As he does now almost every quarter, Federated Investors' J. Christopher Donahue held forth on virtually all issues on money fund-related on the company's earnings call Friday. Donahue, Federated, investors and analysts discussed fund flows, fee waivers, consolidation and outsourcing, regulations and enhancements, and more. (See also: "Federated Investors Shows Continued Inflows Into Money Funds in Q1".)
Donahue said, "So far in the 2nd quarter, we have seen expected patterns with early quarter inflows, followed by mid-month outflows, most likely from April tax payments.... New business trends are favorable as we continue to benefit from consolidation and outsourcing.... We added a new $6 billion separate account to subadvise money market assets in early April from a major insurance company. Our MMF market share was about 8.5% at quarter-end, compared to just under 7% at the end of 2007 and up from about 5% back in the year 2000."
He continued, "Consistent with industry patterns, we have seen a migration from Treasury money funds to government agency and prime funds. At quarter-end, Federated's MMFs by type were: $67 billion in Treasury funds (down $25 bil.), $131 billion in government agency (up $9 bil.), $94 billion in prime (up $16 bil.), and $36 billion in muni (up $1. bil.). In April, we have continued to see Treasury funds continue to decrease, agency funds have decreased slightly, and prime have continued to increase."
On waivers, Donahue said, "Low market interest rates continue to impact yields for money funds and Federated continues to incur waivers in certain money funds in order to maintain positive or zero net yields. During the first quarter, the impact of these waivers ... was a little over $5 million in reduced operating income. Based on current market conditions, we expect waivers to impact operating income by about $1.5-2 million per month over the next several months. Of course, there remains a wide spectrum of potential outcomes given the multiple variables involved." He cites market yields, asset changes, Fed actions, expense changes, custom mix changes, and the company's willingness to continue waiving as variables.
Donahue also said, "In terms of MM regulations and enhancements, Q1 saw an important development with the issuance of the ICI Working Group Report on Money Market Funds.... Federated supports the recommended enhancements and will work to implement [them] in the few areas where we are not already in conformance.... We believe that the report makes a vital contribution to the discussions on the important role of money market funds in our capital markets with a focus on enhancements designed to further strengthen the resiliencey of MMFs. Recent comments from Fed Chairman Bernanke, Treasury Secretary Geithner, and SEC Chair Shapiro indicate that the government and regulators appreciate the role of money funds and the importance of strengthening these funds."
Finally, in the Q&A session, Donahue said, "It's our view and the ICI's view that the marketplace should be in a good enough position to enable that [Treasury] insurance to lapse and we go back to the way we have successfully run money funds for 35-plus years.... In terms of capital charges, we think they are unnecessary and unwarranted in this business. Our idea is to focus on the competance and credit work and knowledge of your customer ... in order to, as Bernanke puts it, 'enhance the resiliency of money funds'.... These are investment products and should be evaluated as such."
