In the May edition of our Money Fund Intelligence, we profile Dave Fishman, Head of Liquidity Solutions at Goldman Sachs Asset Management. Fishman discusses GSAM's reform plans, its fund lineup, and the industry shift from Prime to Government. Says Fishman on their recent growth, "For the past several years we've been investing in our business, and we've been staying in front of clients, working to educate them on the coming regulatory reforms and their investment options. I think clients have responded, and our growth is simply the result of staying in front of people and investing in a business we believe in." (We reprint our latest MFI interview below.)
MFI: Tell us about GSAM's history. Fishman: Goldman Sachs got into the business in 1981 when we were asked to take over two retail money market funds from another manager. We started building an asset management business around that and formed GSAM in 1988. We are currently celebrating our 35th year with approximately $280B in money market fund assets and over $1 trillion in asset under management in GSAM. I began here as a portfolio manager in 1997 and became co-head of the money markets business in 2001.
Over the years, we have continued to evolve along with our clients. We merged our short duration and money markets businesses in 2008 to improve our ability to provide clients with a holistic approach to managing liquidity. We are going through a similar evolution today and that is why we recently rebranded our business as Liquidity Solutions. Our goal is to help clients solve for this changing environment.
MFI: What is your biggest priority? Fishman: Our biggest priority is meeting or exceeding our clients' needs. Obviously, money fund reform has made that a bigger job compared to the past. Reform is creating significant change in a product that was basically unchanged for 40 years and has offered many features and functions that people came to rely on. So our priority is to make sure we offer the right mix of products to meet clients' needs. With this in mind, we have made some significant changes to our product lineup over the last two years, which we think set us up well for October of this year when we'll implement the final changes.
MFI: Can you recap these changes? Fishman: In the past two years, we have added four new funds: an ultra-short duration bond fund, a retail prime fund, a retail tax-exempt fund and a new Treasury fund that invests in US Treasuries and Fed repo. Our government lineup is something that we've been very proud of. As the market is changing, there's been more demand for Government funds, which are going to continue to offer the features that people were most comfortable with in money funds. Our expectation has been that the government complexes are going to grow. Currently, the Government fund sector is larger than Prime funds, so we've tweaked our government lineup to offer more variety.
MFI: What are your big challenges? Fishman: We have three dynamics that are all happening at the same time and interacting with each other. One is global monetary policy. The combination of massive quantitative easing and policy rates that are negative or at extremely low levels creates a challenging environment for generating attractive returns for liquidity investors. Second, the introduction of Basel III and banking regulation has incentivized banks to shed deposits. Third, US money fund reform is top of mind right now and we are trying to get our clients comfortable with the coming changes.
We've spent the past two years urging clients to think about this in advance and not wait until the last minute. We don't think this is a situation where investors should come in after Labor Day and say, 'Money fund reform is happening in the next month.... What should we do?' It's something that needs a lot of thought and effort, especially if you want to actually end up in a place where you want to be. All of these dynamics are working, in effect, at cross purposes ... and that creates a big challenge for the market.... This is where we have been partnering with clients and providing education and direction.
MFI: Are you shortening maturities? Fishman: Broadly speaking, our view that money is in motion within the money market universe leaves us biased to be a little bit shorter duration in prime funds and a little bit longer duration in government funds. Given the challenging dynamics we just discussed, we expect to see money go from prime funds to government funds. Right now, there is about $1.2 trillion left in prime funds. We think we could see half of that, or about $600 billion, move to government funds. If [this happens] that is going to create a strain on Prime funds because they will need to have liquidity to meet redemptions. On the other hand, we think government funds are going to struggle to get those assets invested.
MFI: How about Government supply? Fishman: There is a constant hunt for supply in government securities. Money market demand is strong as investors shift to government funds, and regulatory changes like Basel III require banks to hold a large amount of high quality liquid assets (HQLA). So we're competing for those assets with banks as we look to put them into our government funds. We're obviously pleased that the Fed RRP continues to offer large amounts of supply -- up to $2 trillion -- so that continues to give us confidence that we'll be able to accept inflows throughout the reform transition period.
MFI: What are customers' concerns? Fishman: Based on our conversations, customers seem most concerned about the potential fees and gates that will be a feature of prime funds under the new rules. Those seem to be a larger concern than the variable NAV. Those concerns are among the main reasons we think assets are likely to move over to government funds as we get closer to October. But we haven't seen a massive shift yet. I think investors are waiting because they can pick up about 20 bps by staying in prime funds. That's attractive enough for people to stay put for the time being.
MFI: What about the new disclosures? Fishman: There's no doubt that it's a changing process, and the businesses is much more expensive to be in because you need to do things that you never had to do before. From our standpoint, we started disclosing long before the April 14 deadline. Transparency is good for clients, and it's a big part of our philosophy. We're happy to let clients know where we are, and we think the quality of the portfolio stands on its own. We're pleased that it's now become the standard. We weren't the only ones who were disclosing prior to the April deadline, but we think standardization will now give the market a lot more confidence in being able to see what's going on. In 2008, you saw industry-wide Prime fund outflows because people didn't know what was in each fund. So I think transparency can give the industry a little more stability when the next crisis hits.
MFI: What about alternatives? Fishman: If we're talking about liquidity alternatives, we are seeing more interest in the short duration and separately managed account business -- a business we have been involved in for 20 years. It's always been a solid business, but it was overshadowed by money market funds. Money funds have been much more popular because of their features -- stable NAV, T+0 settlement -- and that carried a big advantage over the short duration space. Short duration has been more popular among investors who understood that taking a little bit more risk should get them higher expected return. Now we're seeing the emergence of funds that are even shorter than a typical short duration fund, but longer than a money fund.
This is a new category that is somewhere in between money market and short duration funds. A few years ago, we launched a product that has a very short duration, the GS Limited Maturity Obligations Fund, knowing that regulation may make prime funds less attractive. It's been building a track record for when regulation hits. Then, people will be able to examine it and see that there's very little movement in the NAV and it's provided a return that's north of money funds. But it is going to take people awhile. However, we are seeing some clients who have gone into separately managed accounts that are shorter than what we've seen historically, but typically longer than a money fund, in order to look for an alternative where they will not have to worry about a liquidity fee or a gate.
MFI: What about Private funds? Fishman: We look at everything, but we believe the fund lineup we have now is the right one. We're constantly talking with clients and looking at what's in the marketplace, and we are always willing to expand our product lineup where there is client demand.
MFI: What is your outlook? Fishman: We are very bullish on the money fund industry. We've been picking up assets while the industry is fairly flat. We're optimistic that the industry will pick up money. There's a lot of cash in the system, and there's a lot of demand for high-quality, short investments. When you look 3 to 5 years out, Prime funds will be a very viable alternative. Prime funds are likely to shrink in the near-term, but we absolutely think prime money funds will survive. Clients are going to need time to look at how NAVs move through a full cycle and to see that liquidity fees and gates are not being dropped frequently. Once people get some history, they'll be able to better evaluate the risks and returns. At that stage, I think there will be people who determine that the extra yield that you can pick up in a prime fund is in fact worth it. So, while prime survives, I think it gets smaller.... But I think all money funds have a bright future.
