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|BlackRock Latest to Telegraph Changes||1|
|Wells Fargo's Weaver Says Clients||1|
|Deposits, FDIC 'Amalgamators' Growing||1|
|Money Mkt News, Benchmarks||1|
|Brokerage Sweep & Bank Saving||8|
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The latest issue of our flagship Money Fund Intelligence newsletter features the article, "Wells Fargo's Weaver Says Clients Still Want Yield Too," which profiles Wells Capital Management's new head of money market funds, Jeff Weaver. We reprint our Q&A below... When Dave Sylvester, the long-time head of money market funds at Wells Fargo, announced his retirement at the end of 2014, the reins were handed over to Jeff Weaver, who now wears two hats. Weaver, the head of Wells Capital Management's short-duration team, also become head of the money market fund team effective January 1, 2015. We sat down with him to get his thoughts on not just money funds, but on separate accounts and the short‐duration bond fund space. He also discussed how Wells is evaluating its money fund lineup to prepare for the upcoming rule changes.
MFI: How long have you been involved in the money fund space? Weaver: Wells Fargo has been offering money market funds for 30 years. The oldest fund is the Wells Fargo Advantage Treasury Plus Money Market Fund, which has an inception date of Oct. 1, 1985. Our funds and our talent are really the result of various mergers and acquisitions. Currently, we're the 9th largest money fund provider with more than $112 billion. As for me, I joined the firm in 1994. I started my career at Bankers Trust in 1991. For the majority of my career I have been involved in the short duration and money market space. Since 2002, I've overseen the short-duration fixed-income team at Wells Capital Management. My team specializes in managing separate accounts for corporations, municipalities, and other institutional accounts. Our clients typically have large exposures to money market funds and deposits, but they also look to separate accounts and short‐term bond funds to add diversification, customization, and yield.
There's a lot of cooperation and coordination that goes on between the short duration fixed-income team and the money market team. Matt Grimes and his group of analysts are the primary taxable credit research resource for both of these teams. In the past when Dave [Sylvester] headed up money funds, our teams were very much aligned, much like they are today. Over the years, he's been a great advisor and mentor. Today, I'm working very closely with a tremendous core of senior fund managers that includes Laurie White, Mike Bird, Jim Randazzo, Vlad Stavitskiy, and our head of short‐duration municipal credit research, Ken Anderson.
MFI: What is your biggest priority now? Weaver: Our biggest priority is -- and has always been -- our clients. We want to ensure that we are providing them with the best solutions for their liquidity management needs. We aim to offer liquidity and preservation of capital while maintaining a stable NAV. But certainly, we do all of this against the backdrop of money market reform, as the new rules are officially coming into place in October 2016. Here at Wells Fargo, we have a large team dedicated to complying with these new rules with members from operations, fund administration, IT, portfolio management, legal, compliance, and sales. From the operation side, these new rules will take a tremendous effort to implement. When looking at money fund reform through a portfolio management lens, however, the news rules won't prompt a dramatic change from what we've done before. For example, consider our government funds -- we've always complied with them being at least 99.5% invested in government securities.
MFI: Can you tell us about supply? Weaver: We are seeing a consistent lack of supply. Money fund reform is practically at odds with the increased bank regulations we have seen put into effect since the financial crisis in 2008. Money funds rely on extremely short-term funding. Yet, banks are being pressed to move away from short-term debt and to issue longer-term funding. This lack of supply is consistent when you look across each type of money fund (prime, municipal, government). For example, much of the issuance that is available to prime funds is bank originated, creating an endless supply and demand struggle. [We see this], too, in government funds. Bank funding via repurchase agreements comprises a major asset class in government money funds. Also impacting supply is the increase in demand of bills. Banks now are required to hold more high quality liquid assets (HQLA) so bank demand for bills is increasing. This all adds up to a big challenge when managing money funds today.
MFI: Will you make any lineup changes? Weaver: We remain committed to offering retail and institutional prime, government, and municipal funds -- particularly if that's what our clients want -- and we believe they do. Many of our clients are in a wait-and-see mode until that October 2016 deadline approaches. Right now, we're evaluating our product lineup. We're speaking with clients with the goal of developing product solutions that best meet their needs. Our client base is largely institutional -- 90% institutional versus 10% retail -- so that is always front of mind as we're making these changes. Once we finalize a plan of action, we will present it to our Funds' board. We will not make any announcements until the board has seen and approved those changes.
MFI: What concerns are you hearing? Weaver: When the rule changes were first announced, clients initially were quite concerned about the floating NAV. There's still some concern about how that's going to work for same day settlement and sweep type mechanisms, but not as much as before. Clients remain concerned about the capital preservation portion of a variable NAV, although we believe that they will find the NAV changes to be negligible. Lastly, our clients are now having more of a concern around fees and gates. We continue to keep them apprised of our portfolios and regulatory matters through our monthly commentary and education primers.
MFI: How have you handled fee waivers? Weaver: Fee waivers are definitely impacting us, our competitors as well, in this low interest rate environment. We've been waiving fees now for some time, yet we remain convinced that money market funds are an important investment option for our clients. We believe fee waivers to be a temporary factor which will be best solved by an increase in interest rates. Generally speaking, institutional fund yields will react more quickly to increased rates because there are a lot less waivers involved.
MFI: Are you seeing interest in "enhanced cash"? Weaver: We always advise our client to tier their liquidity management strategy. Many of our clients in the money fund space are already customers of our enhanced cash and short-term bond offerings. It certainly is a compelling time to consider other options other than money funds, and that's one of the reasons we have aligned our money market fund and short duration capabilities. In short duration fixed-income funds and separate accounts we have over $60B in assets -- about $40B of that is in separate accounts while the remainder is in ultrashort and short‐term bond funds.
In the ultra‐short space, we have four differentiated offerings -- the Adjustable Rate Government Fund, the Ultra Short-Term Income Fund, the Ultra Short-Term Municipal Income Fund, and the one we get really excited about is our Conservative Income Fund. We feel like it is a natural extension for money fund customers. We launched the Conservative Income Fund in 2013, and utilized the separate account team's track record. The fund has a one-year maximum average duration, and a limit of 3 1/2 years' duration for any one security. Securities purchased are limited to an A-rating or better and are diversified between money market securities, governments, corporate bonds, and asset-backed securities. The fund was designed to look a lot like the institutional investment policies that we've become quite accustomed to seeing over the past three decades. We think that the Conservative Income Fund is a low volatility NAV option, and an extension beyond the money market fund universe that allows clients to pick up additional yield. It can perhaps be a solution for the next step beyond money market funds.
MFI: Tell us about separate accounts. Weaver: The benefits of using separate accounts are that you can get beyond the money market universe and pick up additional yield, but also you have the ability to customize to your preferences and cash flows. We can customize a separate account to reflect each customer's unique return objectives, risk tolerance, biases, and cash flow needs. We manage separate accounts that range from money market fund-like accounts out to benchmarks that are in the one-to-five-year range ... to pick up the additional yield.
We refer to separate accounts just beyond money market funds as "enhanced cash." They tend to have portfolio durations less than one year and keep their maturities at three years or less. They tend to be invested in single-A or better credits although increasingly we've seen clients willing to go lower in credit quality. That's why we created the Conservative Income Fund; it's representative of those enhanced cash separate accounts. We also offer products in the limited duration space. These tend to have durations right around the two‐year mark. We have many variations of these in the separate account side, in addition to our short‐term fund offerings, the Short‐Duration Government Bond, Short‐Term Bond, and Short‐Term Municipal Bond funds.
MFI: Are you launching any new products? Weaver: We're certainly aware of the 60‐day [maximum maturity] money fund option. We have not ruled out anything. We'll certainly consider it. If we feel like that is what is going to help our clients the most, then we will look to pursue it. However, we do get concerned about supply, and wonder if the 60-day fund is going to offer the yield that clients want given the supply/demand dynamics we just discussed. In the end, clients want liquidity, they want capital preservation, but they want yield as well. That's why you haven't seen a shift away from prime funds yet, because for the time being they can continue to earn the additional yield in institutional prime funds.
MFI: What is your outlook for rates? Weaver: We expect the Fed to raise rates this year albeit at a slower pace than we've been accustomed to seeing in previous tightening cycles. The March FOMC meeting, despite the removal of "patient," had a very dovish tone to the comments and perhaps that pushes off the first increase to later in the year. Now, the increased demand for government securities -- not only from a shift from prime to government, but also from banks with their increased HQLA holdings -- could cause the spread between prime and government to increase. Where we are today with government vs. prime, it's only a modest pickup in yield. But it's quite possible that in the future we could see spreads of 25, 40, or even 50 basis points. All of a sudden, it becomes a much different decision for our clients and, at that point, prime funds could be quite attractive.
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.)