This month, Money Fund Intelligence interviews Jason Granet, Deputy Head of Liquidity Solutions for Goldman Sachs Asset Management, and Kathleen Hughes, Global Head of GSAM's Liquidity Solutions Client Business. Goldman Sachs Asset Management is one of the top 5 money fund managers globally, and we discuss the firm's history in cash, their latest priorities and challenges, and developments in Europe and in the world just beyond money markets. Our interview follows. (Note: This article is reprinted from the June issue of our flagship Money Fund Intelligence newsletter; contact us at inquiry@cranedata.com to request the full issue.)
MFI: Tell us about your history. Granet: We entered the business in 1981 with $2 billion in assets. Over our 37-year history, we have grown the franchise into $280 billion-plus of money market fund assets across a range of fund families globally. In 1996, we launched our Dublin-domiciled Liquid Reserves family and we consolidated our U.S. funds into the Financial Square family in 2010. We recently launched our Liquid Reserves Plus funds in dollars, euros, and sterling, which is an extension of our Liquid Reserves range. We manage taxable, tax exempt and tax advantaged money funds both onshore and offshore, and we have funds domiciled in dollars, euros, sterling, and yen, as well as a suite of separate accounts and short duration products. Money markets have a long legacy here and are an important part of our global franchise.
We believe our credit process is a strong contributing factor to our business. We're unique in the sense that we run an independently constructed list of between 600 and 1,000 issuers -- depending on the day or week -- that is maintained by Goldman Sachs' credit risk team. They've been doing that since the day we started in the early 1980s. It is the cornerstone of our franchise and something that we are very proud of.
Personally, I am just finishing 18 years at Goldman Sachs. I was responsible for our Liquidity Solutions business in Europe and Asia, and I've just recently relocated back to New York as the deputy head of the business globally <b:>. `Hughes: I've been with GSAM for nearly eight years. I joined in September of 2010, and I've been in the money market space in Europe since 2001.
MFI: What are your big priorities? Hughes: When we think about priorities, the overarching theme has always been to understand our clients and aim to align our product offerings with their biggest needs or challenges. So, one of our biggest priorities right now won't be a surprise to you or your readers: it's European money market regulatory reform. We're engaging with clients, helping them understand how that reform will impact them and making sure that we are evolving our products to meet their needs.
Another theme that we're very engaged with clients on right now is the impact of tax reform in the U.S. and how to navigate the potential effects of repatriation. Some other things that we have been focused on are changes in technology, and how we can use technology to help our clients and drive more efficiencies for them, whether it's efficiencies around trading, moving money, or even risk management. As Jason said, we have also recently launched some new products. Those are clearly products and opportunities that were created by pending European money market fund reform and client feedback. Again, we are focused on seeing how can we help clients.
MFI: What are your big challenges? Granet: We believe different cycles bring different challenges. The first is obviously when there is stress in the system, whether it was in '94, '98, clearly '07-'08, or the early 2010's with stress in Europe. So, there are different points in times that require that we adapt to those challenges. Right now, negative rates continue to be a challenge in some parts of the world and interest rates remain relatively low globally. In this environment, just showing some differentiation can be a challenge. Lastly, bank regulation has been another challenge. As ratios are introduced and then get tweaked, adjusting can create different challenges on the investment side for our clients and different types of clients.
The overarching credit quality of the investment universe also goes through different cycles. In managing money market funds, we are investing the highest quality, most liquid part of the investment spectrum. So there is always pressure on sourcing appropriate investments and making sure we have robust, bulletproof portfolios in the highest quality, best, and most liquid markets. Different backdrops, political and regulatory changes, idiosyncratic company events and tax changes can all play into that, and it's something we are regularly navigating.
MFI: What are you buying? Granet: Markets at the front end of the curve have been volatile in 2018. That's created lots of different opportunities for us in our different strategies. As one example, with the reconciliation of some negotiations in Washington, T-bill issuance has increased massively versus years past. Market dynamics are always fluid, so when it comes to the portfolio we are always evaluating the relative value of different assets. The overarching perspective that we take doesn’t change, but every day or every week can provide some micro-differences.
MFI: What are clients asking about? Hughes: I'll mention three different things. First, clients are always acutely attuned to the interest rate environment. When we talk to clients in the U.S., they are wondering how to take advantage or think about the rising rate environment and what is happening in the short end of the yield curve, thinking about that with respect to cash on their balance sheets or cash within the ecosystem that they may be managing.
Second, and in contrast the U.S., clients in Europe are still dealing with the pain of negative interest rates. Those clients that have excess cash may not want to keep it all in money market funds and are looking for alternatives. Are there ways to use other strategies in the short duration space that can help to offset some of that negativity?
Third, tax reform is top of mind for many of our clients, certainly clients in the U.S. Their outlook on structural cash within their system has changed. Cash that used to be thought of as sitting in another jurisdiction with kind of an unlimited investment horizon allowed you to think differently about risk and return. Now that U.S. tax reform has been passed and is underway, that cash is no longer trapped and many are thinking about their options.... There is definitely money in motion as a result of tax reform.
Another theme, which is maybe a little bit more out there but is starting to come up, is ESG [environmental, social and governance issues]. Certain institutional investors have been focused on ESG for a long time, but we are starting to see it come up more in dialogues with corporate treasurers. Companies are being rated and scored on ESG factors by third-party providers. A company treasurer wants to know what is driving those scores and how they are being viewed.... There are lots of different ways that businesses are asking us about that topic and we are engaged on that one as well.
MFI: What about recent flows? Granet: There are a couple of things happening with flows. The first is, we are definitely seeing a shift -- somewhere between a trickle and a flow -- back into prime funds. There have clearly been opportunities in the markets as yields, indicated by LIBOR, have moved to levels that are attractive to investors, especially relative to other indices.... Money is also moving from offshore to onshore, and investors are shortening investment durations.
MFI: Tell us more about European funds? Granet: The European regulations have two styles -- short term money market funds and standard money market funds. The short-term have 60/120 day WAM/WAL limits, while the standards have 180/360 WAM/WAL limits. Our new Plus funds fall under the 180/360 limits.... This was a product completion exercise for us -- we didn't have any real offerings in the 180/360 bucket.... We also have offerings beyond too, [which] would fall outside of money market fund regulations.
Hughes: In Europe, everything is going to change. Doing nothing or sitting it out is not an option. What clients have shared with us as we have engaged them is that the low volatility NAV product feels closest to what they enjoy today from a utility perspective -- being able to trade in and out at a dollar or a euro or one pound. So client feedback seems to be coalescing around the LVNAV product.
MFI: What about your outlook? Hughes: I am optimistic. The industry since 2008 has definitely been tested with two rounds of reforms in the U.S., negative interest rates, etc. That certainly [attests] to the robustness of the market. We are optimistic about what is coming down the road in Europe, and we feel optimistic with respect to the importance of this product for our clients. We continue to hear that this is something they rely on every day. So we want to make sure that we are preserving the utility of the product and responding to our client’s needs and challenges.
Granet: This environment provides a tremendous opportunity for us right now to engage with clients. With rates moving, tax changes, and reform, we are rolling up our sleeves a little higher and digging in a little deeper. It's just an awesome time for us to be even more engaged and solve client issues.
