Published: April 01, 2011
BlackRock has undergone substantial change in recent years, particularly with the acquisition of Merrill Lynch Investment Managers (MLIM) and Barclays Global Investors (BGI). As a result of these acquisitions, as well as the organic evolution of the firm, BlackRock is now positioned as a leading provider of money market funds (MMFs) and securities lending, both within the United States and internationally. In this interview, Helen Sanders talks to Rich Hoerner and Simon Mendelson, who were appointed co-heads of Global Cash Management and Securities Lending for BlackRock in October 2010. Rich has a strong background in portfolio and risk management, with many years’ experience at BlackRock. Simon was formerly head of corporate strategy for BlackRock following a career in management consultancy, with an emphasis on financial institutions, and he joined the cash business as COO in 2007.
Both MLIM and BGI brought significant value to our business. MLIM increased the scale of our activities, and enabled us to access the full breadth of Merrill Lynch’s relationships, among both institutional and retail investors. While the needs of international investors have always been a priority for BlackRock, BGI dramatically expanded our international footprint, with particular strength in GBP funds, as well as a strong fund portfolio in EUR and USD. These acquisitions are now behind us, and all three businesses are now largely integrated into a unified BlackRock, with one back office and technology infrastructure, standardised fees, and a cohesive suite of products.
Investors continue to value our stable and reliable approach to fund management and dedicated resources
In many ways, investment priorities globally remain consistent, with a primary focus on security and liquidity. While yield is typically less important among investors, this is not universally the case, and certain clients are still looking for opportunities to earn extra return on their cash. In reality, the current low interest rate environment is probably not the right time to seek higher returns as this usually implies higher incremental risk for a relatively small return.
In general, however, we see greater consistency across corporate investors globally than we saw before the crisis. Before 2008, we found European investors typically had a slightly higher appetite for risk than their US counterparts. For example, MLIM had a small number of ultra-short bond funds that we inherited with the acquisition. While the size of these funds was not huge, it was interesting that corporate investors were willing to risk principal value to achieve a higher return, which was far less the case in the US. Now, however, this appetite for risk has reduced, and is more aligned with US investors.
BlackRock has always had a conservative approach to risk, evidenced during the crisis as our funds remained stable throughout a period of great uncertainty in the short-term credit markets. Consequently, investors continue to value our stable and reliable approach to fund management and dedicated resources, particularly in areas such as credit research and risk management. Although we have not needed to adjust our investment process as a result of the crisis, we have, of course, revised some elements of our activities in line with new regulatory requirements. For example, in the US, our MMFs now typically hold higher levels of daily and weekly liquid assets and typically have a shorter weighted average life. In Europe, the situation is similar; however, these demands are more driven by the rating agencies and the industry group, namely the Institutional Money Market Funds Association (IMMFA), as opposed to regulatory bodies
We expect to see our international funds grow more than our US funds in the short to medium term, driven by two key factors. First, despite the presently low interest rate environment, there is the potential to earn greater return on cash in Europe. Second, while MMFs are well-established in the US and UK, awareness and adoption of MMFs is still developing in other parts of Europe and Asia. BlackRock is already a leader in USD, EUR and GBP funds, and we are gradually expanding our activities in Asia as demand for MMF solutions develops. [[[PAGE]]]
In some areas, such as in parts of Europe, clients are less familiar with MMFs than in the US or UK; furthermore, certain areas of Europe have less uniform definitions of what a MMF is. Consequently, we tend to spend more time on definition and product explanation. However, this is changing rapidly, with the advent of standardised definitions for MMFs and short-term MMFs introduced by the predecessor to the European Securities and Markets Authority (ESMA) - CESR or the Committee of European Securities Regulators, and greater clarity from IMMFA on how triple-A rated stable NAV funds operate
Despite the possibility of future regulatory change in the money market space, we are encountering relatively little client concern. On some occasions, clients express a concern that increasing regulation may change the nature of the MMF product with which they are familiar, such as moving from stable to floating NAV. Occasionally, clients ask us how they should make use of the increased information disclosure for MMFs. In response we have published significant information and engaged actively with clients to help pre-empt some of these enquiries and help clients derive the maximum benefit, and confidence, from using MMF's.
The situation in the US and Europe is quite different; in the US, there is one regulator with oversight of MMFs, while in Europe there are a number of regulators. IMMFA has issued some changes to its Code of Practice, and is currently working on additional measures to be adopted by fund managers to provide greater reassurance to investors. For example, to be classified as an IMMFA fund, a MMF is required to hold a triple-A rating from one or more credit agencies and is therefore subject to the agencies’ strict investment criteria for stable NAV money market funds. Under these parameters a MMF must be highly diversified, for instance with no more than 5% exposure to any single issuer. Funds typically only invest in the highest quality money market securities, and are not permitted to invest in commodities, equities or derivatives. They offer same-day access to liquidity, and are managed through a rigorous investment process with considerable resources dedicated to credit research. IMMFA funds generally offer stable NAVs, although variable or accumulating NAV funds are also permitted.
In addition, as mentioned above ESMA is seeking to standardise the definition of UCITS vehicles classified as MMFs across Europe, including defining MMFs under two categories - MMFs and short-term MMFs (ST MMFS). These products are similar, but there are differences in a number of areas which are summarised in Table 1.
We expect to see our international funds grow more than our US funds in the short to medium term.
Basel III should make banks stronger and safer, and that, in turn, will make money market funds safer because they typically invest in securities issued by banks. However a downside is that by becoming less reliant on short-term funding, banks will finance longer, while money funds are being required by regulation to invest shorter. This divergence will have the effect of lowering yields in money funds as more funds invest in a smaller pool of issuance. We should add that BlackRock is heavily involved in regulatory discussions in the United States, and is also engaging actively with European regulators. Our focus is on making the industry more secure and robust, while maintaining a useful product that satisfies the investment needs of our clients, both in the short term and in the years to come.
The opinions expressed are as of 24 March 2011 and may change as subsequent conditions vary.
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