Below, we excerpt the second half of our latest Money Fund Intelligence "Profile," which interviews Waddell & Reed Portfolio Manager Mira Stevovich and Assistant Portfolio Manager Sabrina Saxer. MFI: Does being retail funds give you a more diversified and stable base? Stevovich: Yes, the flows are more predictable. Our shareholder base is very large. We have what I call 'sticky assets', in that if rates go down, investors don't necessarily leave the funds. Their concern is stability of principal and return of assets rather than a primary focus on return on assets. So there's not a lot of volatility in our flows.
Saxer: In addition to having a broad shareholder base, our average account size is quite small such that it would require an unusually large amount of transactions to materially impact our funds. We didn't experience significant redemptions during the crisis of '08 and in fact, on the whole received net inflows. The recent market concerns, including the credit downgrade of the United States and the European market disruptions, have not caused flow problems for us either. I believe this is true for most retail funds.
I think it is important to note that the industry has functioned incredibly well prior to and since the fall of 2008. During the several weeks surrounding this last crisis, money market funds, as a whole, experienced massive redemptions which did not disrupt the market from a liquidity standpoint. This should be a good measure for the regulators in their consideration of further changes to 2a-7 funds.
Stevovich: Retail funds, for the most part, were not impacted with regard to outflows to the same extent as institutional funds. I think that's what has been most difficult for us to accept, this 'one size fits all' regulation. Our funds are very different as the recent flow volatility shows, and the liquidity requirements are probably a little bit of overkill for the retail funds.
MFI: What about fee waivers and survivability? Stevovich: I believe for the foreseeable future that our management will continue to support the money funds as a service to our fund complex clients. Saxer: Currently, the 2a-7 funds provide a convenience for our customers. For now, subsidizing the money funds is part of our cost of doing business in this low rate environment. Rates can't stay low forever and in the future, this will be a profitable asset class again.
MFI: What are your thoughts on the future of money funds? Saxer: What I don't want to see is, as Mira pointed out, a 'one size fits all' regulation if we are to have more of it. We are not operating in a status quo environment as some in the media have put it. The SEC's amendment to 2a-7 last year made tremendous changes and enhancements to the rule. While I agree that many of the changes were important, some were very punitive for retail funds, in particular the creation of the 10% and 30% liquidity buckets. There should have been some sort of tiering based on the size and nature of the fund investor base. If you look at our flows during the most tumultuous times, you'd see that we had more than enough liquidity and 10% overnight is overkill. I would like to see the President’s Working Group proposals tabled for now.
Stevovich: I think a floating NAV for a retail fund would not be a wise move. I believe that would be contrary to why retail investors place their cash in a money market fund. I don't know which would be better, having some sort of liquidity facility or a capital reserve. If I had to choose one of the President's Working Group proposals, the NAV buffer is most appealing, mainly from the standpoint that it would be easiest for a retail fund to implement. Some of the other suggestions, I think would be too complex for a small fund to administer. Whatever additional regulation is mandated, I believe money market funds will continue on as an investment vehicle, because they fill a need for investors.
Saxer: The regulation that has been put into place has addressed what the main problem was back in 2008, and that was a liquidity issue. At this point, I think the additional changes are not necessary and would be regulation for regulation's sake. The Fed providing liquidity in 2008 was systemically important for all the markets at the time, not the money funds specifically. If you think about who actually benefitted from the temporary liquidity and other programs, it was everybody, including taxpayers. The entire market was not functioning. Money market funds have worked very well for a long time and are clearly systemically important for the health of our economy. I think that further regulation could have many unintended consequences and that well intentioned changes made to a $2.6 trillion industry could have very negative implications.
