Crane's 7th Annual Money Fund Symposium in Minneapolis is now in the books. We had a record number of attendees (501) come to Minneapolis, where the host city earned praise, and we also had what many have called our best program ever. Over the next several days, we will summarize highlights from each of the three days. Today, we cover the first half Day 1, which began with a welcome address and Q&A featuring Karla Rabusch, the President of Wells Fargo Advantage Funds and also featured a session on the "State of the Money Fund Industry." (Conference Attendees and Crane Data Subscribers may access the full Binder, Powerpoints and Recordings via the "Money Fund Symposium 2015 Download Center" or our "Content Center.")
In the opening address, Rabusch discussed some of the changes that Wells Fargo has gone through. She says, "When the companies merged in 1998 (Wells Fargo and Norwest), our portfolio management team for our money funds was led by Dave Sylvester out of the Norwest business and he was a phenomenal industry presence. He just recently retired and we took that opportunity to pull the funds together under Jeff weaver and put our short duration and money funds together with the changes in the institutional prime business."
On the changes the company has made following money market reform she said, "Last month we announced our changes, designating which are institutional and which are retail. We've designated 4 of our funds as retail, 3 as institutional, and 3 as government funds. The biggest challenge is, for the funds we designate retail, figuring out how to move out the institutional clients that are in there." In terms of adding new products, Rabusch added, "We already have short duration, conservative income type products and separate accounts. We still need to get more clarity and need to understand a little bit more what our clients' plans are. I think a lot of our clients aren't really ready to think about it too much so we're in the process of talking about it with clients and figuring out what to do."
She continued, "We are focused on clients first, that's why we are all here. Sometimes it feels like we're focused on regulators first because we're responding so much to regulators, but we need to make sure that we're fitting our clients' needs into the regulatory framework. There's always going to be a place for money funds. We'll see how they transition -- how much transitions to government funds, how much stays in prime, how it all works. There's obviously going to be opportunities and we're all going to find ways to meet the needs of our clients."
"The State of the Money Fund Industry," featured Crane Data President Peter Crane; Federated Investors' Global Money Markets CIO Deborah Cunningham; and JP Morgan Securities' Head of US Interest Rate Strategy Alex Roever. "The last 6 months or so, people keep asking me over and over is how much money is going to move, and of course nobody knows. But we're going to be up here speculating over the next few days," said Crane, providing an overview of the industry. "Money market funds are still $2.6 trillion in assets, and it's amazing that the base is still there. So while people predict where the money might flow in 2016, I take the 'under' on this. I think assets will be pretty much where they are today because they have been flat for the last 4 years. If the money hasn't gone elsewhere by now, what in God's name is it waiting for?"
One of the subjects that Cunningham discussed was fee waivers. "On fee waivers, we've been in this environment for the better part of five years now," she said. "The number has continued to grow and has kind of peaked over the course of the last year and in our own case has started to go down ever so slightly -- a reflection of a little bit of the yield uptick in anticipation of a rate increase later this year. As far as recapturing what's been lost, some people think about waivers as a loss in a product type and that's not at all the case here. It's a lower margin, it's less of an income that's earned on that that particular product, but it's not a loss. So trying to recapture something that just was lower from a margin perspective for a period of time is something that we, from Federated's perspective, don't have as part of our thinking at this time."
She added that it doesn't take a major yield increase to return the fee levels to normal. "Generally speaking ... for every ten basis points in yield increase, the waivers decrease by 25%." By the time by the time you get to 75 basis points in the market ... you get you back to zero from a waiver perspective." Crane concurred, saying, "One or two Fed hikes are going to return the vast majority of these waivers to money fund and that $3.5 billion in revenue rate is going to be $7 billion after 2 Fed hikes. Of that first hike my wild guess is that 80% is going to go back to fund companies. The big dog is going to eat first, and net yields may barely budge." Cunningham also talked about consolidation. "The discussions around consolidation have heated up, multiples beyond where they have been over the course of the last several years. [Though] they're still small in nature."
Roever provided insights on rates and supply. "What strikes me about this cycle as we're moving closer towards the Fed actually raising interest rates is that it's very different than the previous cycles. I think it's different because we've changed so much from a regulatory perspective ... not just in the money fund business but also on the banks." He continued, "We've got fund sponsors like Federated, Fidelity Blackrock, etc., who are who are making all sorts of plans about what to do as reform approaches. We've got banks who are obviously big issuers into the space trying to make plans about where they're going to be able to issue on the curve, how much they're going to be able to issue. The missing piece in all this is the shareholders and actually that's the most important piece. Where do they move their money and are they going to have the ability to actually move? I think entropy is a pretty powerful force."
Predicting fund flows out of prime or bank deposits and potentially into government funds is "the biggest parlor game in the room." He says, "You get you get estimates ranging from a few hundred billion to a trillion. `Our best guess is something in the $400 to $500 billion dollar range, although the certainty that we would put around that is not especially high. Realistically between the two, we're talking about something on the order of $700 billion to $1 trillion of total flows potentially shifting into government funds space."
Cunningham added, "I believe we will see some money in motion certainly occurring in the second half and especially in 2016. Probably the easy choice for investors to make initially in the prime institutional world is to go into the government funds because they're structurally the same. They look and feel and operate in a similar manner to what they're used to today." But as assets go into government funds, spread will widen. "Ten to 12 basis points has been about the norm between a prime and govie fund historically, but if that goes to 20, 30, 40 -- at some at some point, those investors that made the choice to go easily into the government fund initially without much of a give up are going to recognize that spread is now wider."
One of the products that Federated is looking to develop is the 60 day and under maximum maturity floating NAV fund. Such a fund, according to modeling data Federated has done, would produce about half the spread differential, she said. "Those might be the logical vehicle at least initially for customers that are looking to kind of come back and tiptoe into that floating NAV fund, because of not no volatility, but lower volatility expected for those products."
On rate hikes Roever added, "It's less than a coin flip probability that we wind up with a September hike. Our economists have two hikes penciled in for this year and perhaps getting up as high as two percent by the end of next year. Laying on this timeline are some key regulatory points. October 2016 is obviously the big thing we're all focused on here -- money fund reform. But I would also point you to January 2018, which is when most of the large regulations on the largest banks have to be in place."
He explained, "I feel it's very likely we're going to see a portfolio managers in prime funds have to build their liquidity in the event that they do start to see money that wants to start flowing from the prime space and into the government funds space. Under the new regulations, it's not impossible for banks to issue a lot of short term debt. But it just gets very costly for them to do that, so we'll probably see some contraction in terms of bank paper. I think the bigger challenge probably isn't the sheer availability of bank credit so much as it is maintaining the diversification among the names."
Also, he added, "We have seen a pretty significant decline in terms of Bill issuance as a percentage of the overall Treasury supply over the past two years. There's not a lot of Bill supply in the marketplace now. One of the challenges we face with money trying to move into the government money fund space is, 'What are you going to put in those funds?'" A lot is going to depend on the Fed's willingness to use the Reverse Repo Program -- whether it's Overnight or Term -- to fill that gap, he said. "Their willingness to do that is going to have a lot of impact on what happens with short term rates in the government space."
