Today, we recap more from Crane's Money Fund Symposium, the world's largest gathering of money fund and cash investing professionals, which took place last week in Minneapolis. (Next year's event is scheduled for June 22-24 in Philadelphia.) We cover two of the "heavy-hitter" sessions below; the first is entitled, "Major Money Fund Issues 2015," which closed Wednesday afternoon's agenda, and the second, "Senior Portfolio Managers Perspectives," which took place Thursday morning. The former featured Rick Holland of Charles Schwab as moderator, with Nancy Prior of Fidelity Investments, Esther Chance of Invesco, and Matt Jones of BlackRock. The "Major Issues" panel discussed a range of topics, but it focused much of its discussion on how fund managers are adapting to money market reforms.
Fidelity's Prior commented, "Our plan, which we announced in January, starts first and foremost with a commitment to offering a full line of money market products so we will have government funds, muni funds, prime funds, institutional funds, and retail funds. But when we went through that conversation with many of our customers ... it became clear to us that though they recognize that the possibility of gates and fees is extremely remote, they prefer to be in funds that were not subject to gate and fees."
She continued, "Three of our prime funds, where we are changing the mandate from prime fund to a government fund, also require shareholder approval. We went out to our shareholders and have received approval on two of those three. Cash Reserves, which is our largest one -- we have received shareholder approval to convert that fund. There's one fund remaining that we have not yet obtained.... Overall, 5 of the 6 shareholder mandates have been obtained and we are looking towards the fourth quarter of this year to execute on that part of the plan." Prior adds, "`The next part for us is the institutional/retail designation -- designating which will be retail and which will be institutional. That will be done in the third or fourth quarter of this year."
On supply in the Government space, Prior explained, "The amount of government securities that are eligible for money market funds is just about $7 trillion, so there is a good supply demand dynamic today. But there will be more assets that are seeking these government securities.... We do know that the Treasury is potentially going to increase their Bill issuance, so that will help. And the Fed's reverse repo facility certainly helps. But our expectation is that with the size of that government market as it is it's going to become a matter of price -- and it will be interesting to see how those supply dynamics really do impact price.... I think supply on the prime side as well as the government side is a challenge for the industry. I think it's one that we will overcome, and I think most of it will be a matter of price."
On BlackRock's changes, Jones commented, "We're going to offer five CNAV government funds and we won't impose fees and gates. The key consideration for us is every single one of those funds will have access to the RRP program which, while there is some speculation that the program's going to go away at some point in the future, we don't see the Fed removing that facility certainly in the short term. On the institutional side, the floating NAV structural changes will be applied to the TempFund -- our $60 billion flagship prime fund. It's a huge change for us. What many in the industry are trying to figure out is how do you replicate that intraday liquidity that exists under the current product structure in a floating NAV fund? How many times do you price the NAV? What does your custodian do in terms of intraday overdraft facilities. These are things that we [are] think[ing] about very intensely."
Later, he said, "The big thing we wrestle with is this whole concept of intraday liquidity and how money moves through the system in the future.... The whole plumbing aspect of what bank regulation and 2a-7 reform is doing to slow down the cash in the market is one of our major concerns." He added, "We talked to our shareholders about a 60-day product, but we decided to go with a 7-day fund, leveraging the same amortized cost guidelines the SEC put out in the release. We think the shorter maturity profile is going to keep a tiny bit more stability in the NAV. Also, as we move into normalization, we feel that a product that is this short may be attractive to our investors."
Chance explained her company's strategy, saying, "Invesco certainly intends to have a full product lineup -- we're going to have Treasury funds, government funds, CNAV and FNAV, Prime and Muni funds. The biggest challenge right now is the intraday strike components -- that seems to be an overarching issue. How many strikes per day is appropriate? How much is too much?" She also discussed Invesco STIC Prime Fund, a 60-day maximum maturity fund that has been around for 35 years. "We started our STIC Prime portfolio back in 1980. The idea was to create an ultra-conservative prime based portfolio that was very liquid, very conservative. It has had a really strong appeal certainly in a rising interest rate environment when the fund will perform extremely well.... It's interesting because now there's so much attention on this product. We've gotten a lot of questions on how the fund performed during various interest rate cycles."
Chance added, "One of reasons we kept the fund around is because it does serve that purpose when you have disruptions in the marketplace. There's a natural tendency for clients to go into government funds, because there's a flight to quality. But when they want to tiptoe back into the prime space you can offer them a product that has lower volatility, lower risk, and is a nice entrance into a prime space. You have a government fund, then you have a traditional prime fund, and the 60-day and in fund fits right smack dab in the middle."
The "Senior Portfolio Manager" panel, moderated by Wells Fargo Securities' Garrett Sloan, included Rob Sabatino of UBS Global Asset Management, Jim Palmer of US Bancorp Asset Management, and Danny Burke of Goldman Sachs Asset Management. Sloan summed up the state of the market in one word -- anticipation. "The money market fund industry is essentially in a state of anticipation," says Sloan. "Anticipation for investors to make decisions about what they want to do with their cash next year; anticipation for money fund providers to make decisions about the appropriate product lineup to match investor needs; anticipation for the Federal Reserve to move policy rates and whether actual money market rates will move with those policy rates; anticipation over whether issuers will continue terming out bigger and bigger portions of their balance sheets due to regulatory constraints; and, anticipation over how much the spread between government and credit products will widen. All of this anticipation leads to a very difficult environment for portfolio managers in which to operate," he explained.
On repo strategy, Sabatino said, "Over the past year we probably decreased our repo positions primarily due to yield. We still have a sizeable position, but given the pickup in yields I think it's more attractive to be in time deposits. That being said, the Fed's Reverse Repo Program has been key to our strategy, especially in our Treasury only fund that allows for repo. We've done both Term as well as Overnight. I think it's going to become a huge part of our market -- it's going to step in for the lack of supply. It's a little more difficult dealing with some of the credit downgrades. Losing two counterparties recently, I think that had a big impact on the entire market and we might see more of that going forward."
On the potential for fund flows from Prime to Government, Palmer said, "I think a lot of investors will either be interested in prime funds or will assume the risk versus a government fund once the spread starts to widen. If we were to get a rate increase or two then investors could really see the differential, and then they could start making better decisions about the kind of risk they're willing to assume. What that is I don't know. As the last panel talked about, they'll know it when they see it. But they are not going to tell us right now because they don't know, and quite frankly, if I were in their shoes I wouldn't tell us until I had to and right now they don't have to."
On portfolio structure, Sabatino comments, "I think we are constrained by supply. We talked about meeting the 7-day liquidity bucket.... When you look at most prime funds in this environment, because of how low Treasury yields are, we really don't have much exposure.... I wouldn't expect to be seeing a huge amount of supply of short term commercial paper or bank debt, so we might have to move and change the structure of prime funds and own more Treasuries and Agencies. That being said, as long as we can get deposits, repo, and overnight instruments we would opt for that just from a yield perspective. But overall, how we look at our portfolio isn't going to change dramatically other than the fact that we all agree we're going to have to get more liquidity.... Palmer adds, "The other aspect is, as we get closer, everybody will just have more weekly liquidity. Thirty percent will just be the starting point and then everybody will put on their own internal buffer above thirty percent because nobody, post reform, is going to want to breach that number."
