Today, we continue excerpting from our April Money Fund Intelligence article, "Goldman Sachs Marks 30 Years In Money Funds," which interviews Goldman Sachs Asset Management's Dave Fishman and James McCarthy. Our Q&A continues: Q: What's your outlook for the Fed and rates? Fishman comments, "Our base case is that interest rates remain on hold in the US this year. Despite improvements in key indicators, the Federal Reserve's accommodative bias remains underpinned by unemployment around 9% and low inflation, and risks to global growth have clearly risen."
He continues, "But we are firm believers that it takes more than a Fed outlook to keep ahead of market developments these days. Even if the Fed stays on hold, we're well aware that policies across major markets globally have profound implications for investors."
McCarthy responds, "Inflation has clearly become more of an issue in developed economies beyond the US. The Fed's stance contrasts with the Eurozone's hawks, where the European Central Bank has signaled an imminent hike to head off the second round effects of strengthening demand in core Europe, and rising commodities prices. We believe that markets may be overpricing the extent of tightening that is likely to come this year, though, as the peripheries' economic problems are far from resolved. Similarly, we think markets may have overstepped in pricing rate hikes by the Bank of England (BoE) this year. Inflation is more than double the official target of 2% and support for a hike is growing, but we believe the BoE should resist removing stimulus while growth remains weak, and tough fiscal corrections are underway."
He adds, "Even stronger inflationary pressures are arising in the world's largest growth economies, and in China we see further hikes in policy rates and reserve requirements. We're closely monitoring the implications for global rates across all major economies."
Q: What's the biggest challenge in managing a money fund today? Fishman says, "The lessons of the global financial crisis and, more recently, the sovereign debt crisis in peripheral Eurozone are clear. Managers cannot be complacent about credit risks, which arise in the corporate, financial and even government sectors of today's markets. The events of 2007-2010 demonstrated clearly how interconnected capital markets around the world have become, and how swiftly shocks can be transmitted across major financial centers."
Q: How do you manage these credit risks? McCarthy answers, "It's a measure of how seriously we have always taken credit risk, that we have checks and balances in place to make sure our fundamental analysis of short-term credit issuers is thorough. In addition to the research capabilities of our GSAM portfolio managers, we also leverage the independent resources of the Goldman Sachs Credit Risk Management and Advisory department. The CRM&A maintains a list of more than 1,200 approved credits, which are signed off by at least two senior analysts. So effectively we're deploying two different levels of quality control in our approach to credit risk management." (Note: GSAM leverages the resources of Goldman Sachs & Co. subject to Chinese Wall restrictions as of March 31, 2011.)
Q: How does GSAM's size help? How does it hurt? Fishman tells us, "We believe our size is among the key benefits of investing with GSAM. We are large enough to attract the attention of top broker dealers. As a result, our clients can benefit from our broad access to dealer inventories, new issuance, and the highest standards of best execution. At the same time, though, we're small enough to be nimble. We don't need to buy massive quantities of an asset for it to have an impact on the fund. From a risk standpoint, that's a great advantage, when it comes to managing volatility."
Q: How have recent regulatory changes affected the industry and how have you adapted? McCarthy responds, "The most significant recent regulatory changes were the tighter liquidity guidelines in the SEC's revised 2a-7 rules, and similar provisions from the European Securities and Markets Authority. Interestingly, though, these changes have mainly reinforced our perennial conservative approach to our investment strategy. These reforms are in line with how we have managed the cash business for the past 30 years, and we welcome changes that we feel have helped raise the standard of risk management industry wide."
Q: What are your thoughts on the future of money funds and the PWG report? Do you think changes like a floating NAV, liquidity facility or capital reserves are likely or desirable? Fishman concludes, "Liquidity management strategies are now more relevant than ever, and we don't see this situation changing anytime soon. Corporate America currently holds near-record levels of cash, and new risks are arising across global markets. It's impossible to predict how the industry will evolve and regulations will pan out, but we believe there should always be a need for liquidity management."
He adds, "As for the President's Working Group, we recognize that there are no easy solutions to the issues that regulators and the industry are currently facing. We appreciate the discussion and debate these efforts are encouraging across the industry, and we welcome the progress made by regulators so far."
