This month, Money Fund Intelligence interviews BlackRock Managing Directors and new Co-Heads of Global Cash Management and Securities Lending, Rich Hoerner and Simon Mendelson. We ask the two veterans about BlackRock's recent mergers, about the company's excellent long-term safety record, and about recent hot topics involving money market funds. Excerpts from our Q&A follow:
Q: After all your fund mergers -- Merrill FFI, BGI, etc. -- is everything now 'one BlackRock'? Mendelson responds, "That's right. We've integrated. All the funds are being managed off a common platform, by a common portfolio management team, using a common set of guidelines, approved lists, etc.... We completed a formal fund merger in Europe to create a single fund family. We have not yet done that in U.S., but we are exploring those ideas. But for now we are all up and running on a common platform."
Q: How have the funds weathered the storm and crisis? Hoerner comments, "We are proud of our track record. Dating back to 1973, when TempFund was created, we've never, whether it was BlackRock or its predecessor, had to take steps to support the NAV at one of our 2a-7 funds. And that includes the most recent credit crisis. We place a lot of resources in credit research and risk management, and it's during times like 2007, 2008, when that investment and those resources really pay off."
He continues, "So, going back to 2007 we didn't own any of the problem SIVs. In 2008, we didn't own Lehman when it collapsed. We were able to withstand the redemption run in September 2008, largely because we were prepared for it. In the summer of 2008, we were growing increasingly concerned about the lack of liquidity in the market and about Sigma Finance, which was the last independent SIV that was still standing. Sigma was held in many money market funds, but not in BlackRock funds. [W]e had concerns about what would happen if Sigma had issues. As it turned out, all of the money fund holdings of Sigma were paid and it was Lehman Brothers that caused problems. We were pretty well positioned to make good on redemption requests."
Q: Are you surviving the yield drought? Does it help to be a giant with low yields? Hoerner replies, "I think it does. Our assets are skewed towards institutional, which, just given their lower expense ratio, and with the exception of treasury funds, still offer some sort of a return. Banks have been more aggressive going after retail money fund assets, as opposed to institutional assets. Institutional funds have weathered the storm better than the retail fund assets. That has certainly been a benefit given our mix of institutional and retail assets."
"Q: What is the biggest challenge today vs. historically in managing the funds? Mendelson answers, "The two biggest challenges in the industry today are the low yield environment and potential regulatory changes. The historically low yields make other options more competitive vs. money market funds, and it's just a difficult environment. The other big challenge, we believe, is the regulatory question and how that will play out. In addition to the SEC rule changes passed last year, there are a spectrum of additional ideas being considered. We have been discussing various options with policymakers in Washington, as well as with other managers and with clients. Our goal is to help get to a strengthened and more secure money market industry that continues to be attractive for issuers of commercial paper and investors in money market funds." Hoerner adds, "Given the fact that the industry is going through changes, we are spending more time talking about those changes with our clients."
