This month, MFI interviews T. Rowe Price Group Vice President Joseph Lynagh, who runs the firm's cash management and ultra-short bond strategies and will be retiring early next year after three decades at the Baltimore-based fund manager. We ask him about T. Rowe's history in cash, fee waivers and a number of other topics. He says we'll have to "buckle down" to make it through this latest zero yield environment. Our Q&A follows. (Note: The following is reprinted from the July issue of Money Fund Intelligence, which was published on July 8. Contact us at info@cranedata.com to request the full issue or to subscribe.)
MFI: Give us some background. Lynagh: T. Rowe has been involved in money funds since 1976.... The Prime Reserve Fund was our flagship fund. It was in place when interest rates really spiked and money funds were quite the story, posting yields of 10-11%. Against the context of today, that sounds like a completely different universe.... We later launched the Tax-Exempt Money Fund to give us a presence in the muni space.... We added a U.S. Treasury Money Fund [and] state-specific funds on the muni side, California, New York and later Maryland. We then introduced what at the time was a low-fee product in our 'Summit' line of funds.
Then, we consolidated cash trading on behalf of the equity funds and the other bond funds, and developed internal sweep money funds, the Government Reserve Fund and the Treasury Reserve Fund.... We also manage our securities lending collateral in a fund that's called the Short-Term Fund. That's in fact a bond fund, but it operates with a very high focus on liquidity preservation of capital. Post-GFC, in 2012, we decided to expand the franchise into the ultra-short space and launched Ultra-Short Bond Fund, which was very prescient at that time when rates were all crowded around zero. It's proven to be a great strategy and we've grown that to be about $2.3 billion so far.
I joined T. Rowe Price in 1990 on the technology side.... In 1994, I got my opportunity as a trader on the Municipal Money Market Desk. I was coming up to speed when the Orange County bankruptcy hit. So, in the context of my career, when I started we immediately had a money fund crisis ... and then at the back end of my career we have what went down in March. Plop the GFC right in the middle there.
MFI: What is your biggest priority? Lynagh: Transitioning to work from home and really getting up and running the kind of communication you need to have between PMs and traders on the various products -- that's an ongoing challenge that we face. I think we've done a really good job. I'm not saying it's perfect, and I wouldn't recommend it as a long term or permanent solution. But I think the communication part is about as good as we can get it right now.
The immediate priority is the transition to my successors, Doug Spratley and Alex Obaza. We've been working together, and again, this is a long-planned transition. But I'm making sure that they're involved in all the conversations.... Part of my mission at this point is slowly taking my hands off the wheel and allowing a lot of that decision making and problem solving, etc., to shift to those guys so that they're at full speed when I step away in February.
MFI: What's your biggest challenge? Lynagh: I don't want to say this is a replay of the GFC. But in terms of the outcomes, the markets, and the quick move to zero rates by the Fed, it is highly reminiscent. Obviously, the product set has changed dramatically with a greater focus on Treasury and Government funds.... But it's kind of the same thing. If you think about what happened during this crisis, the Fed basically pulled out their playbook from 2008-2009. They did a 'find-replace' on the dates of all their programs and updated them. So, the speed with which the Fed was able to put stuff in place was reassuring.
The priority is how do you effectively put yield into the product in a way that stays true to your mission. At the same time, you’re recognizing that in a zero-rate environment you just have to buckle down and tough this thing out. We will get past it, we proved that post-2008. But, we're once again in that mode where it's basic blocking and tackling, and it's not pretty. Now T. Rowe Price, like many of my peers, is back to waiving fees. We know how this is done. We've done it before. There's a whole process involved in that, internal forecasts, etc., on how that gets done. In many ways, it is kind of a replay of events we've seen before.
MFI: What are you buying now? Lynagh: Depending upon strategy, obviously in the Government funds it's a lot of T-bills. Like everybody else, repo is something we have to have exposure to, because that gives you optionality on liquidity. That market, post-GFC, was pretty thin there for a while.
When you move into the Prime space, we've always relied very heavily on internal credit research in order to define our approved list. I think what's interesting is, except for a few outliers, the approved list largely remains pretty much intact. Which I think really [speaks to] the quality of research that goes on and how these are our highest quality issuers and we remain confident in them. I think the big change, if you compare 2008 to today, is that we all have much shorter WAMs and weighted average lives. So you're naturally doing trades that are in a much shorter space. But I think it is really kind of the usual suspects in terms of banks and corporate issuers who fill out our space.
In the muni product, the rapid move to lower rates there … has really set up quite a food fight for any kind of yield at the front end of the curve. Our products right now are pretty heavily weighted in VRDNs and commercial paper. As we enter note season here, we'll see how it goes in terms of what issuers get approved for money fund purchase and which do not. I would suspect as we go forward here, that our appetite for one-year dated municipal issuers will require some thought. Obviously, municipalities have really taken a hit here on tax revenues. So I expect us to be fairly circumspect as to the names we choose to add back on a one-year basis.
MFI: Any customer concerns? Lynagh: It's kind of a different game this time around. The heavy skew in the asset base towards Government and Treasury funds, I think made a big difference. In terms of investor concerns, I don't think they change. Obviously, we're all concerned when we see rates start to flatline here.... We're back in that mode where all funds are going to be moving over the next couple of months towards a handful of basis points in total return. Certainly, investors can't be happy about that. As an investor myself, I'm not happy about that. However, it is what it is. You always have to stay true to the mandate, which is liquidity, stability of principle and a level of income commensurate with those first two priorities. That's our mission, so that’s what we continue to deliver.
MFI: How are fee waivers? Lynagh: If we go back to the last time we were in a zero-rate environment, T. Rowe Price made the decision that we were going to waive expenses and absorb expenses necessary to produce a one basis point yield in all of our funds. That was consistent with the majority of players in the industry. The [plan here] is the same. I know last time around there were some managers who made statements about 'clawbacks'.... But certainly that's not our intent.
If you think about clawbacks in general, it's kind of a very unfair practice in terms of future investors paying for past investors' subsidies. But, yeah, we’re waiving fees in almost all of our funds at this point.... If gross yield is insufficient to cover costs, administrative costs, that's where an adviser might be placed in a situation where they, in fact, have to absorb some of those costs.
MFI: Talk about your customers. Lynagh: T. Rowe Price has a primarily retail-focused customer base in our money funds. That being said, within our Government strategy and our Treasury strategy, we do have institutional share classes. But in general, our experience, especially in March and April ... and in the GFC, of an incredibly stable, steady client base. Also, with the internal sweeps, I feel like we have such good liquidity in those funds. Being either Government or Treasury strategies, you can really meet any kind of redemption in the sweep products pretty easily.
MFI: What is your outlook? Lynagh: In terms of the coming year, I think I always start with my outlook on rates. If you think about where the Fed is, [it’s] kind of back to where it was post GFC, which is a zero-rate world. The Fed needs to be flat out providing liquidity to the world. And so certainly rates will stay at zero for the next 12 to 24 months.... I think over the next 12 months, certainly Covid represents an ongoing risk. I think we're going to see episodic surges of the virus around the country and around the globe, really.
I think, in terms of issuers and credit stories, we're still watching very closely how everyone weathers this current economic slowdown. It's far-reaching, it affects corporations, it affects municipalities, it affects everybody. So, pay very close attention as we go forward here over the next 12 months.... I expect we’re kind of in a recovery mode for 24 months in terms of how one would manage either a money fund or an ultra-short strategy. You're against the backdrop of zero rate, and that is very likely to persist for an extended period of time.
