Earlier this month, Money Fund Intelligence interviewed Creston King, portfolio manager at Davis Selected Advisers, which manages the Davis Government Money Market Fund, offered to buyers of the Davis series of equity funds, and the Selected Daily Government Fund, used for the company's no-load fund series. Both money funds are 100% exclusively 'government.' King has been managing money funds since 1994 and has been with Davis since 1999, and Davis has offered their funds since the late 1980's. We excerpt the first half of our Q&A below.
Q: Have Government money funds had any problems during the recent crisis? King tells us, "No, they haven't. That's one of the things I've railed against a little bit here.... All of these regulations are being written for prime funds. I don't like them. I think they are not appropriately written. Many of them should only be applicable to prime, but we're supposed to apply them to the government sector as well. So we've had a fun time engineering things so that they would be appropriate for government as well. [But] we are a small sector of the entire money fund universe, so I really don't see how we are going to get anything changed."
Q: Did Davis choose to have just Government funds because of safety concerns? Or were you just lucky? He answers, "Yes, they choose to have them because of safety. Founder Shelby Davis used to call bonds 'certificates of confiscation.' We don't want to have anything risky.... The reason behind it is that we want our customers to take risk in the equity funds. We don't want them to take risk in the bond fund or money fund."
Q: What's your biggest challenge? King tells us, "Well, recently I would say it's been complying with the [SEC's] 30% liquidity rule.... We went through the transition earlier in the year to [learn] kind of how it works and to structure the portfolio. One of the things we've done is just ... maintain that [large repo] position.... [Our] portfolio is probably a higher percentage of repo than it's been in a long time."
Q: Have there been additional reporting challenges? King responds, "We designed our own spreadsheet and monitor weighted average maturities and the weighted average life of the portfolio to take into account the floating rate maturities. We did go to State Street and get them to do stress testing for us. One question is, 'Why does a treasury fund not have to do stress testing and a government fund does?' I don't think there is that much difference. Certainly, in this particular environment, let's just look at it right now, Fannie and Freddie are 100% guaranteed by the US government.... I don't know if they are going to remove that at some point, though I think they probably will."
Q: Can you talk about how the WAL has impacted your portfolio? He tells us, "Yes, we won't buy [floaters] longer than 13 months.... You can buy a 2 year [final maturity floater]. I ... could buy those 2 years but have to write them up and get them approved by showing why we believe that it's going to reset at amortized cost.... [T]he other thing is ... that is going to push the weighted average life out a lot more quickly."
Q: Tell us about the Government agency security market and supply. King explains, "The big names of course are Fannie Mae and Freddie Mac, Federal Home Loan Bank and Federal Farm Credit Bank. After that there is Farmer Mac, which is considered a lesser agency. I have never personally bought it, but I've seen it offered and traded every day. After that you can get into your smaller securities that are out there.... We are not as much into that market as [we are] Fannie, Freddie, Home Loan and Farm Credit."
