Today, we reprint the remainder of our recent Money Fund Intelligence "profile" of Fidelity's Money Market Group President Robert Brown. We ask, Q: What are your thoughts on the future of money funds? Brown answers, "Looking out five years, I think the industry will be alive and well. It will continue to provide a low cost, convenient form of short-term financing for corporations, state, federal and local governments, and issuers in general. It will continue to provide a strong value proposition for shareholders. I'm saying that in a more normalized rate environment, but that value proposition will be there.... It will be a product that sustains the test of time."
Brown explains, "First, we think the changes put in place by the SEC in 2010 have significantly increased the resiliency of money funds. The lower WAMs reduce interest rate exposure; the new WAL requirement decreases spread risk; the new monthly holdings and Form N-MFP provide greater transparency; the lower Tier 2 amounts limit credit risk; plus, the board has new tools to suspend redemptions to limit the potential losses for shareholders in an emergency."
He adds, "The new liquidity requirements have created approximately $820 billion in ready liquidity in money market funds, without any government backing. I think that is critical to understand. Again, we have a significant opposition to the floating NAV and bank-like capital requirement for advisors. That is not something that Fidelity supports."
Q: Tell us about your PWG comments. Brown responds, "We are offering another option we feel may be most viable. The basic idea is to have a 'hold-back' of a small amount of income to allow a reserve or a buffer to build within each money fund. The buffer will rise over time and be an asset of the fund subject to board oversight. We think having this additional amount in the fund, which would be disclosed to shareholders monthly as part of Form N-MFP, would give investors even greater confidence in these funds. In our comment letter, we made reference to a hold-back similar in size to the cost of the Treasury guarantee program. We think the advantages are that this will be simple to implement and within the authority of the SEC to enact within the changes to 2a-7. Although there are tax changes that may be helpful, this idea can be implemented without changes in tax law."
He continues, "Liquidity has been significantly enhanced through the Rule 2a-7 changes that went through in May of 2010.... [I]f you go back and you look at, 'How does a fund actually create 30% liquidity?' Well, it requires in terms of the actual portfolio construction close to almost 50% of your securities now within a 30- day window.... We think liquidity has been addressed, and we are quite comfortable with how our funds are positioned. We do not necessarily see the need for additional liquidity requirements."
Brown adds, "Advisors need to continue, as they have for many years, to do a very good job with making minimal credit risk determinations and position their portfolios accordingly. Our buffer concept really deals with market value NAV volatility, such as we experienced during the market stresses of '07 and '08 prior to the default of Lehman Brothers. We think this buffer would help provide more flexibility to portfolio managers to exit securities that they didn't deem appropriate for the fund at that time."
Q: Can you talk about Fidelity's customer base? He says, "From a taxable perspective, we're just slightly more overweight institutional vs. retail at this point. But it is practically 50-50. On the municipal side, it's predominantly retail investors. Through our various distribution channels, we have a well-defined set of principles in terms of the institutional money that we will actually ... take into the funds. It goes through a well-structured review in terms of: How long will the money be here? What is the size of the money? What is the potential liquidation date? How does it impact existing shareholders? Any dollars that we take in, we ensure that it has no negative impact on our existing shareholders."
"That conservative approach served us well in '07 and '08, and it continues to serve us well today. Most of our funds have a blend of different type of shareholders. Many funds are sold through intermediaries, who have been exceptional partners for us, and we view them as critical to our existing and future success," he explains.
Q: Overall, what has been the key to Fidelity's success? Finally, Brown tells us, "I would say that it goes back to the historical vision of the firm in terms of looking at the money market business as a franchise business and the view that success will come over decades, not over 12 months. It has been the continued investment in research, the underlying hallmark of Fidelity. It's in our name.... It's the consistency, in terms of the investment strategy, it's the consistency in terms of dedicated resources to this business, it's the consistency in the firm's approach to the long-term strategy and the franchise tag on this business for Fidelity. And, always, the number one focus is on our shareholder."
