This month, our flagship newsletter Money Fund Intelligence interviewed State Street Global Advisors' Senior Managing Directors and Global Heads of Cash Management Yeng Felipe Butler and Pia McCusker. We discussed a number of topics, including finding the right mix of liquidity and return for clients in the new post-reform money fund environment. Our discussion follows. (The interview below is reprinted from the December issue of our flagship Money Fund Intelligence newsletter; e-mail info@cranedata.com to request the latest issue.)
MFI: How long has State Street Global Advisors been involved in running cash and money market funds? Butler: State Street Global Advisors has been managing client cash for nearly four decades. We launched our first prime money market fund in 1988 and have continued to bring new cash solutions to our clients over the years. Today, we provide commingled and tailored solutions to institutional clients around the world through our money market funds, separately managed accounts, cash ETFs, and ultra-short term bond funds.
MFI: How long have you been involved? McCusker: I've been with the organization for 16 years, starting my career as an analyst in State Street's ABCP conduit team (anyone remember Clipper, Frigate, or Galleon?), thereafter navigating through and post financial crisis as Head of Credit Research within Global Cash. Amidst a greater regulatory regime, I took over the Global Cash Management team last year when my predecessor was appointed Chief Risk Officer. Butler: I joined SSGA in 2010 as Head of the US Cash Business and started my career in institutional cash sales and marketing at Merrill Lynch Investment Management. What attracted me to SSGA was the chance to work with a team dedicated to excellence and always putting clients first. This year, I took on responsibility for the global cash business, and we've been able to build on that culture of excellence globally to ensure a seamless and highly differentiated client experience to our large multinational corporate cash clients.
MFI: What is your biggest priority currently? What are you working on? Butler: Helping clients understand and navigate the changes brought on by reform is our top priority right now. Across the industry, the conversion of prime funds to floating NAV has largely transitioned uneventfully. And if there were issues, they were small and very quickly remedied. This points to the strength of the product and the commitment of the industry to meeting the challenge of money market reform. Sharing this experience with clients helped them better understand the full value proposition that we offer-both from an investment and operational standpoint.
McCusker: It is critical for us to work closely with our cash clients to find the right solution to cash investing post money market reform. Since October, many of our clients have shifted their cash portfolios toward government strategies. As the yield spread widens between government and prime funds, we are actively partnering with these clients to find the right mix of liquidity and return for them.
MFI: Tell us about your latest fund adjustments. McCusker: We recently made two major changes to optimize our fund line-up. The SEC reforms of 2016 presented an opportunity to rationalize our product offering and expand it to better meet the needs of our clients. We created six new cash management strategies to provide more choice for our clients to balance their safety, liquidity and yield needs. We also merged some funds from our legacy fund families to simplify our offering and eliminate duplicative offerings. The result is a very comprehensive line-up designed to meet the cash needs of all of our clients worldwide.
MFI: What's the biggest challenge in managing cash today? What has it been historically? McCusker: From a portfolio management perspective, moving a trillion dollars from prime to government has created capacity issues. We are having further conversations with clients to determine if the government fund will continue to be the best strategy for them. Balancing liquidity with return targets is the key issue. Historically, prior to 2008, clients were focused on return -- they were very interested in yield. Now, we are helping them with their increased focus on liquidity and ready access to their cash.
MFI: What are you buying now? What aren't you buying? McCusker: SSGA's philosophy on credit investments has not changed over its history. We are focused on preservation of principal and liquidity. Historically and currently, we are a conservative cash manager. We will stand by this philosophy regardless of the interest rate or credit environment. Moreover, having an independent credit research team supporting the global cash business has been a successful 'ingredient' for us, and we plan to keep this winning 'recipe'.
MFI: What are your customers concerned about these days Butler: In our consultations with clients, they are telling us that they are most concerned with liquidity and ease of access to their cash. They want a simple, transparent investment process that is easy to explain to their management. When you are running a business, no matter if you fly airplanes, build software apps, or are managing an investment portfolio, our clients want to know where there cash is and how quickly they can access it. Furthermore, our clients need help in navigating the new landscape. What is the Fed going to do? Are interest rates poised to move higher? How are new regulations impacting my business? SSGA helps answer these questions and provides custom-tailored solutions.
MFI: Are fee waivers impacting SSGA? Butler: We continue to monitor interest rates and the yield our funds are providing to investors. Currently, in the U.S., fee waivers are less of a challenge post the rate hike in 2015. But negative interest rates in Europe and Asia warrant constant close attention, and we remain diligent in providing the best outcomes for our clients.
MFI: Can you comment on the recent MMF reforms? Butler: While money market reform has had an immense impact on our business, the smooth transition was a testament to the industry, issuers, investors and clients, who all handled it with fluidity and in an orderly fashion. I think our biggest lesson learned was that by carefully listening to clients and planning ahead to meet their needs, we were able to lead innovative efforts across investment and operational processes that resulted in a good outcome for everyone. This experience will be put to good use as we look ahead to reform activity that will soon impact our European clients.
MFI: Can you comment on the huge shift from Prime to Government? Butler: It was massive. We expected it, we planned for it, it happened in an orderly manner, and now we are potentially looking at a rebalance back to prime strategies as yield spreads widen. We are very well-positioned for this as our institutional prime fund (Institutional Liquid Reserve) is currently one of the largest institutional prime funds with over $9B in assets under management.
MFI: Do you manage ultra-short bond, enhanced cash, and/or offshore funds? McCusker: Yes, all three. SSGA offers a full suite of short-term investment products. We are active across a broad array of global investments including Dublin based UCITS in US Dollar, Euro and Sterling that serve a wide variety of institutional cash clients. Separately managed accounts are also a huge part of our cash business. We currently manage over $120B in separately managed accounts. These are highly customized portfolios based on bespoke requirements from clients on their investment guidelines and goals.
MFI: Tell us about the "offshore" or European fund business. Butler: Our European money market fund business provides a full suite of cash strategies across the three major currencies (US$, Euro, Sterling). As the European money fund industry begins its journey down the road to reform, we stand well-prepared to meet that challenge and provide the best solutions to our clients. Regardless of Central Bank interest rate policy, our clients value cash as an asset class and we will continue to engage with them and offer perspective to help them optimize their portfolios.
MFI: What is your outlook for the coming year and the future of money funds? Butler: Money market funds have a very bright future because they provide a unique set of benefits to our clients. Note that despite the dramatic asset shift from prime to government funds, the total assets in the money market funds industry has not changed. Further, as the Federal Reserve begins to normalize rates, we could potentially see a reallocation of assets back to prime funds. We also expect to see refinement and continued innovation in cash strategies along the short-term spectrum as investors seek new solutions and providers like SSGA innovate alongside clients.
McCusker: We are all looking forward to positive rates! As the Fed begins the process of normalizing rates, we hope this will be a catalyst for our clients to differentiate between products, such as prime and government funds, and use them in a combination that best meets their particular investment needs.
