The following is reprinted from our January MFI.... Money Fund Intelligence's latest monthly fund family "profile" features Charles Schwab Investment Management's Rick Holland, managing director & portfolio strategist for money market funds. We discuss Schwab's history with money funds, current portfolio tactics, recent customer concerns, and the outlook for the money market mutual fund business in general. Our Q&A follows.

MFI: How long has Schwab been involved in running money funds? Holland: Charles Schwab Investment Management, or CSIM, began managing proprietary money market funds in 1990, which is when we built out our portfolio management team and supporting infrastructure. We felt that the money market fund business was a natural extension of our expertise in managing our own balance sheet and corporate cash. Today, CSIM is the fifth largest money market fund complex, managing approximately $157 billion in money market fund assets.

MFI: What's new at CSIM? Holland: I was brought on board in October 2011 to build a team that can help financial intermediaries such as advisors and consultants, and our retail shareholders, better understand our money fund credit research and investment management philosophies, policies and procedures. Even though Schwab is not directly focused on corporate cash or balance sheet investors, our clients have plenty in common with institutional investors. Financial intermediaries and independent advisors are sophisticated investors who direct significant money fund assets to Schwab. They need similar access to information, transparency of process and high quality products as large, direct corporate cash shareholders.

MFI: What's Schwab's biggest challenge in managing money funds today? Holland: Currently, one the biggest challenges is the availability of supply. There is a lot of demand for short term, especially non-European, product. But an ever-dwindling supply poses obvious challenges. As the credit crisis in Europe continues, money fund managers are reducing exposure to many European countries -- especially those in the Eurozone -- and are investing assets in other regions, such as Australia and Canada. The shift is increasing demand for product issued within these other regions, but there is only so much available supply. And some nontraditional buyers are also looking for government or Treasury paper because of the credit crisis in Europe, which exacerbates the whole supply challenge. In addition, at Schwab we are limited by how much exposure we can have to any one region or to any one issuer. As credit conditions in Europe remain challenging and we avoid certain regions, finding suitable alternatives becomes additionally challenging.

MFI: Does Schwab have additional limits and policies beyond 2a-7? Holland: Our own policies are consistent with what you would expect to find in any highly regarded, conservatively managed money market funds complex. Our internal standards are always more stringent and conservative than those imposed by Rule 2a-7, but we are certainly in full compliance with that governance.

MFI: What are the funds buying now? Holland: Again, most of that bucket has been reallocated to financial institutions located in Canada and Australia, with just a smattering in Japanese paper. We are also starting to see just the slightest reemergence of very high quality, domestic, non financial commercial paper issuance -- but this is more the exception than the rule.

MFI: Are money funds like index funds? Holland: There is a real difference between pure index or passive management and the very active management we employ in the day to day activities associated with Schwab's 2a-7 funds. Approximately three-fourths of the more than $200 billion managed by Charles Schwab Investment Management is in our money market funds, making these funds a critical component of our business. Given the size of our money fund assets, management of our 2a-7 funds is very active here at CSIM, unlike that of a pure index fund.

Watch for Part II of our latest MFI interview in coming days.

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