For our July 5 Crane Data daily News, we wrote "June MFI Excerpt: Reich and Tang Does Daily MMFs and FDIC Sweeps, which excerpted from our Money Fund Intelligence interview with Tom Nelson, Chief Strategist for Reich & Tang. We reprint the second half of the interview below.... Nelson tells MFI, "As I mentioned earlier, FDIC-insured sweep products are growing in popularity and will eventually become as standard as the money fund sweep has been historically. Whichever product eventually wins out in this popularity contest will have a lot to do with what becomes of the next wave of regulations placed around them. We could see a floating NAV on money funds potentially tip that balance, but let's cross that bridge if/when we come to it. In the mean time, let's continue to offer investors what they deserve -- choice."
Q: What's the biggest challenge in cash management today? [Nelson responds] The biggest challenge today at the fund level is the interest rate environment and the fallout in the repo market. It makes it tough for all of us to find attractive paper. Rates are low, and US Treasury and Government funds have been at 0% for way too long now. Muni and prime funds continue to offer clients and shareholders some yield, but it's thin to say the least. And at the macro level, the regulatory uncertainty makes you wonder what the landscape will look like, and ultimately how the business will be run in the next couple of years. Floating rate NAVs would erode investor confidence in funds, and a liquidity facility, by placing additional costs on the shareholder, is not a great solution either. So we remain staring at this dark cloud on the horizon waiting to see how it will impact the way we invest ... and how it will affect the way individuals and American businesses address their short-term cash management needs.
Q: How are fee waivers impacting the Daily money funds? Is R&T committed to the business? Can small firms compete? Reich & Tang has never been more committed to its funds business. With all that is surrounding us in the industry, and fee waivers eating away at everyone's profitability, there are two main themes on which we are focused—client service and innovation. For existing clients and shareholders, we continue to educate and inform, be a daily resource, and just plain old service the heck out of them. Keeping existing clients on the books is always paramount, but even more so in a highly commoditized business like money funds.
Our goal is to de-commoditize through our processes, investment philosophy, and innovation. As with any company in any industry, failure to innovate will ensure a loss of market share. The [Daily] RNT Natixis Liquid Prime Portfolio is what we consider an innovative step by addressing the most pressing needs of investors in general, while not compromising our philosophy or high standards. It's kind of a "if you build it, they will come" type of thing. We are sure we will see the benefits of this innovation in the months to come. So, yes, small firms can compete -- if they have the right strategy and willingness to innovate. Microsoft was a small firm at one point.
Q: What are your thoughts on the future of money funds and the PWG report? Money funds will continue to serve as a critical component to the way individuals and businesses invest their short-term cash and working capital, and we see their future as being bright. There will be bumps along the way, the market will adapt, and we will continue to see some consolidation and fund mergers. And as interest rates begin their eventual rise, fee waivers will go away, yield to shareholders and fund profitability will begin to grow again, and the strong will have survived.
What we cannot discount is the incredible value money funds have offered investors for the past 40 years. It is undeniable, and the need for them will always be there. However, its future is rooted in a stable NAV. Without that original tenet in place, the model becomes broken and investors will quickly find somewhere else to place their cash and working capital -- and the speed in which that process takes place should not be taken lightly.
We will continue to support measures that increase liquidity and capital strength of money funds as we saw happen with the SEC Money Market Reforms that were put in place last year. We believe these measures helped to shore up investor confidence in funds and overall were a positive for our industry. We are, however, quite surprised with the overall lack of industry dialogue regarding the differences in behavior of retail and institutional investors. There are events that can precipitate asset flight, or a "run on the fund" scenario. In the circumstance of a credit event, it affects both retail and institutional investors relatively the same, in that most will be running for the door.
However, in the case of a liquidity event brought on by a systemic problem or a significant interest rate differential, there is a vast difference in the behavior of retail and institutional shareholders. Retail assets would likely remain quite stable while institutional assets will tip the balance. So, in all of this talk about money market fund reform, it seems retail shareholders are unfairly carrying the burden in providing a solution for institutional clients. More discussions need to take place in this regard.
