This month, MFI interviews several key members of Western Asset Management's Liquidity Business, including Client Service Executives John Bonczek and Zak Green, and Head of Liquidity Justin Rose. The three discuss the current cash environment, both in the U.S. and "offshore," and recent changes at Western, which is an affiliate of Legg Mason. Our discussion follows. (The interview below is reprinted from our Sept. Money Fund Intelligence.)
MFI: Give us a little bit of history. Green: Western has been involved in running cash in various products since its inception in 1971. We acquired Citi Asset Management in December 2005, [and] we still manage largely with the same team today. Those funds date back to around 1990. Bonczek: We always like to point out that for the most part, the investment and credit research team has been in place from the Citigroup days. [They have] an average tenure of 22 years.
MFI: How about your own histories? Bonczek: I came over in the CAM [Citi] acquisition and I've been with Western for over 10 years. Green: I have been working in the short duration space in various sales, product development, and management roles for more than 20 years. Rose: I was director at UBS on the short term interest rate desk for 18 years, and former head of money market funds at Standard Life Investments. Prior to coming to New York, I was a Client Service Executive in the Western Asset in London.
MFI: What is your biggest priority? Green: Without a doubt, our clients are always our biggest priority. Working with them to help ensure a smooth implementation of the SEC reforms has been the main focus of our time over the past several months. We're working to make sure that our clients are comfortable with the changes and understand what they entail. We're just trying to serve as a resource to them. Bonczek: Education is a big thing to our clients, making sure they understand everything that's involved and all of the ramifications.
MFI: Talk about your recent changes? Rose: We have put out a couple of press releases on this subject. Last year was principally outlining where we thought our fund lineup would be for money market reform. We also terminated funds that we viewed as "sub-scale" and consolidated our Tax Exempt line-up. This year, we've done a further press release and made the required filings for our final fund line-up. However, the work is still ongoing [but we’ll be ready by] the 11th of October. Green: In anticipation of these reforms, we also looked to bolster our Government fund presence and launched the Treasury Obligations Fund, a dual, triple-A rated Treasury & Repo fund. Outside of the 2a-7 space we also launched two new Ultra Short Bond Funds.
MFI: Could you talk for a moment about your master feeder structure? Bonczek: Basically, under the hub and spoke, master feeder structure, you have one hub portfolio, and in that hub portfolio, we have assets that come in from both offshore and onshore.... The advantage is it's a 2-a7 regulated hub portfolio [and you have] economies of scale, diversification, and the ability for certain spoke funds to have investments that would not normally be available to them. Going forward, that master hub portfolio has to float because it is a 2-a7 regulated hub. (See our recent LOTD on www.cranedata.com for more.)
Rose: I also think in the offshore space our investors are very comfortable with our fund restructuring including our Cayman Island spokes. We also have a Dublin-domiciled, UCITS US Dollar Prime money market fund which follows ESMA guidelines, the European regulator on money market funds.
Bonczek: [The Cayman Islands-domiciled fund is for] offshore clients in general, whether it's Latin America or global clients.... If you have an interest in investing offshore (US) dollars, this is a perfect vehicle. The Cayman-domiciled funds ... have a 5 pm EST instead of other domiciles where you have a much earlier cut-off. So, that plays well for multinationals on the West Coast because they have time to invest their money.
MFI: What is your biggest challenge? Bonczek: I think it's been dealing with the low interest rate environment and money fund reforms. Rose: The low interest rate environment for money market fund has been an extremely important factor. I mean, two years ago nobody would have expected the US to still be at this low level of interest rates.... Thankfully, it's not negative like [much] of the G7.... There's always the constant challenge of making sure that we're providing a sufficient yield for investors and obviously paying our costs. It's an expensive business. We're having to always balance that.... Going forward, we're trying to anticipate change in regulation and in client wants and needs, and developing products that really service those needs and wants.
MFI: How defensive are the funds? Green: The Prime portfolios are definitely ready [for Oct. 14]. Our PMs, we think, have done a really terrific job in shortening the WAM gradually so as to maintain a very competitive prime fund yield with our peers. We see that our WAMs are shortened to largely the same levels as most of the industry ... in order to provide that ample of liquidity that clients are going to be looking for.
MFI: Any other customer concerns? Green: In general, all clients do have questions and concerns about gates and fees.... So that requires some additional education on our part to let clients know the scenarios that the SEC envisioned these potentially being used.... We stress and feel that there are very remote opportunities where fees would ever be implemented.
Bonczek: I'd add that clients have operational concerns. Things like earlier cut-off times. West coast clients realistically only have two cut-off times, because the 8 o'clock or 9 o'clock cut-off time is very early for them.... It's just a whole change of behavior in how they have to invest, if they're going to invest in institutional prime funds.
Rose: I would add, I deal a lot with the money fund boards. There's been a huge amount of work done to educate directors on their new responsibilities are going forward. I don't think that should be underestimated. The Fund Boards will have to make key decisions going forward and they are asking all the right questions.
MFI: What about fee waivers? Green: Generally speaking, I don't think we're alone in that we've certainly seen fee relief since the rate hike in December. Obviously, if we remember back before then, there was really no spread to speak of between Treasury and Prime funds. Now, there is a meaningful spread between the two. That's really what we would stress.
MFI: What do you have left to do? Rose: I think a lot of the work has really been done, operationally.... Don't underestimate how much this is actually going to cost at the end of the day. It's been a very expensive exercise to meet these new requirements. As I've said, I think most of the work has actually been completed. Investors should [benefit from] the data that the funds are providing on websites and the huge amount of transparency now in the product. We're in the home stretch, but there's still more to do.
MFI: What about Europe? Rose: They're a long way behind the U.S. and still have not completed their final reforms. We have a very sizeable offshore money market fund business [in] U.S. dollars specifically. We closed a number of funds last year.... [It's] still a key part of our business, we're watching it with interest.... It looks like European regulations are going to allow, at least for the next couple of years, CNAV prime funds albeit in a low volatility form. [But] there is a disconnect between [these regulations and] the SEC, and that's never a good thing in markets.
MFI: Tell us about your clients. Bonczek: We have a diverse client base of large corporate clients, hedge funds, municipalities and endowments. Rose: I would say hedge funds are an increasing user base, because they're obviously being pushed off bank balance sheets. So there's definitely a growth area there. But again, obviously because of the floating NAV and gates and fees, prime money market funds will lose their eligibility for margin, etc. So there are some funds where investors have reduced [their usage].
Green: The relationship is very, very important. It's one of the ways that clients can differentiate between products.... One of the things clients appreciate is who can understand their needs, who can understand their business, who can serve as a true consultant for them and be a resource as well as a trusted partner, providing them with information not only on their funds but on the industry as a whole.
MFI: How about the future of MMFs? Green: We think the money fund industry has really demonstrated remarkable resilience despite the changes the pending reforms require. We've been impressed with the way providers have really banded together, worked to educate their clients and fostered them through the unchartered waters of these reforms. We're confident that money funds are here to stay and we believe they will continue to play a really vital and necessary role in client investment strategies. There really is no other solution that is their equal when it comes to providing safety and liquidity.
Bonczek: I think that some of our clients are sitting on the sidelines and they want to see what happens as October 14th comes and goes. In regard to institutional prime funds, they want to see how the assets of the portfolio hold up, how the NAV fluctuates, if it does fluctuate, and investors want to make sure they're compensated for moving back in or staying in institutional prime funds.
Rose: I think if you look back at what money market funds set out to give investors, it was preservation of capital, liquidity, and yield, those three key cornerstones. But the rule changes have made sure that you can't get access to all three in one product, so the investor has to make a choice. We believe whatever choice our clients have to make, we have the full range of funds to meet their needs.
