This month, Money Fund Intelligence interviews Joe D'Angelo, Managing Director of PGIM Fixed Income, who runs the money market desk, and Chris Nicholson, Vice President of Fixed-Income Product Management at PGIM Investments, the distributor of the PGIM funds. PGIM's funds formerly carried the Prudential moniker, but they changed earlier this summer to synch the fund names with that of their advisor. Our discussion follows. (Note: This article is reprinted from the August issue of our Money Fund Intelligence newsletter. Contact us at inquiry@cranedata.com to request the full issue.)
MFI: How long have you been running cash? D'Angelo: We were running cash before I started here, which was 30 years ago.... PGIM Fixed Income evolved from three internal fixed income groups focused on mutual funds, separate accounts, and proprietary accounts. These three separate groups were each managing money independently in the infant stages of money markets, going back to the early '80s or even late '70's.... Ultimately, all fixed income asset management was brought together. At that time, in roughly 2000, the firm had about $130 billion in assets under management. Now, PGIM Fixed Income is up to 600-plus clients with over $700 billion under management (as of June 2018). I grew up on the issuance side of Prudential, coming here in the late '80s to work under the Treasurer. We were a prominent direct issuer of commercial paper. I moved from the direct issuer desk to securities lending, then jumped to investments around 2000."
Nicholson: I've worked in various roles in financial services for the last 15 years [and] came over to Prudential, or PGIM now, in November of 2014.... I head up the fixed income product management efforts on the mutual fund side of things.
MFI: Tell us about the recent rebranding? Nicholson: This actually goes back a few years. In January 2016, the asset management organization was Prudential Investment Management, and we changed the name to PGIM.... At that time, our affiliated managers had some brand recognition, but the name change united all of Prudential's investment businesses under a single name to be used globally.... In April 2017, we changed the name of the retail distributor to PGIM Investments from Prudential Investments. We already were operating as PGIM Investments outside of the U.S. with our UCITS platform.
In January, we announced the renaming of all mutual fund and closed-end fund names, and that became effective June 11 of this year. All funds were updated to reflect PGIM and no longer Prudential in the name.... Renaming the funds more closely aligned them to the firm [and] helped to accelerate the brand-awareness around PGIM, now the global investment management business of Prudential Financial.
From a high-level perspective, we're constantly reviewing the structure of our investment vehicles, including the money market fund lineup. That includes looking at things like industry trends, client needs, and new regulation. Back in 2016, after a thorough analysis of all those factors, we felt that changing the retail money market fund over to a government money market fund was really in the best interests of fund shareholders.
D'Angelo: Basically, there's about $75 billion under management across our three money market segments, run by me and my team. We have government and agency-only type mandates, 2a-7 and 2a-7-like mandates, ultrashort, custom, and enhanced cash mandates. The enhanced programs are largely the reinvestment vehicles for securities lending.
Nicholson: We also have a couple billion in ... government 2a-7 mutual funds, and we have another Pru institutional money market fund [which is] $15-16 billion. That's predominantly being used as an internal vehicle for reinvestment of securities lending proceeds. Our "Core" money market fund used to be a 2a-7 fund, but we moved it outside of 2a-7 and [now] call it an ultrashort bond fund. It has similar guidelines as 2a-7 ... but it's an ultrashort. We did that [mainly] because ... the NAIC classification of money market funds [changed following the MMF reforms], thereby requiring pretty substantive capital charges.... Then, we have some other enhanced funds. The latest of which is this ultrashort ETF, and that's maybe another $3-4 billion.
MFI: What's your biggest challenge? D'Angelo: We've been managing money markets for a long time, and two of our senior portfolio managers, Doug Smith and Bob Browne, have been here with me for 25 years-plus. So, we've seen a lot, and lived through a lot, including the turmoil of the financial crisis and subsequent rebuilding of the market. I think where we sit now ... there's some misperceptions.... The SEC tried to change the rules in such a way to that the market wouldn't just crumble again. But by creating this notion of a floating NAV and potential gates and fees ... about $1 trillion moved out of prime money market products. It went into government money market funds, and now there is $2 trillion-plus in these products. So asset managers are competing heavily for the same inventory.
Then, with the prime product now, portfolio managers may be worried about NAVs ultimately floating. So, some may be giving up yield for the sake of liquidity and preservation of capital. Those are good things, don't get me wrong. But it effectively squeezes managers of those products into the same little space, too. Given the post-financial crisis regulations, there is less ability to differentiate products, which can be a challenge. There is also less front-end presence from the broker-dealer community. You don't have the Goldmans and the Morgan Stanleys willing to buy paper.
It's also important to keep an eye on the handful of dominant money market managers left standing post crisis. If there's a sea change in how they look at the market, you don't want to be left in a game of musical chairs holding a CD, for example, that they don't want to buy anymore. So, it's important to know where other managers reside in terms of sectors, names, and maturities. Is it one year, six months, nine months? Since the regulations changed, I like to say, 'Six months is the new one year.'
Going back to 2008-2009, our competitors were other front-end buyers. Now we find a lot of corporate money is being managed internally, and they [have] a different style to asset management. Separately, we see more long-end managers, especially now that rates have gotten off zero, creeping back into the ultrashort world.... It's a totally different set of buyers that you're trying to handicap. The 2a-7 folks are doing one thing. But the ultrashort folks ... they're doing a different thing.
MFI: What are you buying now? D'Angelo: With $700 billion under management, PGIM Fixed Income has a presence across all fixed income markets. We look at all sectors at the front end of the market, supported by experienced research and trading professionals working in a collaborative environment. We don't avoid sectors, and we don't double down on anything. Obviously, we buy banks, everybody in 2a-7 has to buy banks. In the ultrashort world, we favor A2/P2 commercial paper in a lot of mandates outside of 2a-7. We can buy CMBS and other structured products. We can buy investment-grade bonds, and some of our mandates are up to three years average life, or even longer."
MFI: Is there flexibility in Govt funds? D'Angelo: Less than we would like. Given new money market regulations, the government universe has become fairly 'plain vanilla' and is highly competitive. Asset managers are tripping over each other to buy Home Loan paper. At PGIM Fixed Income, we're very conservative with respect to our posture and position towards repos. We do overnight repos when available and also try to find value in bills and agencies.
MFI: Any concerns with any sectors? D'Angelo: Knock on wood, no sectors or issuers in our space have had a credit issue for some time. From a broader perspective, evaluating overall macro and market trends may be more critical at this time. If you're investing in our world, you may be happy because rates are finally off zero. From that perspective, everyone's kind of pleasantly surprised how quickly rates have risen. The other trend that we see is the spread advantage of LIBOR versus the cost to borrow money via securities lending. That's been a positive for securities lending income.
MFI: Does PGIM offer other ultrashorts? Nicholson: In April, we launched PGIM Ultra Short Bond ETF (PULS), an actively managed ultrashort ETF. It's our first entry in the ETF space.... Now that we've moved away from zero and front-end rates are moving up ... that area of the market has been getting a lot of flows.... Broadly speaking from an ETF perspective, we want to be vehicle-agnostic. We want to offer our best investment strategies ... in whatever vehicle our clients want. We've seen that ETFs are certainly a space that is going to continue to grow, and we want to be a part of that.
MFI: What about your outlook? D'Angelo: With respect to products, sectors, and spreads, we get a taste of everything in ultrashort mandates and securities lending mandates. We're also carefully watching forward-looking liquidity. So far, it's been good.
