Federated Investors released its First Quarter Earnings last week, and held its quarterly earnings call on Friday. J. Christopher Donahue, president & CEO, commented, "Looking now at money markets, period-end money market fund assets decreased by about $13 billion from year-end, while average money market fund assets increased slightly compared to the prior quarter. Our market share is approximately 8.7%. Consistent with the industry, we saw money fund redemptions during the second half of the quarter. We think that elevated tax payments and other uses of cash were factors in these redemptions. And in the seasonal redemptions, we've seen this month around April 15."
Donahue continued, "On the regulatory front, in March, the SEC released four memos on various attributes related to money market funds and opened a new 30-day common period that ended this week. We are filing separate comments on each of the topics that were raised. We continue to advocate for pro-investor and capital market positions. The comments to the SEC proposal, and indeed the SEC itself acknowledged that floating the NAV would not stop a run during periods of extraordinary market distress. On the other hand, redemption gates have been demonstrated to work. In our experience, investors, once they understand the structure and remote possibility of a gate being imposed, prefer gates and/or fees by a wide margin when compared to floating the NAV, which ruins the fund's cash management appeal each and every day."
He said, "Surveys of investors indicate that they will reduce or eliminate their usage of money funds as subjected to a multitude of legal, tax, record-keeping and operational issues that would be brought along with a floating NAV. Investors will likely move to cash -- move their cash to government securities, government money funds or to the biggest banks as they believe are too big to fail. For issuers, the impact of a floating NAV will be an increase in their funding cost, loss of efficiency and market flexibility. The costs of this artificial floating NAV are real, material and damaging to investors in the capital markets. The benefits are illusory and nominal at best. We are optimistic that sound policy will win out and that floating NAV should not be imposed on any funds or investors."
CFO Tom Donahue told us, "Looking at money fund minimum yield waivers, the impact to pre-tax income in Q1 was $29.7 million. Based on current assets and assuming overnight repo rates for treasury and mortgage-backed securities run at roughly 5 to 6 basis points over the quarter, the impact of these waivers to pre-tax income in Q2 would be about $29 million. Looking forward and holding all other variables constant, we estimate that gaining 10 basis points in gross yields would likely reduce the impact of minimum yield waivers by about 45%, and a 25 basis point increase would reduce the impact by about 70%. Multiple factors impact waiver levels and we expect these factors and their impact to vary."
During the Q&A section, one questioned asked about MMF Reform, "I think one of the things that Chris said in his prepared remarks or in his comments is that he is hopeful that good policy will open the day here and prevail. My question, which individuals or groups at this point are most vocal about the desirability of a floating NAV? And why are you confident that it won't be the outcome?" Chris Donahue responded, "`Well, the groups that are most attentive to the floating NAV are those basically who want to end the money market fund, and that has been their heritage. So they are very, very few. If you look at the comments, of the 1,400 comments, high 90-percent were against the floating NAV. So there are very, very few people who are articulating for the floating NAV, but they are a powerful and notable minority."
He added, "There are some in the media who are propounding for as well and some in the industry who see the beauty of floating the other guy's NAV as the solution to the problem. But as to what my confidence level is and to what the SEC will do, I think I use the word what they should do. I don't know what they are going to do and it's hard for me to characterize the level of confidence in what the SEC will do. They should not do it and I would expect that they would allow good policy to win out here again. The biggest vote going on really -- I've talked about the comments, I've talked about the way this business works -- but the biggest comment really is that you have $2.7 trillion worth of voters in the marketplace deciding that these funds are the way they want to manage their cash."
Finally, Donahue added, "And that's despite the fact that alongside of them, they could buy and roll US government securities, they could invest into big-to-fail banks and they could invest in our or others' ultra-short funds with very modest fluctuations in the NAV, and yet tens, if not, scores of basis points more in return. And the reason is because of the efficiency and beauty of the money market fund product. So it's hard to say what exactly they are going to do or when they are going to do it, but I don't think that there is a good case been made for floating the NAV on these funds."
