Last week's Money Fund Symposium in Atlanta featured a number of industry heavyweights discussing a host of important topics. But the session, "Major Money Fund Issues 2017," which was moderated by Peter Crane and which featured Tracy Hopkins from Dreyfus BNY Mellon CIS, Pat O'Callaghan from Goldman Sachs A.M., and Jeff Weaver from Wells Fargo Funds, was one of the conference highlights. Crane first asked, "Give us your thoughts on how big corporates and big investors are looking at prime funds now. Are they still hesitant, are they dipping their toes into the water? That's the big question everyone's asking." (Crane Data subscribers and conference attendees may access the recordings, Powerpoints and final binder via our "Money Fund Symposium 2017 Download Center.)
Hopkins comments, "As it relates to corporate investors, what we're kind of seeing and hearing is now is that we finally have some yield spread between products [and that] there is some new interest back into prime funds.... I think the movement from government funds back into prime funds is going to be slow. But now that there's about a 30 to 33 basis points spread, you're just gaining interest again, as we have started to see.... We are starting to see prime funds starting to take up in assets. Overall the prime MMF space is up about 9% YTD, and the institutional prime MMF space is up about 28%."
She continues, "So, we are starting to see customers getting a little bit more comfortable with how the funds are performing, now that all the operational nightmares and headaches have kind of been put to [rest] and the funds are operating smoothly. We are seeing that customers are probably most concerned about the stability of the NAV -- how it's performing over various interest rates cycles. I think what most people are noticing is that for the most part the NAV's don't move very much, and we kind of knew that."
Hopkins adds, "As an industry, we've always done mark to market against amortized cost, so we were pretty familiar with how funds perform with different interest rate cycles. So you know when you look at the fund's NAVs, they may have moved one or two basis points, maybe intra-month, so it's pretty stable. Now that there's [some] return, I think more customers will start eventually tiering their cash holdings away from government funds and dipping their toe back into prime funds."
Crane said to O'Callaghan, "[You've] made the comment that ... some investors are now more concerned about the floating NAV than the gates and fees. I guess that's good news, or is it? Tell us about that." He responded, "I think when you go back prior to October of last year, and clients were discussing the faults around utilizing prime funds ... the reality of it was you had a large number of clients who were going to leave to the prime phones for a number of reasons."
O'Callaghan explains, "One, they just didn't want to be there at the time of implementation. So they felt like they wanted to be out prior to October 14th. Then there were other concerns around investment policies. But in almost every meeting that we had with clients, consistently the fees and gates was an overwhelming factor in the conversations. Post October 14 of last year [though], most of our clients are talking about the elevated premiums that the prime funds are trading [from an] NAV perspective."
He tells us, "But they're not really showing any type of concern around the potential of gates and fees.... I think that a lot of it has to do with the buffers that portfolio management teams are building into their portfolios [keeping liquidity] above 30%. Obviously that 30% number is a very watched number. The fact that there are daily disclosures around liquidity levels now [is] giving investors a lot of comfort. But I think buffers well above 30% have clients not as concerned about the fees and gates, and more concerned about the potential of an NAV move."
Weaver adds, "We have seen assets creep back into our prime funds, largely in-line with the industry. Actually, our largest fund is up about 43% ... so a little more significant there. Our concerns certainly are on a scale standpoint. In order to get these clients back in, they need to be larger. But certainly clients are more interested in discussing not only floating NAV but also fees and gates, and I think that's an excellent point.... There [are] nice buffers -- most funds [are] at 40% liquidity, which certainly provides ... room. [T]hen also in the end, FNAV volatility has been quite [tame] and [NAVs have been] even increasing. [S]o there's some comfort level there. We just continue to talk to our clients and about how we are dealing with those ... and I think we'll continue to see a slow pace back into prime."
He also comments on "the whole [reform] process <b:>`_," "Getting ready for all the these different strikes, and all the different requirements, [involved] a massive amount of work, a massive amount of effort. It was very difficult, but the industry stayed together and did a great job. [O]ne of the biggest concerns coming into reform [involved] was there going to be enough government product to invest to handle the shift out of prime and into government? Certainly, in the end, there really was. We did have the luxury of overnight RRP, which was certainly necessary. But in the end, it wasn’t overwhelmingly the investment of choice except for at quarter-ends. Government supply certainly made the transition easier."
Hopkins says, "The massive asset shift from prime funds into government funds [means that] now you have funds that are much smaller.... Because of those [reform] costs, expenses have crept up a bit. Now I think we're in the process of re-growing those funds.... Whether they'll [ever] be the same size as they once were, I think time will tell. I think you'll get to a sizeable amount eventually again. But probably right now the toughest part for us is dealing with the fund size and growing those assets a bit, and again just working with clients on the education about the fees and gates and the floating NAV."
Finally, Crane asks, "Do you think investors understand gates and fees, or the floating NAV?" Hopkins responds, "I do think they understand the gates and fees. I'm not sure if they still recognize that funds prior to the last reforms did have a form of gates. So they're not necessarily a new topic. As Charlie [Cardona] used to say, they're better gates and fees than what we had in the past. So I think it's just getting comfortable around the remote possibility ... the main part of it is really for the shareholder protection. They're not there to bring people heartache. It's really there to protect your principal." Weaver adds, "Yeah I think they are beginning to understand. We're getting data, right? We're able to start seeing the fluctuation of the NAVs going forward. We're starting to get a better feel for that."
