This month, our Money Fund Intelligence newsletter speaks with Denise Latchford, Senior Portfolio Manager and Director of Money Markets for American Century. We discuss the return to "normalcy" in the money markets, as well as a number of other money fund related issues. Our Q&A follows. (This interview is reprinted from the May issue of our flagship Money Fund Intelligence newsletter; e-mail info@cranedata.com to request the full issue.)
MFI: How long have you run MMFs? Latchford: American Century has been investing money for almost 60 years. The company was founded by James Stowers Jr. in 1958 as Twentieth Century, which later merged with the California-based Benham Group in 1994. We then became American Century Investments.... As far as money market funds go, though, the firm has been involved in these since 1972. That was inception date of Capital Preservation, which I think makes it the oldest money market fund. I've been with the firm over 25 years now."
MFI: What is your biggest priority? Latchford: Right now, we're just really focused on the markets and our funds. We spent a lot of time over the last two years with reform, so it's kind of nice having that behind us.... We have ZIRP behind us as well, and finally have interest rates going up. So, it certainly makes it more fun investing when [gross] rates are above 1.0%. I am tired of zero interest rates. With things like this tax reform proposal coming out right now and the new Administration, and possibly a whole new Fed maybe next year ... we have a lot of actual investment-related [topics to focus on].
MFI: What's your biggest challenge? Latchford: It's nice that the credit markets are quiet at the moment.... It feels positive. We buy a lot of bank names, either directly in the form of CDs, indirectly as Letter of Credits on VRDNs, or as indirect exposure through asset-backed commercial paper. So we, credit analysts and portfolio managers, pay close attention to the banking sector. We have a few French banks on our approved list, and our analyst in London keeps us informed on what is happening internationally. So that is a huge advantage. Currently the French elections and how they are playing out has been our topic.
Another challenge is figuring out what the Fed is going to do going forward. What are they going to do with the balance sheet, and how is that going to impact us? Also, right now our big challenge is supply.... That's definitely been a challenge in the commercial paper market. It's also been a challenge in the VRDN market. (We use VRDNs to meet our daily and weekly liquidity needs.) The supply in this area is down as well. Many muni issuers have termed out their debt, decreasing the VRDN supply."
Latchford continues, "The MMF reforms, in general, have made investing more challenging. We have to combine affiliated issuers and combine credits for our issuer test, and that, [plus] the fact that banks and certain areas are not issuing as much paper [presents a challenge]. What is being issued, we pretty much have to count together. Banks that sponsor ABCP programs have to be tracked as a guarantor.... We were pretty big buyers in asset-backed commercial paper [but] now all the administrators, any J.P. Morgan program or any Citibank program, have to be combined at the guarantor. So it limits the amount that you can purchase in them. Our exposure has gone down from before the reforms.
MFI: What about your fund lineup? Latchford: We had two prime funds, but we converted one into a government fund, pretty much like everybody in the industry. So now we have: one prime fund, one government fund, one Treasury only fund, and then two tax-exempt funds, a national and a California.... As far as the cash for our equity and bond funds, it's probably at about $1.8 billion. We also have asset allocation funds, and there are little cash slices in those that we probably have another $500 million in."
MFI: What are you buying? Latchford: For the prime fund, we're definitely looking at floaters, a lot of CD floaters. We buy a lot of Canadian banks' CD floaters. That seems to be our 'go-to'. We still use VRDNs for our liquidity requirements, and Treasuries. We still invest in ABCP and add industrial commercial paper names when we can. Unfortunately, we're too small for the Fed RRP program.... We do a moderate amount of repo when managing the cash for the equity and bond funds, but it is not in a centralized money fund. We have a limited amounts of repo lines [now], because we aren't huge players in that market because of our size.
Our Capital Preservation fund at one point was close to $3 billion and I think we're $2.3B now. That fund probably has one of the most stable asset bases ever. I think we have some of the same shareholders from 1972.... We use the Treasury 2-year floaters when we can for Capital Preservation, but it is limited because of the WAL.
MFI: Has the removal of First Tier and Second Tier changed things? Latchford: For us, for the most part, it has been business as usual. I think the industry might have migrated a little bit into that area. The nice part of the removal of that is: our credit analysts don't have [as much] concern over an unexpected rating action.... So in that respect, it gives us a little bit more breathing room. But it doesn't really change the way we look at credits, as far as drifting down into A2/P2 paper.... It just gives us a little relief [so] we don't have to be concerned about [this cliff].
MFI: Any customer concerns these days? Latchford: As we start to see spreads start to widen ... suddenly yields will become a concern. If we get two more interest rate hikes, the environment will look different between a government fund and a prime fund.... Some of our customers now are suddenly now [asking for] a lot more control saying, "We want this as a separate account. We don't want fees and gates."
MFI: What about fee waivers? Latchford: We actually came out of waivers early. For the Prime fund, we were out [relatively] early just managing our way out of them. But the three hikes have helped a great deal. Overall for the company as a whole, money market funds [are only] around 3% of our total assets.... So the fee waivers didn't impact American Century perhaps as hard as they impacted other fund companies, where they are a lot heavier in money market funds. But I'm not going to say that the management company wasn't happy once we stopped them.
MFI: Any last comments on the MMF reforms? Latchford: I think I have one word for those reforms, and it's 'huge' <b:>`_. The thing that I noticed the most with reform was that unless people were directly involved I just don't think they realized how large of an undertaking it was, how many areas it impacted, and how many people actually needed to be involved. 'Money market reform' sounded kind of neat and clean and easy, until you had to spend two years with it. It impacted every area of a mutual fund company.
MFI: Do you guys manage ultra-short bond funds? Latchford: With the ultra-short bond funds or ultra-, ultra-short just outside of money markets, some of our clients are looking at those. So I have a feeling we will be opening [some of] those up in separate accounts as one-offs.... Another thing that I think might be coming in the future is a lot more automation, because with the way that these reforms worked out and then people having to shift around and we're starting to see more separate accounts. American Century as a whole manages a fair amount in separate accounts for those types of clients. We didn't have as many in the money market area, because that normally wasn't a sector to bring over separate account money to. But it's starting to be, so that is now flowing into the money market world.
MFI: Any thoughts on the future? Latchford: When I started, interest rates were around 8%. I remember when they dropped to 6%, saying, 'Woah, look how low that is'.... In general, it feels positive at the moment for money market funds. Our flows are pretty steady right now. We are getting geared up for still some movements and anticipating at some point to see money move back into prime funds as spreads widen between agencies and prime as we continue to get these hikes.
