Thank you to all who attended and supported Crane's Money Fund Symposium last week in Minneapolis! (We had a record 502 attendees.) The conference binder, recordings and Powerpoints are now available to attendees and to Crane Data Subscribers at the bottom of our "Content" page. Watch for excerpts and coverage of the sessions in coming days on www.cranedata.com and in the July issue of our Money Fund Intelligence newsletter. Our next event is European Money Fund Symposium, Sept 17-18 in Dublin, our next "basic training" Money Fund University is Jan. 19-20 in Boston. Next year's Money Fund Symposium will be in Philadelphia, June 22-24, 2016. Also, in today's "News," we excerpt from our latest Bond Fund Intelligence, Crane Data's new publication focusing on the bond fund and conservative ultra-short bond fund marketplace. (Contact us to see the latest issue and our BFI XLS "complement" or to subscribe. BFI is $500 a year, or $1K including BFI XLS.)
The June issue of our new Bond Fund Intelligence newsletter features a profile of Gregory Nassour, Senior Portfolio Manager at Vanguard Investments. Nassour manages the new Vanguard Ultra Short Term Bond Fund, which launched earlier this year. Nassour tells us about the important gap that this new fund fills in the Vanguard lineup and why the space between money market funds and short term bond funds is so critical for investors in this market. As Nassour says, it's all about giving investors choices. Below, we reprint our latest BFI interview.
BFI: How long have you managed funds? Nassour: I've been with Vanguard since 1992 and I've been within the fixed income group since 1994. I'm principal and senior portfolio manager within the group. I co-head all of our actively managed investment grade corporate bond portfolios. I'm portfolio manager on the Ultra Short Term Bond Fund (along with David Van Ommeren), the Short Term Investment Grade Portfolio, the Intermediate Term Investment Grade Portfolio, and the Long Term Investment Grade Portfolio.
BFI: How have Vanguard's short term products evolved? Nassour: The oldest one we have is our Short Term Tax Exempt Portfolio which started back in 1977. On the taxable side, the Short Term Investment Grade portfolio started in October of 1982. When you look at the whole gamut, Vanguard runs a lot of short term bond portfolios. We have a Short Treasury, a Short TIPs, a Short Term Federal Portfolio, Short Term Investment Grade, a Short Term Government Bond Index Fund, a Short Index Fund, a Short Corporate Index Portfolio, and a Limited Tax Exempt Fund.
BFI: So the new Ultra Short Term Bond Fund fills a gap in the lineup? Nassour: Exactly. We have an equivalent short term tax exempt portfolio, but we did not have one on the taxable side. So this is basically to fill out our fund lineup. Our Short Term Investment Grade portfolio is right around two and a half years duration. If investors wanted to go shorter, they had to go to our money market portfolios, so we wanted to fill that gap. The Ultra Short Term Bond Fund has a one year duration and that's going to be its home. The biggest challenge right now in this space is yield; hopefully this will be short lived. It's important to point out that it's not a money fund. It has a variable rate NAV, so if rates go up, prices will go down on this particular bond fund. We've made it very clear, not only on all of the PR that we did, but to all of our clients who are considering the product that this is an extension of our bond fund lineup.
BFI: How has the fund been received? Nassour: One of the neat things about this portfolio launch has been its consistency. This fund is just under $230 million in assets right now and the cash flow has been very consistent. Overall, Vanguard is great at keeping hot money out of the portfolios. We have policies in place to make sure that doesn't happen so that we can protect the current fund holders. That's a true benefit of the portfolios here; money tends to be sticky. That's great from the shareholder standpoint and it helps us manage the portfolio much better.
BFI: What is the investment strategy? Nassour: About 25% of the portfolio will look similar to the securities we would hold in a money fund. The rest of the portfolio has around 25% in corporate bonds, 25% to 30% in asset backed securities -- mostly high quality AAA auto loans and credit cards. There will be a small amount of CMBS, mostly the triple-A enhanced tranches. So the portfolio is very conservative. It has 10% Agency bullets and about 10% Treasuries. Yes, it has some money market securities in it, but I look at it as more closely related to the Short Term Investment Grade Portfolio -- just a little bit more conservative. We know that investors want a little more yield than money market funds because money market funds are not yielding anything. At the same time they're not in a longer duration portfolio where they're worried about a rate rise.
BFI: Are there concentration limits or diversification requirements? Nassour: We are going to keep this portfolio right around the one year duration. One of the hallmarks of Vanguard is, we give you exactly what the fund says it is going to be. For example, a long term investment grade fund is never going to become an intermediate fund because rates are going to rise, the inter-mediate funds are not going to shorten up to where it becomes a short term fund, and on down the line. This fund is going to be right around one year duration. It will give shareholders some decent current income. Right now the SEC 30-day yield is 65 basis points yield to maturity. The duration is not going to fluctuate too much up or down from that one year.
We offer enough funds that we give the investors the ability to choose what they want. If you want a Treasury fund, we have short, intermediate, and long Treasury funds. If you want an investment grade fund we have short, intermediate, and long investment grade funds. We give investors choices and we stay exactly within what the portfolio says it's going to be. In terms of concentration limits, all of our investment portfolios are highly diversified. If it is a lower quality security like a triple-B, we wouldn't own more than 25 basis points exposure in the portfolio. If it's single-A, we might hold up to 50 basis points in the security, and at AAA obviously we can hold more.
BFI: Can you invest in any junk or any below investment grade? Nassour: All of our investment grade portfolios have the ability to go up to 5% in high yield securities -- this way, in case securities get downgraded by the rating agencies we're not forced sellers and we can sell when the time is right. But we do not plan on investing in the high yield sector as a strategy in [this fund] at this time. Even in our Short Term Investment Grade Portfolio we're only around 1.25% of high yield exposure. But in this fund it is currently zero.
BFI: What types of investors are using it? Nassour: We've been looking at the behavior of our investors, and we have found a lot of investors moved out of money market funds and into this particular fund. I think that's just a yield play. Yields are so low in the money market space that they wanted to get a little bit more out of their money so they moved into this fund. And that's what we thought would happen. Certainly some investors moved down from short term investment grade into this fund just to get a little bit shorter duration in case rate rises. From a shareholder perspective, if they have a long term investment plan and they're dollar cost averaging into the funds, then yes, when interest rates go up, bond fund prices will go down. But as you continue to buy, you'll be buying at yields that will be higher and higher in the portfolio and you'll be buying the fund at a slightly lower price.
BFI: What is your outlook for rates? Nassour: We believe the Fed is going to move, probably in 2015, in a more gradual pace, so we don't think it's going to be a real shock to the portfolio. We don't think it's going to be a straight line -- they'll probably pause along the way to take a look at how the economy is performing. I think this fund will actually fare pretty well in that sort of environment. As rates slowly begin to rise, we'll be able to invest in product that will have a slightly higher yield and because it will be slow, it'll be able to absorb the rate hike. What investors need right now is yield. They're not making anything on money funds, short term yields are still not exceptional, and everyone can do with a little bit more income.
BFI: Are there any lessons to be learned from past rate hike cycles, like 1994? Nassour: I think the Fed learned a lot during that period. If you get behind the curve, then you wind up with a 1994 scenario where you're just jumping too quickly, in fifty basis point increments. They don't want to do that, but they also don't want to go too slow either. We're in an economy now where inflation is not rearing its ugly head. We're not getting macro-economic data that is fantastic; we're just muddling through. The Fed is very aware of that environment, so I do believe they're keeping that front and center in terms of how they're going to proceed with the rate rise. It will be painful on the way up, but when rates normalize, it's definitely a longer term positive for investors. Investors are really feeling the pain of low yields, especially those who are either nearing retirement or in retirement. From that standpoint, a higher rate environment will certainly be better.
BFI: What is the future of ultra short bond funds in general? Nassour: One of the lessons that a lot of investors learned, especially during the crisis, is the importance of having a balanced portfolio -- money funds, bond funds, equities. So bond funds are going to be very important. In terms of the future of ultra short term bond funds, they're going to have a place because investors have different needs for their allocations.
Crane Data released its June Money Fund Portfolio Holdings Wednesday, and our latest collection of taxable money market securities, with data as of May 31, 2015, shows jumps in holdings of Other (Time Deposits), CD, Repo, and CP, and drops in holdings of Treasuries and Agencies. Money market securities held by Taxable U.S. money funds overall (those tracked by Crane Data) increased by $31.6 billion in May to $2.436 trillion, after dropping $49.3 billion in April, $19.2 billion in March, and $52.1 billion in February. Repos remained the largest portfolio segment, just ahead of CDs. Treasuries stayed in third place, followed by Commercial Paper. Agencies were fifth, followed by Other (mainly Time Deposits), then VRDNs. Money funds' European-affiliated securities represented 28.8% of holdings, down from 29.3% the previous month. Below, we review our latest Money Fund Portfolio Holdings statistics.
Among all taxable money funds, Repurchase agreements (repo) increased $10.7 billion (2.1%) to $527.5 billion, or 21.7% of assets, after decreasing $113.6 billion in April and increasing $98.7 billion in March. Certificates of Deposit (CDs) were up $10.8 billion (2.1%) to $524.1 billion, or 21.5% of assets, after rising $1.7 billion in April and dropping $37.4 billion in March. Treasury holdings decreased $4.2 billion (1.0%) to $408.8 billion, or 16.8% of assets, while Commercial Paper (CP) jumped $4.1 billion (1.1%) to $390.3 billion, or 16.0% of assets. Government Agency Debt decreased $3.2 billion (1.0%) to $331.6 billion, or 13.6% of assets. Other holdings, primarily Time Deposits, jumped $13.7 billion to $230.1 billion, or 9.4% of assets. VRDNs held by taxable funds decreased by $100 million to $23.5 billion (1.0% of assets).
Among Prime money funds, CDs still represent over one-third of holdings at 34.5% (up from 34.4% a month ago), followed by Commercial Paper at 25.7%. The CP totals are primarily Financial Company CP (15.1% of total holdings), with Asset-Backed CP making up 5.5% and Other CP (non-financial) making up 5.1%. Prime funds also hold 6.7% in Agencies (up from 6.5%), 4.2% in Treasury Debt (down from 5.0%), 4.7% in Other Instruments, and 5.8% in Other Notes. Prime money fund holdings tracked by Crane Data total $1.520 trillion (up from $1.492 trillion last month), or 62.4% of taxable money fund holdings' total of $2.436 trillion.
Government fund portfolio assets totaled $441 billion in May, the same as April, while Treasury money fund assets totaled $475 billion in May, down from $472 billion at the end of April. Government money fund portfolios were made up of 52.0% Agency Debt, 25.1% Government Agency Repo, 3.9% Treasury debt, and 18.1% in Treasury Repo. Treasury money funds were comprised of 69.1% Treasury debt, 30.1% Treasury Repo, and 0.8% in Government agency, repo and investment company shares. Government and Treasury funds combined total $916 billion, or 37.6% of all taxable money fund assets.
European-affiliated holdings rose $4.5 billion in May to $702.2 billion (among all taxable funds and including repos); their share of holdings fell to 28.8% from 29.0% the previous month. Eurozone-affiliated holdings decreased $400 million to $378.3 billion in May; they now account for 15.5% of overall taxable money fund holdings. Asia & Pacific related holdings increased by $5.3 billion to $291.4 billion (12.0% of the total). Americas related holdings increased $23.0 billion to $1.440 trillion, and now represent 59.1% of holdings.
The overall taxable fund Repo totals were made up of: Treasury Repurchase Agreements (up $20.0 billion to $273.6 billion, or 11.2% of assets), Government Agency Repurchase Agreements (down $9.2 billion to $164.8 billion, or 6.8% of total holdings), and Other Repurchase Agreements ($89.1 billion, or 3.7% of holdings, same as last month). The Commercial Paper totals were comprised of Financial Company Commercial Paper (up $2.8 billion to $228.8 billion, or 9.4% of assets), Asset Backed Commercial Paper (down $800 million to $83.8 billion, or 3.4%), and Other Commercial Paper (up $2.0 billion to $75.7 billion, or 3.2%).
The 20 largest Issuers to taxable money market funds as of May 31, 2015, include: the US Treasury ($408.8 billion, or 18.3%), Federal Home Loan Bank ($208.9B, 9.4%), Federal Reserve Bank of New York ($137.6B, 6.2%), Wells Fargo ($71.8B, 3.2%), Credit Agricole ($70.6B, 3.2%), BNP Paribas ($63.9B, 2.9%), JP Morgan ($60.4B, 2.7%), RBC ($58.8B, 2.6%), Bank of Nova Scotia ($57.4B, 2.6%), Bank of Tokyo-Mitsubishi UFJ Ltd ($55.5B, 2.5%), Bank of America ($52.2B, 2.3%), Federal Home Loan Mortgage Co. ($45.1B, 2.0%), Toronto-Dominion Bank ($43.9B, 2.0%), Natixis ($43.2B, 1.9%), Barclays PLC ($42.9B, 1.9%), Sumitomo Mitsui Banking Co ($42.3B, 1.9%), Federal Farm Credit Bank ($42.0B, 1.9%), Credit Suisse ($40.1B, 1.8%), Mizuho Corporate Bank Ltd. ($37.0B, 1.7%), DnB NOR Bank ASA, ($35.4B, 1.6%), and Bank of Montreal ($35.3B, 1.6%).
In the repo space, the Federal Reserve Bank of New York's RPP program issuance (held by MMFs) remained the largest program with $137.6B, or 26.1%, up from $106.2B a month ago. The 10 largest Fed Repo positions among MMFs on 5/31 include: JP Morgan US Govt ($16.1B), State Street Inst Lq Res ($8.5B), Morgan Stanley Inst Lq Govt ($7.7B), BlackRock Lq T-Fund ($6.4B), UBS Select Treas ($6.1B), JP Morgan US Trs Plus ($5.5B), First American Govt Oblg ($5.0B), Wells Fargo Adv Trs Plus ($4.6B), Schwab Govt MMkt ($4.2B), and Fidelity Cash Central Fund ($4.4B). The 10 largest Repo issuers (dealers) (with the amount of repo outstanding and market share among the money funds we track) include: Federal Reserve Bank of New York ($137.6B, 26.1%), Bank of America ($40.8B, 7.7%), BNP Paribas ($38.9B, 7.4%), Wells Fargo ($37.7B, 7.1%), Credit Agricole ($30.7B, 5.8%), JP Morgan ($29.5B, 5.6%), Societe Generale ($24.2B, 4.6%), Barclays PLC ($22.7B, 4.3%), Credit Suisse ($22.1B, 4.2%), and Citi ($21.1B, 4.0%).
The 10 largest issuers of "credit" -- CDs, CP and Other securities (including Time Deposits and Notes) combined -- include: Bank of Tokyo-Mitsubishi UFJ Ltd ($48.3B, 4.8%), Sumitomo Mitsui Banking Co ($42.3B, 4.2%), RBC ($41.5B, 4.1%), Bank of Nova Scotia ($40.1B, 3.9%), Credit Agricole ($39.9B, 3.9%), Toronto Dominion Bank ($37.2B, 3.7%), DnB NOR Bank ASA ($35.4B, 3.5%), Natixis ($35.3B, 3.5%), Wells Fargo ($34.0B, 3.4%), and Skandinaviska Enskilda Banken AB ($32.5B, 3.2%).
The 10 largest CD issuers include: Bank of Tokyo-Mitsubishi UFJ Ltd ($37.6B, 7.2%), Sumitomo Mitsui Banking Co ($35.2B, 6.7%), Toronto-Dominion Bank ($33.5B, 6.4%), Mizuho Corporate Bank Ltd ($30.6B, 5.9%), Bank of Montreal ($28.8B, 5.5%), Bank of Nova Scotia ($28.3B, 5.4%), Wells Fargo ($25.1B, 4.8%), RBC ($21.5B, 4.1%), Natixis ($19.2B, 3.7%), and Sumitomo Mitsui Trust Bank ($18.5B, 3.5%).
The 10 largest CP issuers (we include affiliated ABCP programs) include: JP Morgan ($22.3B, 6.8%), Commonwealth Bank of Australia ($17.2B, 5.3%), Westpac Banking Co ($17.2B, 5.3%), RBC ($15.7B, 4.8%), National Australia Bank Ltd ($12.0B, 3.7%), Lloyds TSB Bank PLC ($12.0B, 3.7%), BNP Paribas ($11.4B, 3.5%), Bank of Nova Scotia ($10.9B, 3.3%), HSBC ($10.6B, 3.3%), and Australia & New Zealand Banking Group Ltd ($9.4B, 2.9%).
The largest increases among Issuers include: Federal Reserve Bank of New York (up $31.5B to $137.6B), Skandinaviska Enskilda Banken AB (up $6.2B to $32.5B), ING Bank (up $4.1B to $27.8B), Swedbank AB (up $3.9B to $22.4B), Federal Home Loan Bank (up $3.7B to $208.9B), DnB NOR Bank ASA (up $3.4B to $35.4B), Canadian Imperial Bank of Commerce (up $3.4B to $20.6B), Goldman Sachs (up $2.8B to $14.0B), Lloyds TSB Bank PLC (up $2.8B to $25.1B), and RBC (up $2.6B to $58.8B). The largest decreases among Issuers of money market securities (including Repo) in May were shown by: Barclays PLC (down $7.6B to $42.9B), Bank of America (down $4.7B to $52.2B), Federal Home Loan Mortgage Co. (down $4.4B to $45.1B), US Treasury (down $4.2B to $408.8B), BNP Paribas (down $3.4B to $63.9B), Standard Chartered Bank (down $2.3B to $14.6B), Federal National Mortgage Association (down $2.0B to $32.2B), Citi (down $1.9B to $29.5B), Credit Mutuel (down $1.3B to $19.0B), and FMS Wertmanagement (down $900M to $8.4B).
The United States remained the largest segment of country-affiliations; it represents 49.1% of holdings, or $1.199 trillion (up $13B). France (9.9%, $240.7B) remained in second, followed by Canada (9.8%, $238.8B), and Japan (7.4%, $181.3B). The U.K. (5.1%, $124.2B) moved up to fifth, while Sweden (4.3%, $104.2B) was sixth. Australia (3.6%, $86.8B), The Netherlands (3.1%, $74.7B), Switzerland (2.5%, $60.1B), and Germany (2.0%, $49.4B) round out the top 10 among country affiliations. (Note: Crane Data attributes Treasury and Government repo to the dealer's parent country of origin, though money funds themselves "look-through" and consider these U.S. government securities. All money market securities must be U.S. dollar-denominated.)
As of May 31, 2015, Taxable money funds held 27.3% of their assets in securities maturing Overnight, and another 13.8% maturing in 2-7 days (41.1% total matures in 1-7 days). Another 22.1% matures in 8-30 days, while 12.2% matures in 31-60 days. Note that three-quarters, or 75.4% of securities, mature in 60 days or less, the dividing line for use of amortized cost accounting under the new pending SEC regulations. The next bucket, 61-90 days, holds 11.5% of taxable securities, while 10.5% matures in 91-180 days and just 2.7% matures beyond 180 days.
Crane Data's Taxable MF Portfolio Holdings (and Money Fund Portfolio Laboratory) were updated yesterday, and our MFI International "offshore" Portfolio Holdings and Tax Exempt MF Holdings will be released late this week. Visit our Content center to download files or visit our Portfolio Laboratory to access our "transparency" module. Contact us if you'd like to see a sample of our latest Portfolio Holdings Reports or our new "Holdings Reports Funds Module." The new file allows user to choose funds (pick a fund then click its ticker) and show Performance alongside Composition, Country breakout, Largest Holdings and Fund Information.
As we make final preparations for our upcoming 7th annual Crane's Money Fund Symposium, which will take place in just over 2 weeks in Minneapolis, June 24-26, we are also prepping for our 3rd Annual European Money Fund Symposium, the largest money market event in Europe. The preliminary agenda is set for this year's show, scheduled for September 17-18 in Dublin, Ireland. Read on for details, but first, if you haven't already registered for Money Fund Symposium, you can still do so via www.moneyfundsymposium.com. (For those attending, safe travels and see you in Minneapolis!)
Looking ahead, the agenda is still being tweaked for Crane's European Money Fund Symposium in Dublin, but registrations are now being accepted. Last year's event in London attracted over 100 attendees, sponsors and speakers, and we expect our return to Dublin to be even bigger and better. "European Money Fund Symposium offers European, Asian and "offshore" money market portfolio managers, investors, issuers, dealers and service providers a concentrated and affordable educational experience, as well as an excellent and informal networking venue," says Peter Crane, President, Crane Data.
"Our mission is to deliver the best possible conference content at an affordable price to money market fund professionals." EMFS will be held at the The Conrad Hilton in Dublin. Book your hotel room before Friday July 17 and receive the discounted room rate of E199 for a single and E209 for a double. Registration for our 2015 Crane's European Money Fund Symposium is $1,000. Visit www.euromfs.com to register or contact us to request the PDF brochure, for Sponsorship pricing and info, and for more details.
The EMFS agenda features sessions led by many of the leading authorities on money funds in Europe and worldwide. The Day One Agenda for Crane's European Money Fund Symposium includes: "Welcome to European Money Fund Symposium" by Peter Crane of Crane Data; a "State of MMFs in Europe & IMMFA Update" with Reyer Kooy and Susan Hindle Barone of IMMFA; "Major Issues in European Money Funds" with Jonathan Curry of HSBC Global AM, Kathleen Hughes of Goldman Sachs , and Marc Pinto of Moody's; "Euro Money Funds and Negative Yields," with David Callahan of Lombard Odier Investment Managers and Jason Granet <p:>`_, of Goldman Sachs; and "Sterling Money Funds & UK Money Market," with Jennifer Gillespie of LGIM and Dennis Gepp of Federated.
Day One also includes: "Senior Portfolio Managers Roundtable" with Joe McConnell of JP Morgan AM, Debbie Cunningham of Federated, and Paul Mueller of Invesco; "Dealer Update & Supply Discussion" with Kieran Davis of Barclays, Jean-Luc Sinniger of Citi Global Markets, and David Hynes of Northcross Capital; "Distribution Panel: New Markets & Concerns" with Jim Fuell, of JP Morgan AM and James Finch of UBS Global AM; and "Regulatory Update: European MMF Reforms" with John Hunt of Nutter McLennen & Fish, Dan Morrissey of William Fry; and Kevin Murphy, of Arthur Cox.
The Day Two Agenda includes: "Money Market Funds in Ireland" with Pat Lardner of Irish Funds Industry Association and Fearghal Woods, of Northern Trust; "French Money Market Funds and VNAV" with Thierry Darmon of Amundi, Charlotte Quiniou of Fitch Ratings, Yann Marhic of CA-CIB and Vanessa Robert of Moody's; "EFAMA MM Working Group on Regulations" with Rudolf Siebel of BVI; and, "Strategist's Update: Rates, Reform, and Supply" with Vikram Rai of Citi.
The afternoon of Day Two features: "Major Issues in US and USD Money Funds" with Charlie Cardona of BNY Mellon CIS, Greg Fayvilevich of Fitch Ratings, and Peter Crane; "Money Market Funds in Asia & Emerging Markets with Andrew Paranthoiene of Standard & Poor's and David Castle of Standard Chartered Bank; "Fund Servicing Issues and Update; and "Monitoring European & Offshore Money Funds" with Peter Rizzo of Standard & Poor's, Alastair Sewell of Fitch Ratings, and Peter Crane.
In other news, Fitch a report on the "China Asset Management Industry." Mutual fund assets have grown sharply in the past year, thanks in large part to the growth in money market funds. It says, "China's asset-management industry is expanding rapidly with the total amount handled, in the form of mutual funds and mandates, having reached CNY6.7trn (USD1.1trn) as of end-2014, 61% higher than a year ago. Fitch Ratings sees growth continuing, given the large amount of domestic savings deposits, rapid accumulation of assets and relatively low asset-management penetration compared with developed markets. Money market funds (MMF) expanded more rapidly than other classes to CNY1.3trn, driven by retail investors buying online; that helped raise China on Investment Company Institute's (ICI) large global fund domicile rankings."
Fitch continues, "Unlike the typical mutual funds' asset mix in other developing countries, equity funds dominated the market until 2012 when strong growth in MMFs changed the mutual fund landscape. MMF assets accounted for roughly 50% of the total mutual funds as of end-March 2015 (CNY2.2trn). MMFs expanded in particular as the CNY1.3trn that flowed into these funds dwarfed the gains of all the other asset classes. The rapid expansion of MMFs had started in 2H13, and has become the largest asset class, mainly driven by retail demand for e-commerce MMFs. MMF AUM increased sixfold within 18 months to CNY2.2trn as of end 2014."
Finally, it adds, "The greatest concentration by asset manager is in QDII (Qualified Domestic Institutional Investor) funds and MMFs, with Yu'E Bao alone accounting for more than 30% of the latter's assets. Yu'e Bao is managed by Tian Hong Asset Management. The top 10 largest MMF asset managers are: Tian Hong Asset Management (CNY580B), ICBC Credit Suisse (CNY184B), China AMC (CNY140B), Bank of China Investment Management (CNY107B), China Southern Fund (CNY106B), E Fund Management Co (CNY102B), Harvest Investment (CNY96B), CGB Principal AM (CNY87B), China Merchants Fund (CNY70B), and China International Fund Management (CNY69B)."
The May issue of our new Bond Fund Intelligence publication features Goldman Sachs Asset Management's John Olivo, head of GSAM's short duration strategies within the firm's Global Liquidity Management group. A GSAM veteran of nearly 20 years, John is responsible for overseeing the management of approximately $45 billion in short duration strategies. Our discussion covers the challenges of a low-yield environment, the opportunities for short duration strategies going forward, product development and more. Below, we rerun the first half of the Q&A that first appeared in the latest BFI.
BFI: How long have you been running short term bond funds? Olivo: It's been almost 25 years since we launched our first short duration mutual fund, the Short Duration Government Fund. Today, we offer a range of innovative strategies and support our clients with deep insight, robust risk management and an extensive liquidity management platform. As one of our flagship products, we believe the Short Duration Government Fund offers a very clear illustration of all these features and of the strength of our platform overall. In addition to our funds, GSAM has been running separately managed accounts (SMAs) in the short duration space for more than two decades.
BFI: Are you looking at launching new products? Olivo: GSAM continually reviews its short duration product suite. Over the years, we have adapted our offerings according to investor demand. We've also sought out product gaps which we think we can fill. In both cases, GSAM's goal has been to provide the right solutions for clients, and to strive to meet investor needs in every type of environment. For example, GSAM recently launched an ultra-short duration mutual fund in preparation for money market fund regulatory reform. That was a case where both investor demand and changes in the marketplace convinced us to act.
We also run short duration strategies which derive their primary sources of alpha in innovative ways -- for instance, from a variety of sectors, specifically corporate or securitized products, and in multiple currencies. That was a case of meeting client needs. Another example is the High Quality Floating Rate Fund. This is one of the few floating rate funds that does not take any credit risk, focusing primarily on floating rate securitized products. GSAM believes this approach will resonate with investors in a rising rate environment.
BFI: Any plans for ETFs? Olivo: ETFs have seen explosive growth, and we think they are one of the more innovative product types to come onto the scene the last couple of years. We are always watching the short duration and money market space across product types. At this point, however, we have yet to launch anything.
BFI: What is the biggest challenge for short duration funds today? Olivo: Achieving yield continues to be the major challenge. As you know, today's low interest rate environment is a persistent, pervasive feature of the market. Short duration mutual funds do offer some flexibility as they can invest in longer dated securities and hedge away the unwanted duration risk, but our strategies are subject to the same interest-rate constraints which face every investor. What's more, the funds invest primarily in high quality, short duration assets, which aren't known for their high yields. As a result, offering an attractive yield has been the biggest issue for the entire short duration universe.
BFI: How do short duration investment strategies differ from money funds? Olivo: Generally, there's enough differentiation between short duration funds and money market funds. The duration on some of the short duration strategies are shorter than a year, but you're buying more traditional fixed income securities. For example, in the High Quality Floating Rate fund, we are purchasing longer duration floating rate products in both the agency mortgage and asset backed securities area. In the Enhanced Income fund, we are purchasing high quality corporates -- with a final maturity no greater than 5 years. That is the primary source of excess return in that strategy. Therefore, there is enough differentiation that you are not crossing over into the 2a-7 world very often. (Watch for the second half of our interview tomorrow, or contact us for the latest issue of our Bond Fund Intelligence.)
Crane Data, publisher of Money Fund Intelligence, celebrates its 9th birthday this month. As we wrote in our most recent issue of MFI, we'd like to take a moment to review our progress and update you on our efforts, which include growing our conference business and extending our coverage beyond money market funds. Crane Data was launched in May 2006 by money fund expert Peter Crane and technology guru Shaun Cutts to bring faster, cheaper and cleaner information to the money fund space. We began with our MFI newsletter and have grown to offer a full range of daily and monthly spreadsheets, news, database query systems and reports on U.S. and "offshore" money funds and other cash investments. (Note: We also wanted to remind you to make hotel reservations -- we expect the hotel to be sold out soon -- and to register for our upcoming Money Fund Symposium, June 24-26 in Minneapolis, and to start making plans for our European Money Fund Symposium, Sept. 17-18 in Dublin.)
As we first mentioned in our May MFI, our big new product addition over the past year is Bond Fund Intelligence, a monthly newsletter that tracks the bond fund universe, with a focus on the ultra-short and short-term bond fund sector. BFI includes news, features, and performance data on over 300 (and growing) of the largest bond funds and ETFs. We also publish a fund "profile" interview each month with a bond fund portfolio manager. As with MFI, Crane Data offers an Excel "complement" with even more performance, data and rankings, Bond Fund Intelligence XLS. BFI includes our new Crane Bond Fund Intelligence Indexes, which now provide benchmarks for various bond market segments, including a new Conservative Ultra-Short BFI Index, a more focused benchmark for the more conservative funds in the space just beyond money market funds.
The BFI newsletter was launched due to the changing nature of the money fund and cash space. With the SEC's money fund reforms making some aspects of the cash marketplace more restrictive, we saw an opportunity to cover the growing space just beyond money funds, the ultra short and short-term bond fund segment. We listened to feedback from clients and money managers who say that area will be more attractive in an era of money fund reforms and rising interest rates. (Watch for our May issue of BFI later this week, and let us know if you'd like to see the latest edition of BFI and BFI XLS.)
Crane Data President & Publisher Peter Crane comments, "While our first love and loyalty is of course to the money fund segment, our clients -- which now include several hundred asset managers, issuers, dealers, servicers, regulators and investors -- wanted to hedge their bets too and to gather more intelligence on this growing market segment. We look forward to working with readers, bond fund providers and others in building out this new product line. We plan to eventually track Bond Fund Portfolio Holdings and launch a Bond Fund Symposium conference in this sector, though these both will take time."
Crane Data has also continued to see great success in the money fund conference business. Our 7th Annual Money Fund Symposium will take place in Minneapolis, June 24-26, and we again expect to host the largest gathering of cash investors in the world. We're also preparing for our 3rd annual European Money Fund Symposium, which be in Dublin Sept. 17-18, 2015 (the preliminary agenda is now available and registrations are now being taken for this event), and our next Money Fund University, which will be Jan. 21-22, 2016, in Boston.
The past 9 years have brought dramatic change to the money fund industry and no doubt more is yet to come. But money funds continue to hold fast, and we think higher rates will soon bring higher assets. In our MFI update, we show the annual asset totals of money funds against our flagship Crane 100 Money Fund Index (the average of the 100 largest taxable funds). During our first two years, we saw assets increase by over $1.5 trillion and yields drop from almost 5% to under 1%. During the next three years, money fund assets declined by over $1.0 trillion, while yields settled just above zero. The past 4+ years, we've seen both assets and yields virtually flat, stuck around $2.6 trillion and 0.03%, respectively.
As for Crane Data, we continue to grow. We now have 14 employees and topped $1.1 million in annual revenue in 2014. We added a new Editor, Dave Kovaleski, who is now writing much of the commentary, and we continue to rely on our core of veteran employees -- Kaio Barbosa, who oversees our Money Fund Portfolio Holdings collection, and Statistics Editors Diana Bucaro, Natalia Mendonca, and Thereza Alves. We hope to continue to deliver good information at reasonable prices, and we thank you for your continued support! Please let us know if you have any feedback or requests. We're always happy to discuss. Sincerely, Pete Crane
The May issue of Crane Data's Money Fund Intelligence was sent out to subscribers Thursday morning. The latest edition of our flagship monthly newsletter features the articles: "Crane Data Celebrates 9 Yrs., Enters Bond Fund Info Market," which marks our 9th anniversary with a look back at the past year, including the launch of our new endeavor, Bond Fund Intelligence; "Schwab & Latest Fund Co. Changes; SEC Answers FAQs," which examines Schwab's recent update on their money market funds, recaps all of the fund company announcements since the beginning of the year, and looks at the SEC's response to reform FAQs; and "ICI Fact Book Shows Flat Is New Up for Money Funds," which reports on the fund flows and other trends from the ICI's 2015 Investment Company Fact Book. We have also updated our Money Fund Wisdom database query system with April 30, 2015, performance statistics, and sent out our MFI XLS spreadsheet earlier this a.m. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our May Money Fund Portfolio Holdings are scheduled to go out on Monday, May 11, and our May Bond Fund Intelligence is scheduled to ship Thursday, May 14. Also, we mention the news of IMMFA's new Chair below.
The lead article in MFI on Crane Data's 9th anniversary says, "Crane Data, publisher of Money Fund Intelligence, celebrates its 9th birthday this month. As we've done in past May issues, we'd like to take a moment to review our progress and update you on our efforts, which include extending our coverage beyond money market funds. Crane Data was launched in May 2006 by money fund expert Peter Crane and technology guru Shaun Cutts to bring faster, cheaper and cleaner information to the money fund space. We began with our MFI newsletter and have grown to offer a full range of daily and monthly spreadsheets, news, database query systems and reports on U.S. and "offshore" money funds and other cash investments."
It continues, "Our big new addition over the past year is Bond Fund Intelligence, a monthly newsletter that tracks the bond fund universe, with a focus on the ultra-short and short-term bond fund sector. BFI includes news, features, and performance data on over 300 (and growing) of the largest bond funds and ETFs. We also publish a fund "profile" interview each month with a bond fund portfolio manager. As with MFI, Crane Data also offers an Excel complement with even more performance, data and rankings, Bond Fund Intelligence XLS. BFI includes our new Crane Bond Fund Intelligence Indexes, which now provide benchmarks for various bond market segments, including a new Conservative Ultra-Short BFI Index, a more focused benchmark for the more conservative funds in the space just beyond money market funds."
In our middle column, we look at how Schwab and others are adapting to SEC reforms, as well as the SEC's FAQs. It reads, "Charles Schwab Investment Management became the latest money market fund complex to issue an update on how it plans to adapt to the SEC reforms. Since the beginning of the year, 10 of the 20 largest money market fund managers have announced changes or updates to their MMF lineups. In this article, we not only review Schwab's plans, but we also recap the changes that have happened so far in 2015. Also, the SEC came out with answers to Frequently Asked Questions about MF Reforms, though these mainly dealt with very technical and minor issues. We also briefly review these."
It explains, "We have reported on all of the announcements that have come to our attention over the past several months. Of the 20 largest money fund complexes, half have issued updates, including the four largest -- Fidelity, JP Morgan, BlackRock, and Federated. Here is a look at the changes (and dates) announced so far." (We also list the 15 largest managers with their assets by type in the article.)
The third article says, "ICI's new "2015 Investment Company Fact Book" revealed some interesting trend data on money market fund flows in 2014. For instance, despite landmark SEC reforms, money funds saw overall inflows in 2014. What's more, institutional MMFs, which were hit hardest by reforms, saw significant inflows, while retail funds saw outflows. In addition, corporate investment in money fund assets was stable last year."
Crane Data's May MFI XLS, with April 30, 2015, data shows total assets plunging in April, the fourth monthly drop in a row, down $89.3 billion to $2.487 trillion, after falling $20.9 billion in March, $1.6 billion in February, and $44.6 billion in January. Our broad Crane Money Fund Average 7-Day Yield and 30-Day Yield remained at 0.02%, while our Crane 100 Money Fund Index (the 100 largest taxable funds) stayed at 0.03% (7-day and 30-day). On a Gross Yield Basis (before expenses were taken out), funds averaged 0.15% (Crane MFA, up from 0.14 last month) and 0.18% (Crane 100, same as last month) on an annualized basis for both the 7-day and 30-day yield averages. Charged Expenses averaged 0.13% (unchanged) and 0.15% (unchanged) for the two main taxable averages. The average WAMs for the Crane MFA and the Crane 100 were 39 and 41 days, respectively, both down 2 days from last month. (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
In other news, the U.K.-based Institutional Money Market Fund Association confirmed Reyer Kooy as the new Chair of IMMFA. The statement reads, "Reyer is head of Institutional Liquidity Management, EMEA and Asia business, for Deutsche Asset & Wealth Management (DeAWM) and has been with Deutsche for nearly 5 years. Prior to joining DeAWM, Reyer was head of EMEA for a similar business at Credit Suisse, and also worked at JP Morgan for 12 years. Reyer has represented DeAWM on the Board of IMMFA since June of 2012 and also acted as its Treasurer.
Outgoing Chair Jonathan Curry of HSBC Global Asset Management was thanked for his 3 years' service as Chair of IMMFA, which followed an earlier 3 year spell as Chair of IMMFA's Investment Committee. Curry comments, "The past 3 years have been challenging for money market funds. I believe IMMFA has been instrumental in ensuring that the views of the investors and industry have been heard. There is still work to do, but we look forward to continuing the Association's work in this key area, supporting our Members."
Today, we excerpt from the April issue of Crane Data's newest publication, Bond Fund Intelligence, which tracks the bond fund marketplace with a focus on the ultra-short and most conservative segments. The article says: Our April Bond Fund Intelligence "profile" interviews `Putnam Investment's Portfolio Managers Joanne Driscoll and Michael Salm, who is also Co-Head of Fixed Income at the firm. Driscoll and Salm run the $2.2 billion Putnam Short Duration Income Fund, one of the largest funds in our Conservative Ultra Short Bond Fund universe. They talk about the importance of differentiating between various types of Ultra Short Bond Funds and why this niche is poised for growth in an environment of rising rates and more regulations.
BFI: How long have you been involved in this space? Driscoll: I have been at Putnam for almost 20 years and currently oversee the short-term liquid markets team where I'm responsible for all of our front-end strategies. Putnam launched Short Duration Income Fund in October 2011 -- with Mike and I serving as the lead managers. In 2009, we looked at the changing regulatory environment for money funds, driven by the pending amendment to SEC Rule 2a-7. While money funds were forced to shorten their investments, issuers were being told by regulators that they needed to become less reliant on the front end and extend the duration of their debt. So, our goal in launching this fund was to leverage the changes in money funds and the opportunities that were created in the market by this change. We felt this would create a demand for a fund just outside of 2a-7, but something more conservative than a short term bond fund.
Salm: During my 18 years at Putnam, I have focused quite a bit on structured products, mortgages in particular. Over time, I have worked a lot on liquid markets in general, focusing on interest rates and volatility, as well as our views about the Fed. In thinking about this strategy, there was a lot of overlap in using our expertise on the front end of the curve and in using our expertise just beyond the traditional 2a-7 venue. We wanted to leverage this very interesting combination of investment processes that you don't necessarily see blended together in normal fund structures.
BFI: How has the Short Duration Income Fund been received? Driscoll: The fund has grown to about $2.2 billion in assets under management. The objectives of our fund are capital preservation and income maximization. Our process is primarily built around the best ideas of our credit team, which focuses on alpha generation within a host of areas. We believe that prudent short term investing requires relentless focus on credit quality and risk management. Due to the nature of the fund, we focus on credit fundamentals and the risk-return trade off. Something that really differentiates Putnam in this space is the way our fixed income team works: We can leverage the entire research team; our analysts cover the sectors across all asset types -- high yield, high grade, money markets, and munis in some cases. With our broader coverage, we can put an intense focus on credit analysis.
We have found that the fallout from the financial crisis has made the ratings agencies reactionary and that impacts many issuers. While our analysts view some of these companies to be either equal to or stronger than prior to the downgrade, due to the ratings requirements of 2a-7, they cannot be purchased by money funds, even though internally we feel that they would be appropriate. These institutions are attractive purchases for Putnam Short Duration Income Fund and add some good yield to the portfolio.
There's a big difference between our fund and our peer group. Putnam Short Duration Income Fund is generally higher quality than many of its peers. We don't buy below investment grade, so we don't have high yield or floating rate bank loans like you see in some competitors. We limit our investments in the low triple-B category because we're trying to minimize the volatility in this fund as much as possible. The reception to the fund has been very positive. We find a lot of investors are challenged by the low level of interest rates and the new 2a-7 amendments. We see more and more interest in the fund because they are looking for products that can add incremental yield over a money fund with low NAV volatility.
BFI: What are the challenges for this fund? Driscoll: For us, it's making sure that financial advisors understand that this is not a money fund or a cash alternative. Prior to the crisis, many firms sold cash alternatives that behaved and looked more like a short term bond fund, and those outcomes, as we know, weren't always good. We spend a significant amount of time educating our financial advisors on the strategy and the risk-return tradeoff, so there are few, if any, surprises. We've seen a large amount of variability in this peer group, so we want to make sure the advisors understand what this fund is.
Salm: In fact, we're very sensitive about distinguishing ourselves so that people know that this category itself can be very heterogeneous. Don't mistake us in any way, shape, or form as a money market fund. We think there's a really good space between the ultra-short bond fund and money market fund categories, which is where the Short Duration Income Fund resides. The fund has been able to meet its objective in the last three years, delivering a high degree of capital preservation and a consistent return.
Watch for more of our latest BFI profile in coming days, or contact us to see the latest issue of our Bond Fund Intelligence. (BFI is $500 a year, or $1,000 including our BFI XLS spreadsheet.)
Crane Data has posted the preliminary agenda and is now accepting registrations for its 3rd Annual European Money Fund Symposium (www.euromfs.com), which will be held Sept. 17-18, 2015, at The Conrad Hilton in Dublin, Ireland. Crane Data's previous European event, held last September in London, attracted over 110 attendees, sponsors and speakers, and we expect our return to Dublin to be even bigger and better. We expect once again to host the largest money fund conference in Europe. European Money Fund Symposium offers "offshore" money market portfolio managers, investors, issuers, dealers and service providers a concentrated and affordable educational experience, as well as an excellent and informal networking venue. Our mission is to deliver the best possible conference content at an affordable price to money market fund professionals. Attendee registration for our 2015 Crane's European Money Fund Symposium is $1,000. Thanks for your support, and we hope to see you in Dublin! Finally, also visit www.moneyfundsymposium.com to learn more about our big U.S. show, Crane's Money Fund Symposium which will be held June 24-26, 2015, in Minneapolis, and www.moneyfunduniversity.com to learn more about our "basic training" event, Crane's Money Fund University, which will take place January 21-22, 2016, in Boston, Mass.
The April issue of Crane Data's Money Fund Intelligence was sent out to subscribers Wednesday morning. The latest edition of our flagship monthly newsletter features the articles: "BlackRock Latest to Telegraph Changes; 7-Day Max Maturity," which reviews big changes from the country's third largest money fund manager, BlackRock; "Wells Fargo's Weaver Says Clients Still Want Yield Too," which profiles Wells Capital Management's new head of money market funds, Jeff Weaver; and "Deposits, FDIC 'Amalgamators' Growing; Going Inst," which examines the increasing availability of FDIC insurance far above the $250K limit. We have also updated our Money Fund Wisdom database query system with March 31, 2015, performance statistics, and have sent out our MFI XLS spreadsheet. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our April Money Fund Portfolio Holdings are scheduled to go out on Friday, April 10, and our March Bond Fund Intelligence is scheduled to ship next Wednesday, April 15.
The lead article in MFI on BlackRock and Western's Changes says, "Another month, another major announcement in the money market fund world. This time it’s from the second largest money fund manager, BlackRock, which informed clients of significant changes to its MMF lineup, including fund conversions, liquidations, and the addition of innovative new 7-day maximum maturity funds. Also notable: the fourth largest MMF, BlackRock TempFund -- a Prime Institutional fund -- will remain as is. BlackRock writes in its April 6 letter, "A number of clients have indicated they are interested in continuing to invest in prime funds. We plan to maintain our largest prime fund, the $66.5 billion TempFund as a prime institutional fund. Our historical analysis shows that in normal market conditions, TempFund has demonstrated minimal per share net asset value volatility. Given the anticipated forward environment, we believe that institutional prime funds are likely to offer investors a compelling yield premium relative to CNAV government funds."
On the proposed 7-day maximum maturity funds the article comments, "The $2.4 billion BlackRock TempCash Fund, however, will be converted to a 7-day maximum maturity fund, essentially eliminating the floating NAV and the concerns over emergency gates and fees. The letter explains, "Some clients have indicated interest in a cash investment product that fits between a CNAV government fund and a FNAV institutional prime fund.... BlackRock will offer an institutional prime fund that limits holdings to those with a maturity of seven days or less."
In our middle column, we feature an interview with Wells Fargo's new head of MMFs, Jeff Weaver. It reads, "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."
We asked him, "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."
The article on "Deposits and FDIC 'Amalgamators'" says, "Zero yields and the expiration of unlimited FDIC insurance haven't stopped the growth of bank deposits over the past year or two. Deposits have increased by almost $500 billion in the year through Jan. 31, 2015, and they've increased by almost $1.6 trillion the past 3 years. Bank and thrift deposits combined have almost doubled since the financial crisis hit hardest in late 2008; they now total a massive $7.65 trillion." It adds, "We also discuss the continued rapid growth of FDIC insurance "amalgamators," who are in the business of breaking too-big-for-insurance deposits into smaller FDIC insured pieces (spreading them among a network of banks). This segment continues to grow via brokerage sweeps, and is starting to see growth from the institutional and corporate cash segment."
Crane Data's April MFI XLS, with March 31, 2015, data shows total assets decreasing in March, the third month in a row, down $20.9 billion to $2.576 trillion after falling $1.6 billion in February and $44.6 billion in January. Our broad Crane Money Fund Average 7-Day Yield and 30-Day Yield remained at 0.02%, while our Crane 100 Money Fund Index (the 100 largest taxable funds) stayed at 0.03% (7-day and 30-day). On a Gross Yield Basis (before expenses were taken out), funds averaged 0.14% (Crane MFA, same as last month) and 0.18% (Crane 100, up from 0.17%) on an annualized basis for both the 7-day and 30-day yield averages. Charged Expenses averaged 0.13% (unchanged) and 0.15% (up from 0.14%) for the two main taxable averages. The average WAMs for the Crane MFA and the Crane 100 were 41 and 43 days, respectively. The Crane MFA WAM was the same as last month while the Crane 100 WAM is down 1 day from the prior month. (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
Today, we excerpt from the March issue of Crane Data's new publication, Bond Fund Intelligence, which tracks the bond fund marketplace with a focus on the ultra-short and most conservative segments. Our latest monthly "profile" follows.... This month, Bond Fund Intelligence interviews Managing Director & Portfolio Manager Dave Martucci and Managed Reserves Investment Policy Committee Chairman and Risk Manager Saad Rehman from JPMorgan Asset Management. Martucci runs the $6 billion JPMorgan Managed Income Fund, which is the largest fund we currently track in our Conservative Ultra Short Bond Fund category, and Rehman has been instrumental in the creation of our new "Conservative" category. We discuss risk management, the growing demand for short-term products, and conservative ultra short’s place within a cash segmentation strategy, below.
BFI: How long have you been involved in the conservative ultra short bond space? Martucci: JPMorgan Chase & Co. has been managing money for corporations, governments, endowments, foundations, and individuals worldwide for well over a century. Currently, J.P. Morgan Asset Management has $1.7 trillion in AUM, around 25% of which is in our Global Liquidity business, which we've been in for over 30 years. Within the Global Liquidity business we manage cash and money market fund portfolios, as well as our conservative ultra short bond fund offering, which we call the Managed Reserves strategy.
The strategy dates back to 2004 and currently has $43 billion in AUM. Of that, around $9B is in mutual funds and the remainder is in separately managed accounts. Within the Managed Reserves strategy is the JPMorgan Managed Income Fund (JMGIX), which was launched in 2010 and now has $6B, an all-time high. I'm the lead portfolio manager and head of our Managed Reserves trading desk. I have 15 years of experience running liquidity strategies, and I've also been a portfolio manager for short duration and intermediate portfolios.
Rehman: I am a Risk Manager and Chairman of the Managed Reserves Investment Policy Committee, which formulates and approves investment policies and procedures as they relate to credit, market, and other risks applicable to the investment management of these funds and accounts. I've worked at JPM for 10 years.
BFI: How has the fund been received? Martucci: We've seen a significant amount of interest recently, as clients continue to be challenged by the Fed's zero interest rate policy. Additionally, they now face the prospect of floating NAVs on the short end and rising rates on the long end. These clients are looking for some incremental return over money market funds, but they still want a conservative approach. Rehman: In the wake of the financial crisis, a lot of clients built up large cash positions on their balance sheets. This excess cash, combined with an effective segmentation strategy, has been driving growth in this space. A natural place to put a strategic cash position to work is in a conservative solution that offers an incremental return over money funds.
Martucci: This is where the Managed Reserves strategy comes in, as it was a natural extension of our well-established money market fund platform, leveraging the best practices and procedures that we employ in that platform. For instance, an approved credit list that you typically find in a money market fund has been built upon and expanded, serving as a key piece of our Managed Reserves strategy. Since the strategy launched, these conservative foundations have enabled Managed Reserves to provide a strong track record of consistent returns over money market funds, with very limited volatility. Since inception, the Managed Reserves composite has had no period of rolling three-month losses. Fund assets are at an all-time high.
BFI: What are the biggest challenges for funds in the conservative space? Martucci: The main issue that we see is the variability of funds in this category. The issue comes from trying to define what that conservative ultra short space is. We're happy that industry leaders such as Crane and others are starting to focus on this and trying to establish it as a category of its own. Clearly, the space is somewhere between money market funds and short duration. We believe that the conservative ultra short space is not determined solely by interest rate duration, but also by spread duration, credit selection, the type of securities these funds can and do choose to hold and, most importantly, the volatility of performance. We address all these factors through robust risk management.
Rehman: What clients are looking for in this space is not just returns, but the risk associated with those returns. We have seen a period of low volatility over the past few years, which we think is masking some of the potential downside. We expect to see more volatility, potentially due to diverging central bank actions, regulations for money market funds and banks, as well as geopolitical risk. With volatility, we expect that we'll start to see divergence in performance for these conservative ultra short funds. One of the factors driving that divergence will be credit selection in these funds. For example, some funds in the ultra short space actively participate in below investment grade credit while others, like JPMorgan Managed Income, do not.
There are many ways you can analyze the risk and returns of funds in the ultra short space. For example, when you look at the average monthly returns of these funds they are somewhat clustered tightly around a mean -- whereas there's a much wider range when you look at the volatility of those returns. Another way to get a general sense of how risky a fund's returns are is to compare the percentage of negative monthly returns over a period, such as the past 12 or 36 months. You can see that the percentage for some funds is almost double that of others in the space. (Note: Watch for more excerpts from our latest BFI "profile" in coming days, or contact us to see the full issue of our new Bond Fund Intelligence.)Archives »