Below, we excerpt from Part II of our latest monthly profile, "Capital Advisors Group's Campbell, Pan Talk SMAs," from our flagship Money Fund Intelligence newsletter. MFI: Do you oversee more money funds or separate accounts? Campbell: We are not a money fund manager. We use money funds as liquidity vehicles for our separate accounts. MFI: Do separate accounts look like money funds? Campbell: Our separate accounts tend to be longer in duration than money funds. We purposely try to be longer than money funds in order to take advantage of additional supply and yield further out on the curve.
Pan: Money funds tend to run a barbell because of WAM restrictions. They have to maintain liquidity on the front end and often seek yield on the back end. We tend to use more of a ladder in our portfolios because we seek to provide liquidity to clients when their liabilities come due.
MFI: Have fee waivers impacting you? Campbell: Because many of our portfolios are longer than money funds, I don't believe that we've been as impacted by fee waivers as money funds have been. But we have felt the impact.
MFI: Can you tell us about your SEC comment letter? Pan: [The SEC] is trying to address the liability side of the business in order to prevent runs. That's where we came in and said, 'What if you have a dual NAV approach,' meaning that the NAV for the underlying securities is fully transparent, an unrounded NAV ... to the fourth decimal place. On a daily basis, investors would be able to see the true NAV, [but] for transaction purposes [the NAV would be rounded to 2 decimal places]. We've done tests and believe the NAV is very unlikely to break the buck when rounded to 2 decimal places. At the same time, we think that the unrounded NAV would provide more transparency to the market and reduce the propensity for runs, as investors would be prepared if funds move closer to 99.5 or 100.5.... We believe that our proposal would maintain the current utility of money market funds, while addressing the SEC's concern about runs.
MFI: Do you have standard portfolios for your SMAs? Campbell: All SMA's are customized, but we do have some general categories. For example, we have a "core plus" product that seeks additional return potential in exchange for potentially increased exposure to headline risk SMA's are customized according to liquidity needs and investment objectives of each client, and we vary our asset class, credit and duration selection accordingly. We also manage offshore money as many of our clients have overseas operations that conduct business in euros, pounds, etc.
MFI: What is your outlook for 2014? Campbell: I think it's a transition year for the industry.... We will have regulatory reform, which will be handed down in one form or another in 2014. We think there has certainly been improvement in the fundamental economic backdrop [and] think we are closer to the point where there is going to be a shift in Fed policy. I think that's going to translate into a steepening of the yield curve and some potential yield opportunities after enduring 4-5 years of ultra-low rates. We view 2014 as a year in which investors will have to begin to reevaluate their investment product selections.
MFI: Can you comment on the overall levels of corporate cash? Campbell: I think that one of the issues relating to levels of corporate cash is where the corporate cash resides. There is far too much cash captive overseas. As long as there are differences in the tax codes between domestic and overseas cash, there is no incentive to put that money back to work domestically. I think it would be healthy for both the economy and the industry to have some of that cash repatriated. Pan: I think that there's another aspect besides trapped cash. With shifting financial regulations, bank credit quality [issues] and counterparty risks, I believe that more and more large corporations are of the opinion that they should self-fund, rather than rely on the markets and banks for cash.
