Today, we excerpt from the latest issue of Crane Data's Money Fund Intelligence newsletter, which features the monthly "profile" article, "Vanguard's David Glocke: Low Expense Is Our Alpha." It says: This month, we interview Vanguard Group Portfolio Manager and Principal David Glocke, who has been managing money funds for 20 year, 15 of them at Vanguard. The fourth largest money fund manager, with $161 billion, runs the flagship Vanguard Prime Money Market Fund, which opened in 1975, and the money fund management team also includes John Lanius on the taxable side and Pam Tynan and John Carbone on the municipal side. Below, we discuss ultra-low rates, portfolio holdings, and recent developments in the money fund space.
MFI: What is your biggest challenge? Glocke: The low interest rate environment is certainly a challenge, especially for savers. Everybody still wants to know, 'When do you think rates are going to move back up again?' The nice part is that the money funds remain well supported in the marketplace. You haven't seen this massive exodus from money markets. People are still very supportive of the product, believe in it and believe in the team behind it, too. The regulatory environment is also a challenge. There's obviously a degree of uncertainty, which creates concern on the part of investors. That said, investors remain confident and committed to the product.
MFI: How about the challenges historically? Glocke: We hear from peers that the biggest problem is trying to find names in the market. We have a different view of the world, and maybe it's easier to do at Vanguard. But you realize, over time, that conditions change. You go back 20 years or longer and consider the credits we used to buy in a portfolio -- General Motors, Ford, and all the finance companies, as well as a number of European issuers, European banks, etc. The list was considerably smaller. Over time, the dynamics changed. We have seen some asset classes grow rather large and subsequently fall off. But in the money market space, there are always assets out there to take advantage of.
In particular, you look at our funds today, and we maintain a heavy weightings in U.S. Treasuries and Agency securities. The agency space is getting smaller. But we still find plenty to buy, and we can't argue with going out and buying Treasury securities. We still think there is value, certainly from a liquidity perspective and a credit quality perspective. They remain an important element in the portfolio, and with the change in the S.E.C. rules that encourage higher degree of liquidity in the portfolios, we prefer to do that in the U.S. Treasury space than maybe in some other asset classes.
We've diversified into other areas in the last 3 years. The municipal component has grown in the fund. We think there are opportunities in that market, given their rate structure. Today, it makes sense maintain a muni component from a yield perspective. From the credit perspective, it's a different story. However, Vanguard has a deep team of municipal credit analysts that we can rely on to make the right decision about which securities to put in a portfolio.
MFI: Do you have any lessons learned from the crisis? Glocke: There are some big picture issues that we sit back and thank our lucky stars for. Vanguard has had some prudent policies in place, such as refusing hot money, not having large concentrations from individual investors, etc. When I came on board here 15 years ago, these guardrails were new. But I understood Vanguard's purpose for such policies, and these long-term policies that Vanguard had in place saved the day during the 2007-08 period. We didn't have the volatility that others experienced.
MFI: What kept you away from SIVs? Glocke: The philosophy at Vanguard was the asset-backed commercial paper market had attractive options. But we wanted to limit our exposure to, initially, the programs that had large sponsors behind them. We also wanted to make sure that there was 100% liquidity behind the program, so it didn't rely on asset sales like the SIV market. We wanted multiple sources of underwriting, more well-diversified sources. We are conservative by nature, so we avoided the landmines like SIVs and securities arbitrage-type programs.
MFI: What are you buying or avoiding? Glocke: Our asset-backed exposure is pretty small. Straight-A is probably one of the bigger ones, on average, but it is a fairly small exposure.... We made a choice about the European situation back in 2010. Like everybody else. we had bank exposure throughout Europe. With the start of all the concern about the European periphery, we decided to cut our exposure. Throughout the course of 2010, the frustration with the European body not being able to tackle the problem made us really concerned, so we walked away from our French bank exposure.
We are early responders to problems. We don't wait for them to happen. We try to anticipate where things are going and adjust the portfolio accordingly. In 2011, for example, we had limited exposure to the northern Europeans, U.K. banks, etc. That became a problem in late summer. As the European situation eroded further, we concluded it was best to get completely out of the sector. All of our direct bank exposure to Europe was eliminated by the end of 2011, and we haven't had any direct exposure to the European banks since. (Look for more excerpts from our Vanguard "profile" in coming days or contact us to request the latest issue of MFI.)
