Money Fund Intelligence's October issue profiles Morgan Stanley Investment Management and speaks with Kevin Klingert, Managing Director & Head of Liquidity, Dave Carson, Executive Director & Head of North America Liquidity Sales, and Executive Director & Senior Portfolio Managers Jonas Kolk and Michael Cha. Excerpts from our Q&A follow:
Q: How important are money market funds to Morgan Stanley? Klingert says, "Earlier this year, Morgan Stanley Investment Management (MSIM) established a dedicated Liquidity Management business. While we have been in the money fund business since the seventies, this distinct unit within MSIM is focused on the 2a-7 and customized cash market. This is a business that the firm knows well, and is an important complement to the overall suite of investment solutions that MSIM provides to our clients."
He adds, "The importance of money funds to Morgan Stanley is evidenced by the depth of resources we have established in credit, research, portfolio management, as well as in the expansion of our distribution resources both here in the United States and offshore. Morgan Stanley has committed significant financial resources to expanding our Sales presence, as we have recently completed the process of hiring highly experienced sales people in five regions within the United States, and London. We believe we have attracted some of the best talent in the industry, which is a testament to our commitment to the business, the respect of the franchise, and the anticipation of MSIM's plans to increase AUM and overall market share."
Q: How has MS been weathering the storm and now the yield drought? Kolk tells us, "We have been unwavering in our commitment to managing our portfolios in a thoughtful and conservative manner, focusing on principal preservation and liquidity. At certain times during the storm, we have sacrificed yield in our portfolios, defensively positioning the funds during times of market stress and dislocation. This defensive posture has allowed us to capitalize on market opportunities to participate in prudent, innovative investments resulting from market and regulatory changes.... Putable FRNs are a great example. Due to our conservative WAM/WAL positioning we proactively approached several high quality banks and negotiated putable transactions with three month put windows and attractive step-up coupons."
Cha adds, "I believe that our early conservative approach to the way we manage money has now become more uniformly adopted as a result of the changes to 2a-7 and the interest rate environment. The yield drought has affected everybody, and as we initially saw a migration of clients from Prime Funds to Government Funds, we are now beginning to see a leveling off of this type of activity. We continue to see steady growth in all funds as we enter the 4th quarter, and as our sales presence grows, we anticipate significant growth in 2011 and beyond."
Q: What's the biggest challenge in managing money funds? Kolk answers, "Today's biggest challenge is keeping pace with the rapidly developing and changing regulatory landscape and the potential for associated unintended consequences (i.e. Basel III). In addition, proposed changes to rating agency methodology add to the challenges. From an historic standpoint, the biggest challenge has been striking the correct balance in terms of the natural asset liability mismatch that is inherent in money market funds. It has and continues to be a delicate balance between delivering a competitive return for our shareholders while maintaining ample liquidity in a safe and sound portfolio construct."
Q: Will you have to be a giant in the future to manage money funds? Carson comments, "While I don't think you have to be a 'giant' to manage money funds, we have seen consolidation in the industry, and we expect more. Liquidity Management is highly scalable, and those who can best recognize these economies of scale will be well-positioned to succeed. While scale will be important, it is also essential that some of the giants not lose the flexibility to adapt to various market conditions. We feel that we are very well-positioned to support sustained growth, as a function of competitive performance, and adherence to our strategy of dedicating ever-increasing resources to this business. Again, this is a core business to MSIM overall, and we will continue to support the business from the considerable resources of Morgan Stanley and the team of dedicated expert professionals delivering it."
Q: What are your thoughts on the future of money funds? Do you think changes like a floating rate, liquidity facility, or capital reserves are likely or desirable? Klingert says, "Clearly, there have been changes in the money market industry, and additional changes are being considered. Regardless of the outcome, we feel confident that, however the landscape evolves, MSIM's Liquidity Business will be well positioned to be successful. We will continue to evaluate the marketplace and dedicate resources to ensure this success."
