Below, we excerpt the first half of our latest "Fund Profile," "Northern Challenges Clients to Rethink Cash: Peter Yi Interview".... This month Money Fund Intelligence interviews Peter Yi, Senior Vice President and Director of Money Markets at Northern Trust. Northern is the 11th largest manager of money funds with over $73 billion in U.S. money market funds. Our Q&A follows.

MFI: How long has Northern been involved in running money funds? Northern Trust has been managing money market funds since the 1970's when Northern created its first cash sweep vehicle in our trust department. We have been doing this for a long time and continue to be very committed to the money market business. We are now managing about $225 billion in AUM across various money market and short duration products and strategies. History tells us that experience and leadership are critical for the money market business and has served us well in successfully navigating tumultuous times.

MFI: What is your biggest priority currently? What are you working on? We spend a lot of time thinking of the future, performing deep analysis and forecasting on how the money market industry will evolve. Our view is that liquidity is valued in any market cycle, and so we feel very good about our business model and how we are positioned. As of late, we have been investing a great deal of time focusing on the regulatory proposals for money market funds. We believe the money market landscape will change and so we are ensuring that Northern Trust is nimble enough to adapt quickly.

Aside from the regulatory debates, one strategic focus has been on our ultra-short product offerings. Investors have been drawn to our ultra-short fixed income strategies as some money market investors seek more yield while core fixed income investors position for higher interest rates at some point. We believe the ultra-short fixed income space will continue to gain traction.

MFI: What's the biggest challenge in managing money funds today? Supply dynamics in the money market sector will be the major challenge in the intermediate to long term, as issuers and investors respond to regulatory change at the same time the financial system deleverages on a large scale. Money market portfolio managers are very focused on high quality issuers within short maturity instruments.

However, the broader theme of deleveraging in the financial system will make it much more difficult to source high quality financial instruments that were traditionally available to money market funds. The sensitivity to regulatory metrics such as capital and leverage ratios will continue to strain issuance. In addition, issuers, globally, are being driven to be less reliant on short term wholesale funding and motivated to seek longer term liabilities. Meanwhile, ever since the 2010 SEC money market amendments were adopted, money market funds have been mandated to seek shorter-maturity instruments. We expect that these conflicting mandates will continue to be challenging.

MFI: What are the funds buying now? What aren't they buying? We have been focused on constructing a credit barbell strategy. In that strategy, we have been purchasing credit in shorter maturities and taking duration in longer government securities. Even for our prime funds, we are maintaining a strong overweight to government securities. With short term interest rates anchored at zero for the next few years, short term credit spreads remain very tight, if not the tightest of the year. The relative value for government securities has become much more compelling to us. We have also been seeking high quality foreign agencies and supra-nationals when those opportunities present themselves.

Within the credit sectors, we have a preference for the Canadian and Australian banking sectors. These two sectors have performed very well throughout the recent crises. They continue to be well capitalized and have emerged from the credit crisis as the strongest institutions.

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