This month, Money Fund Intelligence interviews Tim Huyck, Chief Investment Officer for Money Markets at Fidelity Investments. Fidelity is by far the largest manager of money funds with over $500 billion, almost double its next largest competitor. The company's history goes back to the earliest days of money funds (recently retired Chairman Edward "Ned" Johnson III played a key role in popularizing money funds), and Fidelity remains the most important player in the space. Our Q&A follows. (This interview is reprinted from the March issue of our flagship Money Fund Intelligence newsletter; e-mail info@cranedata.com to request the full issue.)
MFI: Tell us a little about your history. Huyck: Fidelity Daily Income Trust (FDIT) was the first money fund that we launched at Fidelity [in 1974], and it was the first money fund with check writing privileges... I joined Fidelity in September 1990, just before the move of the money market desk from Boston to Dallas. We were in Dallas for 7 years, and then in November of '97 we moved from Dallas to Merrimack. We're celebrating our 20-year anniversary here in Merrimack (NH) this year. I'm coming up on 27 years at Fidelity, and all but three of those years have been spent in money markets. I've traded; I've managed the trading desk; I basically had every trading role on the taxable money market desk. I managed most of the taxable money market funds that we had at some point or another. In 2014, I took over as CIO for the money market group, and I report into Nancy Prior.
Money funds are important to Fidelity because they are important to our customers. We have more than 11 million customers investing in Fidelity's money market mutual funds. Our market leadership position has grown over the course of the last several years, and has grown quite a bit since 2008. [Regarding our people] money funds at Fidelity are not a stepping stone into other asset classes. Money funds are a career at Fidelity.
Because it is an important part of our business, we commit a tremendous amount of resources to our money market business. From trading to portfolio management, to credit and quantitative research, we have a full team dedicated to the support of managing our money market funds. That includes a research team on the ground in London that is responsible for covering our foreign bank exposure. The team numbers 93 in total, including seven portfolio managers, 13 traders, 70 research analysts and associates and three quantitative analysts.
MFI: What is your biggest priority currently? Huyck: With reform behind us, we're able to focus our time on Fed policy and fiscal policy under the new Presidential Administration and Congress. There are a lot of open questions at this point. You can include credit in there too. The credit environment is pretty solid, [and] bank credit quality is as high as it’s been in years.
MFI: Are there any more changes that need to be done? Huyck: There aren't any changes in queue at the moment. However, we are, probably like many of our competitors, constantly reevaluating our product line. The industry had a tremendous amount of assets moving between fund types last year. So we will take a look at our fund lineup this year and make sure that it remains appropriate.
With respect to the movement of assets, we had close to $300 billion in assets move among our funds, and we've got a little over $500 billion under management. So a tremendous amount of money moved. But one of the things I'm particularly proud of was the ability of our team, and the overall industry, to handle that money movement. We were able to manage those flows and accommodate those flows without any disruption to the shareholders.... It went remarkably smoothly, given the amount of flows. I think it speaks volumes to the preparedness of the industry and the tremendous liquidity that is in the money markets.
MFI: What are your biggest challenges? Huyck: I would say a challenge may be too strong of a word. We have now roughly $400 billion in government assets. We are focused on getting those dollars invested. We've spoken publicly about the 2a-7 eligible universe of government securities, which is close to $7 trillion. So the eligible pool of investments is huge. At the same time, the demand is also big and growing.... Obviously, you've got $1 trillion more in demand that has shown up from money funds in the last year. Getting government assets invested is more of a rate story, than an availability story. The question is not whether you can get the funds invested, but what rate do you have to pay to get access to that government supply?
The market has seen the spread in government and prime funds expand. Historically, the spread between prime funds and government funds has been 10-12 basis points. That spread has moved to 35-40 basis points now. So, that's a result of less demand in the prime area, and more demand in government money market securities suppressing the yields on government securities. Customers are showing increased interest in prime funds ... now that the spread is 35-40 basis points. Some customers are considering moving back, and as you've pointed out, institutional prime assets industrywide are up almost $20 billion YTD. [But] clients still have questions about what their investment guidelines allow. Many ... said 'We're going to move from prime to government for the initial transition and revisit the investment strategy later.' That 'later' is starting to happen now.
MFI: What are you buying now? Huyck: We've been very active in floating rate securities, in both the government and prime funds. Futures markets are predicting multiple rate moves from the Fed in 2017. So we think floaters will perform well as the Fed continues to move rates higher. Treasuries are another security where we've been very active. We hold a lot more in Treasury securities now than we did a year ago.
MFI: Are customers noticing the yields? Huyck: It certainly makes for easier conversations with customers when you can tell them you're paying them more than just a basis point. Shareholders and investment professionals tell us they're excited about potential for increased investment yields. It's not a lot, but in some cases it hits 40, 50, 60, 70 basis points, in net yields that money funds are paying.... Bank deposits since 2008 have grown nearly $4.5 trillion dollars. We looked at some FDIC data that suggested that the rate on bank demand deposit accounts hasn't varied at all over the course of last year and a half.... So when bank deposits were paying [roughly] 15-20 basis points and money funds were paying a basis point, the marginal dollars generally went into banks. That investment calculus may start to change if money fund yields continue higher.
As market rates rise in a rising rate environment in the short end, money funds have historically grown in those types of environments because banks are slower to raise their administered rates. This could be a potential source of ... demand for money market funds as fund yields continue to rise.
MFI: Talk about ultra-short bond funds. Huyck: We had a very good year in both our taxable and municipal Conservative Income Bond (CIB) funds. The Conservative Income Municipal Bond Fund, which passed its three-year anniversary in October, has grown to over $1 billion. The taxable fund also grew tremendously last year.... Clients are asking a lot about [these].... Prime money funds are no longer a one-stop shop where investors can get their return, liquidity, and stable NAV. So we’ve talked a lot about segmenting cash. Some clients are choosing to invest operational cash in a government money market fund, while investing shorter-term strategic cash in a prime money fund, and investing longer term strategic cash in a conservative income bond fund.
Note though that as the Fed continues to hike, the Prime to CIB spread has tightened.... So variable NAV prime funds have gotten closer to that conservative income yield. That will be something to keep an eye on too, not only the government to prime spread but also the prime to CIB spread.... We're not trying to reinvent or manage funds to "old 2a-7." We want to be very clear that these conservative income bond funds are just that, they're bond funds.
MFI: What is your outlook? Huyck: I think the future for money market funds is pretty bright, as bright as it's been in a while. We've gotten reform behind us, the Fed has told us they're going to move rates higher three times this year, [and] the credit markets are relatively subdued.... Typically in an environment where the Fed is moving rates higher ... that has been an environment where money is coming into money market funds. So the extent that we do get ... Fed hikes this year, I think it's reasonable to expect the industry to grow.
Our guiding principles for money market fund management since the day we started [have been] safety, followed by liquidity, followed by return, and in that order. I think it became very apparent that shareholders view money market funds the same way. If return [been] higher on the pecking order of what investors were seeking in money funds, the industry would be a fraction of what it is. I think it really speaks again to the value of proposition of money funds. Shareholders still find MMFs useful and valuable in ways that yield can't measure.
