Below, we reprint the first half of our latest Money Fund Intelligence "profile," "Stability Still Top Priority at BlackRock; Eye to Future." The article says: This month, we sat down with Rich Hoerner, head of global cash management, and Tom Callahan, deputy head of global cash management, at BlackRock, the 3rd largest manager of money funds globally with approximately $263 billion (as of 3/31/14). They talked about new products, the regulatory environment, and some emerging trends that could reshape the money fund landscape. Our discussion follows. (Note: Crane's Money Fund Symposium concludes this morning in Boston. Thanks to all our attendees, speakers and sponsors, and we hope to see you next year, June 24-26, 2015, in Minneapolis!)
MFI: Tell us about your background? Hoerner: I started with PNC in 1987 and joined the money market business, which was then known as Provident Institutional Management Corp., in 1992. In the mid-1990s, PNC bought BlackRock.... I grew up on the portfolio side of the money fund business before taking over as co-head of the cash business at BlackRock about 5 years ago. Callahan: I've been with BlackRock just 8 months. I joined in September of last year from the NYSE where I had been the CEO of their Liffe U.S. futures exchange. Prior to that, I ran Merrill Lynch's money market business for a time.... So I have been in and around the short end of the market for most of my career.
Hoerner: The cash business at BlackRock has a long history. TempFund [which celebrated its 40th birthday late last year] was launched in October 1973 by Provident National Bank.... In 1982, Pittsburgh National Bank and Provident National Bank merged to form PNC. Then in 1995, PNC purchased BlackRock, [while BlackRock continued to be managed independently]. In 2006, BlackRock purchased Merrill Lynch Investment Managers.... In December of 2009, BlackRock bought Barclays Global Investors from Barclays Bank.... They [BGI] also had a money fund business and a sizable securities lending business.
MFI: What is your biggest priority? Callahan: Our number one priority now is the same as it always has been, the stability of our funds and being a fiduciary to our clients. There's obviously a lot that's changing in our world. Regulatory reform at long last appears to be coming some time later this year, so that's an enormous focus for us. We have many clients that are open-minded to floating NAVs and believe that's going to work within their businesses. But we're also realistic that there are many clients that are not going to be able to adapt to a floating NAV, if that's part of the rule.
We're trying to plan our business and strategy for both types of clients, so that we can lay a path for them and have good products for them to use. That always has been and always will be our number one priority: to focus on our clients. In the supply constrained market that we're in, where credit spreads are enormously tight, it's probably tempting for people to go down the food chain of credit. We're just not doing that. We're committed to our investment process and our rigorous risk management approach. We're being very disciplined in terms of the risk that we introduce into the portfolios we manage on behalf of clients.
Hoerner: The big priority right now is just continuing to adapt to the changes in the short-term markets -- the shrinking supply, the near zero yield environment, changes in tri-party repo, etc. We're making sure that we're not reaching for yield as a result of these changes and adapting in other ways, not by just simply moving out on the curve. MFI: What about challenges historically? Hoerner: The challenges in the past were always largely around credit quality. That's what was always the big worry, almost the singular worry, and believe me, it's still a big worry today. Supply is also a challenge, given the shrinking of the ABCP market and the implementation of Basel III and liquidity coverage ratios.
MFI: What are you buying? Hoerner: if you look at our portfolios, take the TempFund for example, the names that will jump out at you are Japanese banks, Canadian banks, Australian banks. There's not as much ABCP as there used to be, simply because there's not as much issuance. You'll notice more Treasuries than you would have 5 years ago [in our prime funds]. Although many investors have begun investing in Chinese banks, that is not an area that we have pursued to date.
MFI: You have traditionally been conservative, right? Hoerner: Absolutely. Like everyone else, BlackRock makes its own independent determination if an issuer presents minimal credit risk. But beyond that, we pay a lot of attention simply to the risk of a credit being downgraded, particularly below first tier eligible under Rule 2a-7 of the 1940 Act. Our approved list is constructed to capture, if you will, that risk of a downgrade. We use maturity limits to manage that downgrade risk and we take a very conservative philosophy. We have an excellent track record of being ahead of the curve on downgrades. We have a very talented credit team and we're willing to accept a lot of false positives, not buying a name when it turns out to be fine. (Look for the second half of our "profile" in coming days, or see the June issue of MFI.)
