Today we continue excerpting our recent interview of UBS's money market team, originally printed in the Money Fund Intelligence May 2009 issue. We asked, "What have been the keys to UBS's success in the money fund space? Rob Sabatino told us, "It has been our conservative approach. We have adhered to the principles of 2a-7, rather than chasing yield. Our investment process is based on fundamental credit analysis, which along with an experienced portfolio management team, has enabled all of our money market funds to maintain a $1 NAV without parental support."
Sabatino adds, "Some of the problems that have occurred within money market funds over the last two years have been due to large asset swings. We monitor and manage our shareholder base actively to avoid having problems. I would say it also speaks to our conservative nature. Since we've never chased yield, we never attracted hot money. So, again, we don't see massive swings into or out of our funds."
He tells us, "Even the best relationships are not immune from the reality of economic crisis. The balance sheet issues that the dealers had forced us to realize they may not be able to provide liquidity. In extreme environments, numerous clients may need to exit money funds simultaneously. Even though we rely on these relationships and we value them, ultimately you have to realize that in the hardest times people are going to look out for their own economic interest. We manage the fund accordingly."
We then asked, "What are you buying now? What aren't you buying? Sabatino responded, "The key for us remains liquidity. We realize that you can't count on the Street to provide liquidity. The market has improved significantly, but it remains paramount for a money market fund to maintain daily liquidity in order to meet unexpected redemptions. We maintain a large percentage overnight utilizing repo, CP, and time deposits."
He said to MFI, "We continue to allocate a significant percentage to agencies and treasuries. In terms of credit, we are taking our credit risk very short. We continue to favor the multi-seller, large, bank-sponsored ABCP conduits. Not only do we like the asset class, but currently have the added advantage of the Fed backstop providing liquidity through the AMLF."
Finally, Sabatino says, "I think our internal requirements are more stringent than the ICI's recommendations. We try to keep roughly 10% overnight, and in this current environment are more like 20% overnight. Then we go even further to maintain a large percentage within 35 days.... We feel it's necessary for us to keep adequate liquidity, in case there is some sort of fear in the marketplace or unwind out of money market funds. So we think it's in the fund's best interests to maintain significant amount of liquidity."
Contact Crane Data to subscribe to or to receive a free sample of our Money Fund Intelligence (just $500 a year). MFI interviews a different money fund manager each month and contains news, articles, indexes, rankings and performance statistics on the money market mutual fund universe.
