BofA Global Capital Management Investor Briefing
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First Quarter 2011
BofA Global Capital Management
Investor Briefing
A Quarterly Conversation with Michael Pelzar, President
Over the past year, cash investors have confronted the sovereign debt crisis, the deteriorating finances of state
and local governments, and watershed changes to the federal regulations that govern money market funds. In the
Q&A below, Michael Pelzar, president of BofA Global Capital Management, discusses the current state of the short-
term debt markets, the impact of more stringent limitations on risk-taking by fund managers, and the fundamental
challenge confronting cash investors: protecting principal, while also achieving attractive yields.
In about six months, we will mark the third anniversary So how have the changes to the regulatory framework
of the bankruptcy of Lehman Brothers. How has the cash affected cash investors?
space changed in the wake of the global financial crisis? Naturally a reduction in risk pressures yields, but the tougher
The biggest change is a profound “de-risking” in the short- regulatory environment affects cash investors in other ways
term debt markets. There’s been a significant de-risking as well. For one, the imposition of industry-wide constraints
across the financial markets in general over the past two on risk-taking compressed yields, so you see much less
years, but it’s been especially pronounced in the liquidity differentiation of performance across money-market funds
space. To a great degree, that change was imposed by the than you saw two or three years ago. The regulatory changes
federal government, which learned during the financial also make it easier for investors to see what is in their funds
crisis that the $3.9 trillion money market industry could and how they’re being managed because of measures designed
significantly impact the nation’s financial system and the to promote transparency. The most important example of
U.S. economy overall. To address the systemic risks that is the requirement that fund companies disclose their
revealed by the crisis, Washington tightened the regulations four-digit “shadow” NAVs per share (shadow NAV), which
governing money market funds, requiring managers to are based on the mark-to-market value of a portfolio’s
increase credit quality, shorten maturities and increase securities, on a monthly basis. Money market funds are
liquidity levels. In short, the government mandated a managed to maintain a $1 NAV per share, but it is not
reduction of risk in money market fund portfolios. uncommon for shadow NAVs to dip slightly — by a few
basis points — below $1. That generally isn’t a problem as
long as the variation is within an acceptable range and is not
the result of credit quality deterioration.
About BofA Global Capital Management
BofA Global Capital Management is Bank of America’s cash asset management division. The firm serves both retail and institutional clients
through a family of high-quality pooled investment vehicles, including taxable and tax-exempt U.S. money market funds, as well as euro-
and U.S. dollar-denominated global liquidity funds. For institutional and high-net-worth investors, BofA Global Capital Management offers
customized separate account strategies that can be structured to address each investor’s unique liquidity needs. Investment advisors may
leverage BofA Global Capital Management’s expertise on behalf of their clients by accessing the firm’s sub-advisory services.First Quarter 2011
Some fund managers have expressed concern that fund managers to think very carefully about the amount and
investors might overreact to shadow NAV information for nature of the risk they’re taking. The shadow NAV holds
funds with NAVs per share of less than $1.0000 and pull managers’ feet to the fire when it comes to risk-taking,
assets en masse from funds, potentially destabilizing the
and we think that’s positive, because for the vast majority
short-term debt markets. What are your thoughts on that?
of investors, protecting principal is their top priority.
The disclosure of shadow NAVs presents both risks and
rewards. The risk is that a large investor will see a shadow It’s been said that the tougher federal regulations
NAV of, say, $0.9990 and redeem from a fund despite the governing money market funds have so boxed in fund
fact that the fund’s underlying fundamentals are sound. managers with regard to the risks they can assume that
that there is virtually no difference in funds’ risk levels.
Redemptions, in turn, can cause further deterioration in the
What is your response to that?
fund’s NAV. We don’t know whether large institutional
I think that’s an assumption that many investors make, and it
investors will react to the added transparency provided by
is potentially a very dangerous one. It’s true that Washington
shadow NAV disclosure by adjusting their investment
has imposed a more conservative approach to the management
policies, such that they automatically redeem their
of money market funds, but fund managers still have a fair
investment if the shadow NAV breaches a given floor.
amount of latitude when it comes to security selection.
However, we have not seen that happen since managers
began disclosing shadow NAVs.
The fear is that if several institutional investors pull large
The shadow NAV holds managers’ feet to
sums from a fund because of its shadow NAV, they could
destabilize not only that fund, but also the short-term debt the fire when it comes to risk-taking, and
markets as a whole. So the problem is that investors don’t
we think that’s positive, because for the
know how other investors will react. The reality is there will
be ongoing fluctuations in the NAV of a money market vast majority of investors, protecting
fund, particularly in a rising rate environment. In addition, principal is their top priority.
the shadow NAV is reported with a 60-day lag, giving fund
managers time to address a problem or for changes in the
market to reduce or eliminate any deviation of the shadow
You can see that when you look at portfolio holdings and
NAV per share from $1.0000. The bottom line is that when
the risk exposures in different funds. For example, when the
investors see a deviation from the $1 NAV, it’s important
sovereign debt crisis broke last year, our funds had no direct
for them to determine whether it is due to normal, everyday
exposure to the sovereign debt of the PIIGS nations or to
market fluctuations or a more fundamental issue, such as the
financial institutions in those countries. That was not the
risk appetite of the manager.
case for many of our competitors. So, yes, changes to federal
And what is the reward presented by shadow NAV regulations have reduced the amount of investment risk in
disclosure? money fund portfolios, but they have not made all funds
The reward is the additional focus on risk that the shadow equal when it comes to risk. And with recent proposals to
NAV publication generates. Because we don’t know how remove references to credit ratings on a fund’s investments,
investors will react to shadow NAVs, it likely will prompt there’s potential for an even wider range of risk-taking.
Investments in foreign securities involve special risks, including foreign currency risk and the possibility of substantial volatility due to adverse political, economic or other
developments. These risks are magnified for investments made in emerging markets.
2First Quarter 2011
Does the assumption that all money market funds are liquidity investing, and that is what we do. Our investment
created equal when it comes to risk exposure influence people do nothing but manage liquidity portfolios. They
investors’ assessment of performance and their choice
don’t manage core fixed-income funds and a money market
of funds?
fund. They’re not an adjunct to a larger fixed-income
Very much so. If you assume that all funds have pretty much
platform. They are dedicated solely to managing money
the same amount of risk and the same type of risk, then your
market funds and other liquidity portfolios.
assessment of a fund’s performance will be based solely on
the level of yield. The problem with that is that managers Second, the complexity of the short-term markets demands
take different paths to arrive at their yields. Some may try to a high level of expertise, which means you need to have
enhance yield by taking additional credit risk relative to their good people. We have highly experienced, extremely
competitors. Others may overweight certain market sectors, knowledgeable portfolio managers, research analysts and
such as European banks, while still others take risk with traders, who are with us, in part, because of our focus on
duration. The point is that you can have two funds offering liquidity. When you make a career of managing short-term
largely the same yield, but one may be taking more risk to debt portfolios — as many of our people have — you want to
achieve it or be taking the same amount of investment risk work at a place that values what you do and understands the
overall but emphasizing sectors or security types the challenges associated with the job. So our dedication to the
investor may not be comfortable with. So in our view, management of liquidity helps us attract and retain people who
investors should be assessing managers on the basis we believe really understand the intricacies of the short-term
of their risk-adjusted yields, not just on nominal yield. debt markets.
Not all investors — not even all institutional investors —
have the capacity or expertise to conduct the assessment
you describe. How do those investors assess the Because of the bank’s geographic reach
appropriateness of a given fund manager for them? and the diversity of its businesses, we can
I think they begin by ascertaining the manager’s investment
philosophy and approach to investing. For example, our
draw on a tremendous amount of real-time
investment philosophy is that the primary responsibility of a financial data that figure very prominently
money market fund manager is to seek to protect investors’
into our investment decisions.
principal and seek to ensure that it is available to them no
matter how volatile the market environment. Obviously we
want to deliver good performance, but our top priorities are
capital preservation and maintenance of liquidity because we Finally, you need to be deeply resourced because investing
believe that those are what investors care most about. If you is the ultimate knowledge business. And I would argue that
know your manager’s priorities are aligned with yours, cash investing is particularly knowledge-intensive because
you’re well on your way to ensuring that the risk/reward the margin of error is so small. The manager of a money
profile of the investment is appropriate for you. market fund has to maintain a $1 NAV within a few basis
points year after year, no matter what the market environment.
The global financial crisis underscored the complexity When you’re expected to bat a thousand every day, you
of the short-term debt markets and the challenges inherent need a tremendous amount of information and the tools to
in managing cash portfolios. What is the key to effectively
interpret it. We’re very fortunate to be able to draw on the
managing cash in the current environment?
resources available to us as part of a very large, truly global
There are really three keys to the successful management of
financial institution.
cash — focus, expertise and resources. With regard to the
first of these, we believe there is value in focusing solely on
3First Quarter 2011
And by resources, you mean the financial resources to hire So the risk teams aren’t just saying ‘No, you can’t take this
professionals, build out systems infrastructure, etc.? risk,’ they’re providing good intelligence on today’s risks
That’s part of it, but not all of it. Even more valuable is that can drive portfolio performance?
the intellectual capital available to us as part of the bank. It’s much more the latter than the former. Our risk partners
Because of the bank’s geographic reach and the diversity work closely with us to review the risk in our portfolios,
of its businesses, we can draw on a tremendous amount and they bring their insights to the management of the
of real-time financial data that figure very prominently into investment risk that drives performance. So in our risk
our investment decisions. We have very tight relationships group, you almost have a parallel organization that has the
with the bank’s sell-side analysts, global trading teams, same mission as our investment team, which is to isolate and
and treasury management professionals, and we can access manage risk. With the two groups working together, you not
detailed analysis and projections on a host of important only get a set of checks and balances, you also create a
signals, such as credit spreads or consumer lending in critical mass of information and knowledge as it relates to
Europe or inter-bank lending in Asia. That data — along risk management. Of course our people are focused on
with input from the bank’s economists — is reflected in our managing portfolio risk and delivering strong yields, while
portfolios. We talked earlier about exposure to sovereign our risk partners are concerned with managing Bank of
debt. Beginning in March 2009, we purposely avoided the America’s risk position, but the give-and-take between our
debt of the PIIGS countries in part because of the data teams generates very productive insights for each of us.
coming into us from our bank partners.
We’ve talked a lot about risk, but for many cash investors,
a major concern is today’s low yields. How can investors
achieve better yields on their cash without assuming
We believe the key to balancing principal excessive risk?
protection and the pursuit of yield is to In the current low-rate environment, investors face a tough
challenge. They need to protect principal but not become
build a portfolio of cash investments with so conservative that they unnecessarily sacrifice yield.
different risk/return profiles. With corporations sitting on so much cash and individual
investors increasing their allocation to cash post financial
crisis, even small losses of yield add up.
The other important resource for us is Bank of America’s We believe the key to balancing principal protection and the
risk-management infrastructure. The bank has a multi-tiered pursuit of yield is to build a portfolio of cash investments
risk-management function that extends from the top of the with different risk/return profiles. Too often cash investors
corporation to the division level and down to individual rely on a single investment such as bank deposits, or a
businesses like ours. At the enterprise level, the risk group money market fund, or multiple funds with largely the same
establishes parameters for the amount and type of risk to be risk/return profile. They should be leveraging the full array
assumed by Bank of America as a whole, while the risk of investments available to them, and that means everything
teams at the divisional and business levels work to ensure from highly conservative Treasury funds to prime funds to
that the exposures of the individual businesses are in separately managed accounts, which we believe are one of
keeping with the enterprise-level targets. The benefits we the best investments available to cash investors but also one
receive from this risk structure are the information and of the most underutilized.
analysis we receive from a host of individuals who
specialize in the management of risk and who enhance
our effort to manage portfolio risk.
4First Quarter 2011
So what factors drive the construction of the portfolio farther out the yield curve to pick up additional yield. In
you mentioned? addition, you can customize separate account portfolios to
Two of the drivers are the investor’s risk tolerance and the liquidity needs of the investor, whereas money market
return objectives. Those are obvious. The other variable is funds have to have assets that provide for either daily or
the intended use of the assets, which is important because weekly liquidity. As a cash investment, separate accounts
that determines the level of liquidity required by the are still managed very conservatively; it’s just that separate
investor, which, in turn, drives — or should drive — the account managers have the latitude to invest more
choice of investments. aggressively should the investor desire that.
Take a corporation, for example. The corporation’s Are separate accounts better suited for one type of investor
operating funds — the assets it needs for daily operating versus another?
expenses — should be invested in a money market fund Because of their high investment minimums, separate
because a fund offers overnight liquidity. Assets that might accounts are often used by corporate and other institutional
not require overnight liquidity — cash for a project six clients to manage their on-balance sheet cash or other large
months or a year down the road — could be invested a bit holdings. However, we also work with many high-net-worth
more aggressively, perhaps in a combination of funds and investors who have recently experienced large liquidity
separate accounts. Finally, you have long-term cash — events, such as the sale of a family business. Say you’re a
assets set aside for a major product launch or acquisition that high-net-worth individual and you sell a company for $500
could be years away. Because the investment horizon is million. Suddenly $500 million shows up on the doorstep.
longer, those assets could be invested still more aggressively, You’re very unlikely to take that money and invest it all at
probably in a separate account with a mix of potentially once in another business or an equity portfolio. Typically
higher-yielding securities than those in money funds. So what you’d do is put those funds into some kind of cash
with a portfolio-based approach, you’re not giving up yield investment that’s conservatively managed, while you
for a level of liquidity you may not need, and you enjoy gradually migrate those assets to longer-term and potentially
the diversification benefits that accrue from a blend of higher-yielding investments.
investments with different risk/return profiles.
Many of our competitors would simply take that money and
How do separate accounts compare to money market funds? put it into a money market fund, creating a “holding pattern”
The major difference is that investors with a separate of sorts. We are able to put that cash in a separate account
account own individual securities in the account rather than and manage the maturities to ensure those maturities
shares of a money market fund. That promotes greater dovetail with the longer-term migration strategy. And by
transparency and flexibility relative to fund vehicle. More doing that, you position the client to optimize the return on
importantly, the risk/return profile of a separate account that cash because you can invest it more strategically, as
can be customized to reflect each investor’s risk tolerance, opposed to putting it in a money fund, which by definition
return objectives and liquidity needs. has to have 10% daily liquidity and 30% weekly maturities.
The high-net-worth investor in our example just doesn’t need
If you’re a conservative investor, you can structure a
that level of liquidity and shouldn’t sacrifice yield to achieve
separate account that includes only U.S. Treasuries, but you
it. And if you’re talking about hundreds of millions of
can invest in Treasuries with longer maturities to pick up a
dollars, even a few extra basis points over a couple of years
bit more yield. If you’re more yield-focused, you can invest
can really move the needle.
in securities with slightly lower credit ratings or move
Mutual funds and separately managed accounts have different fee and expense structures. Limitations and restrictions to investing in separately managed accounts include higher
investment limits and net worth requirements. Separately managed accounts are sold exclusively through financial advisors. Please review prospectuses or offering documents for
specific details. Separate accounts are not managed in accordance with the requirements of Rule 2a-7 under the Investment Company Act of 1940 and do not seek to maintain a
stable NAV. The value of the account may increase or decrease.
5First Quarter 2011
A year ago, Bank of America sold the equity and fixed platforms to provide state-of-the-art risk monitoring. We
income businesses of Columbia Management but retained expect that these multi-million-dollar investments will
Columbia’s cash asset management business, which
enable us to fully translate the experience and insights of
became BofA Global Capital Management. Now that you’ve
successfully bifurcated the business, what are your goals our people into better results and a better experience for
for BofA Global Capital Management in 2011? our clients.
Last year we were very inwardly focused because we So last year we spent a lot of time and effort on the basic
were building — if not a new business — a very different blocking and tackling that’s required to launch a business.
business from the one that existed as part of Columbia This year we’re building on our gains from 2010 by ramping
Management. This year we will be out in the market up our investments in client service and outreach, as well as
working with investors to help them keep up with the in sophisticated investment tools. Given the size of those
rapidly changing investment environment. With regulatory investments, I think our investors are really going to feel the
reform, the fiscal challenges facing governments worldwide, impact of that effort in the months and years ahead.
and increased geopolitical turbulence, there’s so much
coming at investors. What we will do this year is leverage
the expertise and insights we have on behalf of our clients We want to share our knowledge to
and investors generally. We want to share our knowledge to
help investors better understand the developments driving help investors better understand the
the performance of their investments. So investor outreach is developments driving the performance
a priority, and we intend to deliver on that by ramping up
our communications programs, by increasing the number of
of their investments.
client events we organize, and by increasing our presence
at industry conferences and trade groups.
What are you expecting over the remainder of 2011 in
Our second priority is to improve the client experience by terms of developments or trends likely to impact the
investing in new technologies or enhancing existing tools. debt markets?
As an example, we are overhauling our website to make it The markets are so fluid and moving so quickly that it’s
more useful to our clients. We’re also rolling out a new probably pointless to develop any predictions for the
reporting system that will enable our institutional clients, markets. You’ve got big unknowns with the implementation
especially insurance clients, to look at their investments of a new regulatory framework, and you have geopolitical
across multiple money-market fund families and aggregate risks that are emerging almost daily. What we can say is that
those portfolios for a clearer view of their exposures we intend to maintain our leadership in managing the risks
and sources of return. Transparency is important to our that affect liquidity investors. We’re going to continue
clients, and we’re investing accordingly. With regard to working closely with our clients, and, together, we’ll address
performance, we are overhauling our investment trading whatever challenges the markets create for us in the months
ahead.
6First Quarter 2011
Michael Pelzar
President, BofA Global Capital Management
Michael Pelzar serves as the president of BofA Global Capital Management, an asset management division of Bank of America. Mr. Pelzar
also serves as a Director of Banc of America Capital Management (Ireland) Limited and Bank of America Global Liquidity Funds, PLC.
Previously, Mr. Pelzar was head of product management at Columbia Management, Bank of America’s former asset management affiliate.
In this role, Mr. Pelzar and his team drove the expansion and acceleration of product development and delivery, partnering closely with the
institutional, intermediary and retail distribution groups and the investment area. Prior to his role as head of product management, Mr. Pelzar
was head of business development and mergers and acquisitions for Bank of America’s Global Wealth & Investment Management business.
Mr. Pelzar joined Bank of America in 2006 and has been a member of the investment community since 1990.
Prior to joining Bank of America, he was managing director and partner at a boutique investment bank, where he specialized in financial
services. Previously, Mr. Pelzar served in the corporate development and product marketing groups at Putnam Investments. He spent several
years with Goldman Sachs & Co. in a variety of roles in the firm’s money market and investment banking divisions in New York, Hong Kong
and Tokyo.
Mr. Pelzar earned a B.S. in finance from the Wharton School of the University of Pennsylvania and an M.B.A. from the Amos Tuck School
of Business at Dartmouth.
Please read and consider the investment objectives, risks, charges and expenses for any fund carefully before investing. For a
prospectus, which contains this and other important information about the fund, contact your BofA Global Capital Management
representative or go to www.bofacapital.com.
An investment in money market mutual funds is not a bank deposit and is not insured or guaranteed by Bank of America, N.A. or any of
its affiliates or by the Federal Deposit Insurance Corporation or any other government agency. Although money market mutual funds
seek to preserve the value of your investment at $1.00 per share, it is possible to lose money by investing in money market mutual funds.
Please see the prospectuses for a complete discussion of the risks of investing in money market mutual funds.
Since economic and market conditions change frequently, there can be no assurance that the trends described here will continue or that the forecasts will come
to pass. The views and opinions expressed are those of the President of the affiliated advisors of BofA Global Capital Management Group, LLC, are subject to
change without notice at any time, may not come to pass and may differ from views expressed by other BofA Global Capital Management associates or other
divisions of Bank of America. These materials are provided for informational purposes only and should not be used or construed as a recommendation of any
security or sector.
This information does not constitute investment advice and is issued without regard to specific investment objectives or the financial situation of any
particular recipient.
Diversification does not ensure a profit or guarantee against loss.
Investing involves risks, including the loss of principal invested.
BofA™ Global Capital Management Group, LLC (BofA Global Capital Management) is an asset management division of Bank of America Corporation. BofA Global Capital
Management entities furnish investment management services and products for institutional and individual investors. BofA Funds are distributed by BofA Distributors, Inc.,
member FINRA and SIPC. BofA Distributors, Inc. is part of BofA Global Capital Management and an affiliate of Bank of America Corporation.
BofA Advisors, LLC is an SEC-registered investment advisor and indirect, wholly owned subsidiary of Bank of America Corporation and is part of BofA Global Capital Management.
©
7 2011 Bank of America Corporation. All rights reserved.
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www.bofacapital.com
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