In the May issue of our monthly Money Fund Intelligence, we feature the story, "U.S. Bancorp Sticks With First American Funds," which profiles the First American Funds and interviews President Joe Ulrey, who is also the CEO of the fund's advisor, U.S. Bancorp Asset Management, and Jim Palmer, the Head of Investments for U.S. Bancorp Asset Management. The Minneapolis-based company was one of the early entrants into the money market space and has now managed money funds for 30 years. We discuss the firm's history, recent changes and the challenges in the money fund space today. Excerpts from our Q&A follow.
MFI: How long have you been in the short term investment business? Ulrey: Jim and I have been working together on the money market funds for the last 20 years, so we have a long history. We both have earned our gray hair legitimately managing through a lot in the money fund space. I started out in cash as head of the short term money market business and Jim worked with me as lead PM. I went on to serve as Treasurer and CFO, as well as holding a variety of other leadership roles within our predecessor firm, FAF Advisors, Inc. Jim has continued to grow and add more responsibilities, ultimately heading the fixed income investment side of our business.
MFI: Tell us about your recent rebranding. What's changed? Ulrey: As you are aware, at the end of 2010, U.S. Bancorp entered into a strategic transaction with Nuveen Investments, where the long fund portion of the business of FAF Advisors was contributed in exchange for an ownership interest in Windy City, the parent company of Nuveen Investments. The important thing to understand is that the money market and short term fixed income business was not part of the transaction and was never considered to be part of the transaction; it has always been viewed as a foundation product offering for U.S. Bancorp.
MFI: How much cash do you manage? Ulrey: Of the $54 billion we are managing today, about $41 billion is in our five registered money market funds. The remainder is in separately managed custom cash portfolios and securities lending collateral programs. We also retained the First American closed end funds and are advisor and administrator for these funds. These closed end funds are just under $1 billion and they are sub-advised. They also weren't part of the Nuveen transaction.
MFI: What is the biggest challenge in managing the funds? Palmer: Money market investing is dynamic, interesting and competitive. I think the primary frustration today is certainly the low rate environment, which has been exacerbated by the significant decline in repo and money market yields on the front end of the yield curve. Low repo rates have dragged down money market rates across the entire front-end maturity spectrum.
In addition, the very thoughtful and appropriate regulatory changes that we've seen in both the money market and banking industries have created an interesting dynamic where money market funds are being required to carry more liquidity while banks are being encouraged to issue longer dated debt. As fund managers, we have to navigate through those changes, and get on top of new products that are coming to the short term market. The First American Fund complex was already fully rated so we were well positioned to integrate the more conservative regulatory policies.
MFI: Can you survive these low yields? Palmer: With repo rates in the low single digits, it makes everything more difficult. [But] this was not a panic-induced reduction in yields, it was more of a reaction to technical factors. We believe a lot of those factors will be alleviated over time. One of the factors that got a lot of headlines was the change to the FDIC insurance fund assessments. That certainly had an impact on repo rates. Over the next several weeks, repo rates will probably end up lower than they were in the first quarter, but should move higher than they are today. (Look for Part II of our interview in coming days, or see the May issue of MFI.)
