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REGULATION/LEGISLATION

Firms prepare for money market changes

New rules prompt staff additions, strategy shifts

Thomas Callahan
Thomas Callahan expects the migration to separate accounts to continue.

Managers such as BlackRock (BLK) Inc. (BLK), Vanguard Group Inc., J.P. Morgan Asset Management (JPM), Goldman Sachs Asset Management and RBC Global Asset Management Inc. are retooling their cash management businesses in advance of changing regulations on net asset value for institutional prime money market funds.

Some firms are adding investment and/or distribution staffers; others are augmenting their short-duration fixed-income strategies; and still others are doing a combination of both.

The Securities and Exchange Commission issued rules July 23 establishing a floating NAV for institutional prime money market funds, which observers say could lead to significant outflows from institutional investors.

A November report from Moody's Investors Service Inc., New York, estimated U.S.-domiciled prime money market funds had $637 billion in assets as of Sept. 30, the majority of which was institutional. Moody's officials “would not be surprised to see reform-related outflows ... exceed 25% (or $159.25 billion) of total AUM between now and 3Q 2016 when the rules will be implemented,” Moody's Vice President Vanessa Robert said in an e-mailed response to questions.

BlackRock, New York, is already seeing demand, said Thomas Callahan, managing director and co-head of global cash management.

In response, company officials are adding standard short-duration mutual funds, short-duration exchange-traded funds and separate accounts.

“The demand for short-duration products is directly related to money market reform,” Mr. Callahan said. He said the money management giant might launch a municipal short-duration ETF “in the near future.”

Noting he is seeing a migration out of money market funds into separately managed accounts, Mr. Callahan added: “As we get closer to implementation in October 2016 we think that trend will continue.”

BlackRock executives already hired some fixed-income portfolio managers and plan to hire more in anticipation of this migration. They would not provide numbers.

In addition to working on standardizing its separate accounts process and limiting the amount of paperwork required to open such an account, company officials also are making modifications to BlackRock's trading network, Aladdin, to help institutional clients better understand their cash management needs and “adapt to the floating NAV world,” said Mr. Callahan.

“Cash was something clients didn't have to think about; it was pretty much auto-pilot,” said Mr. Callahan. “Now the auto-pilot's been switched off.” BlackRock had $281 billion in cash management assets under management as of Sept. 30. Although BlackRock spokeswoman Tara McDonnell told Pensions & Investments that the firm doesn't break down the assets, she noted most of the cash management AUM is institutional.

Vanguard goes active

In late November, Vanguard, Malvern, Pa., filed a registration statement with the SEC to launch an actively managed ultra-short-term bond fund as an alternative to prime money market funds.

“We believe the actively managed fund fulfills an investment need for clients seeking further duration diversification in the fixed-income component of their portfolio,” Vanguard spokeswoman Katie Henderson in an e-mailed response to questions.

Vanguard had $24 billion in institutional cash management assets as of Oct. 31.

John Donohue, managing director and head of global liquidity in JPMAM's global fixed-income and liquidity group in New York, said his team is talking to clients about their liquidity needs.

“We launched a few floating NAV products a few years ago in anticipation of these regulatory changes,” said Mr. Donohue. “They haven't had a lot of traction, but as that (October 2016) date approaches, we may see some movement into that space.”

In the past three years, the firm has recruited three portfolio managers and two credit analysts to the strategy, which has about $43 billion in AUM. JPMAM also launched a short-duration high-yield fund last year.

In addition to separately managed accounts, Mr. Donohue added he expects to see money flowing into government money market funds, since they're exempt from the new SEC regulation.

JPMAM has $538 billion in AUM in its global cash business, of which about $500 billion is institutional.

Preparing for changes

GSAM is another manager that's preparing for the impending regulation change.

“Our clients have been interested in stability, liquidity and yield. Money market funds used to bring you all three, but money market reform is changing that a bit,” said David Fishman, managing director and co-head of GSAM's global liquidity management business, New York. “You can't get all three at once in today's market, so you need to decide what's more important and what will yield you two out of those three.”

James McCarthy, managing director and co-head of that business, said, “We continue to explore other strategies. Bespoke separately managed portfolios are something we can already offer today. In addition, we're considering other types of mutual funds and even ETFs.”

Mr. McCarthy said GSAM launched in February “a limited maturity obligation fund. It's longer than a money market fund but less volatile than a traditional short-duration fund.”

He said some asset owners “are looking at private placements, but it's not something we are putting as much priority on.”

GSAM's lineup of liquidity funds ranges from money market funds to short-duration bond funds. GSAM manages about $230 billion in money market assets and about $60 billion in short-duration fixed income. An institutional breakout was not available.

Officials at RBC Global Asset Management, Minneapolis, launched a short-duration fixed-income mutual fund and an ultra-short fixed-income mutual fund at the beginning of 2014. “We think separately managed accounts will capture a good portion of the money we think will be in motion,” said Brandon T. Swensen, vice president and co-head of U.S. fixed income.

RBC GAM has more than $31 billion in institutional cash management assets globally.

Some firms, such as Neuberger Berman Group LLC, exited the money market fund business years ago. In 2009, the New York-based firm had about $50 billion in money market mutual funds. Thomas A. Sontag, a managing director and co-head of global securitized and structured products at Neuberger Berman's Chicago office, said executives at Neuberger decided to focus their attention on separate accounts, which can be customized and offer a “much more transparent management structure,” Mr. Sontag said.

Pricing and fees

In terms of the difference in pricing and fees between money market funds and separate accounts, Michael S. Falk, a consultant to money managers and a partner with Focus Consulting Group in Chicago, noted that “managers charge very low fees on money market funds.”

Mr. Swensen, however, argued that separate accounts “can often be a more attractively priced option than a money fund, particularly for large institutional clients, because mutual fund fees cannot be negotiated lower, but large separate accounts can potentially be offered or negotiated at a lower fee based on the size of the account.”

He added: “Roughly speaking, the fees for an institutional separately managed cash or enhanced cash account could be half of the stated fees for the institutional share class of a money fund.”

“Enhanced cash separately managed accounts can generate higher gross portfolio yields and also generally can provide lower fee structures for institutional investors than money market funds,” added Mr. Sontag. n

This article originally appeared in the December 8, 2014 print issue as, "Firms prepare for money market changes".