Both Vanguard and BlackRock recently released video interviews with their leading portfolio managers and executives to discuss money fund related issues. Vanguard posted an interview entitled, "Money Market Reform: Are You Impacted?" The clip features money market fund PMs David Glocke and Justin Schwartz, who discuss how investors will be impacted by the SEC's Reforms. Also, BlackRock posted a video on its Cash Academy website called, "The Importance of Scale," which features commentary from Thomas Callahan, Head of BlackRock's Global Cash Management Business, on the recent acquisition of BofA's money fund business.
Vanguard's Q&A begins with Schwartz, who will speak on Tax-Exempt MMF issues at Crane's Money Fund Symposium next month in Philadelphia (June 22-24), talking about the recent changes to MMFs. He says, "I think the most important thing to note is that for most of our shareholders, not a lot is going to change, but we are happy to go through a couple of the key changes here today. And the first thing I'd like to get started on is enhanced disclosure. So our shareholders are going to have some increased transparency into the portfolios, and that's going to take place through the website. So we'll have daily website disclosure on our daily and weekly liquid assets that we hold in the portfolio."
Schwartz continues, "In addition, they'll be able to see a market-based value of the portfolio; something different from money market funds. This will be taken out to the fourth decimal place. It's important to note that this is not the share price that investors will be transacting at. We'll strive to maintain a stable $1 NAV in all of our money market funds. In addition to that, we'll be posting daily shareholder cash flows on the web page so shareholders will have a better insight into what's going on to the fund day in and day out. [We] currently report ... detailed portfolio holdings to the SEC at the end of every month. Those [were] available on a 60-day lag and after April 14, our shareholders will be able to access those through the SEC's website [and] on our website as well."
Glocke adds, "A couple of things that investors are probably going to start hearing about is the SEC allowed the money market funds to not just offer the stable net asset value portfolios, which clients have gotten used to for the last 40 years, but to also go ahead and offer floating-rate net asset value type portfolios. And we've decided at Vanguard that's not really where we want to go. We just want to offer the stable NAV traditional-type money market funds that clients are used to. So those are the products that we'll offer."
He continues, "Also, they'll hear something about fees and gates. So the SEC is going ahead and allowing boards of directors of portfolios to implement fees and gates, which we would expect would be implemented in times of extreme stress. The trigger mechanism for that is something that's going to be displayed on our website through the enhanced disclosure, which represents the amount of weekly liquidity in the fund. As long as the portfolio has at least 30% weekly liquidity in the portfolio, the board of directors won't have to consider whether they need to implement fees and gates. So what we've done is we've enhanced the amount of liquidity in our funds to around 40% in total assets. And we think that's going to give us enough of a buffer to go ahead and avoid the times where we might have to turn around and implement that. And in addition to the government funds that we offer, won't have fees and gates apply to them at all. The SEC allowed the board of directors to go ahead and opt out of that for government funds and Vanguard's board chose to do that."
Glocke adds, "On the taxable side, there's not a lot of changes other than enhancing the amount of liquidity. During the financial crisis, in particular during the Lehman period when things were really volatile, we lost less than 2% of our assets over the course of a week. So having that additional buffer from 30 to 40% I think gives us a lot of comfort knowing that we can go ahead and deal with anything that comes up day to day. And certainly, as we did during the financial crisis, if we saw conditions eroding in the markets, we would turn around and enhance that to go ahead and make sure that we had an even larger buffer, again, similar to the way we managed the cash back in that time period."
Schwartz comments, "`On the municipal side, I'd say very little has changed in terms of how we manage the portfolios. The securities that are available for money market funds in the municipal market are actually structured such that they qualify for daily or weekly liquid assets. So, traditionally, even dating back before the financial crisis, municipal money market funds ran about 70 to 80% in what today qualifies as weekly liquid assets."
Regarding brokerage accounts, Schwartz explains, "That's probably one of the biggest areas of change that our shareholders will see. So, as a result of the reform, Vanguard has decided to only offer the Vanguard Federal Money Market Fund as a settlement option and a brokerage account. As David mentioned before, government funds are not subject to fees and gates and they're open to all investors. So with Vanguard Brokerage thought that would be the best option for clients. It is important to note that they can continue to use all the Vanguard money market funds as they do today with the exception of settling brokerage trades."
He adds, "It's a good opportunity for investors to think about what they value in their money market fund, whether it's tax-exempt income or, in the case of a prime fund, maybe a slightly higher yield than a government portfolio <b:>`_. So those are decisions and things that the clients may want to consider."
Glocke says of their Ultra Short Bond Fund alternative, "The strategies that we're hearing about and seeing people execute on ... Vanguard introduced an ultra-short bond fund recently. So it's positioned right between a money market fund and a short-term bond fund. It's a variable NAV fund very similar to a bond fund, but it buys shorter-duration assets. So that's where its maturity profile would be right between the two. And we've seen a lot of interest in that product, investors considering that, mostly though from investors who have money maybe in money market funds that recognize at this point that maybe it's time to take some of that cash that has traditionally been long-term cash in the money market fund and move it into something that offers a better opportunity for returns."
Schwartz comments, "And we have a municipal product, Short-Term Tax-Exempt Fund, that has a similar maturity and duration profile to the ultra-short-term taxable fund that is available for clients as well who desire the tax-exempt income." Glocke tells us, "In this low-yield environment that we finally are starting to move out of very slowly, a lot of clients were looking for a way to go ahead and get a higher return but yet not necessarily to go into the more traditional-type bond funds. So these products give investors who have that risk profile an opportunity to do something a bit different."
Finally, on Vanguard opting not to have floating NAV funds, Glocke says, "But I think a lot of clients really prefer to go ahead and know that when they're transacting, it's $1 in, $1 out. It's never a guarantee. We can say that over and over, and it's in all the prospectus. We have a long tradition of very conservative investment management and we feel very comfortable that our investment-style approach that Vanguard has will go ahead and keep us where we should be."
In BlackRock's video on Scale," Callahan says, "Today, I'll be discussing the changing face of the cash industry and the role that scale plays in our ability to meet the needs of our clients.... We see the impact of scale in three critical dimensions: Accommodation, Access and Investment Diversity. Let's dig into each of these." (See our April 19 News, "BlackRock Completes BofA Funds Merger; Now 2nd Largest MMF Manager," for more.)
He continues, "First, Accommodation. This refers to the ability of money market funds to accept the flows of all its investors, big and small. In an environment where supply of traditional cash instruments such as commercial paper, time deposits and government debt is shrinking, larger clients need larger funds to accommodate flows without impacting the overall fund. We believe clients should consider fund size and manager track record when choosing cash investment options, and seek providers that manage funds in a way that is equitable to shareholders of all sizes."
Callahan goes on, "Second, Access. In our view, the size of a money market platform impacts the access that it has to the market. Relationships are important, not just with clients, but also with partners and counterparties in the market, on whom we rely on every day for both supply and liquidity. Scale players such as BlackRock are more active in the market and work more closely with dealers to access investments and achieve liquidity for our clients."
He concludes, "Finally, Investment Diversity. A platform at scale allows providers to invest their funds in a more diverse set of assets, producing deeper liquidity and reducing concentration risk across the portfolio." He adds, "As the firm trusted to manage more money than any other investment firm, BlackRock has long believed in the value of scale.... To that end, we are pleased to announce the addition of assets from Bank of America Global Capital Management, a deal we closed in April 2016.... It solidifies our commitment to being a scale player in this space; working tirelessly to meet your cash management needs every day."
