On Friday, we excerpted from the March issue of our Money Fund Intelligence newsletter, which profiled Bob Brown, President of Fidelity's Money Market Group. We feature part II of the interview today.... Brown says to MFI, "I think that we have a time-tested investment process that has certainly weathered what most would describe as a 100-year storm, and we continue to look to enhance that. We do it from the lens of a conservative approach. I think shareholders have really stated emphatically that yield is not their number one objective."

He adds, "There is a strong value proposition here, which is the diversification of your short term holdings. We pay out a market-based rate vs. a bank's administered rate. And there are also the benefits of what the product offers, in terms of the stable NAV, the check writing, and so forth."

Q: What are the funds buying now? What about new portfolio disclosures? He comments, "Given the size of bank issuance, we continue to focus a great deal of our efforts in this sector. We continue to like Canada, Australia, Switzerland, Japan and core Europe -- France and Germany, in particular."

Brown says, "The bank exposure in our prime funds is at its lowest that it's been in a long, long time. We have added floating rate exposure in the 6-12 month final maturity range. Our agency exposure is down; it is hard to really obtain significant amounts of value there vs. Treasuries. We're continuing to buy Treasuries across all funds to provide quality and liquidity in all of our taxable money market funds. Although they may not be the highest yielding alternatives, we feel that they often represent attractive value for our funds, and contribute to favorable risk adjusted returns."

Q: Are you hearing any customers concerns lately? Brown tells MFI, "In terms of our institutional customers, there is a level of focus on European bank exposures, given the overall sovereign debt crisis.... There is also a fair amount of interest on what were the implications from the first round of 2a-7 reform. Our customers are also interested in what is the most likely next step for future 2a-7 regulations and the recent PWG report."

Q: What's your outlook for rates? He answers, "The market expects the Fed to begin tightening in early 2012. It seems reasonable, given the better data that we've seen recently. Markets will clearly take rates higher in advance of the Fed, so we should see rates move higher in the second half of 2011 if economic activity continues to improve. A near-term concern about lower rates is driven by downward pressure on repo. Longer term, which for us is 6-9 months, the outlook is more positive. But for now there will continue to be pressures that will force short-term rates down."

Q: How are fee waivers impacting Fidelity's money funds? Brown says, "The business continues to be a franchise business for us. Given our scale and our size, and very competitive fee structure, we are able to navigate through this very difficult period of low rates.... [G]iven our asset base and our long term commitment to this business, we believe that we have the necessary resources ... to continue to reinvest in this business and deliver the product that our shareholders are looking for. That will not change.... If you look at the beginning of '07 to the end of January 2011, our money fund assets under management increased by approximately 63%, moving from $265 billion to $435 billion. That is only our 2a-7 registered funds. Our market share has gone from 11.4% to 16.1%."

Look for the final piece of our interview later this week or contact us to request the full issue of Money Fund Intelligence.

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