From Money Fund Report®: What is being described as an enhanced-cash repo fund to "provide short-term financing through repurchase agreements to a broad range of counterparties" will be launched in January by Austin Atlantic Asset Management Co.
Sean Kelleher, president of the firm and leader of its fixed-income management team, spoke with Money Fund Report® about the new AAAMCO Ultrashort Financing Fund.
AAAMCO has been "managing mutual funds for 25 years, and most of our shareholders have been depositories," Kelleher told MFR. One area where business was particularly hard hit as a result of the financial crisis was an equity mutual fund that catered mainly to banks. Started by banks in 1953, the fund was the subject of heavy redemptions post-Basel III and Dodd-Frank. It was "a business model that evaporated due to regulation with outflow of more than 75 percent of net assets, mainly from our bank shareholder base." With the new fund, Kelleher said, "We are fighting back, using regulation to source new opportunities."
Kelleher expects the fund’s $10.00 per share net asset value to remain at that price because of the nature of how the fund is managed. "We obviously can’t say that we are a constant net-asset-value fund but the reality is all we are doing is repo and repo is a cost-base asset for a fund, so following that logic the NAV should not move, but we can’t put that in a prospectus."
No "Credit Wrap"
According to Kelleher, the fund will be composed of a diversified pool of repo agreements with a yield higher than prime money funds through the use of repo counterparties that are not typically used by 2a-7 fund managers. Kelleher pointed to real-estate investment trusts as an example. The collateral in the fund will be government and investment-grade fixed-income securities, but with substantially larger haircuts than what is typically found in a 2a-7 fund’s repo positions. In the current market environment, Kelleher said the fund has targeted a yield of 50 basis points over 2a-7-regulated money-market funds.
Kelleher referenced the structure of money-market funds that includes the reporting of "other repo" on SEC form N-MFP. He noted that the money funds are paying what he described as a "substantial, above-market premium for the highly-rated counterparty" that provides what he referred to as a "credit wrap" around the collateral that would otherwise be ineligible for the fund. His fund, he added, will engage in repo agreements where larger haircuts on the collateral seek to offset any incremental risk from the counterparty, which provides a higher yield for the fund.
Asked how he would approach a corporate treasurer in presenting the fund, Kelleher said, "We call it ‘secondary liquidity.’ We’re not a same-day-liquidity fund like money-market funds; we are not looking for people to use the fund as a checking account." Kelleher continued, "These days most institutional investors have excess cash, so structuring your cash to represent what you need for operating purposes versus the excess is something entirely logical to do."
Kelleher summed it up by saying that the fund is taking the "skill set of a sell-side repo desk and porting that into a mutual-fund structure with total-return-oriented management."