Late last week, Crane Data President Peter Crane spoke before the Commercial Paper Issuers Working Group quarterly meeting and gave a preview of issues that will be discussed at this week's Money Fund Symposium in Pittsburgh. At the CPIWG gathering, Crane also ran a Q&A with DWS Senior Credit Analyst Matt Plomin, who talked about their recent name change from Deutsche Bank Asset Management, the process of choosing names for fund approved lists and investments in separately managed accounts and other pools outside of money market funds. Excerpts from these two sessions follow. (Note: For those of you attending our 10th annual Crane's Money Fund Symposium, which takes place June 25-27 at the Westin Convention Center, welcome to Pittsburgh! Watch for reporting on the event in coming days, and see those of you attending at the show this afternoon!)
Crane says of hosting his conference in June, "It's a great time. It's awesome for the short-term investment community to get together, but bad things tend to happen in June. If you look back, Brexit was at the tail end of our conference several years back. The European debt crisis back in 2012 occurred then too. One of the reasons is that you have these seasonal flows ... we saw a gigantic outflow of $62 billion this week.... On June 15, you hear giant sucking sound as corporations pay their tax bills.... The week before, we saw almost a record inflow.... I think it just became clear [that] there are some giant tax bills [due to repatriation]."
On the Money Fund Symposium, we commented, "Chris Donahue, CEO of Federated, is going to give the keynote speech.... Money funds are such a big chunk of what they do.... Chris will probably talk a little bit about the rebound in revenues that goes along with rising rates. He'll talk a little bit about this bill in the House of Representatives, H.R. 2319, which is a long shot to overturn the floating NAV.... We're also going to discuss global and European money fund issues.... [Also] one of the big topics is 'alt-cash' ... ultrashort bond funds, private liquidity funds, and separately managed accounts."
Crane continued, "But the big theme this year at the conference is really going to be rising rates and the recuperation of revenues. [Though] providers in general won't be out celebrating. They'd be in great shape were it not for all the other factors that are weighing upon the asset management business. Mutual funds are scared about index funds [and other issues]. But from the money fund side, they're just happy to have made it through a brutal rate environment."
He added, "Year-to-date, assets are stronger than they've been in years, and they'll only get stronger as we go forward. One of the reasons for that and one of the big issues is money market mutual funds are again comparing favorably with bank deposits [which are now] over $9 trillion.... It's unclear how interest rate sensitive these assets are, but the history of money market mutual funds really shows that at some point cash investors will move over at a certain level, whether it is 10 basis points, 50 basis points, or a full percentage point. It varies for different types of investors. But if and when the $9 trillion in deposits moves, it could be a gigantic tailwind."
Crane explained, "There is some evidence that deposits are peaking. We have seen two down months out of the past five months. But it's still unclear that deposits are migrating en masse. It is, though, clear that some of the new money is shifting towards money market mutual funds. Sweeps, estimated to be up to $1 trillion [are one of the battlegrounds too]. So bank deposits are going to be a major issue to keep an eye on. [E]veryone here is also very anxious and interested in the recovery of prime assets.... In general, I still expect Prime to recover, but it's going to be a long, slow, painful process.... Now that the Fed's moving rates, their NAVs will be impacted if they move out. Prime money funds can't really extend until the threat of their NAVs being pressured by a Fed move has subsided."
On some other topics, he commented, "The same people that run money funds also buy [a lot of investments in] other vehicles, like separately managed accounts, ultra-short bond funds and securities lending reinvestment pools.... Just one observation on consolidation in general, is that it has slowed.... And there are actually are a handful of new entrants space ... so there are some tiny green shoots of interest around the edges." Crane also discussed how funds remain paranoid about their NAVs dipping to $0.9999 and their 'weekly' liquidity levels approaching 30%, the level at which emergency gates and fees could be triggered, and discussed the bullish and bearish cases for the growing class of conservative ultra-short bond funds.
We asked DWS's Plomin about the impact of European money fund reforms and repatriation, and he said, "DWS manages offshore euro, offshore sterling, offshore U.S. dollar funds, about $25 to $30 billion dollars.... We're going to go to the LVNAV [limited volatility net asset value] structure which basically [allows] transactions at a stable $1.00 unless your actual NAV deviates by 0.25%.... Broadly speaking, our client base is institutional [so] we have a lot of multinationals in our funds, and we have a lot of separate accounts that serve the same clients. They'll use a separate account for their more stable elements of their cash."
Plomin continued, "One thing that we did see initially from tax reform was that a few of our clients decided to move from the onshore government funds into the offshore funds because of the tax. Their tax opinion was that they could move to and fro without implications because of the tax system. So a few of the more sophisticated plans decided to do that and take advantage of the larger fund size offshore stable NAV offshore and the better yields.... Some of our clients are [also] somewhat skeptical that tax reform gives you years to pay the tax bill... If there's a change in the makeup of Congress or if there is a different President ... they would like to pay the bill now."
The DWS analyst told the CPIWG, "The front end is a lot more credit comfortable.... One of the reforms that came through in October 2016 was to reduce the reliance on ratings agencies and the analysis portion of the credit review. So there's no longer a limit on the Tier 2 credit if you go into a fund. A lot of these funds are triple-A rated, so [Tier 2 is] off the table for these. But for unrated funds ... you can see a bump up in Tier 2 issuance.... I mean these are good companies. They are strong companies."
He also said, "We switched a large Prime fund into Government, so fully half of our assets are Government assets. As an asset manager, we don't necessarily care where the money is managed, because we charge a fee on [either kind]. But as a credit analyst, selfishly I'd like to see a growth in Prime <b:>`_. We've been able to keep up our Prime or credit assets through use of SMAs -- we've had quite a few of these onboard this year -- and offshore funds.... We also run a billion or so in retail money that is unrated that we could get more credit aggressive in. We're not doing that, but we worry that others might. One of the things about money funds is that they're all perceived to be run so similarly, that if one person is a bad actor ... the entire industry is in trouble. So, we're closely monitoring our peers to make sure that that is not what's happening, or if it is that we prepare for it."
When asked about ESG [environmental, social and governance] issues, Plomin commented, "Yes, we're looking at that of course. You know as you see requests from clients … because we're a global firm, because we're German-based, there's always been ESG mindfulness within our processes. So even clients are just now getting around to asking about it, it's something we've been doing for years.... DWS has an ESG engine that aggregates and synthesizes different views for clients, particularly tech clients on the West Coast."
Finally, we asked "What are you buying?" He answered, "We like agency floaters and Treasury floaters a lot. We do quite a bit in Home Loan, and we try to find more Government supply in esoteric places.... You can't really find bank issuance in the front end outside of ABCP conduits, so we’re looking at new conduits that come to market.... But there are some aggressive policies in some of these conduits. It's not as bad as it was pre-crisis, but you're seeing a bit of envelope pushing."
