Last week, Crane Data hosted its 10th annual Money Fund Symposium, which brought together 565 money fund managers and professionals, issuers, dealers, cash investors and servicers to the $3.0 trillion money market fund industry. We'll be excerpting the keynote speech from Federated Investors CEO Chris Donahue in the upcoming issue of our Money Fund Intelligence, and we'll also be transcribing and excerpting some of the other conference highlights in coming days. Below, we quote from the segment "Major Money Fund Issues 2018," which was moderated by Crane Data's Peter Crane and which featured Dreyfus's Tracy Hopkins, Goldman Sachs Asset Management's Pat O'Callaghan, and Wells Fargo AM's Jeff Weaver. They discussed the major topics of the event and industry, including rising rates, competition to bank deposits, the prevalence of Government money funds in the industry and the continued popularity of ultra-short and "alt-cash" options. (Note: Thanks to those who attended and supported our Pittsburgh show! Visit our "Money Fund Symposium 2018 Download Center" to access the Powerpoints, recordings and binder materials, and mark your calendars for next year's show, June 24-26, 2019, at the Boston Renaissance.)
On the "Major Issues" panel, Crane first asked about ultra-short issues and whether investors were still interested in this segment. O'Callaghan says, "Yes, absolutely. I think there are a lot of issues going on right now in the front end. There is offshore reform coming in at the beginning of next year -- when it is fully implemented.... The previous panel discussed the Fed, and that ... is a key component to cash right now. The Fed being active is drawing people's attention back to the front end. If you go back to a couple of years ago -- there wasn't a lot of deviation [between MMFs and ultra-shorts].... Now you have a situation where rates are going higher and spreads are growing wider ... [and you also have issues] like repatriation.... So all of this is getting investors' attention.... They're not just looking at money funds; they're looking at products across the board ... whether it's ultra-shorts or Treasury funds.... All of that is very good for us."
When asked whether we're biased towards Prime over Government MMFs, Hopkins comments, "I think [whether investors choose prime or govt] it's all good. We like to see the markets being healthy and assets being diversified across various asset classes. I am very happy to see Prime assets coming back in. It's been a slow and steady increase. [A]fter [the] 2014 [reforms], we saw the mass migration go into Government funds. But now that there is some yield, near a 2% level and we're short and liquid ... I think it is a healthy thing to see customers diversifying their assets and moving back into Prime. And, yes, I am a little bit biased because I do think that the market requires people to be invested across all asset classes."
Weaver says about rising rates, "Certainly, money market funds are a great place to be when rates are going up, with the shortest duration and the least amount of interest rate risk.... We do expect the Fed to continue to raise interest rates.... At the beginning of the year, we expected there would be four raises and that has come to fruition.... We still believe there will be two more this year and that's now reflected in the dot plot.... [We also expect more] in 2019, since the economy is doing well." He adds, "I think we're pretty content with our fund lineup.... I feel like we have a good suite of products."
On spreads, Hopkins tells us, "Before reform in 2016, you had some corporate and other institutional investors saying they would not look at Prime unless there is a spread of 50 bps. What we are seeing now is that these some customers are starting to ... become much more comfortable with the options that are out there, whether it's an SMA [or other].... We are seeing these customers start to dip their toes back into Prime.... Since October 2016, institutional prime funds are up 65%, or 11% year to date.... So I think customers were getting used to seeing maybe a 15 bps yield spread. But [when] it ticks up to 35 or 40, you are just leaving money on the table. If you are bucketing your cash appropriately, that is return that you do not want to leave on the table, especially with some big cash investors. Some customers still would like to see 40 bps before they dip their toe in, but there is a number of customers who have come back at this point."
When asked about fees, O'Callaghan says, "On Prime funds, we did waive and have been waiving additional fees to increase shareholder return. The reason behind that was, if you look at our Prime funds we are generally an institutional shop, so the fact that [reforms had] impacted our prime fund assets.... This year we made a concerted effort to get the Prime funds back up to scale.... Scale really has different meanings to different people, but within the corporate treasurer sector, you generally need assets of $5 to $10 billion.... So this definitely was an exercise to make our Prime funds relevant to our corporate clients again, and it's been mostly successful. We raised about $8 billion through the waiver program, and will continue to do that until we're at scale."
Hopkins adds, "Well, the good thing is there's no [zero-yield] waivers on the funds anymore. There are still competitive waivers going on.... We've done that for the same reason that Goldman has, we're trying to build up the funds.... Even in the Government space, there's some competitive waivers going on.... Our question is really whether the market has repriced itself.... What we're seeing right now is we're about 15 bps in that [high-end institutional] space."
Weaver comments, "The NAIC did change their view on money market funds because [agency funds] are not guaranteed by the US government. They are now excluded from their list of approved money funds. This is [primarily an] insurance focused development. I think while we somewhat disagree about it, it is what it is, and I think we should all be playing by the same rules.... The Government funds have grown so much relative to the Treasury funds [so it shouldn't have a big impact]."
On flows and repatriation, O'Callaghan tells us, "Offshore, our complex is down slightly. I would say the vast majority of that is repatriation related. Onshore, the prime space is up. As we mentioned, we have a free waiver program in place. It is unclear if repatriation [is driving this].... On the government fund side, we are up slightly on the year. I know the industry is down.... So I would say net-net flows have been good." Weaver adds, "We feel good about flows, and people are excited about yields in the front end."
Next, we asked about some alternative products. Hopkins says, "The ETF component is an interesting one and we are taking a look at that.... It is something that gets some interest on our end. On the ultrashort side, we do have an ultrashort bond fund that [is] a little bit longer in duration. With money market reform, we took the maturity and duration play so it looks more like the old 2a-7 where it has a 120-day WAM and its invested in high grade securities to be held in maturity and securities were held in 18 months. It is really conservative.... I think where we were seeing interest is in the private wealth space. But corporates are starting to take a bigger role."
Finally, Crane asked about ESG (environmental, social and governance) issues and recounted the tale of a couple of these funds in the 1990's. O'Callaghan tells us, "Over the last year to a year and a half, definitely investors have been talking about it [discussing] progressive policies and how to effectively incorporate that into their investment policies." He says separately managed accounts are the primary vehicle for these investors.
