The latest fund manager "profile" in Crane Data's Money Fund Intelligence features the article, "State Street Global's Meier & Smith on MMFs." MFI interviews State Street Global Advisors' Steve Meier, Chief Investment Officer for Global Cash, and Barry Smith, Global Head of SSgA's Cash Business. Money fund veterans Meier and Smith discuss the Boston-based manager's history with cash, recent challenges in the short-term markets including concerns about Europe, and the regulatory outlook for money funds. We excerpt from the first half of the piece below.
Q: How long has State Street been running cash? Meier: We've been managing cash portfolios since 1978. It's a core competency for State Street Global Advisors and an area that gets a lot of institutional focus given our size and various businesses that touch cash across the State Street Corporation, including securities lending cash collateral. Smith: As you know, SSgA is one of the largest managers of cash globally with assets of just about $450 billion dollars as of March 31, 2011. What is interesting though is if we look at the composition of those assets they tend to be heavily weighted towards securities lending cash collateral, as well as other captive sources from within the company. This would include such as STIF sweep accounts, for example. We've had less of a focus on marketing to the more traditional cash market of corporate treasurers, and other institutional investors. So our current focus in the cash business, and a key reason I joined SSgA just over a year ago, is to bring the best in class investment, credit research, and risk management capabilities that are resident here -- and have made us the second largest manager of cash globally -- to a corner of the market that is not as aware of SSgA as a significant force in this asset class.
Q: What are your biggest challenges? Meier: The real challenge for us now is finding safe yield. We've been operating in a zero to 25 bps Fed funds environment since December 2008, which is challenging in its own right. More recently, though, we've seen tremendous yield compression, a flattening of the yield curve, and up until recent days, a flattening of the credit spread curve as well. Some of that had to do more with market technicals and the change in the FDIC's methodology for accessing insurance premiums on banks, focusing more on liabilities and less on deposits. The FDIC change resulted in about $60+ billion worth of Treasury Repo being taken out of the marketplace. The lack of an increased debt ceiling has impacted Treasury issuance and repurchase agreement availability as well. Also, focusing on portfolio liquidity has been a core requirement on our side.
Q: Has it been a challenge to grow the business? Smith: There is more cash than ever sitting on corporate balance sheets, and the list of providers that large corporations feel comfortable with is relatively short. As we've increased the awareness of SSgA's capabilities in this marketplace, we are actually bucking the asset flow trends you are seeing across the industry. I think what people are finding is that we are a little bit of a best-kept secret, because when they do their due diligence on us, they are finding that we are among the best in the industry at managing this particular asset class -- and one of the largest. But we are somebody that maybe they haven't evaluated in the past. As they are looking to add capacity and they are looking for places where they can put those additional dollars that they're keeping on the balance sheets, State Street is showing up again and again as the provider that they are turning to.
Q: What are you buying now? Meier: Our focus on very high credit quality issuers has always been a priority at State Street Global Advisors. We've been buying top-tier banks located in Canada, Australia and Scandinavia, and sound banking institutions here in the States. We have also been buying extendible floating rate securities to provide a little more yield as the market continues to repair and credit spreads further compress. We continue to buy Asset Backed Commercial Paper that has 100% liquidity support provided by banks that we feel very comfortable with from a credit quality and liquidity standpoint. We've also been very involved in repurchase agreements as core liquidity. The focus for the money funds and the registered funds has been on traditional collateral, specifically Treasuries, agencies, and agency mortgage-backed securities. But we also have a fairly significant presence and relevance in financing alternative collateral through fully secured over collateralized tri-party repurchase agreements, including those that have been collateralized by investment-grade corporates, money market instruments, and equities for appropriate portfolios.
Q: How about the French banks? Meier: From a credit quality perspective, we are very comfortable with a limited universe of top French banks. The Moody's action, putting several on watch for potential downgrade, focuses on their long-term not short-term credit ratings. Those institutions are rated AA1 to AA2, and relative to the current S&P ratings they're still highly rated by Moody's. From a liquidity perspective, those institutions have been diversifying their sources of funding, they've reduced their reliance on wholesale funding and money funds in particular. In addition, they have significant unencumbered assets which can be repo'd to the ECB if their wholesale funding goes away. (Look for more excerpts from SSgA and more on French banks in coming days.)
