This month, MFI interviews SEI Managing Director and Senior Portfolio Manager Sean Simko and Portfolio Manager Daisy Lac. We discuss SEI’s use of outside managers as subadvisors, their move to offer only Government MMFs, and their focus on separately managed accounts. Our latest Q&A follows. (Note: This interview is reprinted from the March issue of our flagship Money Fund Intelligence newsletter; contact us at inquiry@cranedata.com to request the full issue. Note too: The Powerpoints and materials for this week's Bond Fund Symposium in Los Angeles are now available to conference attendees and Crane Data subscribers at our BFS 18 Download Center. We hope to see you in LA Thursday!)
MFI: Tell us about your history. Simko: SEI debuted its money market offering back in 1981. The first funds were launched in our subadvisor program as our money funds are today. In this offering, we hire outside money managers and delegate security selection to take advantage of economies of scale. The program has continued to evolve over the years, with the most recent significant change taking place as a result of the Security & Exchange Commission's decision to require institutional prime money market funds to maintain a floating net asset value and the imposition of an option to impose liquidity fees and redemption gates under certain circumstances.
As a result, we liquidated three prime obligation and two municipal money market funds and transitioned assets to other offerings in our subadvisory program. The program includes two sets of funds. The first is the SEI Daily Income Trust (SDIT) Government Money Market Fund. The complex includes four funds that act as the cash sweep component of accounts for institutional and high-net-worth clients and do not charge redemption gates or liquidity fees. The SDIT Funds have assets of just under $10 billion.
The second is a pair of funds (one taxable and one tax free) in the SEI Institutional Managed Trust (SIMT) complex. These are meant to provide low-risk, highly liquid exposure in client portfolios. While the funds target short weighted-average maturities, they are not money market funds, and their NAVs will fluctuate.... These funds are able to purchase short-term securities at attractive valuations and offer yields above money market strategies. For those investors who do not need daily access to liquid strategies, these could be an attractive investment. The SIMT Fund has assets of $400 million. Daisy and I are not involved in the manager selection within our sub-advised money market solution. There are dedicated analysts that carry that responsibility [and] focus on the research, analysis and due diligence. The additional value we bring to the process is through our oversight and risk meetings.
In 2000, SEI also started offering cash management solutions through SEI Fixed Income Management, the in-house team that I manage. Daisy is a senior leader on the team. We have the ability to construct custom portfolio to fit all types of investor risk levels and goals. Historically, money market funds were used by investors who desired liquidity and safety from their investments -- two characteristics that are also achievable through a fixed-income separate-account implementation. Today the SEI FIM team manages in excess of $10 billion across a range of strategies that include cash management solutions along with traditional fixed income mandates across the yield curve. The end goal is always the same. Through our analysis we look to build a well-diversified very liquid portfolio that focuses on purchasing high-quality credits.
MFI: What's your biggest challenge? Lac: Navigating the ebb and flow of supply is a big challenge money market portfolio managers have faced historically and continue to confront in today's market environment. The regulatory framework post-financial crisis dramatically altered supply and demand dynamics. Large bank issuers were mandated to reduce reliance on short-term wholesale funding, and they noticeably curbed short-term issuance. The tremendous levels of liquidity the Fed injected into the system further blunted the need for banks to issue in the short-end. Low interest rates allowed companies to borrow longer-term funds at attractive levels and thereby diminish their use of commercial paper issuance.
Meanwhile money market investors are operating with intensified liquidity requirements. So you have a great deal of money chasing short-dated assets which are not as abundantly accessible, and this is the context those who manage cash are faced with daily. Since the start of 2018 there have been a couple of new antagonists in the supply-demand interplay. With the suspension of the debt ceiling and an increasing need to fund the government, we are in the midst of a significant [increase in] Treasury bill issuance. This supply injection has been a catalyst in pushing short-term yields higher.
As a counterpoint to this, the 2017 Tax Cuts and Jobs Act (which offers U.S. multinationals an impetus to repatriate large sums of cash currently held overseas) prompts the consideration that there could be a resultant drop in issuance from these corporations as they retire outstanding commercial paper with the cash they have brought back to the U.S. The forces that impact supply are ever changing and compelling factors in influencing cash management strategies.
MFI: What are you buying now? Lac: Running a cash mandate is akin to saying we are guardians of liquidity, and carefully preserving liquidity is the primary driver of our management strategy. With this goal in mind, we are constantly analyzing and assessing where we deploy our funds. Our banking sector exposure primarily consists of large global institutions in the U.S., Canada, Australia, and the Nordic region. In terms of corporate commercial paper, we favor A-rated issuers that maintain sizeable programs, have a regular presence in the market, and are distributed by multiple dealers. These are the attributes that we feel enhance the liquidity characteristics of the paper that we would be buying.
MFI: Are things too calm? Lac: While the overall credit environment has been relatively benign, I would offer that this perceived "calmness" shouldn't be taken at face value. We continue to feel comfortable about our investment exposures, but we are always thinking underneath the surface. For example, a couple of worrisome trends: household debt figures hit the highest level on record at the end of 2017, and credit card and auto loan delinquencies have also been spiking since 2017. While signs aren't necessarily calling for an imminent crisis, it's worthwhile to watch for signs of deterioration in various sectors as the means to stay proactive in assessing our exposures.
On the corporate side, repatriation of large sums of cash engenders many angles of analysis. While corporations likely would deploy some of these funds toward paying down debt and bolstering balance sheets, it is equally plausible that the cash influx would be funneled toward more shareholder friendly initiatives or M&A and other corporate restructuring. To this end, would the initiatives have a detrimental impact on credit ratings? Our concern of course, is that a hit to ratings would impact pricing and ultimately liquidity strength of issuers.
MFI: What are customers talking about? Simko: The straightforward and common concern heard over the past few years is the need to find value, or yield, in this low interest rate environment. We are in the middle of a dynamic policy shift from an ultra-low to low interest rate environment courtesy of the FOMC. One of the bigger challenges in today's environment is continuing to ... reign in your credit risk. In a deteriorating credit environment similar to what we witnessed in 2009, the potential pitfalls of credit risk are straight forward. Today's environment is more benign. It is easy to develop a false sense of tranquility [and become] complacent. It is in this environment that it is imperative to remain strong and stick to your investment thesis. [You need to run] multiple 'what-if' scenarios around your positions, even when there is remote … chance of disruption.
MFI: What is your outlook going forward? Simko: We are optimistic as it relates to the money market landscape. The environment is conducive for the FOMC to stay on course with its methodical march higher in removing accommodation. Steady economic growth combined with little inflationary pressures provides the FOMC a green light and investors the ability to capture higher yields. Global synchronized growth is a term that continues to get utilized.... Going forward, global removal of accommodation is another phrase that should find a home within investor's vocabulary and playbook. The money market arena should see little disruption if the removal of global accommodation is done with transparency and proper communication.
Lac: Our outlook for the coming year is favorable but we do remain circumspect. The five rate hikes since December 2015 have, without a doubt, heralded the return of a stronger investment landscape for money market portfolio managers. With the Fed poised to move multiple times this year, even higher yields are in the offing for this asset class. Having survived the years of ZIRP, and weathered regulatory reform and its crosscurrents, money market funds and mandates are still standing, and their relevance is further supported as interest rates rise. The near term focus for us is proactive positioning of our cash mandates ahead of the expectation of more rate hikes.
We will also be following the evolution surrounding the transition away from LIBOR to SOFR. LIBOR has been a mainstay in the money market world and its wind-down will certainly impact the asset class. So while the headwinds for money market participants may not be as dire as compared to a few years back, the market continues to evolve, and we remain vigilant in monitoring the developments and how they would impact the cash management space.
