This month, MFI interviews Cavanal Hill Investment Management VP & Senior Money Market Portfolio Manager Mike Kitchen, who runs Cavanal Hill's Government Securities Money Market Fund and U.S. Treasury Fund, Senior Tax-Free Fixed Income Manager Rich Williams, and Repo Trader Ryan Friedl. They tell us about the history and latest priorities at Cavanal Hill, whose tagline is "Long live your money." We also discuss the outlook and challenges facing money market funds in general. Our Q&A follows. (Note: The following is reprinted from the December issue of Money Fund Intelligence, which was published on Dec. 6. Contact us at info@cranedata.com to request the full issue or to subscribe.)
MFI: Give us some history. Kitchen: Cavanal Hill began managing its first money market fund in the '90s. Our wealth management group itself traces its roots back to 1910, when Harry Sinclair, of Sinclair Oil, and some other oil men, founded what's now called Bank of Oklahoma. What we at BOK's Wealth Management Division, which Cavanal Hill is part of, traditionally do is manage money for ultra-wealthy clients and institutions, including one of the nation's oldest charitable trusts. We've got over 35 investment strategies: taxable fixed income, tax free, fundamental and quantitative equity and, of course, cash management.
Cavanal Hill itself has about $8.0 billion under management and roughly $3.0 billion of that is in money market funds. According to MFI, we're the 36th largest out of 67 money fund families. So we're bigger than one might think.... There's a presence not just in Oklahoma, but places like Arkansas, Arizona, Texas and Colorado. We've got a big footprint in the heartland.... I've been here 20 years and this is all I've done here; manage the money market funds.
MFI: What's your major priority? Kitchen: It's always the same. It's the classic money fund value proposition -- balancing safety, liquidity and yield. We're always responsive to the competitive environment. As you know, right now we have a Government fund and a Treasury fund. Before 2016, we had a Prime fund and a Treasury fund. But like so many others, we transitioned the Prime to a government security or 'govie,' due to the 2016 Money Fund reforms.
We had lengthy discussions with shareholders and internally, and there just was no appetite for a Prime fund with gates and fees. We do have our ears to the ground, in case there's an appetite for a Prime fund again. I think right now our shareholders, who tend to be institutional, are content with what we've got. I don't think interest rates are high enough to interest too many people in a new Prime offering. But at some point, hopefully in my lifetime, interest rates will be reasonably high again, and at that point, I think we may get some interest. Then it's just a question of getting critical mass.
MFI: What's your biggest challenge? Kitchen: Even with a Government fund, you want to run things smoothly without any mistakes. The big challenge now is with the shape of the curve. There isn't a lot of extra yield to be had. And we're not foreseeing any movement in the near-term levels. It's much more fun as a manager being in an environment where rates go up, or are expected to go up. But ... being a relatively small money manager, we're very accessible to shareholders. We're more than happy to speak with them at a moment's notice, and that's kind of a differentiator. A lot of our shareholders, most of them, in fact, come from an existing relationship with Bank of Oklahoma. So we're convenient for bank customers to deal with. We're [also] rated by Standard and Poor's and Moody's. That's a distinguishing factor too, because we're under the strictures of those two ratings agencies.
MFI: What are you buying now? Friedl: We began using FICC-sponsored repo last year.... It's been a great help for our funds. They're one of the better-rated counterparties that we have, which allows a lot of flexibility to use them. It's been nice building that relationship.
Kitchen: It provides a lot of flexibility, and they've been very accommodative. As you well know ... they've become the largest single counterparty. We started getting into that, I guess maybe September or something like that last year. As far as what else we're doing, we stopped buying LIBOR floaters within the past year just because of the phase out that's upcoming. We bought a fair amount of SOFR-based floaters in the Government fund. To use your phrase, 'So far, so good,' as far as those go. I've been very pleased with these.... We usually have a lot in overnight repurchase agreements, kind of in keeping with our institutional customers' need for liquidity. We are heavily biased towards institutional on the shareholder side.
We balance that with some floating rate notes; and the longer-term fixed positions a little bit out on the curve to lock in a bit of yield when we can. But repo is the main liquidity tool.... We like floaters, though, since they offer a little yield, a little bit of an advantage over repo levels and they don't really weigh on your WAM much, even in a declining interest rate environment.
MFI: Any agencies you like? Kitchen: Home Loan is the main story as far as agencies go. Our philosophy is: customers want to put their money in, get interest and get their money back with no problem.... So we try to stay fairly plain vanilla, I'll put it that way. If you look at our government fund, you'll see Home Loan and sometimes the other two major agencies. And that's basically it.
MFI: What are customers asking about? Kitchen: I think they were so used to rates being so low for so long -- that they're not yet worried [about rates going back down].... I am pleased to hear that there is some push back against negative rates. Looking at what it's done overseas, I don't think it's the solution to anything. Certainly, it would do us no good. But ... barring a huge dislocation, we're probably not going to see rates go too much lower this time around. Let's hope.
MFI: How about a word on fees? Kitchen: Sure. For the mutual fund industry as a whole, fees have always been and always will be, I think, an issue. We have a sizable number of share classes. I haven't heard any real negative feedback.... We work really closely with our treasury and corporate trust areas to accommodate the needs of the large institutional shareholders.... Our other mutual funds tend to use us as their money market sweep.
MFI: Talk about tax exempt options. Williams: We closed our tax-exempt money market fund due to the last round of Money Market Reform. The tax-exempt cash strategy SMAs are fairly small, about $27 million. After we closed the Tax-Free Money Market Fund, we looked at the ultra-short tax-free space and found out there weren't too many funds there. That's when we opened the Ultra-Short Tax-Free Income Fund. There's also an ultra-short tax-free strategy with an additional $100 million or so. When the Fed was raising rates, they saw a great deal of interest. But it's slowed down a bit for obvious reasons.
MFI: How important is the Fed? Kitchen: We kind of do both [macro and micro analysis], but it all starts with a good macro call. You position yourself with a good macro outlook while not putting all your money on that one outlook being correct. Repo is helpful there because you'll always have liquidity. If you're in a rate environment where things are going up, that will capture the yield that moves very quickly. It keeps you liquid even when rates are declining. Floating rate notes are helpful because they can do a little bit better than repo in any environment. We extend out the curve a little bit when we can to kind of lock in rates when we think things are going down. Right now, it's pretty 'flattish,' so you're not really being paid much to go out the curve.
MFI: How important is repo collateral? Friedl: We look through to the collateral. We get reports every day and spend time reviewing these, making sure they're Treasuries and agencies.... We've spent a lot of time making sure that we're getting that high-quality collateral and working with the dealers. Kitchen: Our collateral has always been govie collateral that qualifies as 2a-7, so you get the look through. But S&P does mandate ratings on the repo counterparty, so that's a constraint there.
MFI: Do think we're done with the Fed? Kitchen: Well, the markets are assigning a bit of a chance out towards June, so [another cut is] possible. I think the bar is somewhat high for them to actually do it. My sense is they want to preserve some ammunition if they can.... So if something really bad happens they aren't left with no bullets, so to speak.
MFI: Are you optimistic on money funds? Kitchen: We're definitely helping pay the rent. I think there are a lot of advantages to having a money fund complex here. For one thing, it generates discussion internally that can be of use.... For instance, when we had that repo spike back in September. It's easy to forget if you're not in this industry like we are, people wouldn't necessarily know what the media was referring to. We did a presentation on what that spike meant, what caused it and what might happen going forward. That was well received and that was good exposure for us and it produced some talking points for people.
I think, as long as there's cash, you're going to have to have a liquid investment class to put it in. Back in '08, things looked so gloomy, but the industry adapted very well to the large number of challenges.... That speaks to the flexibility of the industry.
MFI: Will we keep seeing inflows? Kitchen: Well, we hope so. It's funny, sometimes I’ll read about the equity markets going down ... and outflows and things like that. Our asset base really isn’t like that. It's driven more by the institutions involved, our shareholders and their own internal cash needs and flows. So you don't really see a lot of response to macro events in our asset flows. It's more specific to the individual shareholders. That's really something completely controlled by their own needs, not something we see in the environment or the marketplace.
