Crane Data hosted its 14th annual Money Fund Symposium conference in Minneapolis last week, which brought together over 420 money fund and cash investment professionals to discuss the latest involving rising rates, pending money fund reforms, and ESG/D&I money fund issues. As we do every year, we ended our opening day with the session, "Major Money Fund Issues 2022." Crane Data's Peter Crane moderated a discussion with Federated Hermes' Deborah Cunningham, Dreyfus' John Tobin and Northern Trust AM's Peter Yi, and D&I money fund issues took center stage (the show started on the Juneteenth Holiday, 6/20). We excerpt from their comments below. (Note: Thanks again to those who attended and supported Money Fund Symposium! The recordings and Powerpoints are available in our "Money Fund Symposium 2022 Download Center" to attendees and subscribers. Watch for more coverage in coming days and in our MFI newsletter, and mark your calendars for next year's MFS, which is June 21-23, 2023, in Atlanta.)
Yi says, "Northern Trust has had a really rich history in D&I [diversity & inclusion] and social impact strategies. We've been doing diversity-type exposures for probably 30, 40 years.... More relevant to money market mutual funds, ... back in 2014, we were fortunate enough to partner with Williams Capital at the time, now Siebert Williams Shank (SWS), and it's been a great partnership. It's allowed our liquidity investors to help support these minority and women owned financial firms.... Those share classes have grown exponentially.... To your point, we've been really focused on diversity, as well as equality and inclusion."
He continues, "But then, you know, we think about ESG as well and the evolution of ESG.... The way we think about ESG is it's really about learning what the principles that investors really want exposure to. Quite frankly, we're not necessarily putting money into [a] specific fund, but really focusing more on SMAs [separately managed accounts]. We have a ton of assets where our investors are just basically coming to us, asking for us to put in some either filters, exclusionary lists or our proprietary credit scoring as it relates to ESG. So again, to your point, it is something that Northern Trust takes very seriously."
Cunningham discusses the integration of Hermes' social screens into Federated and comments, "[We're] using the proprietary information that they provide for us now in a way that is part of our credit scoring system that we use internally.... As far as ... emphasis on different aspects of the E, S and G, depending on the particular issuers that we're looking at, we can have both quantitative and qualitative inputs to the credit scoring system. It is definitely something that we think we've taken a step further now. Traditionally, we have thought about integration of Prime products. But we've now included that integration into our Government money market products as well as our Municipal money market products. On the government side, engaging with the GSEs, making sure from a repo counterparty perspective, those aspects of ESG are associated with those counterparts as well. And on the Muni side, it's kind of a natural audience for that industry given the projects that are being funded through that marketplace.... So we’re not looking at a cutoff or exclusionary ... [but rather] integrative into all aspects of our money funds."
She adds, "But then, further beyond that in the equity and longer-term fixed-income markets, there's also ... thematic products. Those are not ones that we have currently within our liquidity product lineup. But these could come at some point. We do have to do a D&I broker aspect with our agency [fund] and have been able to achieve about 75% of our trades with either veteran, minority or women-owned businesses. Then, most recently have opened a 'SDG' Sustainable Development Goals class of shares within our largest government agency and repo fund as sort of a furthering of our path down this ESG front from a liquidity products standpoint."
Tobin tells us, "I think the way I think about it is ... there are three levers that you can pull and two of them we've spoken about. One is, what are you buying in your portfolio? The credit overlay. You look at the ESG scores of issuers, and if they're doing the right thing ... you want more of it.... We all run hundreds of billions of dollars of funds, so these issuers listen to us and [have a] huge incentive to do the right thing. The other thing is, 'Who are you doing business with?' D&I funds [are doing trades] through minority firms and veteran firms.... Then the third lever is, 'What are you doing with your revenue potentially? Are you taking some aspect of your revenue into voting towards something very specific or more broadly?" He describes Dreyfus' BOLD share class, which devotes some revenues to Howard University and historically black colleges and adds, "Our clients want to effect change with their cash investments."
On the Fed, Tobin says, "What we just witnessed was a perfect storm ... no one expected 75 bps. We got perfect Fed guidance for six weeks [that we were going to get 50 bps].... In the matter of two days, when we were guaranteed 50, we got 75.... So when you look at this past week, you're going to see there were so many different ways to play it. You're going to see some pretty wide dispersion in performance."
When asked about corporates and bank deposits, Cunningham replies, "As far as corporates and what we're seeing from a portal standpoint or any type of direct investment into the products, people are taking note that we're again above zero. The difference between bank deposits and money market funds was so low for such a long period of time, we saw a huge number of go into deposit products. Now the banks don't want those deposits and actual market rates are increasing and administered rates (i.e. deposits) are not. So, you're seeing a variation."
She tells the Symposium crowd, "Generally speaking, as a cash manager in a rising rate environment, the best thing that can happen to you from a performance perspective is to get cash flow. So, cash flow in a rising rate environment is something that is extremely beneficial. Sometimes our salespeople get very annoyed with us in a declining rate environment because we say we don't really want cash flow. This is just going to take our yield down faster.... But getting positive cash flow out of deposits, getting positive cash flow from direct investors that are truly now feeling like they are getting something other than just safety of principle, but a bit of a return from their cash investments, is working out pretty well."
When asked about money fund reforms, Northern's Yi answers, "My guess SEC is still reading comment letters, trying to be thoughtful around, 'Does this make sense?' I think overwhelmingly ... swing pricing is universally disliked. It comes down to, at least for us, 'Is that going to be adopted?' ... If the SEC adopts what's proposed here, our big headline is: we're not going to re-enter the Prime and Muni space. There are so many new complexities involved with swing pricing. And the reality is even some of the other considerations, like increasing weekly liquidity minimums, that's going to have an impact because it's going to likely compress the yields between a prime fund and a government fund."
He continues, "From our perspective, one of the foundational ... philosophies we have is that investors should be compensated for the risks that they take. So, again, for us, if things are adopted [as proposed] we are not going to re-enter the space. [But] we have a lot of different wrappers. The reality is, if SEC does adopt these rules, this is all kind of isolated to '40-Act money market mutual funds. But at Northern Trust Asset Management, we manage a bunch of different wrappers, six collective investment trusts, offshore UCITS funds and of course SMAs. We still have a thriving business with credit as well as muni instruments and those type of investment products."
Cunningham adds, "As far as timing goes, we had originally thought that the staff would come out with their recommendations for the Commissioners sometime in the fourth quarter, with some sort of vote during that end of year timeframe. Then depending on what the ultimate rulemaking would be, implementation in '23 and '24. We're hearing now that, in fact, maybe that's moved up a little bit, and that Chair Gensler is really encouraging the staff to get their recommendations to the Commissioners by the end of the third quarter. So, we'll see if that speeds these things up or not." Finally, Tobin comments, "My prediction is that we will see it around year-end and it will include swing pricing."
