This month, Crane Data's flagship newsletter Money Fund Intelligence interviews Wells Capital Management Head of Money Markets Dave Sylvester, Wells Fargo Advantage Funds President Karla Rabusch, and Head of Money Fund Distribution Brad Marcus. In addition to being in the forefront among the regulatory debate, the Wells Fargo Funds Management Group has also set the bar high for shareholder openness and communication, publishing a monthly market update and recently revamping its website. Our Q&A follows.
MFI: What's the biggest challenge in managing a money fund? Sylvester: In the late '80's, we were getting into 9% treasury bills, double digit commercial paper rates, and virtually no risk. Defaults were very rare; the concept of systemic risk was fortunately far in the future. If you look at it now, it is a much different equation, because we have lots of risk and almost no return. So if we are thinking about portfolio management as analyzing the trade-off between risk and return, the focus now has got to be almost exclusively on risk. I think the job of managing money fund portfolios has effectively changed from an investment-related job almost exclusively to a risk management function.
Marcus: There is a lot of information in the marketplace and one challenge that we have is making sure that customers have the most current information so that they can make informed investment decisions. One of the ways that we do that is through a number of communications, including Dave Sylvester's monthly portfolio commentary. Another way that we provide transparency is through our daily portfolio holdings.... We introduced [daily holdings] in November 2008 and we've not wavered from providing that information to our customers. These and other useful resources are available through our redesigned web site, www.wellsfargoadvantagefunds.com.
Sylvester: The Wells Fargo Advantage Funds provide daily disclosure to our shareholders, which has broadened their access to information regarding their fund's holdings, allowing them to make more informed investing decisions for their liquidity needs. We have a very clear investment perspective that is demonstrated in our fund's investments and overall structure. As the fund manager, I am responsible for determining the portfolio's investments and positioning. The increase in transparency allows our shareholders to fully understand our positioning and allows them to select our funds as a representation of what they are seeking in the marketplace. Money funds can be criticized by different parties for extending or for not extending credit to parts of the markets, but what the transparency allows for is for shareholders to participate in that decision process through their investing.
MFI: What are you buying now? What aren't you buying? Sylvester: It seems like the list of what we are not buying gets longer every day, and the list of what we do buy gets shorter. We are certainly not alone in that. Like a lot of funds, we have to back away from European exposure to an increasing degree. What we have seen in the past is that headline risk can evolve pretty quickly into real risk. Even as short as money funds are structured in terms of the maturity of their investments, we really have to work to be in front of that. We can't simply react to credit events after they've happened. We have to anticipate them. Credit risk in money funds has always been asymmetrically negative. By that I mean there is very little opportunity for price appreciation from the improvement in credit quality of a security held in money fund, but there has always been lots of room for price downside from credit deterioration. In this environment, the odds are stacked against us even more.
We have been trying to be cognizant of what headline risks can evolve into real risks, and, not surprisingly, the focus has been on the financial sector. As financials have come under increasing stress, we've had to move to other areas of the market -- bricks and mortar industrial-type companies, increasingly U.S. Government securities -- areas that we might not have looked at necessarily in our prime funds four or five ago. We are all playing with the same deck, but we have a deck that is getting smaller and smaller. We are at a point now where the biggest card in the deck is a four, but we are all still in the game, and we all still have to play.
MFI: Has your composition changed? Sylvester: We came into all of this with a pretty conservative structure, so we haven't had that much structural change to the portfolio. If you look at our Heritage Money Market Fund, which is our largest prime fund, we have a weighted average maturity around 21 days, and a weighted average life of about 35 days. That is down five days or so over the last year. We're running over 50%, sometimes approaching 60%, in liquidity. We are also seeing industries in the portfolio that we wouldn't have seen a year ago -- food and beverage, drug companies, and others along those lines. We've been big users of municipal variable rate demand notes in that portfolio all along, and our allocation to that sector has been growing.
MFI: You filed to liquidate some small municipal funds recently. Was this just a critical mass decision? Marcus: Yes, that is correct. Given the current and projected asset levels of the funds, it was difficult to implement the fund strategies at those levels. We believe that this decision was in the best interest of our shareholders. We remain actively engaged in the muni markets with our national and California funds, and continue to have nine investment professionals focused exclusively on this market.
MFI: How about customer concerns with Europe, etc. Are you getting calls? Marcus: Our customers' questions seem to track news articles pretty closely, so their concerns reflect what is in the news at the time. I think that customers really want to understand the issues and implications, if any, and are really looking for information. We're not getting a lot of questions on yield. Clients understand the yield environment and are looking for safety and liquidity, which we feel our funds clearly offer.... We do a particularly good job in providing customers with an overall view of our holdings and [European] exposure, which is underweighted to the rest of the market.
