Several of the foremost money fund experts in the world shared the dais to discuss portfolio composition, supply, reforms, and other topics in a session called "Senior Portfolio Manager Perspectives" at last week's European Money Fund Symposium in London. The panelists were Debbie Cunningham, chief investment officer, money markets, Federated Investors; Joe McConnell, portfolio manager, J.P. Morgan Asset Management; and Jonathan Curry, global CIO for liquidity at HSBC Global Asset Management. Yaron Ernst, managing director, Moody's Investors Service, moderated the session. (Note: Crane Data would again like to thank all the sponsors, speakers and attendees of last week's event in London; our next European Money Fund Symposium will take place in Dublin, Sept. 24-25, 2015.)
On securities, Cunningham said, "If you look at some of the main types of securities over the last several years from prime funds, several of them have been fairly stagnant to lower from a supply perspective, including CP. There has been some increase in structured types of products, including structured CDs. In the U.S., repo is something that we use substantially in many of our portfolios. What has taken place though is a shift out of the traditional repo counterparties (banks and broker-dealers) into the NY Federal Reserve. They engage in reverse repo with 100 MMFs. We have eight of those. The offshore funds that we manage are not eligible for that particular program at the NY Fed, however, it is helpful because it allows us to save our traditional counterparts for repo in the bank world and dealer world for those dollar-denominated products." McConnell added that they are having more conversations about structured products with calls and puts.
On portfolio composition, Cunningham said they have made some changes heading into what looks like a rising interest rate environment in 2015. "We've definitely reduced our maturity, increased our floating rate percentages, and shortened our barbells. Barbell is the structure that we use almost continuously with the long end of the barbell just changing depending on what the interest rate outlook is. At this point that long-end of the barbell has been shortened pretty drastically." The long end of the barbell has been reduced to about 3-6 months vs. the usual 6-12 months.
She added, "Given what we were talking about from a repo perspective, we've modified: number 1, how we use repo, and number 2, the term of that repo. Whatever we need to do from a structural perspective to continue to be able to deal with traditional counterparties -- banks and broker-dealers -- in addition to the Fed [we're doing], simply because we don't want to become depending on the Fed because they're able to change that program or perhaps take it away. So we're trying to reduce our dependence on repo."
Curry added, "I am hopeful that we may see a recovery in asset-backed commercial paper supply in Europe. At the moment it's counterintuitive to what's in the money fund regulation, but I think that's a reason why that part of the regulation may change. That's been a valuable asset class for money market funds. On the repo side, I would love to see some type of similar facility in Europe put in place to provide some supply to the market. Unless there are changes to the regulation, the only realistic supply that can step in is government."
On the potential for negative yields in Europe, McConnell said, "While maybe not everyone believed it was coming, it's been talked about for a long time now so it gave people a chance to get ahead of it. In terms of preparing for negative yields, we're prepared to do fee waivers -- it's something we've done across currencies for several years when we have had to the need to do so." Negative yields are certainly possible as the ECB has made clear that "they are going to throw the kitchen sink trying to avert deflation in the Eurozone," said McConnell. "It's not weeks away, but potentially in a few months, we're certainly going to see funds -- probably in the government space first -- get to a gross yield that's no longer zero or above."
Added Cunningham, the prospect of negative yields is highest in the Eurozone, although the U.S. is not out of the woods with rates as low as they are. Sterling on the other hand seems to be holding its own. "The mechanism that we've been using, fee waivers, has worked and will continue to work through all three of these markets at this point with Sterling being impacted very little." She said an outgrowth of negative yields could be the closure of funds by some complexes.
"If you look back at when the zero rate environment was undertaken by the ECB in 2012, I think there was almost a worse reaction in the market to that announcement than there was for the negative rates that were announced over the last several months in 2014. Part of the reason for that is because of the credit improvement in the market." Curry added, "We did a survey last year and looked at our approved list and saw how much it changed between 2011 and 2013. We've had to look farther afield -- geographically and across sectors."
The panelists also discussed the SEC reforms. Said Cunningham, "We were disappointed that floating NAV was undertaken, but I would express a lot of optimism for what ultimately became the rulemaking. Some of the positives associated with the 2014 rulemaking that maybe were not as apparent in the proposal is the retention of the amortized cost for everything but prime institutional and municipal institutional, so that's a good thing. If you recall, the proposal was to eliminate amortized costs even for retail and government money market funds. The retail definition they ultimately came up with is also very positive. If you went back to the proposal and the $1 million cap they were placing on what was considered a retail account, when Federated did our initial assessment, it was about 1/3 retail, 2/3 institutional. Ultimately, their amended definition (how it must be a 'natural person') gives us something that's more like 60% retail, 40% institutional. So, I think there's less impact because of that expanded retail definition."
She added that the IRS tax accounting proposal is good, but not as good as it could be. "These are just proposals at this point and we will be responding before the middle of October to the IRS on their proposals. What they didn't do was put any kind of de minimus threshold in there. A 'de minimus' threhold would be a huge positive and eliminate further some of the complications." Also, she said the gates and fees proposal was amended appropriately.
Finally, on the proposed money fund reforms in Europe, McConnell said he hopes some of the positive develops that happened with reform in U.S. happen in Europe. "What we like about what happened in the U.S. was that they retained some of the options for investors in terms of, there's a version of CNAV, there's a version of VNAV. Clients have an option there. Maybe in Europe there's a potential for some retention of CNAV at least in government funds." He added, "It's a long road ahead still and there's a lot of people in this room who will spend a lot more time talking to regulators. I'm more optimistic than I was say a year ago."
