This month, Money Fund Intelligence interviews Nafis Smith, Vanguard's new Head of Taxable Money Markets. We discuss the retail behemoth's history, strategies, and outlook for money funds, and Smith addresses a number of major issues in the money markets today. Vanguard is the second largest manager of money market mutual funds with $335.6 billion in assets (as of 10/31/18). Our Q&A follows. (Note: The following is the first half of our latest fund "profile", reprinted from the November issue of Money Fund Intelligence. Watch for the second half later this week, and contact us at info@cranedata.com to request the full issue.)

MFI: Tell us about your history. Smith: We've been running money market funds pretty much since Vanguard was founded. Our flagship taxable retail money market fund, now Prime Money Market, was launched over 40 years ago, back in 1975. In the early '80s, we launched our first government offering, Federal Money Market. In the early '90s, we filled out the taxable lineup and added Treasury Money Market Fund. We also run a number of municipal funds including Vanguard Municipal Money Market, which was launched in 1980.

I joined Vanguard in 2003 after I graduated from Cornell University. I've been a part of Vanguard's Fixed Income Group since 2005. Throughout the course of my career in fixed-income, most my career was in bond indexing. I spent time in our Australian office from 2014 to 2016. Then in 2016, I moved back to the U.S. to become a money fund Portfolio Manager working for David Glocke, helping to look after Prime Money Market and Treasury Money Market.

When I joined the money market team, my job was to work as closely as possible with David to learn about the cash business and prepare to lead the team.... David [who retired on June 30] was with Vanguard for 20-plus years and had almost 30 years of experience in the industry. He expertly stewarded our products through a number of big changes in the marketplace. Ultimately, he decided that it was time to retire, but my experience working for him was invaluable.

MFI: What is your biggest priority? Smith: There are two things that come to mind. One is SOFR and the transition away from LIBOR -- thinking through what a world without LIBOR looks like. When you think about LIBOR versus SOFR, it's apples-to-oranges. You have a risk-free, secured overnight lending rate -- basically a risk-free rate -- versus a term, unsecured credit rate. The two benchmarks are going to behave very, very differently. We're doing some analysis around when LIBOR goes away at some point and we're in a SOFR-based floater world. We're making sure that we're comfortable with any of the potential risks.

Another development on the FOMC front that we're thinking about involves the developments around IOER and the potential for further technical adjustments. The FOMC came out earlier this year and divorced IOER from monetary policy. The Fed-effective versus IOER hit zero bps recently after being close to 8 bps earlier this year. So, we're just thinking through if there's another adjustment come December when they raise rates, what the impact is to rates in the short-end.

MFI: What are your big challenges? Smith: Once upon a time, trying to navigate month-ends, quarter-ends, and year-ends, when banks and other institutions would do some balance sheet window dressing, you had to be strategic and forward-thinking. I think today, it is somewhat easier, just given the availability of bill supply, which ramped up significantly earlier this year. The Fed is there in terms of their overnight repo facility. So with investing nowadays, it's somewhat easier to secure product.

We've had three rate hikes already this year. We'll have a fourth, and then potentially three or four rate hikes next year. Then at some point, we need to start thinking about, 'When does the Fed pause?' You start to think through all of that, and it's certainly a challenge.

That's the beauty of the model here at Vanguard. When you have a low expense ratio that does the heavy lifting, it allows the decision making to be pretty easy. The investor base is definitely more retail-focused, and that's been the case since inception. We were able to weather some of the challenges of the crisis and beyond the crisis because of the very sticky nature of the investor base.

MFI: What are you buying now? Smith: Our ownership structure and the funds' low expense ratios allow us to construct a very high-quality and competitive portfolio. We don't necessarily run it like an index fund, but there is a focus on very high-quality liquid instruments. Our weekly liquid assets have been primarily comprised of bills or government securities for a long time. Given the uptick in supply this year, and where spreads are on bills, we continue to be heavily invested in bills and discount notes to some extent. We continue to buy floating rate notes and very high-quality U.S. banks. We like northern European banks, Australian, and Canadian banks, as well. We like the floaters for obvious reasons -- the protection that they offer in a rising rate environment.

We have a tri-party treasury repo position in our Federal Money Market portfolio. Relative to the size of the portfolio, it's not massive. The total repo book is about $15 billion in a $100 billion portfolio. In our Prime funds, we will opportunistically trade tri-party Treasury repo. Over the past few years, you've seen more foreign bank presence in repo markets. Specifically, French and Japanese banks provide a lot of repo. In our government fund, we have a core position that we maintain, and we'll consider it in our prime funds from time to time.

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