During Federated Investors' Second Quarter earnings call with analysts, Chief Executive Officer Chris Donahue said Federated is working on developing "private" money funds that mirror existing Federated MMFs and he expects to have "substantially all of our product changes to be completed by the end of this year." He was joined on the call by Federated President Ray Hanley, CIO Debbie Cunningham, and CFO Tom Donahue, who discussed a range of money market fund related issues, from fee waivers to new product development. We also mention some excerpts from Northern Trust's earnings call, which mentioned fee waivers and fund "top-ups".
According to Federated's 2Q earnings release, "Money market assets were $242.0 billion at June 30, 2015, down $3.2 billion or 1 percent from $245.2 billion at June 30, 2014 and down $6.2 billion or 2 percent from $248.2 billion at March 31, 2015. Money market mutual fund assets were $208.8 billion at June 30, 2015, down $3.6 billion or 2 percent from $212.4 billion at June 30, 2014 and down $5.5 billion or 3 percent from $214.3 billion at March 31, 2015." Further, "Revenue increased by $15.1 million or 7 percent primarily due to a decrease in voluntary fee waivers related to certain money market funds in order for those funds to maintain positive or zero net yields and an increase in revenue from higher average equity assets." Federated derived 31% of its 2Q revenue from money market assets.
On fee waivers, the release continued, "Fee waivers to maintain positive or zero net yields on money market funds and the resulting negative impact of these waivers could vary significantly in the future as they are contingent on a number of variables." On the earnings call, they said, "Looking forward, we estimate that gaining 10 basis points in gross yields from beginning Q2 levels would likely reduce the impacts of yield waivers by about 40% and a 25 basis point increase would reduce the impact by about 65%. We expect to recover about two-thirds of the remaining money fund yield waivers related pre-tax income."
On the earnings call, CEO Chris Donahue said, "We announced our plans during the second quarter for funds characterized as retail under the 2014 money fund rules, and we continue to make progress on the institutional products line-up. We expect to provide more details on these products in the coming months. We expect, as we have mentioned before, to have products in place to address the cash management needs of all of our money fund clients. These will likely include, prime and muni money market funds that meet the new requirements, government money funds, separate accounts, and offshore money funds."
He continued, "We are also working on privately placed funds and in attempt to mirror existing Federated money market funds for our qualified institutional investors, either unable or unwilling to use the money funds that have been modified under the new rules. We expect to have substantially all of our product changes completed before the end of this year which is well in advance of the October 2016 requirements for floating NAVs or institutional prime and Muni funds." He also said the transition of $4 billion in money market assets from the acquisition of Reich & Tang and the acquisition of $100 million in money market assets from Touchstone Advisors will be completed this month.
In the earnings call transcript, posted by Seeking Alpha, one analyst wondered if the money market fund industry was seeing inflows from JP Morgan shedding $100 billion in deposits. Hanley responded by saying that, "It appears to us that, yes, the money did not flow into the money funds" and "stayed on the sidelines." [Note: Crane Data believes money funds did see much of this JPM bank money in June. MMFs haven't seen an inflow in June since 2007, and they've averaged outflows of $41 billion in the month over the past 7 years prior to 2015. But they experienced an inflow of $15 billion this year.]
But he added, "Over the longer haul, however, meaning post-2016, when the dust settles on what these money funds are going to look like.... When all that settles out, then there is no reason in my mind to expect that if the bank is not bidding for that money, then ... a large portion of it will be available to the money fund.... So it will be a determination made by corporate treasures and alike, as to where they think their best investment lie. And I am just waiting for the dust to settle, but still remain convinced that our future has greater money market assets in the post-2016 environment." Hanley added, "We think money funds will continue to get their share when you get -- especially when you get past the noise of the product reconstitution."
When asked if they have seen any changes in behavior yet among institutional or retail investors, Tom Donahue said, "We have not yet seen meaningful change in investor behavior. One consistency is, they wish they didn't have to deal with it. The other consistency is, they know that they do. You've seen some modest moves into government funds," he said, but for the most part investors are in wait and see mode.
On the matter of interest rates, Cunningham said, "Our outlook at this point is that the process will start in September and then it might be an every other or every third meeting type of increase. Our expectation would be they get to 1%, and they wait and see then. One percent is still highly accommodative. There is lots of room for growth from an economic perspective with 1% interest rate. Yet it brings the US back to a little bit more of a normal situation in comparison to the other parts of the world." With regard to fee waivers, Tom Donahue added, "In terms of the waivers, if it's 25 basis points in September, remember we mentioned that would recover 65%. If it gets all the way to 1%, that would virtually eliminate the waiver situation."
Also, money fund fee waivers, "top-ups" and bank deposits came up during Northern Trust's second quarter earnings call. On money market fund fees, CFO Bill Bowman said, "Lower money market mutual fund waivers also contributed to growth this quarter. Money market mutual fund fee waivers in C&IS were $14 million, 8% lower year-over-year and 11% lower sequentially driven primarily by higher gross yields in the funds.... [W]e recorded a pre-tax charge of $45.8 million related to voluntary cash contributions to four constant dollar net asset value funds.... While the market based net asset values of the four funds were well above the prescribed threshold for transactions to occur at $1, this voluntary action offsets legacy losses realized by the funds during the financial crisis. The market base NAV's now approximate one across all four funds." (See the call transcript on Seeking Alpha.com.)
He added, "So, money market fee waivers were down for two reasons in the quarter. One was primarily because the yields are up and short term rates have risen if you look across overnight repo rates in particular moving up, so that's one factor. And we've slightly lower cash balances in those funds available. So the combination of those two were the drivers, but I would highlight that rate -- the short end of the rate curve moving up does help produce a lower fee waivers."
Bowman explained about "topping-up" several MMF NAVs, "We constantly evaluate our liquidity products and suite of products that we provide to our clients. And as you are well aware there is a lot of SEC reform and other items that have been appearing. So as we went through the evaluation process, we looked at some of the legacy issues that existed in four funds and made the determination as a management team that the right time to address the legacy issue losses ... was now. I'll be clear, all four funds traded above the $0.995 NAV price that is required. These top-ups will bring them to $1." When asked if this was in preparation for MMF reform October 16, 2016, Bowman replied, "That is a part of it, but it was also as we're looking at our array of liquidity products and offerings to our clients in conjunction with that reform. We felt that this was the right time." [Note: Money funds have to now report actions under the new Form N-CR, so this early July deadline likely triggered the move.]
Finally, on deposits, Bowman said, "Total deposits averaged $92 billion in the quarter, up 9% year-over-year and 7% sequentially with strong growth in non-interest bearing demand deposits." When asked if Northern is grabbing some share from competitors who are trying to push deposits off the balance sheet, Bowman replied, "Yes, so we certainly see clients that are approaching us because of discussions they have had elsewhere around the use of other's balance sheet. I would say that we're taking a transaction by transaction approach to that and looking at the overall breadth and nature of the relationship we attain with those deposits before we take -- and I am speaking [of] very large deposits here -- before we take those on. So if it's an opportunity that say a hedge fund has a billion, we want to dialogue about what the other opportunities are with them other than what we would say as a very transactional oriented deposit or very rate sensitive deposit. And we're actively pursuing those in terms of deal-by-deal."
