risk.
MFI: How bad are the negative yields in Europe? What are your plans there? Abed: Negative yields in Europe are a significant challenge, and it's clear the situation won't change, and may worsen, in the near term. While we can't impact the level, we can assist clients mitigating the impact. So we're working closely with our UBS banking colleagues across Europe to help clients separate cash into distinct tranches and provide a blend of solutions. From an opportunity perspective, this is the time when clients are looking for help from experienced managers who they can partner with to access a range of solutions across domiciles, currencies and risk/return profiles. So we're building out not just the fund menu but also our distribution and investment teams in Europe to ensure we can support this demand.
MFI: What is your outlook for MMFs? Abed: We're positive on the liquidity management business. I personally expect it's going to continue to grow long term.... [C]lients will continue to want secure and liquid ways to manage their cash.... If you look at the other big area of regulatory change, banking regulations and particularly Basel III, this will actually provide a tailwind to the money market fund industry as banks push cash off balance sheet. The basic value proposition that money funds provide investors -- diversification, convenience, safety, and liquidity -- is still valid; I think all those things will serve it well.
Sabatino: We've seen a significant amount of consolidation of fund providers in the U.S. as well as abroad. In order to be fully committed to the business and to do it successfully, you need resources. We have a large global research team and we have portfolio management teams located around the world. The pace of consolidation has clearly slowed down, and we are now left with a core group of providers who understand the need for liquidity management will persist regardless of low or negative interest rates.
