One of the largest "private label" relationships in the money fund business is changing after over 3 1/2 decades. Federated Investors, the fourth largest money fund manager, and brokerage firm Edward Jones, will alter the terms of their money fund management agreement later this year, according to recent Federated 10-K Filing and recent comments from Federated CEO Chris Donahue. The 10-K explains, "On February 18, 2016, the Board of Directors of Federated Investors, Inc. approved the transfer by its wholly owned subsidiary, Federated Investment Management Company (FIMCO), of FIMCO's general partnership interest in Passport Research, Ltd. (Passport) to a wholly owned subsidiary (Buyer), of The Jones Financial Companies, L.L.L.P. (Jones Financial). FIMCO and Jones Financial, for itself and on behalf of Edward D. Jones & Co., L.P. (Jones), previously entered into a non-binding letter of intent, dated as of February 5, 2016, regarding the transfer. The transfer is expected to be consummated in the fourth quarter of 2016, after completion of certain related transactions in the third and fourth quarters of 2016."
It continues, "Passport currently serves as the investment adviser for two registered investment companies (Funds), the Federated Tax-Free Money Market Fund (TFMMF), a tax-exempt money market fund with approximately $4 billion in net assets as of January 31, 2016, and the Edward Jones Money Market Fund (EJMMF), a government money market fund with approximately $15 billion in net assets as of January 31, 2016.... Prior to the partnership interest transfer, it is anticipated that customers of Jones with accounts in the TFMMF will be given the opportunity to transition from the TFMMF to the EJMMF during the third quarter of 2016 and, thereafter, the TFMMF will be reorganized into another Federated-sponsored tax-exempt money market fund prior to the transfer being consummated."
Federated's filing continues, "After the transfer and subject to the contingencies described below, (1) Passport, as a subsidiary of Jones Financial, will remain the investment adviser for the EJMMF, (2) FIMCO will be the sub-adviser for the EJMMF and (3) Federated Administrative Services (FAS), a wholly owned subsidiary of Federated Investors, Inc. and an affiliate of FIMCO, will continue to provide certain administrative services with respect to the EJMMF."
It adds, "Jones Financial, Jones, FIMCO and Passport are currently negotiating a definitive agreement, and certain ancillary agreements, for the partnership interest transfer and related transactions.... The transfer, and related transactions, may reduce Federated's pre-tax income up by to $6 million per quarter after the transfer is consummated in the fourth quarter of 2016, depending upon market conditions at the time.... Federated has a majority interest (50.5%) and acts as the general partner in Passport Research Ltd., a limited partnership. Edward D. Jones & Co., L.P. is the limited partner with a 49.5% interest. The partnership is an investment adviser to two sponsored funds."
Speaking at the Citi's "2016 Asset Management and Broker Dealer Investor Conference" last week, Federated's Donahue elaborated on the new arrangement with Edward Jones, saying, "The [Edward] Jones relationship is a $15 billion money market fund on the government side and a little less than $4 billion on the tax-free side. Edward Jones has done an excellent job of getting ready for the new tomorrow of the "DOL-land" [referring to pending new Department of Labor rules expected to impact revenue sharing]. They have put together a "Bridge Builder" series of funds and a new enterprise where they will enable their salespeople to charge a given percentage.... The last piece of that puzzle from their perspective was to put the money market fund into that structure."
Donahue adds, "We have had a deal with them since 1980, being the investment manager for their money funds. Obviously, everybody wanted to continue that, which is what we're doing. But it [is now] in a new structure.... As we reported in the 10-K, we have a jointly owned investment advisor and we are turning over to them our portion of that advisor.... We will be a subadvisor to the fund." He reassured analysts that this was a "one-off" situation, since Edward Jones is the only group "we had this kind of relationship with".
At his Citi presentation, Donahue also touched on a few other money fund related subjects. On sweep funds, he says, "The Broker-Dealer community on the sweep side generally don't like fees and gates, so therefore a lot of the Broker-Dealer sweep money is going to go to government funds. This is exactly the situation with Edward Jones. Why deal with fees and gates if you don't have to?"
He comments on investor flows after MMF reforms kick in, "Just because the clients decide in the second or third quarter ahead of the October deadline to do something, that doesn't mean that is a permanent decision. We don't know how much is going to shift from prime to Govie ... and nobody knows what the spreads are going to be between Govies and Prime ... and how people will react to what those spreads are. They are 18-20 basis points right now, and that's higher than the 10 basis points they were before. So you don't know how that's going to go."
He commented on their pending new "Private" money fund which they are planning to launch. He also said Federated is "creating a new money market-esque type fund as a collective fund" that can only be utilized by ERISA accounts. Donahue tells us, "We are developing a fund that will look, taste, and smell just like a money market fund, and yet be consistent with how 2a-7 funds used to run back in the old days." He concludes, "We think we will have enough buckets to capture whatever our clients want to do on the cash management side.... We look at it as an opportunity to build all the products, strengthen the relationship with the client, and then look forward to 'up' assets for us in money market funds in the post '16 environment."
Federated's new 10-K also includes some additional information on MMF Reforms. It says, "This increased regulation and oversight has required, and is expected to continue to require, additional internal and external resources to be devoted to technology, legal, compliance, operations and other efforts to address regulatory-related matters, and has caused, and may continue to cause, product structure, pricing, offering and development effort adjustments, as well as changes in assets flows and customer relationships. The current regulatory environment has affected, and is expected to continue to affect, to varying degrees Federated's business, results of operations, financial condition and/or cash flows."
It adds, "Management believes that the floating NAV under the 2014 Money Fund Rules will be detrimental to Federated's money market fund business and could materially and adversely affect Federated's business, results of operations, financial condition and/or cash flows. Federated continues to dedicate internal and external resources to analyzing and addressing the evolving changes to these various regulations applicable to Federated.... While significant steps in Federated's efforts to adjust its product line in response to the 2014 Money Fund Rules, Money Fund Rules Guidance, and Other Regulatory Developments have been completed, Federated's plans are not finalized or completed, continue to evolve and remain subject to fund board and, in certain cases, fund shareholder and other review and approvals."
The 10-K summarizes actions so far, explaining, "Federated will continue to offer Treasury and government money market funds without the liquidity fees or gates as permitted by the 2014 Money Fund Rules.... Federated has designated a subset of its prime and municipal money market funds as retail money market funds under the 2014 Money Fund Rules.... Federated plans to offer four institutional prime and national municipal (or tax-exempt) money market funds that will, beginning on or about October 14, 2016, have an initial NAV of $1.0000 that fluctuates and have the required provisions for liquidity fees and gates."
Finally, it says, "Federated has filed a registration statement for an institutional 60-day maximum maturity fund, and continues to evaluate converting certain existing Federated Funds to 60-day maximum maturity funds, while other existing funds will remain 397-day maximum maturity funds.... Federated continues to explore investment options for certain customers and anticipates launching in 2016 one or more private funds that mirror existing Federated money market funds as investment options for qualified investors. Federated anticipates that the adjustments to Federated's product line will offer investors a full menu of product choices for liquidity management.... Federated will announce any further plans relating to the adjustments to its product line periodically in advance of the October 14, 2016 final mandatory compliance date under the 2014 Money Fund Rules to give customers the opportunity to plan for their liquidity management needs."
