The November issue of our flagship Money Fund Intelligence newsletter, which was sent out to subscribers Friday morning, features the articles: "MF Consolidation Accelerates; Govt Fund Conversions Begin," which looks at Prime to Government fund conversions, consolidation, and Schwab and Fidelity's declaration of "retail" funds; "Prior Speaks on Changes; New Reality at Fidelity," where we summarize recent comments from Fidelity's Nancy Prior and changes to the firm's funds; and "BlackRock Buys BofA MMFs in Biggest Deal of Decade," which recaps the news that BlackRock acquired BofA's $87 billion money fund business. We have also updated our Money Fund Wisdom database query system with Oct. 31, 2015, performance statistics, and sent out our MFI XLS spreadsheet earlier. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our November Money Fund Portfolio Holdings are scheduled to ship Tuesday, November 10, and our November Bond Fund Intelligence is scheduled to go out Monday, November 16.
MFI's lead "Consolidation" article says, "Acquisitions, liquidations, and conversions headlined a busy month in the money market fund space. With now less than a year until MMF reforms take effect, some Prime funds have already begun converting into Government funds. The first batch of these took place this week, and more are slated to convert in December and throughout 2016. To date, over $230 billion in Prime money funds have converted or declared their intent to convert into Government funds, with over $40 billion converting this week and next. On the acquisition front, BlackRock shook the money fund world with its purchase of BofA's cash management business, and a steady stream of minor fund liquidations, conversions and announcements continued."
The piece continues, "In October, two small Prime money market funds announced conversions to Government, and two more firms announced their exits from the money market space. Nationwide will convert its $1.0 billion Nationwide Money Market Fund and its $1.8 billion Nationwide VIT MMF to Government funds on 10/14/16. Also, Pioneer is converting its $280 million Pioneer Cash Reserves from Prime to Government on 11/13/15. Further, William Blair filed to liquidate its $1.4 billion Ready Reserves Fund on Nov. 18, and Delaware filed to convert its $169 million Delaware Cash Reserves to Delaware Ultrashort [Bond] Fund in Jan. 2016."
Our latest MFI "profile," reads, "Fidelity President of Fixed Income Nancy Prior spoke recently about the state of the money market fund industry in a speech at the AFP Annual Conference entitled, "Money Market Funds: The New Reality." She discussed Fidelity's second phase of changes to its money market fund lineup, which were announced October 14, and also talked about the size of the Government securities sector, conservative ultra-short bond funds and the fact that there is no "silver bullet" for corporate cash investors."
It adds, "The big news in the recent announcement, which followed the late January shocker that Fidelity Cash Reserves will "go government," is that Fidelity will convert both its $65.5 billion Fidelity Institutional Money Market Portfolio and its $2.2 billion FIMM Tax Exempt Portfolio into Retail funds. Fidelity will retain just one Prime Institutional fund, the $47.8 billion FIMM Prime Money Market Portfolio."
We quote Prior, "In the end, MMFs survived a very long and difficult regulatory process, and will continue to exist in a form we all recognize. That survival was not a given through a series of ups and downs of a regulatory process that lasted more than five years. One result of the regulation, however, is that the current value proposition of prime MMFs -- stability, liquidity, and a competitive market yield -- has been diminished. In fact, investors will no longer be able to maximize all three with any single MMF product. There will be tradeoffs between the different types of funds, and investors will have to choose which features are most important to them. For many of you here, prime MMFs have traditionally been a great cash investment option. They met your needs by providing all three elements -- stability, liquidity, and a competitive yield."
The "BlackRock Buys BofA" article says, "In one of the largest acquisitions ever in the money market fund space, BlackRock announced that it was taking over management of BofA Global Capital's cash business. BofA Funds is the 14th largest manager of money market fund assets that we track with $48.3 billion -- and according to BlackRock's press release announcing the move, has $87 billion in total cash assets under management. Prior to this transaction, the largest money fund mergers in the past included both BlackRock's merger with Merrill Lynch Investment Management in 2006 and BlackRock's merger with Barclays Global Investors in 2009. (See our Dec. 2, 2009 News, "Merged BlackRock, BGI Form World's 3rd Largest Money Fund Manager.") When the BofA transaction is complete, BlackRock will become the second largest manager of money fund assets with about $370 billion in AUM, jumping ahead of now No. 2-ranked JP Morgan."
We also look at how money fund managers are reducing fee waivers in the sidebar, "Fee Waivers Being Reduced." It says, "As yields creep up and a possible interest rate hike looms, money fund managers are beginning to reduce the amount of fee waivers. In Q3 earnings calls and releases, Federated, Schwab, Northern Trust and T. Rowe Price all reported lower fee waivers and higher MMF revenue. And, we take our quarterly look at the largest money fund markets in the world in our story, "Global MMF Data Shows: Big Jumps in Ireland and China." It says, "The Investment Company Institute's latest "Worldwide Mutual Fund Assets and Flows" show that global money market mutual fund assets increased in the 2nd Quarter of 2015, rising $31 billion, or 0.7%, to $4.580 trillion. Ireland solidified its spot as the second largest MMF market with a big jump, while China and Luxembourg also gained assets in Q2. Globally, MMF assets increased by $107.5 billion, or 2.2%, over the past year (through 6/30/15)."
Our November MFI XLS, with Oct. 31, 2015, data, shows total assets increasing $56.5 billion in October after declining by $9.4 billion in September, rising $7.2 billion in August, and jumping $52.4 billion in July. YTD, MMF assets are down by just $8.2 billion, or 0.3% (through 10/31/15). 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) went up a basis point to 0.05% (7-day).
On a Gross Yield Basis (before expenses were taken out), funds averaged 0.18% (Crane MFA, up one bps) and 0.21% (Crane 100, unchanged). Charged Expenses averaged 0.15% (unchanged) and 0.17% (up one bps) for the two main taxable averages. The average WAMs (weighted average maturities) for the Crane MFA was 36 days (up two days from last month) and for the Crane 100 was 36 days (unchanged). (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
Below, we link and excerpt from more coverage of BlackRock's takeover of BofA Funds money fund assets. (See yesterday's News, "BlackRock Taking Over BofA MMFs in One of Biggest Acquisitions Ever.") Reuters writes in "BlackRock to buy Bank of America's $87 billion money-market fund business," "Bank of America Corp, the No. 2 U.S. bank, has agreed to sell its $87 billion money-market fund business to BlackRock Inc in one of the cash-management industry's largest deals ever. The transaction comes as big banks have faced pressure to simplify their businesses since the global financial crisis and marks the largest in a series of deals reshuffling the cash-management industry before costly regulatory reforms take effect in 2016. Terms of the transaction were not disclosed. The agreement is expected to lift BlackRock's global cash-management business to $372 billion from about $285 billion, according to the New York-based company.... Mergers and acquisitions trimmed the money funds industry from 75 providers in the United States last summer to just 67 this year, according to Crane Data, an industry research service. Once the deal closes next year, BlackRock will leapfrog JPMorgan Chase & Co to become the second largest money fund family, behind Fidelity Investments, according to Peter Crane of the research service.... "Everybody has been talking about consolidation for years, but it really didn't happen until today," said Crane. "So many large players have resisted getting out of the business until now, but it's just a matter of the costs and uncertainty of money fund reforms proving to be overwhelming to some players." Crane said Bank of America's decision came after an evaluation of which businesses were essential. "At the same time asset managers are trying to get bigger, banks are trying to get smaller," he said. "This reflects regulatory pressure on both sides."" See too WSJ's "Bank of America to Sell $87 Billion Money-Market Fund Business to BlackRock" and Bloomberg's "BofA Sells $87 Billion Money-Market Funds Unit to BlackRock".
The Wall Street Journal published, "Will a Rate Rise Reach Money-Fund Investors?." It says, "Few areas of finance have as much riding on the Federal Reserve's interest-rate decision this week as the $2.7 trillion money-market-fund industry. While interest rates have been near zero, asset managers including Charles Schwab Corp. and Federated Investors Inc. have waived more than $30 billion worth of fees on their money funds over the past six years to keep expenses from eating up the funds' yields and taking a bite out of investors’ principal. If the Federal Reserve raises interest rates -- which could happen as soon as Thursday -- asset managers will need to decide how to divvy up the funds' increased interest income between reinstating fees and passing along higher yields to return-starved investors. "My guess is that half of the first rate hike won't be passed through to consumers, because it will go to unwinding these fee waivers," said Peter Crane, president of Crane Data LLC, a Westborough, Mass., firm that tracks money-market-fund assets. It continues, "Some share classes of Federated's institutional funds no longer have waivers, so all of a rate increase could flow through to those investors, said `Deborah Cunningham, chief investment officer for money markets at the Pittsburgh-based company. "It won't happen immediately, but will filter through over a month, with 60% of the increase expected in the first week, and the remainder happening over the rest of the month," she said.... Assuming the Fed raises rates in quarter-point increments, that latter group would see a benefit with a second Fed move, she said, and by a third move all waivers should be gone. Asset managers have been forgoing much of their usual fees for running the funds because with interest rates so low, charging the full fees would cause the funds' share price to fall below the steady $1 a share they aim to maintain." The WSJ piece adds, "Charles Schwab alone waived $168 million in fees during the second quarter, on top of $184 million in the first quarter and $2.01 billion over the three years through 2014. Money-fund sponsors have gotten a bit of relief this year. Slight increases in some short-term rates in the marketplace have allowed companies to scale back waivers.... Federated pointed to the reduced waivers -- costing it $22.2 million in the second quarter compared with $29.6 million in the same period a year earlier -- as a major reason its second-quarter revenue rose by 7% from a year earlier. T. Rowe Price Group and Northern Trust Corp. also reported lower waivers.... Asset managers are anxious to claim the lion's share of that to help cover costs incurred due to regulatory changes that were put in place after the 2008 credit crisis, Mr. Crane said. In a recent conference call with analysts, Charles Schwab executives said they were looking for a resumption of higher fees on the more than $150 billion Schwab clients hold in money funds to help generate revenue to support the company's growth plans. Investors in money funds with the lowest usual fees -- and thus either small or no waivers currently -- will see the biggest and most immediate benefit from rising interest rates. That could mean bigger gains for investors in institutional money-market funds, which typically charge lower fees than funds for individuals."
The August issue of our Bond Fund Intelligence newsletter features a profile of Fidelity Investments' Kim Miller, who manages the $4 billion Fidelity Conservative Income Bond Fund. The fund, which launched in 2011, is one of the largest offerings among our Conservative Ultra Short Bond Fund category and was designed to fill the space just outside of money market funds. In the Q&A, which we excerpt below, Miller tells us why he is bullish on ultra-short space. (Note: E-mail us to request a copy of the latest issue of our new Bond Fund Intelligence product and our BFI XLS spreadsheet "complement". As with our MFI, BFI is $500 a year; $1K including the XLS.)
Q: How long have you been managing short-term assets? Miller: I've been at Fidelity for 23 years. I started out as a Municipal Bond analyst then I became a Corporate Bond analyst. Beginning in 2003 I came to the taxable desk and ran both of our institutional money market funds. When I handed those off they had about $140 billion in assets. Then in 2011, I began managing the Conservative Income Bond Fund. Overall, Fidelity has been running short-term bond funds for almost 30 years. Our first short term bond fund was launched in 1986.
Q: Tell us about the launch of Conservative Income Bond Fund. Miller: After December 2008, when the Federal Reserve took interest rates to zero, a lot of Fidelity's institutional shareholders expressed interest in employing different strategies for their short-term investments that didn't need to be immediately available for operating needs. These clients didn't want to earn zero on their entire cash balance, so we started talking about differentiating their short-term investments, sometimes described as the difference between strategic cash and operational cash. By strategic cash, I mean money that they set aside for contingencies or long term capital expenditures. The question was: Is there a product that we can create beyond money markets that will provide a better yield to shareholders without introducing them to undue price volatility? By the end of 2010, we were pretty sure that the opportunity was there, and the fund was launched in in March 2011.
Q: What kind of growth has the fund seen? Miller: Conservative Income has about $4 billion in assets under management. It's been growing steadily, but has leveled off recently. From an institutional perspective, investors wanted to see a 3-year [performance] number, and the fund has been around for 4 years, so we may begin to get some traction from those types of shareholders. But [some of the] money that they would look to redeploy in this fund clearly resides in money market funds, and for the most part I think investors are inclined to wait until reform takes full effect in 2016 before they make any definitive decisions.
Q: What are the investment guidelines for the fund? Miller: The investment objective of the fund is to seek to obtain a high level of current income consistent with the preservation of capital. The fund is designed to complement traditional cash management or liquidity management strategies, not replace them, with less of an emphasis on competing in the Ultra Short category. We talk in 'WAM' terms, not in 'duration' terms, which is more familiar to traditional cash investors.
Normally, the fund maintains a [WAM] of 273 days or less. The fund's lower quality investment grade securities (BBB) exposure is capped at 5%. The fund generally does not purchase any structured product. But most importantly, from the standpoint of NAV stability, the fund normally does not invest in fixed rate securities with a maximum maturity of 2 years or floating rate securities with a maximum maturity of 3 years. That's a real governor when it comes to sourcing supply because it largely precludes the fund from participating in the primary market. So the fund sources most of its supply in the secondary market.
Q: What does the portfolio look like? Miller: It's predominately bonds -- some CDs and CP -- but it's predominantly just short term bonds. The other noteworthy thing is the fund does not buy any subordinated debt. [The fund] doesn't include many Treasury or Government securities, [but] that's more indicative of the interest rate environment.
Q: Who invests in the fund? Miller: There are two classes, and the distinction is between over $1 million and under $1 million. It's about evenly split between the two. The former is built almost entirely on high net worth individuals and the retail class is just retail investors that are looking for the slightly higher yield associated with short-term bond funds. I don't have a lot of strong institutional sponsorship yet, because they are figuring out how they're going to deal with pending changes to Rule 2a-7.
Q: How has the regulatory environment impacted the space? Do you expect to see inflows due to MMF reforms? Miller: There are a couple things going on with the institutional investors that we speak to. First of all, many of them are going to have a lot of difficulty accepting provisions for gates and fees. But I think the bigger challenge is interpreting and understanding the implications of the floating NAV. There are going to be changes in NAV, potentially more frequent than a $10 fund with only two decimals.
Q: What are the risks and rewards of rising interest rates? Miller: We learned a lot in 2004 about how funds behave when the Fed starts raising interest rates. This fund now has close to 65% in floating rate securities indexed to 3-month LIBOR, which I'm hoping starts creeping higher in anticipation of rising rates. With respect to the Fed, I think the threshold for raising rates has never been lower. First of all, FOMC members have indicated a desire to get off zero and labor market conditions certainly allow them to do that. Also, the economy is starting to show some wage inflation. FOMC members have said they only need to be reasonably confident that inflation returns to 2% in a reasonable period. (Note: This interview took place in late July, prior to recent market turmoil.)
How do you interpret what a reasonable period is? The market is thinking a reasonable period is 1 to 2 years, but I think the Fed has a longer term view -- 3 to 5 years. I have every confidence that inflation is going to get to 2% in 3 to 5 years. To me, that gives them the liberty of raising as soon as they want. Frankly, you are going to get a better indication of how the market is going to respond to a rate increase in September than you would in December, so based on the current environment, I fully expect a move in September.
Q: What are the risks to Ultra Shorts? Miller: I think a slower Fed will insulate them a little bit, but the Ultra Short category has a lot of different strategies. The fund has competitors that have up to 20% in high yield, and other competitors buy structured products, some of which are negatively convex and will not do well in a rising interest rate environment. So depending on the strategy, we could see at least for some portion of the asset class, a repeat performance of 2007. But again, I don't think we’re going to have the credit dislocation that we had in 2007.
Q: What do you see for the future of Ultra Shorts? Miller: I'm very bullish on the Ultra Short space. Ultra Shorts serve two purposes: it allows investors that are traditional fixed income investors to shorten up without leaving the asset class entirely. Also, cash right now isn't paying much, so they are not necessarily going to drop all of their fixed income assets into cash. If they are looking to hold on to their investments until other asset classes become more attractive, I think they will look at the conservative end of the Ultra Short category. After the recent changes to 2a-7 become effective, traditional cash investors will probably employ several different strategies. Some of their cash will remain in general purpose money market funds, some will go into government money market funds, and some may be invested directly in treasuries or CDs. Investors with a long time horizon may establish an SMA, but those with shorter scopes will look to conservative Ultra Short bond funds.
We wanted to remind those attending (or considering) our upcoming European Money Fund Symposium in Dublin, Sept. 17-18 to make hotel reservations asap if you haven't yet. Our block of rooms at the Conrad Dublin is almost sold out (and the hotel expects to sell out), and attendees only have a couple more days to get our discounted rate. Visit www.euromfs.com to see more Hotel details, to register or for more information. Crane's European Money Fund Symposium is the largest annual gathering of money fund professionals outside the U.S., and features two days of sessions and discussions on European and global money fund issues. (Note: Mark your calendars too for next year's U.S. Money Fund Symposium, the largest money fund conference in the world, which will take place June 22-24, 2016, in Philadelphia. Our next "basic training" event, Crane's Money Fund University, will take place Jan. 21-22, 2016 at the Hyatt Regency Boston, and we're also preparing to launch a new Bond Fund Symposium, though likely not until March 2017.) In other news, the Financial Times wrote late Friday, "Investors Head for Cash and Gold in Volatile Week. The piece says, "Stock market volatility ... drove investors out of equity funds this week and into gold and money market funds. Outflows of $29.5 billion from equity funds ... were the highest on record in nominal terms, according to an analysis of data from EPFR by Bank of America Merrill Lynch. Meanwhile, more than $22 billion flowed into money market funds, a cash proxy.... "The Chinese situation has some investors taking stock, and there certainly has been an increase in US money market fund assets," says Dennis Gepp, a managing director who runs the European money market funds for US-based Federated Investors." (Note: Crane Data's Money Fund Intelligence Daily shows money fund assets increasing by just $10.7 billion through Thursday (8/27), hinting that flows subsided late last week. Money fund assets inflows have been strong all summer though, even long before the recent market correction.)
The July 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: "Vanguard Goes Pure Retail; UBS, SSgA, MS Reveal Plans," which explains what several of the largest managers have said recently on money fund reforms; "Anticipation, Change Focus of 7th Money Fund Symposium," which recaps the highlights of our record breaking conference last month in Minneapolis; and "Responding to MM Reform Questions at Crane MFS," which features commentary from the SEC's Sarah ten Siethoff and other attorneys on reform FAQs. It also discusses recent fund liquidations. We have also updated our Money Fund Wisdom database query system with June 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 July Money Fund Portfolio Holdings are scheduled to ship Friday, July 10, and our July Bond Fund Intelligence is scheduled to go out on July 17.
The lead article in MFI says, "In June, a wave of fund companies announced how they plan to adapt to the new money fund rules, including one of the biggest, Vanguard. UBS, SSgA and Morgan Stanley also made MMF announcements. Of note, Vanguard became the first to decline to offer institutional floating rate Prime or municipal money funds, though every other large complex had pledged to offer these to date."
It continues, "A press release entitled, "Vanguard To Designate Prime And Tax-Exempt Money Market Funds For Individuals," explains, "Vanguard plans to designate its $133.4 billion Prime Money Market Fund and its six tax-exempt funds (one national and five state municipal money funds) as "retail funds," meaning that individual investors will continue to have access to these funds at a stable $1 NAV. In addition, Vanguard announced two name changes, effective December 2015: Institutional Shares of Vanguard Prime MMF will be renamed Admiral Shares. Vanguard Admiral Treasury MMF will be renamed Vanguard Treasury Money Market Fund."
In our "profile" this month, we review the highlights of our Money Fund Symposium. It reads, "Crane's 7th Annual Money Fund Symposium, which was held in Minneapolis in late June, is now in the books, and it goes down as our largest conference ever. We had a record number (501) of attendees, and we also had what many have called our best program ever. Thanks to those that participated! Below, we review some of the highlights."
MFI explains, "The conference kicked off with a welcome address and Q&A featuring Karla Rabusch, President of Wells Fargo Advantage Funds. Rabusch said, "We are focused on clients first, that's why we are all here. Sometimes it feels like we're focused on regulators first because we're responding so much to [them]. But we need to make sure that we're fitting our clients' needs into the regulatory framework. There is always going to be a place for money funds. We'll see how they transition -- how much [shifts] to government funds, how much stays in prime, how it all works. There are obviously going to be opportunities, and we're all going to find ways to meet the needs of our clients."
It adds, "Day 1 also featured a session on the "State of the Money Fund Industry" with Crane Data's Peter Crane, Federated Investors' Deborah Cunningham, and JP Morgan Securities' Alex Roever. Crane said, "Money funds still hold $2.6 trillion; it's amazing that the base is still there. So while people predict where the money might flow in 2016, I take the 'under' on this. I think assets will be pretty much where they are today, because they have been flat for the last 4 years. If the money hasn't gone elsewhere by now, what in God's name is it waiting for?" Roever added, "We've got fund sponsors like Federated, Fidelity, Blackrock, etc., who are who are making all sorts of plans about what to do as reform approaches.... The missing piece in all this is the shareholders, and actually that's the most important piece. Where do they move their money and are they going to have the ability to actually move?" Predicting fund flows out of prime or bank deposits and potentially into government funds is "the biggest parlor game.""
The third article says, "One of the featured speakers at Crane's Money Fund Symposium in Minneapolis, June 24-26, was Sarah ten Siethoff, Senior Special Counsel at the Securities & Exchange Commission, who elaborated on some Frequently Asked Questions on money fund reforms. She sat on a panel along with attorneys Stephen Keen of Perkins Coie; and Jack Murphy of Dechert, in a session called "Money Fund Rules: Questions on the Rule." Keen & Murphy provided an overview of reforms, then focused their attention on some of the FAQs that they felt required additional clarification."
The issue also has a brief entitled, "Fund Liquidations Jump in June. It says, "JP Morgan, Fidelity, Federated, Touchstone, and Reich & Tang all liquidated money funds in recent weeks as a result of lineup changes and mergers precipitated by reforms."
Crane Data's July MFI XLS, with June 30, 2015, data shows total assets rising by $15.5 billion in June, after rising $26.8 billion in May. (MMFs assets fell by $156.8 billion total in the first 4 months of 2015.) YTD, MMF assets are down by $114.8 billion, or 4.3% (through 6/30/14). 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 0.16% (Crane MFA, up 0.01% from last month) and 0.19% (Crane 100, same as last month) on an annualized basis for both the 7-day and 30-day yield averages. Charged Expenses averaged 0.14% and 0.15% (unchanged) for the two main taxable averages. The average WAMs for the Crane MFA and the Crane 100 were 36 and 39 days, respectively, down 2 days and 1 day, respectively, from last month. (See our Crane Index or craneindexes.xlsx history file for more on our averages.)
In other news, the International Monetary Fund released its annual assessment of the US economy, commenting on a number of areas, including money markets. On money market funds it says reforms have helped, but vulnerabilities remain. "Changes to the triparty repo infrastructure (including reengineering of the settlement cycle, improvements in the collateral allocation processes, and limits on intra-day credit) have reduced risks. Despite reforms, vulnerabilities in the triparty repo market remain large (including the reliance on two clearing banks). Potential next steps could include the use of central counterparty clearing houses for repo transactions. This, in turn, would require implementing adequate risk management requirements for central counterparty clearing houses including cyber resilience, standardized stress testing, and recovery and resolution regimes. The requirement that some money market funds move to a floating net asset value by 2016 is a positive step. `However, a significant share of funds will be able to maintain stable net asset values, allowing institutional and retail investors to treat their investment as deposit-like, despite their greater liquidity risks. Shifting all money market funds to floating net asset values should be reconsidered."
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, 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.)Archives »