The May issue of Money Fund Intelligence interviews Thrivent Asset Management Senior Portfolio Manager William Stouten, who oversees the $545 million Thrivent Money Market Fund as well as a number of other cash pools on behalf of parent company Thrivent Financial for Lutherans. We discuss the challenges of being a smaller sized manager in the current environment. We excerpt from the article below.
MFI: What's your biggest challenge now vs. historically? Stouten: Beyond generating enough yield to cover expenses, I think the challenge is finding enough supply of products that fit the new 2a-7 liquidity rules. I think that's one the biggest challenges now and probably in the future as new regulations change the attractiveness of short-term borrowing. Banks are being encouraged to extend their maturities and money funds are encouraged to maintain more liquidity, so I think there is going to be a challenge to find products to fit that space.
MFI: What have you been focusing on? Stouten: On the investment side, we've been spending a lot of time looking through more municipal securities. There are certainly a lot more challenges in terms of looking over the documents, because there are nuances in municipal securities that aren't necessarily in products like commercial paper.
MFI: Has your investment strategy changed over the years? Stouten: I think there are two things that have changed. Historically, there was certainly less focus on liquidity. [In the past] I would never maintain more than 10% maturities in a week. As a retail fund, with a very diversified shareholder base, the funds were never that volatile even through the financial crisis. So, trying to meet the 30% liquidity guideline has been a different strategy for us as a small retail fund, and it is unfortunate that the yield and profitability of the fund is unnecessarily impacted.
The other component is the diversification. Historically, there was a lot of product available and a lot of issuers. It seemed prudent to diversify the portfolio. I think it's more challenging to keep the portfolio diversified in this environment with a significant reduction in issuers with Tier I ratings. Because of that, I think money funds in general are more concentrated than they have been historically. We now operate our fund with a higher concentration in Treasuries and Agencies, and I think that's probably the case across the board, just having higher concentration in these products.
MFI: How are fee waivers? How bad is it? Stouten: We are waiving a significant amount of fees to maintain a zero net yield to the shareholders, and that is costing the firm money. The firm has actually had to contribute to the funds the past few years. That's obviously not sustainable in the long run. I don't think Thrivent wants to make any drastic changes until there is more certainty around possible regulatory changes. I think we will always want to have some conservative, liquid product available for shareholders in the short term space. But in this interest rate environment, money funds are not economical without scale. We need higher interest rates.
MFI: What are your thoughts on pending regulatory changes? Stouten: I am concerned that there has been so much negative talk about money market funds in the press, and much of it from the industry itself, that if regulatory changes like a floating NAV are enacted, the industry will have a lot of work to do to reverse the damage. After spending years agreeing with clients that a floating NAV will not work, it will be difficult to go back to those same clients and convince them to stay put. If the industry had spent nearly as much time working with regulators to make the changes more palatable, I think we would have had less regulatory changes and more constructive ones. There are a lot of things that can be done to keep the NAV stable even in a floating NAV environment, and therefore, I don't think the floating NAV concept is as drastic as it seems to be portrayed at times.
However, the industry needs to get these ideas out there. For instance, using amortized cost accounting for the 30% liquidity bucket, better pricing parameters, less reporting requirements, etc. Sometimes when you talk about a floating NAV, it sounds like it's pretty scary, that it's going to go all over the place every day and people are going to have gains and losses and it's an accounting nightmare. In reality, the NAV for most money market funds, especially now with the new regulations, isn't going to deviate from $1 except under extreme circumstances. So there aren't going to be all these daily gains and losses, as some have speculated. [I]f that is communicated, then the floating NAV concept becomes more acceptable to the shareholder. I certainly understand the industry's hesitation for change.... [A]ny time you change there's resistance.
MFI: What about capital or a buffer? Stouten: Actually, we're pretty open to that concept. I think it would be desirable to have a choice. Obviously, in this interest rate environment there isn't an easy way to pass on the cost of a capital buffer to clients and shareholders. But given the size of our firm, it is not something that would be insurmountable. I think that there is some concern in the industry that all the money would go to those firms that were able to provide a capital buffer to their money market fund. The reality is that the cost of providing that capital would be a significant deterrent to growing the fund whether the cost is in the form of a yield to shareholders or cost of capital to the firm.
MFI: Is there anything you'd like to add? Stouten: Having this cloud of potential regulatory changes over the industry for so long has not been helpful. I do think that the perception of implied support to money funds is something that regulators should deal with, but the industry cannot adapt or respond to regulatory uncertainty.
MFI: Is the harder rhetoric making it more difficult to craft a solution? Stouten: I think there has been a lot of energy, time, and money spent trying to convince regulators and the general public that a floating NAV is not going to work. I agree that it would be easier to leave things as they are now, and that any such change carries risk. However, if we are forced into a floating NAV environment, there's a lot a ground that the industry has to cover to try to convince clients that "yes, in fact it will work" and they should stay in money market funds. I think there is some risk in trying to maintain the view that it’s a bad thing. A softer rhetoric may be warranted.
