Crane's Money Fund Symposium, which took place last week in Philadelphia, attracted 575 attendees -- shattering our record of 505 set last year in Minneapolis. One of the highlights of the 3-day conference was the keynote speech by BlackRock Vice Chair Barbara Novick, who discussed "The New Look of Money Market Funds" and focused on adapting to money market fund reforms. We excerpt from her speech below. (Stay tuned for more coverage in the coming days, and see the bottom of our "Content" page for recordings and slides.)
Novick, who delivered the keynote at our last Philadelphia Money Fund Symposium in 2011, began by discussing the history and evolution of money fund reforms. She then turned her focus to the two major aspects of the 2014 reforms -- the floating NAV, and fees and gates. On the floating NAV requirement she said, "Based on historical data, we would expect the NAV to wiggle around the dollar. We're not talking about big changes where you see it go up and down, it will wiggle -- very tight bands around that dollar."
On the fees and gates rule, Novick added, "That's probably the most controversial ... because it's unknown and untested." She explained, "We don't really know what that will look like, and history does compel us to say we want to make sure we have access to our capital at all points in time. I tend to think about these a little bit differently. First, by having these triggers, the portfolio manager is incented to manage that fund very conservatively, and I think that's good. If there's anything we've learned, people taking risks in money market fund portfolios isn't the best idea for any of us. Second, if we had some extreme environment ... wouldn't you want boards to have the best toolkit available industry-wide to deal with a stress event? I think of these as tools for terrible risk events, highly unlikely that we'll ever see them implemented in our lifetimes, but important to have that extra belt and suspenders."
Novick identified two major trends she's seen as a result of reforms. On the first, consolidation, she commented, "We're not the only one that has bought other money funds. In fact, you see a number of people getting out of the business -- either selling funds or closing funds. They're asking things like: Do I have enough scale? Do I have the technology? Do I have enough resources? Do I want to be in this business?" On the other hand, there are companies that want to be consolidators and aggregators, she said. "So, yes, you're going to have fewer providers, bigger providers. But probably, as a whole, an industry that's more conservatively managed and safe."
She continued, "A second trend, which I call restructuring and conversion, involves everything from the introduction of new fund structures, merging funds, and the conversion of funds from Prime to the Government." On the Prime to Govt conversions, Novick notes that to date, the asset shifts are almost entirely the result of fund conversions, as opposed to investors moving out of Prime.... It's actually not client driven at all, it's fund sponsor driven. We'll probably see some client-driven activity closer to the implementation date."
Novick went on, "At BlackRock, we've merged funds, we've closed funds, we've liquidated funds, we've converted Prime funds to Government funds, and we've launched Ultra Short bond funds.... I think that makes us the same as all the other providers in the room.... All of us want to have a range of choices that meet those different client needs." Many investors, including corporate treasurers, are watching and waiting before making any moves. "They want to see what the yield pickup is, they want to see where Prime funds are, where Government funds are, and they're reserving their decision, which makes sense."
Later in the presentation, she was asked about the yield premium that investors will require to stay in Prime. Novick answered, "That's the trillion dollar question. We all don't know. I think it's going to be institution-specific. At these low rates, even a small premium is a huge percentage jump. I think you have to factor in a lot of different questions ... there's no one size fits all answer to the question."
Novick continued by saying that through all the changes, "The uses and needs for cash from the client perspective really haven't changed. You need cash for operations, you need cash to make a bond payment, you need cash to pay construction costs. You need cash for lots of things, and that part hasn't changed. Client conversations are going to continue to center around what is their ultimate use of the cash."
She expects clients to segment their cash. "To anyone who thinks there was a day of one-size-fits-all and those days are gone ... I would say I'm not sure those days ever existed. Because when I talk to clients [both then and now], they're all different -- they have different needs, different strengths. The basic concept here is segmenting cash, looking at different buckets, understanding the true liquidity needs, understanding the risk tolerance, and possibly making a selection of multiple buckets."
Novick also discussed how the industry is adapting to changes, including the implementation of multiple NAV strike times per day. "A lot of our clients have told us they still want same day liquidity, they want access to the money; that's what a money fund is. So the industry seems to be coalescing around 3 strikes a day -- probably 8 am, noon and 3 pm." The keynote also mentioned several other things to watch for in the months ahead, including final rules from the IRS and CFTC, details on the New York Fed's Reverse Repo Program, corporate tax reform in the US, and EU reform negotiations coming to a close.
Another item on that list is the "big unknown," interest rates. "Don't ask me which way they are going to go. I can find as many economists who can take any possible position on that -- going up, going down, going up a lot, going down a little, tied to Brexit, not tied to Brexit ... so it is a big unknown. It's an important unknown for money market funds because with rising rates, more likely than not, you'll start seeing more of a spread between Prime funds and Government funds. It's not guaranteed, but it's likely. Likewise, you'll start seeing more of a spread with the Ultra-Short bond funds. What's going to make these products more attractive, more viable, is in part dependent on an interest rate scenario that no one can predict with any certainty. That's another good reason to have an array of products and choices, because it's going to change over time with the interest rate environment."
Novick concluded, "It's all about the client. Let's keep the clients in mind, let's think about what products we need, what products clients can use. If we do that, all of us, we'll end up in some pretty good places. And understand, it's always been changing and it always is going to be changing -- that's not new. It shouldn't be scary, it's just a given."
In the Q&A portion, she was asked about the challenges of the recent acquisition of BofA's money market funds. Among the most important things to sort out are people issues and technology issues, she said -- decisions like who's going to work with which clients, who's going to manage which portfolios, or which systems to use. "How do you get the best of both? Because a merger is really successful when you try and blend them and get the best of both." She said the merger of BofA funds into BlackRock will help when it comes to dealing with reform changes. "You have to look at each fund, you have to look at the number of classes, you have to look at the fee structure, just so many things -- then there's a mountain of paperwork as we all know. So the mergers were a good warm up act for reform. We used the opportunity to do a lot of mergers and liquidations of smaller undersized products. When we were all done I think we had a healthy robust fund lineup, a healthy robust team, and healthy robust clients."
