Last week, we hosted our fourth webinar and first true virtual event, "Crane's Money Fund Webinar: Mini Fund Symposium," a 3-hour series of sessions including segments on "`The State of the Money Fund Industry," "Strategists Speak: Treasury, Fed & Repo;" "Regulatory & ESG Money Funds Update;" and, "Major Money Fund Issues 2020." Today, we quote from this last session, which featured BNY Mellon/Dreyfus' Tracy Hopkins, Goldman Sachs Asset Management's Andrew Lontai and J.P. Morgan Asset Management's John Tobin. Watch for more coverage in coming days, and thanks again to our Mini Fund Symposium attendees, speakers and sponsors! (The full recording is available here and materials are available via our "Webinar Download Center.")
When asked about ESG vs. Social MMFs, Hopkins comments, "What we did, we call it an 'Impact' fund. It's really a subset of the ESG sector as a whole. When we took a look at ESG [in] the money fund space, I think it's a different kind of way of looking at things. [O]bviously, [in the] short duration product the vast majority of what we do is really heavily concentrated in the financial sector and the government sector. Instead of converting a Prime fund to an ESG specific mandate, we [decided to] convert one of our Government funds, the Dreyfus Government Securities Cash Management Fund."
She continues, "Where we changed the strategy a little bit is to direct the aggregate value of our buys themselves to minority owned brokerage firms. Being part of Bank of New York Mellon and Dreyfus, our firm does put a lot of emphasis on diversity and inclusion, and it's always been an important part of our organization. So, we felt that this is a good way to go.... Given the fact that so many assets from our large customers, and we're mostly institutional, are really in that Government and Treasury space, we thought there was some value add there."
Tobin tells us, "Socially responsible investing [has] mostly been associated with exclusions or negative screening.... We think of ESG as an additional set of data points, and we basically incorporate those data points into our investment process. The idea being that it helps us make more informed decisions, and at the end of the day, you get better risk adjusted returns.... To Tracy's point, it's difficult to specifically tilt money market funds to ESG. Right? We're predominantly financial services and we've taken a different kind of approach from an integration standpoint.... Academy does have share classes within our funds and that's expanding. Academy is both a military and a minority-owned firm. So, they have dedicated share classes that sit within our products and then they distribute those products. So, for some clients that want to basically invest via them, we make that available to them."
He adds, "We actually incorporate ESG, the metrics of that to our fundamental scores in the issuers we buy. And why I think it's an important and different is that that fundamental score drives how much of an issuer we can put into a portfolio, and what the tenor is of that purchase. So, it's stick and carrot. In other words, if an issuer does what they're supposed to do or is well graded in ESG, it improves their fundamental score.... That's how we are playing it, more holistically."
Lontai responds, "The environmental section of ESG is very hard to do on the front end. The offering we have ... is the Financial Square Federal Instrument Fund, and much like the Dreyfus fund, it seeks to do business with minority, women and veteran-owned brokers. We use the Federal Home Loan Bank's definition, so we are using those brokers to do business with. And again, here the idea is to have an impact with those brokerage firms to make sure that they are fairly representative, and to make sure that they are generating revenue so they can compete in other areas outside of just the money funds."
He also says, "In terms of screening, we're much further along, as I think most of the market is, in Europe than we are in the U.S. Our European Prime Fund, Euro Reserves, has been using a screening process for about a year now. So much to what John was talking about, we've incorporated ESG, various metrics and various levels, not only the environmental impact, but how women and minorities are represented on their boards, in their management, what type of business sectors they're in. And that is incorporated in the credit process for our Euro fund. And as John mentioned, it helps enhance what we're able to do with the various credits there."
When asked about exiting Prime, Lontai answers, "Goldman is definitely sticking with Prime funds. We view front end credit as something that definitely offers value to clients. But much like after 2008, what that offering is going to look like is going to be probably much different than it was at the beginning of the year. We've already seen ... Prime funds change. You're seeing much higher levels of liquidity. You're seeing much larger investments in Treasuries.... There's likely going to be regulation somewhere down the line. So, what a Prime fund looks like a year from now, two years from now, is definitely going to be a little different. We're not 100% sure what it's going to look like, but regardless, we think it offers value. Goldman is going to have some sort of front end credit offering to hopefully meet our clients' needs."
Hopkins responds, "I kind of agree that we're going to expect probably some level of reform to come down the path. But at this juncture, we also are of the mindset that Prime has an important place in the money market space. Customers, especially those who go into a low yield environment, [are] looking for whatever yield that they can get. And Prime offers some diversification. It offers a higher yield than what we're going to see in Government and Treasury funds. So, at this juncture, we're going to stick with it.... I think that as we kind of look at regulatory reform somewhere down the line, there may be some changes.... But I think prime is still a valuable tool and that it is going to keep people out of fee waivers for a little bit longer."
Tobin adds, "One of the reasons this question keeps coming up [is] we saw some key individuals kind of walk away from the space. But I think if you really do an examination of their specific business model, you can get to a point where from a strategic standpoint, it makes sense.... I don't think it's necessarily a sign of the future. But again, regulatory reform is most likely coming and that's going to dictate a lot of these answers in the future, particularly [for] the marginal players [outside] the top 15. Maybe they rethink things depending on what regulation looks like."
When asked about cash levels and flows, Hopkins tells us, "We're still in this really scary environment, in the sense that Covid has not gone away. So [we] would anticipate that cash levels will still stay elevated.... But I think over time once the market maybe improves, there's a vaccination, people are getting more comfortable, the economy is on somewhat of a better footing, ... eventually you'll start to see some of these balances over time flow out and get reallocated.... But there will be some fluctuations. [In the] third and fourth quarter of the year, I think you'll see money flows kind of buildup and stay a little bit elevated. Then, probably over time, you'll start to see some of these flows kind of go out and get reallocate in the market. So, we're positive on where flows are going to be. We just need a little bit more yield in them."
When asked where Goldman's flows are coming from, Lontai answers, "I think most like most people, it was coming from large institutions that were looking for a war chest of cash, if you will, to stockpile cash. It really started in March when you saw a lot of corporations begin to draw down on their credit revolvers just as a way to generate liquidity. They didn't need it and they needed a place to put it. So, it ended up in various forms of money funds and Government funds. And then we've really seen it continue through most of the summer, as we've seen corporations really begin to issue in record levels into the corporate market."
He continues, "Much like the revolvers, a lot of these corporations really don't need the cash. They just want to have liquidity on hand should something arise. Until uncertainty dissipates, we're going to see corporations sitting on a lot of cash, more cash than they have historically. And that's going to end up in some place where they feel very safe, that they're not going to lose any of the principal. That's going to be Government funds for the most part.... I would say the other big inflow source was kind of investors de-risking in March.... That's keeping some money on the sidelines in cash as well."
Finally, Tobin says, "We also saw fiscal stimulus money coming in. So, we knew we were getting inflows, but the degree, and I guess the speed was slightly off-putting. A lot of money came in quickly. I mean, at the end of the day, it was great just from the standpoint, if you think about where yields were at that point and we saw a good chunk of that would be around, that allowed us to put duration into the portfolios, which is kind of helping today. We won a lot of new clients. I think a lot of these clients came into large sums of money very quickly and in a little bit of a conversation, and we were [the recipients of] that money."
Mark your calendars for our future online events: "Crane's Bond Fund Webinar: Ultra-Shorts & Alt-Cash" on Sept. 24 from 1-2pmET, where Crane Data's Peter Crane and a panel of ultra-short bond fund managers will give a brief update on the space; "Crane's Money Fund Symposium Online" on Oct. 27 from 1-4:30pmET, which will feature another afternoon of money fund discussions; and, "European Money Fund Symposium Online" on Nov. 19 from 10am-12pmET.
