In our latest Money Fund Intelligence "Profile," we interview Waddell & Reed Portfolio Manager Mira Stevovich and Assistant Portfolio Manager Sabrina Saxer. Waddell, founded in 1937, is one of the oldest mutual fund complexes in the United States. The advisor introduced its first money market fund in 1979, and the fund company now runs 79 mutual funds with $91.7 billion in assets (as of June 30, 2011). The first half of our Q&A follows. (Look for part two in coming days.)

MFI: How much cash do you run? Stevovich: We have three money market funds that currently total approximately $1.6 billion in assets. In addition, we manage the cash portion of our other mutual funds. Depending on the equity market, we have on average $3 to $5 billion in additional cash.

MFI: What's the biggest challenge in managing a money fund? Stevovich: Low rates for an extended period of time has been our biggest challenge. In addition, the weak economy has significantly decreased the supply of commercial paper available to us. Banks, which have historically been a big portion of the market, have been under tremendous pressure and have not been as attractive from a credit standpoint.

Saxer: I would have to add that I think that another big challenge has been and remains the regulatory environment. Stevovich: Yes, the regulation has been very challenging, however, on the positive side it has come at a time when we haven't had to focus on predicting the next Fed rate move. This has given us time to devote to implementing the new regulations.

MFI: Do you do more than manage the portfolio? Stevovich: Yes, in addition to managing the cash, we do our own internal credit work and due diligence. We have also been actively involved in building the new 2a-7 compliance models and mechanisms. For example, Sabrina created and maintains our stress tests. Also, because of all the new regulations, recently we have been interfacing more with our legal, compliance, and accounting staff. Saxer: We are an efficiently staffed shop, so it is not uncommon for us to be involved in all aspects of running the funds.

MFI: What are the funds buying now? Stevovich: Historically, we have invested in a combination of corporate and bank credits. However, since the 2a-7 amendment, we have increased our use of taxable and tax exempt VRDNs because they fit the 7 day liquidity requirement. Traditionally, we have not invested in repos for the money market funds, and given the extremely low interest rate environment, we don't anticipate investing in this vehicle in the near future. Currently, we are not investing in Euro zone banks or traditional asset-backed securities.

Saxer: We do, however, invest in Straight-A Funding, which is a unique asset backed program in that it has an SEC exemption letter that allows funds to consider the program U.S. government guaranteed. Regarding the VRDNs, in addition to providing liquidity, they have put options that allow for pricing at par. This helps keep the fund's NAV stable.

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