Federated Hermes, the 6th largest manager of money funds, reported Q1'24 earnings and hosted its Q1'24 earnings call late last week. On the call, President & CEO J. Christopher Donahue, comments, "We ended the first quarter with record assets under management of $779 billion, driven by record money market assets of $579 billion.... In Q1, we reached another record high for money market fund assets, money market separate account assets and total money market assets.... Total money market assets increased by $19 billion during the first quarter from year end. Money market strategies continue to benefit from favorable market conditions for cash as an asset class, elevated liquidity levels in the financial system, and attractive yields compared to cash management alternatives, like bank deposits and direct investments in money market instruments like T-bills and commercial paper. In the long-expected, upcoming period of declining short term interest rates, we believe that market conditions for money market strategies will continue to be favorable compared to direct market rates and bank deposit rates."
He continues, "Our estimate of money market mutual fund market share, including subadvised funds, was about 7.35% at the end of the first quarter, down slightly from about 7.40% at the end of 2023. Looking now at recent asset totals as of a few days ago, managed assets were approximately $775 billion, including $579 billion in money markets, $77 billion in equities, $96 billion in fixed income, $20 billion in alternative private markets and $3 billion in multi asset. Money market mutual fund assets stood at $414 billion."
CFO Tom Donahue comments, "Total revenue for Q1 increased $4.9 million from the prior quarter, due mainly to higher average money market assets, increasing revenue by $13.7 million and higher average equity and fixed income assets, increasing revenue by $7.2 million, partially offset by fewer days, reducing revenue by $5.8 million, and lower carried interest and performance fees, reducing revenue by $9.3 million."
During the Q&A, Patrick David with Autonomous Research asks, "For the last few quarters, you've talked about the money fund opportunity shifting from retail to institutional as the Fed pauses and then cuts. So with $17 trillion still sitting in deposits, could you dig in on how those more institutional money fund pipelines and discussions are looking? What is your confidence that we should still expect the usual second half seasonal pop in those flows, despite what's already been an unusually strong start to the year?"
Chris Donahue responds, "I'm going to let Debbie comment in a minute, but a delay in the reduction of interest rates still keeps the money fund trade alive on the retail [side]. And when ... you look at the marketplace in terms of what rates are even on commercial paper and T-bills and things like that, it's still a decent trade. It's not the big trade that we talked about. But that was always dependent upon when [or if] the Fed actually starts to lower interest rates, and everybody's guess is as good as mine."
Money Market CIO Deborah Cunningham says, "The longer rates are where they are today at ... a 5.25-5.5% target rate, the better off we are from both a flow standpoint and an expectations standpoint.... So it's not a bad thing to delay [cuts]. What it does delay, however, is the broader participation in the flows from the institutional side.... Institutional customers who have the capability of not only being in direct Treasuries, but direct commercial paper, which is a positively sloped curve at this point ... continue to be in those direct securities. Now that will change, unless something unless history doesn't repeat itself. But the likelihood [of that] in our estimation is very small."
She states, "We think this is just a very big positive in the context of continuing the strength in the retail flow. And when you mentioned the $17 trillion that are still there from a deposit perspective, I think about 40% of that is in non-interest-bearing deposits. So that's just fertile ground for additional converters into what we believe is the better cash management product."
Analyst Ken Worthington from J.P. Morgan queries, "TradeWeb announced the acquisition of ICD, which follows BlackRock's acquisition of Cachematrix. How prominent are these platforms or portals in money market fund distribution, and how fast is the use of these platforms growing? What portion of your money market fund sales come through these portals?" Donahue answers, "So the portals have [seen] long-term, growing use.... I don't know what our percentage of assets coming through portals is, but just about every one of the clients on the institutional side that are corporate are using various portals. I don't have more information on how we break down. As you know, we break our information down by institutional and retail, which is basically, broker-dealer. But I don't know the numbers by what comes through what platform."
Cunningham adds, "Maybe to add to that for just a second on the platform side from a trading perspective, for instance, with Tradeweb.... We have very little, less than 5%. What we do on those types of platforms, we are much more of a voice-to-voice type of trading firm. We feel like we get better execution. We feel like we're better received from a content and expectation standpoint. This kind of endears us a little bit more when there are special things that come to the market. We feel like that helps us from a positioning perspective to be able to be part of those ... more esoteric types of products that come to the market. That is not the market norm. I'd say the market norm is probably over 50%, but it's mostly indicative of smaller players, not the larger players. I think most larger players like to have the relationship and the voice contact. That is ... the way that we operate our trading business from an FHI standpoint."
She explains, "As far as the portal distribution for our money market funds, we are on basically all the portals that are out there. So to the extent that the portals continue, and maybe they consolidate to some degree from an ownership perspective, we're not looking at that as problematic.... I don't know the percentage, that Chris was mentioning, but it is not a very large portion of the business compared to other channels." President Ray Hanley adds, "The open architecture is a key part of those portals [so] we don't expect any change in our business, for example, as a result of the ICD transaction."
Asked about ideal environments for inflows, Donahue states, "My answer is that since money market funds are the Eighth Wonder of the World, they're always a wonderful product. We've gone through 50 some years of these cycles, and people always need their cash taken care of and we always gain more clients and don't lose clients. Specifically, though, the main thing to me in terms of environment for the money fund is the word 'measured.' So if it's measured up, that means slow and deliberate. If it's measured down, that means slow and deliberate. Measured is always better as an environment for the money funds. Right now, because we have an open retail trade and can look forward to a stronger institutional trade, it's almost nirvana for money funds."
Finally, Cunningham weighs in, "Nirvana is one that I use quite often and I agree wholeheartedly. From a future expectations environment standpoint, measured is good, which is effectively, your first scenario ... where interest rates go down in a measured and orderly fashion. The curve is predictive of such declines. The key to that scenario is it's, again, a perfect type of scenario for gathering cash and keeping the cash very diversified amongst different players, different investor bases. But the key is that it goes to what I'm going to call maybe the 3% level. So 100 basis points above ... where the target inflation rate is, not to the 0% level, which is where it stood ... for a very long period of time."
She adds, "Your second scenario [stagflation], a slow growth environment with inflation creeping up to some degree, that's not something that's really too problematic for us either. It's maybe not Nirvana, but either one of those scenarios works, with the first one being the preferred and what we think at this point is expected. `Now with that start date being moved out ... and there be a scenario where it doesn't start at all in 2024, I think the answer is potentially yes."
