A number of asset managers, brokerages and banks reported fourth-quarter earnings over the past week and a half, and those that mentioned money market funds and bank deposits so far show that "cash sorting," or the shift into money funds from bank deposits, remains alive and well. On BlackRock's latest earnings release and earnings call, CFO Martin Small tells us, "The last two years have been a character-building and awe-inspiring time for investors, for clients, and certainly for us at BlackRock. The monetary policy shock of a rapid rate-rising campaign upended 10 years of asset allocation practices and spurred repositioning of portfolios into cash and money market funds at the expense of risk assets. At BlackRock, our business is to serve clients with excellence and help them design portfolios for the future."
He continues, "We've spoken throughout the year about what conditions we'd expect to bring investors out of cash and into risk assets. It's generally unfolding as we described. With greater clarity on terminal rates in the fourth quarter, we saw evidence of portfolio 're-risking', and we expect this trend to accelerate in 2024. BlackRock's a share winner when there's assets in motion and clients continue to consolidate more of their portfolios with us."
Small adds, "BlackRock's cash management platform saw $33 billion of net inflows in the fourth quarter and $79 billion of net inflows in 2023. We're pleased with the continued strong growth in our cash and liquidity business. With year-end AUM up 14%, or over $90 billion year on year, we're leveraging our scale and integrated cash offerings to engage with clients who are using these products not only to manage liquidity but also to earn attractive returns."
During the Q&A, Analyst Mike Brown of Keefe, Bruyette and Woods, asks, "When you think about the fixed income inflows, where should we think about where that money will kind of shift from? Is it from the money market funds or is it kind of the ownership of direct securities moving into funds or from bank deposits? I'd love some commentary on that."
President Rob Kapito responds, "I'll just add just two things, Mike. I wake up every morning salivating about the $7 trillion that's sitting in money market accounts that's waiting to move. And in order for it to move, you have to have a wide plate of products. That's what we have been developing in client solutions.... ETFs are becoming the investor's preferred vehicle with access to investments.... As we blend the active and passive business together, we're going to see a lot of active fixed-income portfolios move into an ETF wrapper. We're the leader in ETF wrappers as well. So, I think there's a huge, huge runway for fixed income. And really, the wind is right behind our back for that."
Analyst, Patrick Davitt of Autonomous Research, questions, "You guys have been pushing this idea that the 7 trillion in money funds will start to rotate into risk assets for a while now. But the historical data we can see from past fed cycles does not really show that, at least from what we can see. It looks like last year's flows maybe came more from the bank deposits than risk positions. So, what are you seeing maybe that we can't see that suggests this cycle will be different? And if rates really are higher for longer, can't both money funds and bonds win with $17 trillion still sitting in bank deposits?"
Kapito dodges, "So the answer is it's going to be dependent upon rates and alternative investments. I think history shows, when the cycle stops, that's when people first start to re-risk. We saw about $40 billion come out of money market funds to us as people re-risked, and then there's market volatility and it stops. So, I think we have to get to what people will feel is the end of the cycle in rates, and then people will look. The benefit for us is then when they re-risk, they usually come into more precision investments, which are higher fee-type investments, and yield really matters. So, I think if you look at it, there's a blurring between the bank deposits and the money markets, all dependent upon rates."
In its latest earnings release, Charles Schwab CFO Peter Crawford states, "Total net revenues were down 9% versus prior year levels to $18.8 billion, as client cash realignment activity impacted our net interest revenue. The benefits of rising rates were more than offset by lower interest-earning assets and increased utilization of higher-cost supplemental funding, driving net interest revenue down 12% year-over-year to $9.4 billion. Asset management and administration fees rose to a record $4.8 billion, bolstered by rebounding equity markets as well as strong client interest in purchased money fund products and advisory solutions.... Exclusive of these items, adjusted total expenses increased by 6% to $11.0 billion, approximately 2% of which reflected the $172 million FDIC special assessment."
He continues, "While the pace of rate increases slowed substantially during the year, the upper bound of the Fed Funds target range still climbed to 5.50%. As expected, clients took advantage of the highest yields in nearly two decades by increasing their allocations to investment cash and fixed income alternatives available at Schwab. These movements caused Schwab's balance sheet to shrink by $59 billion, or an 11% decline from the year-end 2022 level. As we have done since the onset of the current tightening cycle, we facilitated these client allocation decisions using cash flows from our investment portfolios as well as the continued utilization of certain supplemental funding sources, including Federal Home Loan Bank advances and retail certificates of deposit."
A "Supplement" to Schwab's Q4'23 earnings release, entitled, "The Charles Schwab Corporation Supplemental Monthly Client Metrics for December 2023 shows Transactional Sweep Cash totaling $417.4 billion as of Dec. 2023, vs. $581.1 billion a year ago, a decline of $163.7 billion (-28.2%). Total Money Market Funds were listed at $477.4 billion as of Dec. 2023 vs. $282.1 billion a year earlier, a jump of $195.3 billion (69.2%).
In related news, The Wall Street Journal writes on "The $8.8 Trillion Cash Pile That Has Stock-Market Bulls Salivating. They comment, "Wall Street wants your money off the sidelines. Rising interest rates drew trillions of dollars into money-market funds and other cash-like investments in the past two years, with more than $8.8 trillion parked in money funds and CDs as of the third quarter of 2023. Investors are optimistic that with rates poised to fall, people will redirect that money and fuel markets' next leg higher."
The piece states, "Wall Street is pinning its hopes on cash moving from money-market funds to provide the next big boost. Rates above 5% were flashy after years of safe investments offering little interest. Their fall could drive investors to U.S. stocks, which have historically provided the highest returns in the long run.... Bond yields have declined from their peaks, but rates offered on Wall Street remain high relative to recent history, pulling cash toward money-market funds. Stocks also still look expensive, meaning bargain hunters might find rates on CDs more alluring than playing the market -- for now."
It adds, "'The assets in money-market funds are staggering,' said Randy Gwirtzman, a portfolio manager at Baron Capital. 'All that dry powder is on the sidelines and waiting to invest.' Expectations for cash to pour into the market once rates fall may prove overly optimistic, however. Money-market funds raked in cash during previous Fed-tightening cycles but didn't hemorrhage it when the central bank began to ease. Assets retreated from their peaks, but still plateaued at much higher levels.... There is some debate over how much of the assets in cash-like products should be thought of as investments, with potential to enter other parts of the market, versus as bank deposits to be saved or spent later on. Total deposits at U.S. lenders have fallen to $17.4 trillion from a peak of $18.2 trillion since the Fed began tightening policy in early 2022."
