NOTE: See Crane Data's Peter Crane talk about the possibility of negative yields in money market funds on Bloomberg TV today at 4:12pm.
This month Money Fund Intelligence spoke with Mike Kitchen and Rich Williams, portfolio managers of the Cavanal Hill Funds, which until recently were known as the American Performance Funds. The $4 billion money fund complex's Cash Management, U.S. Treasury, and Tax-Free Money Market Funds are advised by Cavanal Hill Investment Management, a wholly-owned subsidiary of Bank of Oklahoma.
As with previous fund profiles, we first ask, "What is the biggest challenge in managing your money fund?" Kitchen responds, "It's always been about balancing the need for credit-worthiness and liquidity and return. Creditworthiness and liquidity should always be the top priorities, but the events of the past couple of months have made this even more obvious. What's happened underscores the need to do your own homework because ratings don't always capture the complete risk picture on any name. That's always been the case, and even more so now."
On Cavanal Hill's size, Kitchen says, "It's possible to be closer to your shareholder base with fund complexes of our size.... Of course, we're not as small as we used to be. Four billion is smaller than many, but it's still sizeable compared with where we started.... Although a lot of funds have had ABCP in varying sizes, the more that you have the more analysis you have to do, the more complicated the analysis is."
Kitchen tells us, "We definitely shortened maturities in the Cash Management Fund over the past few months; we've suspended ABCP investments. If you look at our holdings, we haven't been major players in the ABCP space anyway. But we thought it was wise to suspend purchases altogether for a while." On new securities, he says, "We've probably looked at everything that everyone else has looked at.... We've always stressed safety and liquidity before yield and the holdings tend to be classic, traditional money market holdings."
Kitchen says, "Clearly we are going to see lower rates... [But] the Fed funds bullet has basically been spent. How much good is lowering the funds target level from here going to do? [You have to wonder], especially because the effective rate has been below that a good chunk of the time anyway. The money fund is a very important source of funding for Corporate America. It's anybody's guess as to how far they are going to go. The challenge is keeping the quality up, yet earning enough yield to overcome the lower levels."
Finally, we asked, "How about Treasuries?" Kitchen says, "Yeah, they are definitely low, reflecting what's going on in the market. There is still is a voracious demand for Treasuries and agencies because of the flight to quality and safety.... Definitely, you're seeing the Treasury funds out there reflecting the lower rates. It's going to stay there for some time." For a copy of the full Cavanal Hill interview, e-mail Pete.
