Below is the second half of our interview with Peter Yi, Head of Short Duration Fixed Income Strategies at Northern Trust Asset Management. We ran part I of our article, "Northern Trust's Peter Yi on Reforms; More Than MMFs," which originally appeared in the June issue of our Money Fund Intelligence newsletter, yesterday. Below Yi talks about developing the next generation of cash products, regulations in Europe, ultrashort bond funds, and the future of money market funds. (Note: Thank you to those who attended our 7th annual Crane's Money Fund Symposium, which concludes this morning, in Minneapolis! See you next year, June 22-24, 2016, in Philadelphia!)
MFI: What changes is Northern making? Yi: Our product strategy continues to evolve and we're aggressively thinking of next generation strategic cash products to round out our liquidity product set. We've assembled a team across all business units to fully address money market reform. We have people dedicated full-time to the effort, addressing all the operational, legal, and business complexities that are associated with the changes. Because we already have separate mutual funds for institutional clients, the changes we announce may not be as dramatic as the news from some money market fund managers recently. In general, we're going to respond to our clients' desires and shape our products accordingly; focusing on what works best for them as we think about innovation and development of new products.
MFI: Will you look at 60-day or 7-day maximum maturity funds? Yi: It's still under observation.... One of the major concerns investors have is the potential to be gated. So if you have a credit fund that is a 60-day max maturity where you can utilize amortized cost accounting, it still doesn't mean you can't get gated. Just that possibility starts to give some of our investors a reason to pause. With regard to a 7-day maximum maturity fund, if you think about the market structure, it's hard to find instruments that are only 7 days long, because regulatory pressures have motivated banks not to have these short dated maturities. I'm not sure market supply is going to be able to support the ability to construct a portfolio in a way where the yield is better than a government fund's.
MFI: What about regulations in Europe? Yi: Our view is the European Commission proposals have been viewed as much more punishing than what's currently being adopted by the SEC. While some of the provisions are concerning, we also think the process is much slower than the U.S. The best thing we can say is we expect a vigorous debate within the multiple Parliaments. We feel prepared though for our offshore funds. Given that the ECB cut their deposit rate to negative 20 bps last year, we have taken a more proactive approach and launched a variable NAV euro-denominated money fund. The results have been good: assets in the variable NAV structure have grown to US$2 billion, from US$1.4B when we launched.... [W]e're approaching $20B in assets across our three offshore funds.
MFI: Have investors shown interest in ultrashort bond funds or other products? Yi: Absolutely. We have a long history managing ultrashort fixed income strategies -- since the late 1980s -- but we have seen incredible growth in this asset class over the last few years. We launched our first two ultrashort funds in 2009 and the assets under management have grown to US$4.7 billion.... Today, Northern Trust manages around $14 billion in total Ultra Short AUM. The success of the ultrashort strategies validates our view that clients are seeking a better risk/return profile, across both our Institutional and Wealth Management channels.
MFI: What's driving ultrashort interest? Yi: We've heard from some investors that just don't understand why they are still earning zero on their cash. We've had more corporate treasurers say, 'We want a high quality customized portfolio, but we think we should be earning something more than zero on our liquidity assets.' So they start moving at least a portion of their cash into more strategic cash buckets, like ultrashort fixed income. Then on the other side of the fixed income investment world, you have investors that are afraid of higher rates because of the downward price pressure when interest rates start to go up It's coming from both directions.
MFI: What about Northern's deposits? Yi: We like to offer a lot of different liquidity products with different options. For some investors, an investment product like a money market fund makes a lot of sense. Historically the yield on money market funds is generally much more competitive than a bank deposit. But we explore the right liquidity solutions for all of our investors and sometimes it ends up being a deposit product and sometimes it ends up being an investment product. Some banks have been very public about trying to aggressively shrink balance sheet deposits and my guess is they are more motivated to push that to asset management products. We don't have that problem. Our goal is to provide the best liquidity solution for each of our unique clients.
MFI: What are your thoughts on the future of money market funds? Yi: Our catch phrase is: "liquidity is valued in every cycle." So we feel very good about the future for liquidity products. We're committed, without a doubt, despite the structural changes, to money market funds. The industry is resilient and we think it will continue to thrive. Investors are always going to have a need for liquidity, so that's why we think the industry is never going to go away. It just might change every so often.
