Yesterday, we excerpted from our latest monthly "fund profile" in the December issue of our flagship Money Fund Intelligence newsletter. We interviewed Creston King of Davis Selected Advisers, manager of the Davis Government Money Market Fund. Below, we reprint excerpts from the second half of our Q&A with the Government fund portfolio manager.
King tells MFI, "Occasionally, I see some Government guaranteed agency paper that is short enough to be included in the portfolio. We might participate in this, because we have the ability to pick up the crumbs, where the bigger shops aren't going to waste their time.... We are willing to trade smaller pieces because we have smaller portfolios."
"Some of these are 100% guaranteed by the U.S. Government. Fannie and Freddy are right now, but Farm Credit and Home Loan are not. There are government agencies or government sponsored enterprises. It isn't implied backing. But if you get a bond, for instance, that is 397 days to maturity or less, you might pick a smaller piece of that. Someone in the trust department area of a bank might say, 'Hey, look, this is a cash instrument. Let's get out of it and do something different.' We can pick that up at an advantageous yield because not many other people are willing to pick up that kind of paper," says King.
Q: Have you guys ever gone outside of the government agencies? He tells us, "We looked at going into FDIC paper. But we got back to the Davis thinking on that, which is, 'Yes we can. However we are picking up just a few bps. It's not worth risking our reputation to go after a few extra basis points. Let's just stick to what we are doing here and stay in the safer positions.'"
Q: What's your outlook for the Fed & rates? King says, "Perhaps it is wishful thinking, but I'm thinking we might see some increase in rates in the late second quarter or early third quarter. I don't know that the Fed will actually come in and do something, but perhaps there will be some improvement in the economy that is evident.... [But] we really don't see the Fed doing anything really all throughout next year, although I am hoping that there is some change by midyear.... I am hoping that there is some increase in that help to push rates up. I have a hard time buying right now 1-year paper yielding in the 20s."
Q: How about your tolerance for fee waivers? King answers, "We've been approached by people asking us, 'Do you want us to manage your fund for you?' The response from senior management here was, 'No, absolutely not.' [But] we have been writing some substantial checks over the past number of months to basically keep us at zero yields."
Q: Are you using any other strategies to survive like pushing the WAM up against the limit or cutting expenses? He answers, "The WAMs have become so short that it's hard to get there. At ninety days you could do some positioning. But now you ... start to bump up against things quickly ... That is why I wouldn't be surprised to see some guys ... flip the switch here and play just outside of money market range. And we may be headed towards that if we actually do go to the floating NAV."
Q: Any predictions on the future? King says, "I thought if we could get through 1994 we could get through anything. But here we are in the land of no yield.... I don't know ... where are we headed or how quickly we are going to get there. But I think, currently, we are still of the mind that we [will] keep it going. But at some point this is going to have to change.... On the plus side, there is still a ton of cash sitting on the sidelines in this market, because there is so much uncertainty as to what can happen and might happen."
Q: Are there any other secrets to competing as a small shop? King tells us, "In my career it's been about maintaining relationships. One of the things that we do is look at small positions in traders' inventories. Sometimes we can obtain higher yields on the small positions. I have found this helps to keep us on the dealers' radar and perhaps help us to get an extra call every now and then."
