This month, Money Fund Intelligence interviews Sam Silver, Vice President & Chief Fixed Income Officer at American Beacon Advisors, which manages the American Beacon U.S. Government Money Market Select Fund. We discuss the firm's presence in money funds and in local government investment pools (or LGIPs), the dramatic changes over the past year in the space, and the outlook for the cash investment world going forward. Our Q&A follows. (Note: This interview is reprinted from the August issue of our flagship MFI newsletter; contact us at info@cranedata.com to request the full issue.)
MFI: How long have you been running money funds? Silver: I first joined American Beacon in 1999 and have been involved in the MMF Industry since 1989. American Beacon has provided cash management since 1986 and opened its first MMF in 1987. American Beacon currently manages over $60 billion between Mutual Funds and Separately Managed Accounts. The makeup of the assets includes Equity, Fixed Income and Money Market/Cash Management accounts. In the cash management space, we manage corporate cash accounts along with Local Government Investment Pools (LGIPs).... Our government money market fund is an institutional fund, so it is made up of primarily corporate accounts who are looking for a stable NAV with a reasonable yield.
MFI: What is your biggest priority? Silver: We are primarily focused on the Fed, since they've been active here recently. So [we're watching] the Fed and economic data, just to make sure all the portfolios are properly positioned during this rising interest rate environment.... As far as looking at opportunities ... we continue to look for clients with stable assets that are a good fit for our government money market fund. For those who want a stable value alternative to prime funds, we also offer customized separate accounts. [S]ome clients like to have separate guidelines slightly different from money market funds to provide more flexibility than what a money market fund can offer.
MFI: Did you guys "Go Government" like much of the industry? Silver: Last year, we decided to go with Government only money market funds and ... closed our Prime Institutional MMF. Those assets went over to our government money market fund, and this was primarily the result of our clients wanting to be invested in a stable NAV portfolio over a variable NAV portfolio.
MFI: What's your biggest challenge? Silver: Managing cash with new liquidity requirements is a new challenge. There've also been [some] disconnects over the last couple of years between what the markets are expecting versus what the Fed is actually doing. For a long time, the Fed kept talking about ... rais[ing] rates, and the market really didn't believe it.... Now that the Fed has started, they seem to be on a mission to normalize rates. It was obviously a challenging environment from 2008 until the end of 2015 when we were in that zero interest rate environment, because there were a lot of fee waivers going on with money market funds, especially retail funds. Institutional funds, with lower expense ratios, were in better shape. But [some] still had to waive fees during that environment just to keep a positive yield.
MFI: What are you buying now? Silver: It depends on the account or fund. But many of the portfolios that we manage are rated and we must adhere to those guidelines as well. We are buying top-tier commercial paper, CDs, U.S. Government agencies and U.S. Treasuries. This includes both fixed and floating/variable rate securities, because during this interest rate environment we're not buying long, fixed securities. We're buying shorter fixed and buying some floating and variable rate type of securities.... We have seen pressure in October of this year on some Treasury bills. It is a little unusual right now, but the Treasury rates are above the short agencies in that 3-month period [due to the debt ceiling]. So, we're limiting exposure, but we do have some.
MFI: What are your biggest customer concerns these days? Silver: It depends on the type of account, but mostly structural reform. With the local government investment pools, you have a much more stable asset base and different rules to follow. So there wasn't as much of a concern there once they found out they weren't going to have to follow all the new 2a-7 rules. GASB oversees all the LGIPs, versus the SEC for 2a-7 funds. Otherwise, for years it was the low interest rate environment that was bothering clients.... Now they're feeling much better.
MFI: Do you guys run internal fund cash too? Silver: Yes, we do. We sweep the cash assets from our mutual fund lineup here at American Beacon into the government fund. So we do manage that cash.
MFI: Tell us more about LGIPs and GASB? Silver: There are some slight changes to the LGIPs with new regulations. But GASB was watching all the money market reforms, and they [decided against] the fees and gates. So that's one thing they left out. They do follow the overnight and 7-day liquidity requirements of 10 and 30 percent, respectively, and they also follow the WAM and WAL [limits] for the 60 and 120 days.... That's for the AAA-type local government investment pools... We're mainly involved with LGIPs in Louisiana and Texas.... They're nice accounts because you build a relationship with those involved in the LGIP, and you get a good feel for seasonal flows.... Whereas, in a government fund or within money market funds in general, a lot of times you don't get to know the underlying shareholders as well.
MFI: How did fee waivers impact you? Silver: It's a relief that the fee waivers are no longer in place. Since we only manage institutional money or institutional only money market funds, our fees were fairly low to begin with. We were waiving [some] management fees to keep a positive yield.... That went on basically from 2009 until 2015. Then that's when we got the first rate hike [and didn't have to] waive fees any longer.... So, yes, we were able to get out of that fee waiver situation after the first rate hike. Now that we've had 4 rate hikes, and we're in that 1 to 1 1/4 percent range on Fed funds, I believe all institutional funds and most funds are not waiving any longer. We've seen recent stories that some of the last funds that were waiving are no longer waiving.
MFI: Can you comment further on last year's MMF reforms? Silver: The implementation of MMF Reform by the money market industry seemed to go smoothly, since there was plenty of lead time going into it <b:>`_. This allowed the industry to prepare and get client feedback on their intensions with regards to Prime versus Government MMFs. The hardest part was trying to decide whether to keep a Prime MMF or go all Government, since there was a substantial cost to Prime and the variable NAV.
Silver continues: Also, making sure that all the systems and websites accounted for new disclosures properly was a challenge.... We were able to accommodate [the changes] without any hiccups. There were a lot of questions going into it.... But all in all it seems like the whole money fund industry handled that pretty well. You didn't really hear much about stress in the market, other than just rates in general.
MFI: Do you guys manage ultra-short bonds or offshore funds? Silver: We don't have offshore funds. Some of the separate accounts that we manage have similar characteristics to ultra-short bond funds, and we've been managing LGIPs since 2000. We have close working relationships with these accounts, which allows us to provide responsive investment strategies with a high level of service. American Beacon also has a selection of bond funds that are managed by outside managers, similar to our equity funds. Internally, we focus primarily on money market assets and cash management, which we've been doing for over 30 years.
MFI: What is your outlook for rates and MMFs? Silver: I think the Fed will continue its path of raising short-term rates and begin reducing its balance sheet. I'm expecting one more rate hike of 25 bps before year-end, and that the Fed will begin the reduction of its balance sheet also before the end of the year.... It's nice to see the increases in short-term rates have not disrupted markets, and clients looking for attractive short-term yields are finally starting to get paid again on their cash.
Silver adds: I think MMFs are going to continue to provide a valuable service to those looking for a safe place to park their money. They provide a good alternative to banks, which may not be looking for cash or paying much for it. Investors want liquidity along with attractive short-term yields, so I think money market funds will remain in demand. I believe the shift in MMF assets from Prime to Government Funds will remain, as long as Government Funds continue to transact at a stable $1 NAV and Institutional Prime Funds continue to transact at a variable NAV.
