We continue with excerpts from our recent Money Fund Intelligence "Q&A" in today's Crane Data News. As we mentioned Monday, we recently interviewed Reich & Tang President & CEO Michael Lydon on the company's "white-labeled" money funds, about its FDIC-insured sweep program, and about the cash investment marketplace in general."
Q: What is "white-labeling"? A: White-labeling or "private-labeling" is an outsourcing solution where a proprietary class of one of our Daily Income Fund portfolios is branded for an intermediary (i.e. broker-dealer) client's offering. Due to the prohibitive costs associated with creating the class, most money fund providers have a significant minimum asset requirement for this solution.
Q: Will you have to be a giant in the future to manage money funds? A: Reich & Tang operates in what I perceive to be a "sweet spot" in the money fund space. We are large enough to achieve economies of scale and to enjoy the benefits of being a significant player in the market, yet we do not face the same challenges some of the larger money fund managers do, particularly in terms of finding available credits. We believe this will become more evident with the changes to SEC rule 2a-7 as more assets compete for an even smaller qualified securities pool. Although over-consolidation of money market funds may create an investor depth problem in the cash markets, our sense is that smaller money fund managers, who do not consider cash management a core focus, will exit the business. We hope to capitalize on such decisions in a strategic manner, and to bolster our status as a retail-focused, mid-sized provider.
Q: Do you also offer FDIC-insured products? Tell us about that marketplace. A: Yes, we have Reich & Tang Insured Deposits (RTIDs). The FDIC-insured product is a complimentary product to our money funds. We are actually one of the few cash management providers that offer our intermediaries the option of a money fund or a FDIC-insured product for their customer's cash. The marketplace for FDIC-insured products has grown significantly over the last few years. Many of our intermediaries have added or are looking to add Reich & Tang Insured Deposits as an option for their customer offerings. We anticipate the demand to continue to be strong among intermediaries to launch new insured deposit programs as a sweep option for their clients.
Q: What are your thoughts on the SEC Money Market Fund Reforms? A: Reich & Tang embraces the SEC's changes, and we were not surprised by any of them. We have been planning for these changes for over a year so we foresee minimal problems, if any, with implementing them. With these changes, we find the SEC rules are becoming more consistent with our investment philosophy and resulting investment practices.
Q: What about the future of money funds? Do you think changes like a floating rate, liquidity facility, or capital reserves are likely and/or desirable? A: Although some industry consolidation is inevitable, we feel that the future for cash management solutions like money market funds and FDIC-insured deposit programs is bright. This is especially true in a rising interest rate environment where money market funds, through management of maturities, can take advantage of higher yields as soon as rates start to rise. In addition, money market funds remain an essential conduit in the short-term capital structure, which helps to maintain low financing costs for businesses.
As for revisions to the money market fund structure, we support all efforts to increase the liquidity and capital strength of money funds. But we disagree with proposals such as a floating NAV, which we feel would not eliminate the prospects of a "run" on a fund. We agree with the ICI's position that a floating NAV would "mean constant accounting and tax headaches." In such funds, investors must track realized or unrealized capital gains and losses in their position and conduct detailed recordkeeping when there are changes in the value of their money market fund investments.
