Today, we excerpt the second half of our May Money Fund Intelligence fund "profile," "Deutsche's Joe Sarbinowski & Benevento Talk MMFs." The rest of our interview follows.... MFI: What have been challenges historically? Benevento: The challenge we face now is very different now than the challenges faced 3-4 years ago, prior to the reform. What you face now is a challenge of less short term supply in the market. So your challenges are really finding that diversified supply, and offering a commensurate yield with it. I think as an industry, we all have to face the fact that money funds can only be the size of their available supply, and as that shrinks, we all face challenges.
MFI: What are you buying? Benevento: One of the tools that we have used is the Federal Reserve reverse repo program. That has been a very important tool, because supply has been crunched or squeezed during times of stress (quarter ends, month ends). That's been an attractive new vein of supply for us. The other thing we are looking at as a new entry to the market is the 2-year Treasury floater program.... [It has a] a very rapidly resetting floater, even though it's off of a 3-month bill, and it's based off an auction on a weekly basis. So that's an attractive addition to supply. In general, we spend our time looking for diversified supply, whether it's issuer, sovereign, or sector, trying to well diversify the portfolios.
MFI: Are clients moving out on the curve? Do you have capabilities beyond money market funds? Sarbinowski: Certain clients have accepted that rates will remain low and have moved out longer. Other investors have been desensitized to where we are [in the rate environment]. But that doesn't mean they are not curious about ideas, and that's part of why our job is to bring perspective and solutions and see where they might fit. We call ourselves liquidity management, because it's not just single product offering. We do offer cash plus and short duration portfolios, so the customized account conversation has been one that's been going on for a few years now and continues to be very relevant. In Europe, we do have a few flavors of funds that go beyond the European definition of money market fund.
MFI: What about European MMFs? Sarbinowski: We are a big player in the stable NAV world in Europe in U.S. Dollar, Euro and Sterling. We are a top tier player with all of our funds in excess of 5 billion in all those major currencies. Due to our global platform, we also have a capability in Indian Rupee, and through our joint venture in China, offer investors who have stranded cash in China, an MMF offering in RMB. There are a lot of multinationals with record amounts of cash, and they generate a lot of that offshore. A lot of those [pockets of cash] are scattered around Europe -- Ireland, the Netherlands, Belgium, and Switzerland being some of the key treasury centers. So definitely, the familiarity with the stable NAV concept is what generated the interest in that type of product over there.
MFI: What about the future of MMFs? Sarbinowski: The future of cash investing -- it's not going away. We see cash at heightened levels. We think there is always going to be relevance for investors to have good consultation and the need for a savvy partner in helping them address their liquidity management needs. Benevento: The success of money funds has always been as an intermediary between investors and issuers of debt as an aggregator. It's been a good equilibrium between that supply of available paper and what clients demand on the risk level. I think the challenge and what we face going into the post-reform world is building that or getting to that equilibrium once again, where the supply matches what is in demand by clients and the new supply matches what is in demand from a risk standpoint by clients.
From a market standpoint, I think we face an interesting time as we get in the second half of 2014, as we see tapering take hold. We believe we'll see a gradual backup in that Fed funds rate towards the upper end of the range, not necessarily a tightening. But we believe there will be trading at the upper end of that range, which is a good thing for the market. Sarbinowski: Whatever the outcome, we've been advocates of market-oriented commercial solutions that really give investors choice, transparency, and risk mitigation. So we remain watchful, and where appropriate, we're participating in the overall debate.
