This month, our flagship newsletter Money Fund Intelligence interviews Deutsche Asset Management Managing Director Joe Sarbinowski and Director & PM Geoff Gibbs. We discuss the recent big shift from Prime MMFs into Government funds, and the new frontier of money fund alternatives, including ultra-short bond funds, separate accounts and FDIC insured products. Our discussion follows. (The interview below is reprinted from our November Money Fund Intelligence.)
MFI: How have you been involved in the cash business? Sarbinowski: Our roots hail back to a couple of different firms including the Scudder Kemper, Alex Brown and the Bankers' Trust franchises. There are some legacy funds from those organizations that have made it all the way to today.... I got involved in the business in 2000, so [I've been here] about 16 years now. Gibbs: I started back in ‘96 with the Scudder, Stevens & Clark business, and then we went through the few mergers where I ended up here in New York with Deutsche.
MFI: What is your biggest priority? Sarbinowski: We're pleased to have gotten past October 14 and to have successfully implemented our plan for reform. Really our priority right now is getting out in front of our clients and ... helping them assess the new environment and where to go. I know you're fully aware that $1 trillion has left the prime space for government, which probably exceeded most people's expectations. We believe that some of our clients will be looking for another home at some point, so now we're helping them understand how our platform has changed and how their decisions can affect the type of risk and return they are willing to take going into future.
MFI: What other offerings do you have? Sarbinowski: We have a full range of choices for mutual fund investors and beyond, quite frankly. We've got prime retail, we've got prime institutional -- our VNAV and Daily Assets funds.... We've got government and treasury only, we have retail tax-exempt -- the stable NAV version -- and then a year ago we launched ultra-short funds in our Limited Maturity Quality Income fund and our Ultra-Short Fixed Income fund.... We have our FDIC sweep product, and we're big in separate accounts. That's our complete lineup, offering clients a real wealth of choice.
Gibbs: If you remember last year at this time, projections for how much money would transition were, at the high end of the range, $600 billion. Ultimately, seeing north of $1 trillion dollars move, I think is a testament to the industry how smoothly that transition was and how well prepared all of us were for reform here. It really goes to show all the work that was done behind the scenes, and we all handled it well.
MFI: What's your biggest challenge? Gibbs: I think to the extent that the Fed Repo facility is available and has been a great back-stop of supply ... that's been helpful. I think the bigger challenge really is managing the prime funds in this new environment. Most of the funds are much smaller than they were in the past. So it becomes trying to balance that liquidity versus stability of NAV, while at the same time providing a sufficient amount of yield to really maintain the confidence of our clients and assuage their fears about some of the [reform-related] changes.
Sarbinowski: We're in a unique situation where our VNAV has operated as a T-0, 2a-7 fund for five years. We've been through the Euro crises, the U.S. debt downgrade, and the budget ceiling crises, geopolitical risks and even a Fed hike. So we're fortunate to have good history to share with clients. But now everyone gets to see how these floating funds operate. The challenge is certainly with so much money sitting in government MMFs, working to create that differentiating factor to have clients to do business with us. So we're not just supplying them with a nice-performing government fund, but also bringing value in the consultative process of where to begin, where to take the risks, what sort of wrappers are appropriate for the right type of cash bucketing they're doing. So that's really the challenge now -- to find some new ways to add value.
MFI: What are you buying now? Gibbs: I think when you're looking at the Primes, it really becomes focusing on short maturities and floating rate product. We're looking to demonstrate the stability of the NAV while providing robust liquidity buckets. In terms of what we're not buying, we're cautious on spread risk [and] use of illiquid products in those portfolios. When we're looking at the government funds, we're making use of floaters. There is a lot less product availability there ... you're really talking about agencies and repo, so it does become difficult to differentiate yourself. Some of the challenges there are really managing around late day liquidity, especially giving the new rules around repo reform.... It really just becomes providing liquidity for your clients, providing service, and having good communications with them.
MFI: What about customer concerns? Sarbinowski: They're taking a breather after moving their money into government funds. But there are some that are now saying, 'Let's talk about [options].' We're first seeing it first in the form of separate accounts. The largest cash investors have done separate accounts for many years in a low rate environment to get some extra yield. Now some additional firms are getting a little sharper about their bucketing and what can they term out.... Obviously, Basel III continues to impact them on the banking front. So they turn to us on the asset management side to see what solutions we have.... So regulatory challenges are on their mind, low yields are on their mind.... It's a more complicated story about how to deploy your cash in this new environment.
MFI: Are you seeing fee waiver relief? Sarbinowski: Certainly, last December's Fed hike gave the whole industry some relief, as well as differentiation between the performance and credit versus noncredit. So, a second hike, potentially this December, would be welcome. It will further sharpen that delineation, and any [remaining] waivers ... will be probably be absorbed with that hike.
MFI: What about MMF alternatives? Sarbinowski: We don't see that there's one silver bullet. The old prime funds were wonderful, and they served a lot of needs at once.... On our platform, we do have an ultra-short offering ... our Limited Maturity fund, which is very similar to [the] 2a-7 of old. Then you've got Ultra-Short, which is more akin to what we see bigger clients buying in the form of separate accounts.
Separate accounts are an animal [where] you have to work with investor guidelines.... The big folks have been doing this for a while.... But other investors who may have in the past only done money funds and deposits, they may have to change their investment policies. There definitely are some hurdles in terms of education.... We think the market will eventually come back in a bigger way to credit, taking advantage of some of the spread differentials. It's just a question of what sort of format that will take. We think ultimately it will be a combination of 'all of the above.'
MFI: Tell us about the "offshore" or European business. Sarbinowski: The offshore business continues to be a growth business for us. We manage stable NAV in dollar, euro and sterling.... We continue to be optimistic about the overall offshore universe in money fund land. Asia-Pac and LatAm are two areas that continue to be growth areas for us. We continue to add clients, and that all feeds into our Irish and Luxembourg platforms. Clearly the elephant in the room is pervasive negative rates, which continue to exist in Europe. There [in Europe] it's just a function of where can clients go to have their money with T-0 liquidity that's well diversified with high quality credits? And really the answer to that is money funds. So we've seen an uptick in flows since rates have gone negative in our euro money market fund.
European money fund reform is quite complex. The regulators have come to some sort of agreement on the shape that it will take, but they still have to iron out the details. With an event like Brexit, there are a few greater distractions going on slowing from moving forward. We really don't see, assuming the same sort of implementation time frame we had here in the U.S., any sort of reform striking until either late 2018 or early 2019, at the earliest. So it's business as usual in a fairly good environment for investors with cash offshore.
MFI: What about brokerage sweeps? Sarbinowski: We've seen a shift into government [MMFs] ... but also FDIC [sweep] continues to grow for us at a nice double digit growth rate. I think that's a function of the flexibility that it affords. It allows a little bit more customization by the clearing firm to treat their clients ... while also having the pass through insurance of FDIC. So money has been moving there for our [Insured Deposit Program, or IDP] product for quite some time. We've been operating a multi-bank program for over 10 years and it continues to be a growth area for us.
MFI: What is your outlook? Sarbinowski: We're thankful that clients still continue to recognize the value of the 'homogenization' of 2a-7. It's a standard, it's well-known, [it has] T-0 liquidity, diversity ... it's a very convenient tool that delivers a very decent return for them. So we're pleased all this money remains there. Looking forward, we think that versus when we were in the zero rate environment, we think that this is a very exciting time to be in this business. There's just so much to talk to with clients about and assist them. You can really be quite valuable and deepen the relationship through this consultative process, having them speak with folks like Geoff and his team and helping them understand where to go with their money. This is a big difference from when we were just in the doldrums of waiting for final money fund reform rules.
