Today, we excerpt from our latest fund "profile" in our Money Fund Intelligence newsletter ($500/yr), which was originally published on March 7... This month MFI interviews Federated Investors' Executive V.P. & C.I.O. for Global Money Markets Deborah Cunningham. Our Q&A follows. MFI: Tell us about your history. Cunningham: From Federated's perspective, we've been involved in running cash since the beginning of time. We now have the oldest registered money market fund on the books of the SEC, Federated Money Market Management. It has 40+ years of history at this point. We ran cash before we even had funds, so we had risk-averse strategies from the very beginning. As far as our historical involvement in the money fund industry, we've been involved in every step of the process, from the original exemptive orders that led to amortized cost, to the first go-round of 2a-7, to the '92 amendments, the '96 amendments, the 2010 amendments, etc.... I started at Federated in 1981, and began in our accounting department. I moved into Investment Management and became actively involved in the team management process for the money funds in 1986.
MFI: What is Federated's main priority? Cunningham: I think our biggest priority is to maintain a product that is useful for our underlying clients. We continue to say ad nauseam that the goal from a cash investor's perspective is to have liquidity, priced at par, with a return commensurate with whatever the market is providing. Unfortunately, over the course of the last six years, the market hasn't been providing a whole lot. But nonetheless that's still the goal of a cash product: to provide safety and stability, and give whatever return you can from a market perspective. So what we have prioritized in that process is making sure that the restrictions, requirements and rulemaking around the product don't eliminate any of those three ideas: stability, i.e., the constant NAV and the amortized cost pricing; liquidity; and return.
MFI: What's your biggest challenge today? Cunningham: I'd still say low yields are the biggest challenge. Definitely supply and regulation are challenges also, and rank up there in the top 3. But rates, in fact, are the biggest issue. We've seen an inordinate amount of waivers, which are not losses, but they are reduced profitability. That's in the context of what's available on an overall gross return or gross yield basis from the marketplace. The economic situation, the credit markets, all of those things are reflecting back into the abysmally low rates ... and it's not a healthy market. We need to get past that, which I believe we are working towards. But, nonetheless, the interest rate challenge is definitely the biggest one.... It's not as if we've been immune to any kinds of problems or issues or challenges in the market place, but this one has just been historically very, very long.
MFI: You have never had a loss event or bailout event, right? Cunningham: No -- I'm knocking on wood -- that is true. We've never had to get parental support, and never had defaulted securities.... But we want to make sure that we continue to do our jobs along the analyst side of the equation with regard to our overall investment team approach.... Maybe that's why we were more confident maintaining our exposure in the most recent credit cycle.... We never exited our business with the European banks. We shortened the durations, mostly reflective of the volatility and the lack of liquidity that was evolving in some of those issuers' names. But we didn't abandon them. And that definitely evolved because of the strength of our credit and investment processes.
MFI: Can you tell us about the 2008 Putnam [Inst MMF] merger? Cunningham: That's one of the reasons why we are very adamant in today's proposed regulatory changes that the "gates and fees" option does work. That was a real life version of that, when clients of the Putnam Institutional Prime Money Market Fund ultimately became shareholders of Federated Prime Obligations Fund. Without that gate being imposed, there could have been worse problems in the marketplace from the liquidity perspective.... It worked. As long as it's not a credit problem, the gates and fees work.
MFI: What about supply? Cunningham: Obviously, the regulatory environment, from a money fund perspective, is tenuous, and we are currently working through that. But also, many of our issuers are faced with their own constraints in their own regulatory environments, particularly banks where you have certain requirements from Dodd-Frank, from Basel III, from a SIFI standpoint. All those things weigh heavily on how banks are issuing and what they're issuing.... As you well know, banks are a large portion of most prime fund holdings.
MFI: Are you using NY Fed repo? Cunningham: We generally have some exposure in our government funds that are eligible to use the program and occasionally exposure in our prime funds. A couple of things: we obviously think it's an immensely helpful program by the NY Fed because it helps establish the viability of the unwind process. Even if it's only on a temporary overnight basis and it's only using treasury collateral, it's established a floor for that type of transaction, giving the Fed more ultimate control in their rate-setting process. This is a program that the NY Fed seems to be pretty optimistic about continuing. They're calling it an exercise now and not just as test, so that's a good development.... Having said that, we have 25 or so other counterparties that we also want to maintain a relationship with on a regular basis. We're trying to walk a tightrope between the relationships that we've developed, and want to maintain and continue to use on a funding basis, versus what seems to be pretty stable and growing potential with the NY Fed.
