Rocky Mountain Summit 2016 It s Time: Staking Out Your Ground in the New World of Cash

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1 Rocky Mountain Summit 2016 It s Time: Staking Out Your Ground in the New World of Cash Cathy Fields, Assistant Treasurer, Hitachi Data Systems Will Goldthwait, Portfolio Strategist, State Street Global Advisors Jeffrey Scribner, Cash Distribution, State Street Global Advisors May 5, 2016 This material is solely for the private use of Rocky Mountain and is not intended for public dissemination. All the information contained in this presentation is as of date indicated unless otherwise noted. GCB 0991

2 Outline 1. Jobs and Inflation 2. Money Fund Regulation Rule Change 3. Yield Does it Matter? How much is enough? 4. Liquidity.. You only need it when you need it 5. Ratings The end of grade inflation 6. Variable NAV Can Cash be a Total Return Asset? Appendices Appendix A: Important Disclosures Appendix B: Biographies GCB

3 The Economy: Jobs and Inflation Thousands We have averaged over 200k jobs per month for the past 3 years ADP National Employment Report SA Private Nonfarm Level Change US Employees on Nonfarm Payrolls Total MoM Net Change SA 2.50 Inflation is showing signs of increase Percent /1/2013 3/1/2013 5/1/2013 7/1/2013 9/1/ /1/2013 1/1/2014 3/1/2014 5/1/2014 7/1/2014 9/1/ /1/2014 1/1/2015 3/1/2015 5/1/2015 7/1/2015 9/1/ /1/2015 1/1/2016 CPI PCE Source: Bloomberg Finance, L.P., BLS, Federal Reserve as of March 31,2016. GCB

4 Money Market Fund Reform Summary Reforms Floating NAV Key Characteristics Institutional Prime and Institutional Municipal MMFs will be required to maintain a floating net asset value based on the current market value of the securities in their portfolios rounded to the fourth decimal place (e.g., $1.0000) Retail Prime*, Retail Municipal* and all Government and Treasury MMFs are exempt from the floating NAV requirement Floating NAV SEC Compliance Date: October 14, 2016 Liquidity Fees (for Prime and Municipal Money Market Funds) Provides new tools for MMF boards of directors to directly address a run on a fund If fund s weekly liquid assets fall below 30%, then the fund board could impose a liquidity fee of up to 2% on all redemptions If fund s weekly liquid assets fall below 10%, then a 1% liquidity fee will be required (automatically imposed) on all redemptions, unless the fund board deems it is not in the best interest of the fund to impose Liquidity Fees & Redemption Gates Redemption Gates (for Prime and Municipal Money Market Funds) If fund s weekly liquid assets fall below 30%, the fund board could temporarily suspend redemptions (gate) To impose a gate, the fund board would find that imposing a gate is in the best interest of the fund Redemption gates may not be imposed for more than 10 business days in any 90 day period Liquidity Fees and Redemption Gates (for Government Money Market Funds) Government funds would not be subject to the new fees and gates provisions but could voluntarily opt into them, if previously disclosed to investors Liquidity Fees and Redemption Gates SEC Compliance Date: October 14, 2016 Source: SEC: Money Market Fund Reform; Amendments to Form PF * Retail strategies are defined as those with policies limiting owners of the fund to natural persons The information contained above is for illustrative purposes only. 4

5 Money Market Fund Reform Summary (continued) Reforms Key Characteristics Enhanced Disclosure and Stress Testing Requirements Daily website disclosure: Levels of daily and weekly liquid assets, net shareholder flows, market based NAVs per share, imposition of fees and gates, and any use of affiliate sponsor support New material event disclosure on Form N CR: Material events would include the imposition or removal of fees or gates, factors taken into account by the fund board in decision related to fees and gates, portfolio security defaults, sponsor support and for retail and government funds, a fall in the fund s market based NAV per share below $ Requires additional reporting of risk measures on Form N MFP and enhanced stress testing factors and scenarios N CR SEC Compliance Date: July 14, 2015 Daily Website Disclosure and Enhanced Stress Testing SEC Compliance Date: April 14, 2016 Enhanced Portfolio Diversification Requirements Aggregation of affiliates: Requires treatment of certain entities that are affiliated with each other as single issuers for purpose of addressing maximum 5% issuer diversification limit in a fund portfolio Requires all of a fund s assets (except for tax exempt funds) to meet the 10% diversification limit for guarantors and demand feature providers. For tax exempt funds, no more than 15% of the value of securities in a portfolio could be subject to guarantees or demand features from a single institution. Enhanced Portfolio Diversification SEC Compliance Date: April 14, 2016 Tax, Accounting and Other Measures Treasury Department and the IRS have released proposed tax guidance that would: Streamline accounting methods to address gains and losses for investors in floating NAV money market funds Provide tax relief from wash sale rules for any losses stemming from buying and selling shares of a floating NAV fund in the same day The SEC also clarified that money market funds with a floating NAV will continue to be considered cash equivalents for balance sheet purposes Source: SEC: Money Market Fund Reform; Amendments to Form PF Diversification does not ensure a profit or guarantee against loss. Expiration: October 31,

6 Yield: Prime & Government Money Market Fund Differences Many US Investors are watching to see how wide the spread in yield will go before they make their investment decision Percent /10/2015 4/10/2015 5/10/2015 6/10/2015 7/10/2015 8/10/2015 9/10/ /10/ /10/ /10/2015 1/10/2016 2/10/2016 3/10/2016 Prime and Government Yield Spread Middle Projected Yield Spread Path 4/10/2016 5/10/2016 6/10/2016 7/10/2016 8/10/2016 9/10/ /10/ /10/ /10/2016 1/10/2017 Upper Projected Yield Spread Path Lower Projected Yield Spread Path Given the extensive liquidity Prime funds will hold to avoid the potential for liquidity gates and redemption fees there will be less opportunity for a yield pick up The market has yet to price the full credit curve due to the potential for asset migration out of prime and into government money market funds Source: SSGA, imoney Net as of March 6, Past performance is not a guarantee of future results. The above projected yield spreads are estimates based on certain assumptions and analysis. There is no guarantee that the estimates will be achieved. 6

7 Liquidity: What is Just the Right Amount? Blackrock Wells Fargo Prime Funds State Street Morgan Stanley Goldman Fidelity Federated 0% 10% 20% 30% 40% 50% 60% 70% Blackrock Wells Fargo Government Funds State Street Morgan Stanley Goldman Fidelity Federated 0% 10% 20% 30% 40% 50% 60% 70% Source: imoney, Crane, as of April 14, GCB

8 Liquidity: The Fed s Reverse Repo Program The RRP has been instrumental in supporting the lower bound of the Fed Funds Target Range It is anticipated that as the Fed unwinds it s QE balance sheet of holdings and market rates begin to rise the RRP will be a less attractive investment options $ Billions Fed's RRP Overnight Balance Fed's RRP Term Balance Source: Federal Reserve and Bloomberg Finance, L.P. as of April 4,

9 Liquidity: The Great Migration Thousands 2,500,000 2,000,000 1,500,000 1,000, ,000 0 $900,000 $800,000 $700,000 $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $0 2/14/2007 2/14/2009 2/14/2011 2/14/2013 2/14/2015 Retail Prime Retail Gov $1,600,000 $1,400,000 $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $0 4/11/2007 4/11/2009 4/11/2011 4/11/2013 4/11/2015 Prime Funds Government Funds Inst Prime Inst Gov Graph Source: ICI, Bloomberg Finance, L.P., as of April 13,

10 Ratings: The Grid Many Household Names are falling into the Tier II ratings bucket but are A3/A /A rated Some examples: United Health Care Comcast Lowe s Daimler Gilead Sciences JPMorgan Fifth Third Banc Harley Davidson Source: SSGA, Bloomberg Finance, L.P., Wikipedia, S&P, Moody s, Fitch as of February 23, Moody's S&P Fitch Rating Long term Short term Long term Short term Long term Short term description Aaa AAA AAA Prime Aa1 AA+ AA+ A 1+ F1+ Aa2 AA AA P 1 Aa3 AA AA High grade A1 A+ A+ A 1 F1 Upper A2 A A medium A3 A A grade P 2 F2 Baa1 BBB+ A 2 BBB+ Lower Baa2 BBB BBB medium P 3 F3 Baa3 BBB A 3 BBB grade Ba1 BB+ BB+ Noninvestment Ba2 BB BB grade Ba3 BB BB B B speculative B1 B+ B+ B2 B B B3 B B Caa1 CCC+ CCC+ Caa2 Not Prime CCC CCC Caa3 CCC CCC C CC CC Ca C C C RD DDD / SD D DD / D D C D Highly speculative Substantial risks Extremely speculative Default imminent In default 10

11 Ratings: Highly Rated Credit Continues its Decline $Million $1,400 $1,200 $1,000 $800 $600 Tier I Rated CP was a much larger part of the overall CP market Outstanding balances of Tier II Rated CP has remained relatively constant over this time period Split Rated CP (CP with one Tier II rating) has increased $400 $200 $0 4/7/2010 4/7/2011 4/7/2012 4/7/2013 4/7/2014 4/7/2015 Total CP Outstanding (All Ratings) CP Outstanding with a Tier II Rating (A 2/P2) CP Outstanding with a Tier I Rating (A 1/P1) Source: Bloomberg Finance, L.P., S&P, Moody s, as of April 6,

12 Ratings: Where have all the Double A Banks Gone? Industrial Companies 50% 50% 45% 47% 46% 45% 49% 51% 52% 42% 40% 45% 41% 41% 44% 40% 37% 36% 11% 11% 6% 8% 7% 9% 10% 10% 10% 9% 2% 2% 2% 1% 2% 2% 2% 2% 2% 3% 55% 33% Industrial ratings have remained relatively stable Aaa up 1%, Aa up 3% and Baa up 5% A decreases 9% 12/29/ /31/ /31/ /31/ /31/ /30/ /31/ /31/ /31/ /31/2015 Aaa Aa A Baa Financial Institutions Financial Institutions have seen large downgrades Aa down 30%, Aaa down 8% Baa up 28% and A up 16% 59% 57% 64% 63% 64% 54% 56% 53% 43% 42% 38% 39% 39% 27% 30% 22% 27% 28% 28% 21% 22% 16% 16% 11% 11% 8% 8% 10% 8% 10% 8% 8% 0% 0% 0% 0% 0% 0% 0% 12/29/ /31/ /31/ /31/ /31/ /30/ /31/ /31/ /31/ /31/2015 Aaa Aa A Baa Source: Barclays Point as of December 31, 2015, Ratings an average of Moody s and S&P, Totals Might not add to 100% due to rounding. 12

13 Variable NAV: Can Cash Be Total Return? Example 1 Yield 0.40% Purchase 50,000, $ $50,000, Sold 50,000, $ $49,990, Principal Gain/Loss $(10,000.00) Days Held 18 Interest $10, Total Net Proceeds $50,000, Total % Return 0.00% Interest earned on original principal off sets loss on that principal due to decline in price of institutional prime money market fund Dollar Price of Institutional Money Market Fund $ $ $ $ $ $ $ $ $ Days Invested 0.40% 0.60% 0.80% 1.00% Source: SSGA as of April 10, Information contained on this page is for illustrative purposes only and does not reflect a funds yield or performance. GCB

14 Decisions, Decisions, Decisions Less Yield More Operating Cash Core Cash Strategic Cash For illustrative purposes only. More Liquidity Less 14

15 Investment Policy Statements: Check List 1. Key Language: including but not limited to & at the time of purchase 2. NRSRO Ratings restrictions Overall or by Asset Type 3. VNAV, CNAV: Total Return? 4. Liquidity Fees, Redemption Gates 5. Size of MMF, total AUM and % Ownership, Ratings 6. Registered MMF, Private Fund 7. Diversification: Fund, Credit, Bank 8. Credit Exposure, Per Asset Type Concentration 9. Liquidity How much is enough 10. Catastrophic events. What is the true definition of liquidity? 11. When do guidelines get too complicated 12. What investments are not allowed 13. Permissible Loss 14. Should you have benchmark returns 15. Market Indicators: Equity, Fixed Income, CDS, Volatility, Economic Data, Fund Flows Source: SSGA as of April 10,

16 Questions? 16

17 Appendix A: Important Disclosures 17

18 Important Disclosure For Rocky Mountain Use Only. Not for Use with the Public. Investing involves risk including the risk of loss of principal. The whole or any part of this work may not be reproduced, copied or transmitted or any of its contents disclosed to third parties without SSGA s express written consent. The views expressed in this material are the views of Will Goldthwait through the period ended April 27, 2016 and are subject to change based on market and other conditions. This document contains certain statements that may be deemed forward looking statements. Please note that any such statements are not guarantees of any future performance and actual results or developments may differ materially from those projected. The information provided does not constitute investment advice and it should not be relied on as such. It should not be considered a solicitation to buy or an offer to sell a security. It does not take into account any investor's particular investment objectives, strategies, tax status or investment horizon. You should consult your tax and financial advisor. All material has been obtained from sources believed to be reliable. There is no representation or warranty as to the accuracy of the information and State Street shall have no liability for decisions based on such information. These investments may have difficulty in liquidating an investment position without taking a significant discount from current market value, which can be a significant problem with certain lightly traded securities. Treasury bills are insured and guaranteed by the US government. US Treasury Bills maintain a stable value if held to maturity, but returns are generally only slightly above the inflation rate. An investment in the fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although the fund seeks to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in the fund. Distributor: State Street Global Markets, LLC, member FINRA, SIPC, a wholly owned subsidiary of State Street Corporation. References to State Street may include State Street Corporation and its affiliates. The SSGA Funds pay State Street Bank and Trust Company for its services as custodian, transfer agent and shareholder servicing agent and pays SSGA Funds Management, Inc. for investment advisory services. Before investing, carefully consider a fund s investment objectives, risks, charges and expenses. To obtain a prospectus or summary prospectus which contains this and other information, call or visit ssga.com/cash. Read it carefully before investing. Web: State Street Corporation All Rights Reserved. Tracking Code: GCB 0991 Expiration date: July 20,

19 Appendix B: Biographies 19

20 Biographies Cathy Fields, MBA, CTP Will Goldthwait Cathy has been involved with Treasury or Treasury related functions in a multi national environment for almost 30 years. She is currently the Director, Assistant Treasurer at Hitachi Data Systems, responsible for Global Treasury Operations including Banking, FX Strategies, Cash and Liquidity Management including all forecasting requirements, Debt, Investments, Insurance Risk Management and anything else Treasury needs to do to support the company s continued growth throughout the world. Cathy joined HDS in 2014 after spending 25 years with Western Digital Corporation. Over her years at WD, Cathy held roles in Accounting, Finance, International Credit and Corporate Treasury. In her last 15 years at WD, Cathy ran Global Treasury Operations as the company s Assistant Treasurer. She was responsible for managing the company s Global Cash and Liquidity needs, Debt and Bank Syndications, Investments which included a $5B portfolio worldwide, FX Risk and Hedging Strategies, and all Banking Relationships. Cathy has a BS in Exercise Physiology from California State University Fullerton and earned her MBA in International Business from National University. Cathy has held her CTP certification (formerly CCM) since Will is a Vice President, Portfolio Strategist at State Street Global Advisors. He is a member of the Global Cash and Global Fixed Income Investment Management Teams. Will is responsible for the communication of cash and fixed income investment strategy and performance to clients, consultants and prospects. He covers multiple sectors and vehicles, including both active and indexed fixed income. Prior to joining SSGA in 2014, Will spent time on both the advisory and brokerage side of the business. Most recently he was part of Royal Bank of Scotland's Institutional Fixed Income Sales team and Merrill Lynch's Institutional Money Market Sales Team. Prior to Merrill Lynch will worked as a Money Market Portfolio Manager and Fixed Income Trader for Columbia Management and Fleet Investment Advisors. Will received his BA from Roanoke College and has his Series 7 and 63 Securities License. 20

21 Biographies Jeffrey Scribner Jeff is a Vice President at State Street Global Advisors, and a member of the Global Cash Business team. In his role as a Regional Sales Representative, he is responsible for the distribution of SSGA's global cash products to clients in the western region of the United States. Prior to joining SSGA in 2012, Jeff worked at Neuberger Berman as a member of intermediary distribution team in New York. Jeff was responsible for the delivery of mutual funds, separately managed accounts and private equity to major wirehouse firms in the Southwest territory. Preceding Neuberger Berman, Jeff was a member of a high net worth and institutional consulting team at UBS. He served in various roles including new business development, investment consulting and analysis. Jeff earned a Bachelors of Science in Business Administration at Bryant University and holds a FINRA Series 7 and Series 66 Licenses. 21