This month, Money Fund Intelligence interviews AB Government Money Market Portfolio Vice President & Portfolio Manager Ed Dombrowski. AB, the former AllianceBernstein, whose motto is "Ahead of Tomorrow," has been rebranding and focusing on expanding their money market fund presence by courting the "portal" and institutional marketplace, among other things. Our Q&A follows. (This interview is reprinted from the January issue of our flagship Money Fund Intelligence newsletter; e-mail info@cranedata.com to request the full issue. Note too: We'd like to welcome those of you attending the 7th annual Crane's Money Fund University, which takes place today and Friday at the Jersey City Westin! Crane Data subscribers may access the conference materials at the bottom of our "Content" page.)
MFI: Tell us a little bit about your history. Dombrowski: We have a long history, nearly 40 years, in the money fund business. The first fund started in July 1978. Alliance Capital was a top 15 sponsor in the 90's and early 2000's. In 2005, the firm sold its money fund business to Federated. From 2005-2013, we refocused our efforts to efficiently manage internal cash, and one of the results of that was creating our Government Money Market Portfolio (formerly Government STIF Portfolio). I came to AB in 2001, and joined its cash management team in 2004. I spent some time in different areas on the cash management desk before becoming a portfolio manager, running three 2a-7 registered government funds, as well as separate accounts.
MFI: What is your biggest priority now? Dombrowski: One of our priorities for 2017 is externally marketing and building brand recognition around our biggest fund, the AB Government Money Market Portfolio. In the past, we were big in the retail channel, but our new goal is targeting institutional corporate treasurers. We're going to try to market our fund in two ways. The first is through the technology and marketing ability of portals; we currently have one agreement in place and will be exploring executing more in the future. Secondly, as an organization with nearly $500 billion in AUM, AB has an extensive internal sales force that enables us to leverage our existing relationships across the firm. We think now is the right time to do this because money market reform and the rising rate environment have investors paying closer attention to their front end allocations. Both should help with our efforts.
MFI: Tell us about any changes. Dombrowski: As a result of money market fund reforms, we converted our prime money market fund (AB Exchange Reserves) to a government money market fund. At the same time we began offering the AB Government Money Market Portfolio to external investors, adding new share classes and a management fee to that fund.
MFI: What's the biggest challenge in managing cash today? What has it been historically? Dombrowski: I think the fragmented repo markets and the new rules around tri-party repo have made it harder to manage late-day funds and volatile flows. The importance of counterparty relationships is paramount. Flexibility with tri-party trades is the key, more so than the rate. Whether it is in regards to the amount of balance sheet allocated, intraday [issues], fund balance shuffling, or even an agreement on the timing of the matching process, all add value. Having access to the [Fed] reverse repo facility also helps us not only in terms of mitigating the flows and the amount of trading that we have to do every day, but also in securing a fair level. In the past, portfolio managers spent a lot more time focusing on ways to communicate their view on the path of short term interest rates. Today, there's a lot greater focus on ensuring that you meet legal, regulatory and compliance criteria.
MFI: What are you buying now? What aren't you buying? Dombrowski: Needless to say, everyone is buying government securities and a lot of them. At year end, the Fed's reverse repo facility was at $468 billion, which shows there are not enough securities in the market to maintain the floor without the facility. If there is no resolution to the 'debt ceiling' over the next 10 weeks, the Treasury will be forced to significantly take down the amount of bills outstanding. If this plays out without a quick resolution, the Fed repo facility will continue to be critical.
In terms of security types, in the late summer we were buying agency floaters, where we have an oversized position. These securities have richened significantly in the past few months, but using the resets as a way to mitigate uncertainty in a rising rate environment will continue to add value. In terms of agency discos, we have an oversized position in FHLB. The market continues center on the Home Loan banks. FHLB's represent over 75% of the approximately $550 billion of issuance in the "disco" (discount) market, so it is hard not to have an outsized allocation. Some of the fund ratings have maximum limits on percentages allowed in each agency, but it is hard to ignore the pickup over other agency names in such a low rate environment. On the other hand, we've stayed away from T-bills under 50 basis points, the Fed reverse repo facility floor.
MFI: What are customers concerned about these days? Dombrowski: In general, most customers are concerned with liquidity. Maybe not so much in a government fund itself, but liquidity concerns may be the reason clients have chosen a government fund over a prime fund. One of the results of reform was that it showed many investors were as concerned with the fees and gates as they were with the preservation of their capital. Liquidity has been a concern across the entire curve and has manifested itself in varying forms over the past few years. The Treasury flash crash, dealers' ability to hold inventory, and the regulatory effects on the repo market are all examples of how all markets have been affected from overnight out to 30 years.
MFI: Can you tells us about the impact of the latest Fed move on fund yields? Dombrowski: It's definitely a slow-moving process [digesting the recent hike] for government funds. Coming into the rate hike, I think most government funds were pretty long. So it should be a slow grind upward in their yields. It's definitely going to take a while to work its way through. Three factors that caused funds to be long were: the highly technical time of the year the hike occurred, the telegraphing of the move by the Fed, and the uncertainty around the debt ceiling. The combination of these factors is how you get rates three months and shorter trading below 50 bps. Dealers also are reporting that the $30 billion dollar [Fed RRP] cap on funds is pressuring larger funds into buying securities in the market, and causing this leaky floor. These factors will only lengthen the time it takes for rates in the short end to normalize.
MFI: Is there anything left to do with reforms? Dombrowski: No. Our three funds are in compliance with all of the new regulatory requirements.
MFI: What are the challenges of distributing via portals? Dombrowski: They have a lot of reporting requirements, and you want to have good information on your fund. One of the things they're selling is their technology to investors. The detailed information that they would like to see from your holdings is pretty intense. Portals help expose your funds to investors, whether it is though the simple visibility on their fund list or their help in putting together functions with clients directly. In a world of increased regulation and reporting requirements, portals are bringing benefits to clients and helping them meet their needs. This is part of the reason their popularity has grown steadily.
MFI: What is your outlook for the future? Dombrowski: The future is bright for money funds. We just went through a tremendous shift, which taught us a lesson we already knew. That is: everybody has cash and it'll always be a part of any portfolio's allocation. It may be in a slightly different form, but it'll be there. If you look back at that baseline of $2.7 trillion of assets in money funds, they remained a viable option even though rates were 0% for 10 years. There's no real reason to believe that we won't see balances increase, not only because of the rate hikes, but because of what's going on with banks shutting off deposits.
Overall, it's been a relatively low volatility environment in both the equity and the bond markets. If there's turbulence in either of those, money markets have always been a safety net. With president-elect Trump coming into office and a large amount uncertainty around his policies and their implementation, you'll see more volatility and investors turning to cash. There are a number of factors that bode well for money markets ahead.
