Federated Hermes reported Q3'24 earnings and hosted its Q3'24 earnings call late last week. On the call, President & CEO J. Christopher Donahue, comments, "We ended Q3 with record assets under management of $800 billion, driven by money market assets of $593 billion, and record fixed income assets of $100 billion.... Moving to money markets, in Q3 we reached another record high for money market fund assets of $440 billion and total money market assets of the aforementioned $593 million. Total money market assets increased by $6.4 billion in Q3, as money market fund gains of $14.8 billion were partially offset by seasonal money market separate account asset decreases of $8.4 billion. Our money market fund assets peaked at about $447 billion on September 23rd and decreased by about $7 billion over the last couple of days of the quarter. We believe a late quarter jump in SOFR rates, led to certain investors shifting some assets into the direct market. We also saw certain large clients using money market fund assets to pay down debt going into quarter end."
He explains, "Q3 saw the first of several expected reductions in the Fed funds target rate, driving substantial growth in industry money market fund asset levels, particularly in August and September. Looking ahead for the rest of '24 and into '25, we believe that market conditions for money market strategies will continue to be favorable and that money market fund yields will continue to be attractive compared to the direct market and bank deposit rates. Our estimate of money market mutual fund market share, including sub-advised funds was about 7.32% at the end of Q3, down from about 7.45% at the end of the second quarter."
Donahue continues, "Looking now at recent asset totals sales of a few days ago, managed assets were approximately $799 billion including $594 billion in money markets, $83 billion in equities, $99 billion in fixed income, $20 billion in alternative private markets, $3 billion in multi-asset. Money and market mutual fund assets were $441 billion."
Asked about market share during the Q&A, he responds, "Well, first of all, over a longer-term period, as you've heard me say 100 times, we end up with higher highs and higher lows over the 50 years we've been doing the money market funds. So a little noise here in the quarter does not disturb us. I mean, we have one client who took $6 billion out because they were paying down debt. And that's the kind of lumpy things that happen that you've got to be ready for and that's just part of normal life."
Money Market CIO Deborah Cunningham weighs in, "The information that was provided with regard to the quarter explanation of SOFR rates, that's a very real one. We have a lot of institutional clients who go between the direct market on an overnight basis and money funds. And really since the Fed rate cut in mid-September, most of those flows have come into the fund side of the market. However, with the jump in SOFR rates at the end of the quarter, there were some that went back out into that sector of the market temporarily on a direct basis. We also are comparing ourselves against a very large group of competitors in the marketplace. In particular, it seems as though some of the larger retail players that are in the direct retail market have been gaining market share on a little bit faster basis."
She adds, "I believe that might have something to do with some of the heat that they've been taking with regard to deposit rates and the customers that have been earning the lower deposit rates rather than money funds. I believe some of that has been more directed into the money fund sector. Obviously, that's not something we can control or are necessarily even really part of. And then it also looks like in some of our banking competitors, there are some internal funds that have been going along those ways. So in general, I think there are lots of explanations, [but] we are not seeing anything on a client basis that would lead us to have concern. In fact, I would say exactly the opposite. When you look at the complexity and the variation of the client base that we have -- broker dealer, RIA, trust, wealth management, family offices -- they all seem to be very pleased and continuing their increased participation with us."
Asked about the recent implementation of money fund reforms, Donahue answers, "So we have seen, unlike the last round back in the day where basically almost $1 trillion left those funds, the customers are basically sticking with it, and our Prime funds are up. And if you look at the stats for, say, a year, the industry assets are up to over $1 trillion and that's up 17% over the year. Our assets on that category are up 25%. We're ahead of the industry on that category. So our clients, I think, were quite appreciative of the fact that we hung in there with those funds, even though we did consolidate from three [Prime Inst] funds down to two. But we went through all the work to make the extra so many basis points available."
Federated President Ray Hanley comments, "If we isolate just the Prime money market funds for the first three weeks or so of October, they're up just a fraction. So, if there have been any changes, we would have had puts and takes because the Prime funds are still very attractive from a Retail standpoint. We're still getting considerable interest there. Even post the rate cut, yields are very attractive and -- but there's no discernible impact in October from the last of the rule changes going into effect."
Donahue says, "I'd like to add a couple of other things about the rules.... Well, remember that they told us we had to have 25% in daily cash. Well, that has a big impact on how these funds work and how people look at them. The other thing is these funds were already a variable net asset value type of fund. So people aren't keeping the money they need tomorrow here. They're willing to deal with these modest changes in NAV. So I think those are important dynamics."
Cunningham responds, "You're always very thorough, Chris. But I think ultimately, in the end, we had absolutely no shareholders leave our Institutional Prime or our Institutional Muni sectors because of the rule changes that went into effect on October 2.... I might note [that these] are the smallest sector in the total universe of money funds. But on a daily basis, we on a continuous monitoring basis, and have to review where we are from a flow activity, whether we're in a net purchase or a net redemption phase. If we get beyond a 5% net redemption phase, we also have a simultaneous process that is running that would look at the price, the cost of redeeming what that greater than net 5% redemption phase would be."
She continues, "If the price [fluctuation] is greater than one basis point -- [and note that the] 50% now that's in weekly liquid assets is always at par -- that's a very difficult hurdle to exceed. Then we would have to review the potential for adding some sort of a fee to those who are redeeming. In the end, this is a process that we are running daily. We are monitoring on a continuous basis. We did historical ... back-testing on it prior to the implementation of the rule, and we're very comfortable that the impact of this on the marketplace and the actual implementation of this that would result in a fee very, very [rarely], if any times."
She states, "On the institutional cash side, that was probably only 5% to 10% of the asset flow in the money markets that we saw. We would expect that as the Fed cuts rates, which we are not expecting to be in that 50 bps clip and which was sort of a surprise in a start to this declining rate cycle, [as we go] down to what we think is a terminal rate of around 3%, you're going to see that institutional flow pick up <b:>`_. It's not going to reduce the strength or it's not going to match the strength that we saw in the retail flow, but it will still be a positive. So that ultimately in the end, when we look at industry assets as reported by Crane at this point as an industry source at $6.8 trillion, I can still see $7 trillion by the end of this year, growing further into 2025 and ultimately FHI [will] catch a good portion of those flows."
Hanley adds, "In terms of your question about the mix ... between Retail and Institutional, an estimate of that for us would be about 60% of the money market fund assets, including what we sub-advise ... would be considered Institutional and 40% Retail, which for us is still coming through an intermediary. And by the way, that 60-40 split would be about what the industry split is as well using ICI data."
Asked about clients shifting between money funds and direct money market instruments, Cunningham answers, "For the vast majority of our clients, it is not an easy switch because they don't [do] repo -- basically the SOFR rate indicates what type of return you can get on an overnight repo in the marketplace. Overnight repo is not really a security, it's a contract. As such, you have to have repo contracts in-place with dealers and banks in order to go into that sector of the market. So for the vast majority of our clients, that is not possible. But for very large clients, large tech firms ... large energy firms, ... large banks that are players in our market, they have those contracts available and usable by them on a daily basis, and they are able to switch pretty easily. So even though it's only a small minority of the actual customers that have that capability to do that switch on a daily basis if they choose to do so, it's still a large volume when that dynamic in the market comes into play."
Saker Nusseibeh, CEO of Federated Hermes Limited, tells us, "We're also doing other stuff that's exciting. I mean, when we talk about money markets funds, generally speaking, Federated Hermes has tended to concentrate mostly on the U.S. for the money markets. What we're now doing is bringing those to our sales force here out of Europe, and we've seen lots of the positive responses to the presentations. The Sterling Prime Money Market Fund has hit an all-time high with GBP 8.4 billion. So ... there's a potential of growth of money markets here and in Asia, by the way, where we've seen flows coming in from 23 new family offices totaling approximately $300 million in money market flows. [That's] not a huge amount yet, but it tells you about the potential."
Finally, when asked about shifts and flows, Donahue replies, "My answer to you is one word: trillions, period.... We could go through catalogs of where all that money is, but it's so much that we're certainly optimistic about our ability to play in that game."
