Late last month, Crane Data hosted an ESG & Social Money Fund Update webinar, which featured a discussion between our Peter Crane and Morgan Stanley's Global Head of Liquidity Product Scott Wachs. The two talked about ESG Prime MMFs, Social Govt MMFs, and Diversity private-labelled share classes. We also discuss asset flows, fee waivers and future MMF reforms. Below, we quote from our discussion. (Note: Crane Data Subscribers and Attendees may access the Powerpoint and recording for the "ESG & Social Money Fund Update" here, and mark your calendars for our next webinar, "Handicapping Money Fund Reforms," which will take place May 20 (Thursday) from 2-3pm EDT.)
After introducing the ESG webinar, Crane comments on asset growth, saying, "What's underappreciated ... is the steady build up prior to that [March 2020] super spike. Asset-wise, it's the best of times for money funds. You had back-to-back 20% gain years in '19 and '20. In '21, when it looked like a lot of that cash was eroding, now March [2021] saw strong inflows too. So that's the good news ... assets are very strong, very robust. The Government MMF assets are almost record level."
Wachs tells us, "Yes, [investors in 2020] didn't know ... when and how they would be able to obtain and spend their money, or what options they may have for investment. Obviously, many companies held off investing [over] concerns about the path of the coronavirus and the path of the economy. There are certainly a number of firms as well that took advantage of government programs to build up their cash for things like payroll, and to continue to maintain their resources so they could more easily open back up when the environment became better. We certainly saw money come into our Government funds. While in March of last year there was a fairly rapid decline in Prime funds for several weeks, the bounce back was pretty quick as well."
He continues, "You look at the beginning of this year, and we've continued to see growth in money market funds, both in Government funds, but also in Prime funds as well for us at Morgan Stanley. When I think about why we've seen that uptick in Government funds, particularly in the last month or so, I think about it from a corporate treasurers' standpoint and what their options are to invest their cash. If you look at Treasuries, what's happening in the market is that Treasury rates have been so incredibly low, to buy an overnight treasury you're talking about yields of two or three basis points."
Wachs adds on rates, "I think everyone has a yield floor in place for their Government money market funds, they range from one to two, three, sometimes four basis points.... But if you think about executing a trade in a money market fund versus executing a trade in a Treasury, all of those fundamental characteristics that cause investors to historically really like money market funds continue to be very, very attractive. In a Government money market fund, you have the constant net asset value, you have same-day liquidity, so ease of access to your cash, and the execution is very easy. Treasuries are not quite as strong on all of those points, and particularly the execution process.... When yields for a Treasury are in the same neighborhood as the Government money market funds, I think a lot of corporate treasurers will choose to buy the Government money market fund."
Crane comments, "Looking at the yields, [the environment] has been as close as you really can get to zero without going negative.... Compressed spreads, Prime yielding barely anything above Governments and fee waivers. The expenses charged on money funds are hitting record lows. In 2009 through 2015 money fund expenses, roughly were cut from 0.3% on average to 0.15%, now, they've been cut this time from 0.3% to 0.1%, even below 10 basis points. Scott, talk about the yields, how brutal? How low? And, fee waivers?"
Wachs responds, "The low yield environment is biting all of us.... I think some of the stats that you just rattled off are pretty much on target in terms of the impact. We're very hopeful, especially given some upticks in the economy right now, that the zero-rate environment this time is not going to last anywhere near as long as it did last time. But there's no doubt in the immediate time frame, the low-rate environment is hurting from a manager standpoint, from an investor standpoint, and from an intermediary standpoint."
He also says, "I think when you think about ESG and sustainability, Morgan Stanley as a firm has had a long history of focus on sustainability. We've been thinking about sustainability as a firm probably for over ten years at this point. So, it's core to the values of Morgan Stanley. We've have expertise and experience in ESG and sustainable investing in businesses across the firm, so we have a lot of organizational history and knowledge in the space. As we thought about our money market fund platform and as we've spoken to clients, we realized this was not only important to Morgan Stanley as the firm, but also to our clients as well. So, we thought about the best way to serve our clients in that regard. We thought about our money market fund lineup and the best way to serve our clients on this topic was to develop an ESG money market fund."
Wachs explains, "We didn't want it to be sort of a plain vanilla ESG money market fund. We wanted it to be one that was very robust and very consistent with a strong recognition of ESG and ESG process.... That's so important to clients, and that's so important to Morgan Stanley as a firm. We decided to convert one of our existing small Prime funds to the ESG Money Market Portfolio, and we did this in October of 2019. It's been quite successful to date and that fund is again, I think, one of the most robust ESG funds in the market."
He tells us, "I want to also just spend a moment talking about how we think about socially conscious funds. And here's how we make that definitional distinction between ESG funds and socially conscious funds, because they really kind of overlap a little bit. `When I think about a ESG fund, I think about a fund that has ESG specific considerations in its investment process, following certain investment guidelines, processes and objectives that are ESG related. A socially conscious fund, in the way we think about it, implements certain considerations from an operational or executional perspective. We have our Government Securities Fund, which is a socially conscious fund in that we trade with D&I [diversity and inclusion] broker dealers. So, for the purchase trades that we do in the Government Securities Fund, we seek to do those trades with D&I broker dealers. So that's not part of the investment decision process in terms of the types of securities you're going to buy, but it's part of the execution of the trading process. Both are important in driving adoption and change in the industry more broadly."
Wachs adds, "The third leg of this ESG and socially conscious dimension is private labeled share classes. This is where there is a share class that is launched and offered by a fund manager in conjunction with the D&I broker dealer.... You'll see a number that have been offered to date and there are a few that are pending as well. We actually filed in March for a private labeled share class, the CastleOak Shares.... It's still in registration, so I can't really say much more than that."
Crane states, "Let's talk on each of these a little bit more. The ESG and the Prime, to me, was really the first wave, but it got hampered by the issues for Prime overall.... Of course, Prime is under the gun now, it's under scrutiny because of the gates and fees, the floating NAV. It's a real shame because prior to coronavirus, it was making a very nice recovery. Prime was coming back, yields were rising, we almost had 2% yields in money funds.... And then all of a sudden it stopped.... If Prime funds are all [invested in] banks, can you really differentiate? And then, of course.... I took a [look at all the] Prime ESG funds ... and then it hit me, they don't have Treasuries."
Wachs replies, "I think sometimes when you think about ESG in the money market fund space, it's a little bit challenging to think about what does that really mean in terms of scoring issuers and looking at issuers? It's not quite as clear as maybe in the equity space ... where you have a much greater variety of industries that you tend to be investing in. But, even in the limited set of issuers that we all look at in the money market fund space, we're looking at the highest quality credits, that's all that money market funds tend to invest in anyway. But even in that context, you look at the ESG factors: environmental, social and governance. There are factors that are ones that you can differentiate on. Things like how diverse is the board of the bank? How do they think about lending to minority communities? How have they responded to the broader social issues that exist today?"
Crane then says, "Let's talk about the Social now. You mentioned doing business through diverse and inclusive and minority dealers is the primary way. These are all Government money funds. The Federal Home Loan Bank has their list of D&I dealers, and I think this really was a crucial step in letting a lot of the government funds have something to hang their hat on. Saying here's the list, Federal Home Loan Bank puts it out, so ask them if you want to do business through us. We're using their list. I know you guys converted a government fund. That's the other thing is that a lot of these government funds were already at least a few billion dollars ... having that heft can't hurt, right?"
Wachs answers, "Absolutely. We were in, I think, a pretty good position to think about this because of the breadth of our Government and Treasury fund complex. This is something that we have thought about for years. Having a very deep Government fund complex, having a Government Securities fund, a Government and Repo fund, a Treasury Securities fund [and] a Treasury and Repo fund ... all ... extremely successful. They all have had very strong scale, which is attractive. That gave us the opportunity to think across the spectrum of Government and Treasury funds as to how to best put in place a D&I trading overlay. The other thing that I think put us in a very good place is that again, because our firm has had a focus on sustainability and D&I for a number of years, a good many of the dealers listed on that Federal Home Loan list are dealers that our firm and our team have relationships with. So, it [wasn't] new to us, when we put this overlay in place on our Government Securities Fund at the beginning of this year.... We really just institutionalized and emphasized to a greater degree the work that we're doing with these D&I broker dealers."
