This month, our Money Fund Intelligence newsletter spoke with Paul Przybylski, Executive Director, Head of Global Liquidity Product Development & Strategy for J.P. Morgan Asset Management, and we also include a couple of comments from some other members of the JPMAM team. We discussed recent trends in the global money markets, including the gradual shift back into Prime money funds in 2017 and how the pending European money fund reforms will affect "offshore" cash investments. JPMAM is the 3rd largest U.S. money fund manager and the 2nd largest MMF manager globally, with over $250 billion in US assets and another $150+ billion in Europe and elsewhere. Our Q&A follows. (This interview is reprinted from the April issue of our flagship Money Fund Intelligence newsletter; e-mail info@cranedata.com to request the full issue.)
MFI: Tell us about your history and the current team at JPMAM. Przybylski: I started working in the space as Chief Operating Officer and Chief Financial Officer for the J.P. Morgan Global Liquidity business around three years ago. Prior to that, I was CFO for the Global Fixed Income & Liquidity business for four years.... Over the past three years, I was involved in various strategic projects, which included, among other things, product development and working directly with JD [John Donohue, CEO, Asset Management Americas and Head of Global Liquidity] and the team.
The current Liquidity team includes: John Tobin, Global Head of Liquidity Portfolio Management; Dave Martucci, Global Head of Managed Reserves Strategy; Paula Stibbe, Global Head of Sales across Money Market Funds, Managed Reserves, and Short Duration Strategies; Jimmie Irby, Heads of Credit Risk Administration; and, Ted Ufferfilge, Head of Global Short-Term Fixed-Income Client Portfolio Managers.
MFI: Where do you see the industry overall heading in the next two years? Donohue: I think we're well positioned for the rotation in the U.S. from 'Govie' back to credit. We're [seeing this shift] not only in our funds, but in the broader market landscape. So I think we should see positives there.... European reform is not going to be done by the end of this year, but by the time we get to December we should have a clear understanding of what we will be doing in terms of product offerings. Finally, repatriation, in general, we sense will be a 2018 event. That said, we will continue to dialogue with our clients as we move through 2017.
MFI: What is your biggest priority? Przybylski: First, we are at the six-month mark post U.S. MMF reforms. That said, we're reviewing our current product offering to ensure we are well positioned for future growth. Second, we have begun work streams on European regulatory reform, which has a target implementation date of Q4 2018. Even though there are still 16 to 18 months before we need to implement these, we know from experience that this time goes by fairly quickly. It took around 2 years to complete the Rule 2a-7 reforms in the U.S. So we're running on all cylinders in Europe from a product development strategy perspective. Third, we're focused on educating our clients with intellectual collateral with emphasis on rotating back from government funds into the credit space where applicable.... As we have the largest publicly available Institutional Prime fund and the largest government fund, it puts us in a good position to handle our clients' cash management needs.
MFI: Tell us about your recent papers on Prime MMF issues. Przybylski: We're seeing the industry begin to gradually shift back into credit and clients have become more inquisitive on credit funds and spreads. There seems to be more comfort, broadly, following reform ... clients are starting to realize that it's not as disruptive as they thought. There has been a [static] mindset for the last 8-9 years with the market sitting in a zero yield environment.... We continue to educate clients, making sure they have all the facts and really understand the details behind how floating NAV works. One of the pieces we put out focused on those operational aspects of reform in the U.S. The credit shift has begun already.... Our prime fund has gained 42% in AUM since the conversion, so some clients have been benefitting already. We want to make sure that we educate as many clients as we can so they can feel comfortable enough to move along with the wave.
MFI: What's the biggest challenge in managing cash today? Tobin: Sourcing new repo supply continues to pose challenges, given tightening constraints on dealer balance sheets and regulations such as the Supplemental Leverage Ratio. However, the market continues to innovate with its current pursuit of centrally cleared repo and increased utilization of bilateral DVP.
MFI: Are you seeing relief from any fee waivers? Przybylski: Waivers have been a broad drag across the industry for the past 8 years due to the rate environment. The initial rate hike back in December 2015 alleviated the initial pain, and with the second rate hike we were almost 90% back to pre-waiver levels. With this last rate hike the industry is [basically] in a full fee rate environment. If you look at the broad industry in the U.S., there are about $2.7 trillion dollars in Rule 2a-7 money market funds.... [Well over $1.0 trillion] of Prime assets have shifted into government type product. We originally thought that the floating NAV would be of greater concern, but as NAV volatility has remained fairly muted for the past six months, it's become clear that fees and gates were more of an issue for clients.
Equally, clients transitioned into the government space because it was a safe default option. They didn't want to deal with fees and gates; they didn't want to deal with floating NAVs, driving the government funds to the size we see today.... Reform also required the market to take significant steps to isolate Institutional clients and create clear designations to segment the product space. Clients were content taking a government yield for clarity on what was going to come next. Now that short term interest rates have increased, we're seeing clients start to realize that a 42-44 basis point spread between government and credit funds is attractive, and that a segmented portfolio can have a meaningful overall return. It's going to take time, and should continue throughout the year. But I think you're going to start seeing clients come back [to Prime] . If there are more rate hikes from the Fed, those spreads should continue to widen.
MFI: What about ultra-shorts and SMAs? Przybylski: I think a number of factors have driven our separate account growth, some of which can be attributed to the reforms.... Clients want to build a customized portfolio with a predefined set of guidelines and a pre-negotiated management fee. [But] separate accounts are more human capital intensive products that require more 'touches' as you go on. They require more account reviews and more client interaction than a mutual fund investment would.
MFI: Can you talk about repatriation? Przybylski: Repatriation is a potential event we're analyzing. Our Luxembourg offshore complex does have a [number] of U.S.-headquartered multinational clients investing in offshore dollars/products. We're performing analysis [to really understand], 'What is the impact to our clients, our Lux complex, and our overall global platform after repatriation happens?' This will be an ongoing analysis as time evolves, and as we see more clarity in the future tax reform. There are dynamics which make European reform more complicated in terms of figuring out how we should be structuring our products, since there is no "default option" like there was in the U.S.. That puts these reforms in a more challenging light, because we could end up launching all three structures [LVNAV, FNAV and Govt CNAV] for product, or we could selectively pick based on client input of what they would like us to launch. That's something we're going through right now, and what we're spending quite a lot of time educating our clients and having dialogues on, so we can understand the market demand.
