In the first major quarterly earnings release and call to shed light on money fund assets and issues, BlackRock showed outflows from its funds in Q1 and Chairman & CEO Larry Fink responded to several questions related to money markets on yesterday's conference call. BlackRock's release said, "Cash management experienced net outflows of $15.7 billion since year-end, although average assets were approximately 4% higher than during the fourth quarter of 2008. Over 92% of the outflows were in government money market funds, where rates are hovering near zero and we have waived a portion of our fees to avoid negative yields. We continued to expand our presence internationally, adding $2.9 billion of AUM during the quarter from clients in Europe and increasing our global market share slightly."
On BlackRock's earnings call, one questioner asked about BlackRock's view on the `ICI MMWG recommendations. Fink responds, "What I've said in the past is I do believe there's going to be a need for capital to be held back in our money market fund business. Right now, the industry is very dependent on having the government guarantee at 4 basis points on our money market funds as a backstop. As a money market industry, we should not think this is going to last forever, and we need to self-regulate and build up our own capital. I would argue though, if we are going to have to impose a capital charge to our own platform, it's going to raise the cost of the money market business."
He continues, "It may commodotize it, but it will also make it more of a scale business. The smaller parties are going to have to be weeded out because, between the risk of taking all of the liability on yourself but more importantly building up that capital base, it just reduces your overall profitability in that business. We have been very much willing to accept some form of capital charge to build up the resources to withstand any credit losses on behalf of our clients. And so ... it would make it even more of a scale business, and there are going to be fewer players. Even in a commodity business then, you're going to be differentiated by your full client service, and if you have an overall relationship and ... I believe we're going to be a net winner in that. I believe we're extremely well-positioned in the future money market fund business."
Another questions asked about fee waivers. Fink says, "The biggest area where we had fee waivers was in the government funds, and this is where we saw outflows. That is the biggest risk where we have issues with the low rates. On the non-government 2a-7 funds where now you have the government insurance backing you, because we're not as big in retail, we're not making fee waivers in those businesses yet. Obviously, if we continue to see very low interest rates and if rates go down, and investors appetites begin to be a little more upbeat, we're going to see outflows in everyting, whether we have fee waivers or non-fee waivers."
"This is what the Federal Reserve wants people to do, that's why they have low interest rates. They want investors when they feel comfortable to get out of liquidity funds into more risk-based assets. Ultimately, that's going to happen and that's going to work out. Our challenge is to make sure that we get some of the slice when they go into long-dated assets.... We will see, whether it's in six weeks or two years, some large-scale outflows out of money market assets into long-term assets."
