The February issue of Crane Data's flagship Money Fund Intelligence newsletter interviewed J.P. Morgan Asset Management Managing Director & Head of Global Liquidity Robert Deutsch. (See too our previous profile in Dec. '09, "Defending the $1 NAV: JPMorgan's Bob Deutsch.") J.P. Morgan ranks as the world's largest money market fund manager with almost $450 billion under management in combined U.S. domestic and "offshore" liquidity funds (see our ranking in MFI), and Deutsch has been one of the money fund industry's most eloquent spokesmen. He discusses flows, regulatory concerns, separate accounts, and the outlook for money funds. We excerpt from the first half of our MFI interview below.
We first asked about assets. Deutsch tells us, "When we looked at global institutional [liquidity flows], we took in $50B in the fourth quarter. The rest of the industry took in $66 billion, so we took in 43% of flows during the quarter. Even for us, that is a pretty dramatic number.... About half of that was U.S. and half was international ... it was fairly divided between credit and government funds in the U.S.... So money is still coming into credit funds. Internationally, it was spread across the Dollar, Euro, and Sterling with additional inflows into RMB. We're well positioned in China, so we have a fairly broad mix across products."
He adds, "Some of this seems to be flight to safety, because the markets were very volatile. [There were] a lot of worries about Europe, sovereigns and banks, but when it came to us almost as much went into the prime as the government funds.... I would say, in terms of what we saw come in, maybe a third was 'flight to safety,' a third was new cash from capital markets activities -- bond issuances and other deals -- and the other third, is at year end, we typically see some cyclical money, particularly from the large retailers."
MFI asked, "Have bank fees been helping?" He answers, "I think we started to see money come back from bank deposits to funds. So it's a reverse of the trend we saw in the first part of 2011.... I think we've seen the bank deposit rates come down. A year ago, some of the banks, and we're probably not one of those, were putting up pretty high yields like, 35 or 40 bps to capture money, and they don't seem to be doing that now.... [T]here was a big wave of [usage of] earnings credit rates and I think less of that is happening."
"The other thing is if your investor is willing to take a zero yield, they still get that FDIC guarantee. That is set to expire at the end of 2012. I don't think it has moved money yet, but I do think some investors are thinking about [that ending]. Some are saying, 'We can't accept the zero yield; we need some return in our money.'"
Regarding, "Separate Accounts, Enhanced Strategies," Deutsch continues, "Another trend we're seeing is the segmentation of cash. We have had a lot of discussions around cash segmentation strategies, and we help clients segment between operating cash, reserve cash, strategic cash, and restricted cash. In some cases, what they did with the money went to funds, like we saw in the fourth quarter. But we also saw our separate account business grow quite a bit. We crossed $50 billion in our separate account cash business and are up a good 10% for the year."
"It's not stuff that happens quickly. These are strategic discussions with clients, and we develop investment policies. They sign on to advisory agreement and all that takes some time. So these tend to be longer lead time, customized deals. A typical client of ours has, maybe $1 billion in cash and they carve out a couple hundred million [for a] strategy that they put out on the curve a bit."
He explains, "A lot of the separate account business is beyond [2a-7].... Most of it is about six-month duration. We use the same credit resources, and technically the same investment platform as our liquidity and 2a-7 products. So it's not the old enhanced cash with lots of derivatives. It's a very constrained strategy both in duration and credit. But in this environment it can pick up 25, 30, or 35 basis points over pure liquidity. So we've got a U.S. fund, we've got an offshore fund, and those two combined are about $1 billion in assets. They are less than a year old. And the separate accounts, most of these are the same Managed Reserves strategy. So this has been a really good product for us, and for the corporate investors it's sort of the right product for them in this environment."
Deutsch also says, "The other product we've done is a product that we model on old rule 2a-7. So it's variable NAV, but it barely varies. It's old 2a-7, so it doesn't have the new 2a-7 guidelines. Now it does not, today, have much of an yield advantage to 2a-7 because of this environment. It's more of a product that we've seeded and we're sort of incubating it and building a track record with it. So most of the client money has either gone to liquidity or managed reserves. But this product ... we think over time there is a place for it and we'll see clients use all three products, all of which are very tightly constrained in the cash space."
He adds, "[W]e've built a product set for this environment, but also for change. So we want to be ready for both market change and regulatory change. Between the product range we've set up in dollars and the size that we've built offshore, even if regulations aren't harmonized between the U.S. and international, we're in a strong place to compete wherever we have to compete." Look for Part II of our "Profile" in coming days, or see MFI for the full interview.
