This month, Money Fund Intelligence interviews Laurie Brignac, Chief Investment Officer for Invesco Global Liquidity, which will celebrate its 40th birthday this year. (Money funds will celebrate their 50th this October.) Brignac tells us about Invesco's history, about the events of the last several months and the issues facing money fund managers for the remainder of 2020. Our Q&A follows. (Note: The following is reprinted from the June issue of Money Fund Intelligence, which was published on June 5. Contact us at info@cranedata.com to request the full issue or to subscribe.)
MFI: Give us some history. Brignac: We launched our first money market fund back in 1980 and at that time we were known as AIM Investments. AIM merged with Invesco in the late '90s, but we're proud of the fact that we have the same investment process that we used on that first day in 1980. I don't know if many people can say that. The process has stood the test of time and worked very well for our clients over multiple interest rate and credit cycles. We're very proud of the fact that we have never had to buy securities or support any of our money market funds, even through the financial crisis. We've been able to honor all purchases and redemptions on T+0 basis.
MFI: What about your own history? Brignac: I actually joined the firm back in 1992, so I'm going be turning 28 this year with Invesco. I like that number better than my age! I've been privileged to be part of changes not only at Invesco but in the industry as a whole. And I work with an incredible team of portfolio managers and research analysts that make coming to work every day a joy. Through the changes over the years, the senior leaders of our teams have basically worked together for close to 15 years and in some cases 20 years. We've been through the 2008 crisis and now this latest COVID event together. At the same time, we've been able to bring in a new generation of portfolio managers that bring diverse experience and backgrounds to our disciplined process.
MFI: What's your biggest priority now? Brignac: There's never a dull moment in the front end of the curve.... Going into this year, our biggest priority was the Oppenheimer Funds merger ... just continuing the integration into the Invesco family. This has been good for the firm. We've taken the best of Oppenheimer and the best of Invesco. At the end of the day, we're going to be much stronger.
Obviously, as the virus started making its way across the globe, we were adapting to the new environment in our global offices: Hong Kong, Shenzhen and then over to EMEA and the U.S. We were very focused on the team, making sure that they had what they need to take care of our clients, but really not understanding, or I think anticipating, just how quickly things would shut down globally. Our biggest priority is always taking care of our portfolios and our clients during volatile and uncertain times, and at the same time, taking care of our team. You make sure that you're taking care of your people so they can take better care of your clients.
MFI: Talk about March's madness. Brignac: We started adjusting our portfolios back at the end of February, really in early March, because of the Covid news. The situation started evolving very quickly. Market volatility increased and the Fed, who was very active in the early part of March deploying liquidity plus an inter-meeting interest rate cut of 50 basis points, was trying to limit downside risk due to the virus. Unfortunately, the risk-off tone continued, and we wanted to hold a little bit more liquidity. We also were going into corporate tax day in mid-March and started seeing redemptions.
That's when we started hearing about how there was just not a lot of liquidity in the market. Dealer balance sheets were full and the credit market seized very quickly. I think it took everybody a little bit by surprise. Up until mid-March, we were seeing inflows into our prime funds. But all of a sudden everything just came to a screeching halt. The good news was that this was clearly not a credit event but a liquidity event, unlike 2008. It didn't make navigating the markets any easier, but at least you weren't concerned about the holdings in your portfolios.
MFI: What's your biggest challenge? Brignac: We are all very good at managing money market funds and liquidity products in a zero-interest rate environment. We did it for many years, so I don't think that that's really the biggest challenge. [But] for the first time ever, you saw Fed fund futures contracts trade at a premium or at a negative yield. The Fed has been very clear that this is not a policy that they are going to embrace; they have a lot of tools at their disposal. But if you had asked me six months ago, I would have said the likelihood of negative interest rates was zero.... But there is a lot of uncertainty in the market, so I think that the likelihood of that has increased. I still don't think we're going to see negative yielding money market funds anytime soon.
MFI: How would negative yields work? Brignac: I think the two probable options would be a floating NAV or the RDM, reverse distribution mechanism. Obviously, we would need guidance from the SEC before anything would be decided. One of the things that I've considered is, do we potentially adopt a model where you could have either option, or both in one fund? You could have a floating share class and maybe an RDM share class. [Depending on] whether you're a retail or an institutional investor, there may be a preference as to which of those you would gravitate towards, like accumulating and distributing share classes in Europe.... Again, I think the likelihood of that happening is quite low, but ... never say never. You just have to make sure that you're prepared as best you can be if it does happen. But it's not our base case.
MFI: What are you doing in the portfolios? Brignac: We're keeping a very conservative allocation at this point.... Despite the fact that we're inching out WAMs and WALs, we're still holding a large amount of liquidity. That is still going to be number one. Because as you know, in money markets, it's not return on your dollar, it's return of your dollar. You want to make sure that you can fund redemptions. Given how flat the yield curve is right now ... in these types of environments, risk can get mispriced. People are just reaching for an extra basis point here and there.
When you look at March, it wasn't a credit event, it was a liquidity event. As the economy starts to evolve and reset, there are going to be some liquidity issues. The Fed is absolutely involved and active, but we've never been one to rely on a Fed put.... So, I think that we're just going to get a little bit more selective in terms of how we're extending and who we're extending with. Do you take a lower quality name for an extra basis point? I just don't think that makes that sense.
MFI: Talk about customers. Brignac: Overall, we are primarily institutional. But our retail presence has most definitely been growing, especially with the successful integration of Oppenheimer. Right now, obviously, cash is king. People are holding on to more cash just because of all the uncertainty, whether it is China relations, the economic impact of Covid, and some of the social unrest, unfortunately, that we have here right now in the United States. So, it really is a good time to remain quite short.
On the retail side, we are up year-to-date, but have seen some recent flows as investors are taking advantage of the risk rally. We are also seeing inflows back into the ultra-short space. That has turned around from a pretty ugly March.... On the institutional side, [we're seeing inflows] there as well, unlike in your typical risk-off environment, where we usually see a lot of money go into money market funds, and then once everybody gets comfortable, it flows right back out.... It doesn't seem like this is going to go out in the same way it came in. I think people are effectively on hold from the institutional side.
MFI: What about fee waivers? Brignac: We've started waiving fees to support certain higher expense share classes. Similar to 2009-2015 when the Fed was on hold, both gross and net yields were quite low. So I think the expectation is that we'll probably get back there again. Luckily, we don't have to dust off the playbook because really it wasn't allowed to get that dusty.
But it's just part of the business of being a global asset manager. Liquidity is an important asset class and I think you have to offer it to your clients. Given the success we've had, our track record, and the tremendous job that our team has done ... it's a good business and it's a business that you want to hold on to, even if it means waivers for the next however many years.
MFI: What is your outlook for the future? Brignac: I think we've got a Fed on hold. There is a lot more cash in money market funds than there has ever has been; it's a blessing and a curse right now. On the one hand as a manager, we absolutely love to see it. But at the same time, you do still want to see money being deployed to support the economy. I think that when you look at the Fed and the Treasury and the job that they've done in providing support in terms of issuing bills to help provide supply for the massive amounts of inflows that we've seen, [the question is] really, 'How does that unwind?' We're having discussions to make sure that as the Treasury extends the average maturity of their debt and reduces their presence in the bill market, that they do so in a way that is still supportive of the front end. Because what we don't want to see is pervasive, negative bill yields like we did in March. That was not good.
I think that the Treasury and the Fed are very aware that though the Fed is on hold, there are a lot more tools at their disposal to support the economy, and negative interest rate policy is not on the table. At some point the Treasury will want to fund more of the fiscal policy further out the curve. But I think unwinding from the front end of the yield curve is likely to be a delicate dance. That's what we're keeping our eye on.
