Federated Investors reported First Quarter 2017 Earnings late last week and, as usual, discussed a number of money market fund-related issues in its release and on its earnings call. (See the Federated earnings call transcript here.) The release says, "Federated Investors, Inc. (NYSE: FII), one of the nation's largest investment managers, today reported earnings per diluted share (EPS) of $0.49 for Q1 2017, compared to $0.44 for the same quarter last year on net income of $49.6 million for Q1 2017, compared to $45.4 million for Q1 2016. Federated's total managed assets were $361.7 billion at March 31, 2017. Total managed assets were down $8.0 billion or 2 percent from $369.7 billion at March 31, 2016 and down $4.2 billion or 1 percent from $365.9 billion at Dec. 31, 2016. Lower money market assets were partially offset by higher equity and fixed-income assets at the end of Q1 2017 compared to both the end of Q1 2016 and Q4 2016."
It explains, "Money market assets were $245.2 billion at March 31, 2017, down $16.8 billion or 6 percent from $262.0 billion at March 31, 2016 and down $7.0 billion or 3 percent from $252.2 billion at Dec. 31, 2016. Money market fund assets were $175.2 billion at March 31, 2017, down $49.5 billion or 22 percent from $224.7 billion at March 31, 2016 and down $31.2 billion or 15 percent from $206.4 billion at Dec. 31, 2016. Since March 31, 2016 approximately $25 billion in money market assets has transitioned from Federated funds to Federated separate accounts, including $21 billion that transitioned in Q1 2017 primarily due to a change in a customer relationship. Federated's money market separate account assets were a record $70.0 billion at March 31, 2017, up $32.7 billion or 88 percent from $37.3 billion at March 31, 2016 and up $24.2 billion or 53 percent from $45.8 billion at Dec. 31, 2016." (See our March 10, 2016 News, "Federated, Edward Jones Restructure Money Fund Deal; New 10-K Filing.")
Federated says, "Revenue increased by $1.4 million or 1 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 (voluntary yield-related fee waivers) and an increase in revenue from higher average equity assets. The increase in revenue was partially offset by a decrease in revenue from lower average money market fund assets and a decrease in revenue resulting from a change in a customer relationship.... During Q1 2017, Federated derived 58 percent of its revenue from equity and fixed-income assets (41 percent from equity assets and 17 percent from fixed-income assets) and 42 percent from money market assets."
They explain, "Revenue decreased by $16.4 million or 6 percent primarily due to a decrease in revenue resulting from a change in a customer relationship, having two fewer days in Q1 2017 vs. Q4 2016 and a decrease in revenue from lower average money market fund assets. The decrease in revenue was partially offset by a decrease in voluntary yield-related fee waivers and an increase in revenue from higher average equity assets. Operating expenses decreased by $9.4 million or 5 percent primarily due to a decrease in distribution expenses as a result of a change in a customer relationship, lower average money market fund assets and having two fewer days in Q1 2017 vs. Q4 2016, partially offset by a decrease in voluntary yield-related fee waivers.
President & CEO J. Christopher Donahue commented on Friday's earnings call, "Now looking at money markets, total assets in the funds in separate accounts decreased by $7 billion from Q4. The previous discussed transition of a $21 billion money market fund to a sub advised separate account impacted the reported assets by product type. Excluding this transaction, money market mutual fund assets decreased by about $10 billion from Q4 and separate accounts added about $3 billion. Our money market mutual fund market share at the end of Q1 was 7.5%, about the same at the end of 2016."
He continues, "Money fund assets remain concentrated in Government funds. We believe that as spreads widen, investors who exited prime funds will over time consider and reconsider their options including our recently launched private prime fund and our collective prime fund. We also believe that a rising rate environment will be positive for money market funds and will encourage investors to shift some money from bank deposits. Our prime collective and prime private funds had about $460 million in assets at the end of Q1."
During the Q&A, Donahue tells us, "In terms of the ... the prime funds and the collective funds ... on the relative economics of the prime and the collective funds, it's basically the same as the other money market funds. But obviously these funds are smaller ... together they are $460 million. But we're trying to grow them, and working hard.... You know getting a money market fund up to a size where people are willing to take a big position is part of the challenge. And that's why I mentioned that both higher rates gross and higher spreads net are going to be important ingredients as we present those products to the marketplace. But basically it's the same drill whether you're in one of our other money funds or in those."
President Ray Hanley answered a question on pricing of separate accounts vs. money funds, "Without commenting on the specific separate accounts, just generally ... in the first quarter if you take our total money market fund business on a net revenue basis, net of the distribution expenses it comes out to roughly around 10 basis points, a little above 10 basis points. And on the institutional separate account side, that's more like around a four basis point rate, which is dominated by a handful of very, very large accounts. But in terms of individual separate accounts they are essentially priced on an individual basis."
When asked about fee competition, Donahue explains, "Well, obviously there is a huge change in the amount of money that went into 'Govies,' and there were some participants who over that time frame reduced their pricing.... In terms of the Prime, because some people shut their primes down and because of the [reforms] implemented October 16, it's difficult.... I'm not aware of people doing a lot of shenanigans on the prime side with those assets but I would ask Debbie to give you an up to date version."
MM CIO Deborah Cunningham adds, "Certainly, on the government side, as Chris mentioned, there have been a few in the market that have chosen strategically to lower fees and capture some of the assets that were flowing out of prime and into government. I would say year-to-date 2017, that has been less of an issue.... From a Prime standpoint, we're not seeing that. I think those funds are now at this point enjoying a yield curve that is fairly steep and has a lot of spread associated with it, versus Treasury and Government agency yield curves. And at this point at least, it's more a battle of how do you get asset size not from a fee waiver perspective but just getting clients comfortable with the new product, with the structural changes that went into those products. It's not being done through a fee waiver standpoint."
One questioner asked, "Historically, there's always been I guess a lag between when short rates start to rise and you start to see a greater demand for money fund assets. But given we've had a couple of increases -- I know it takes some time to filter through -- are you seeing any change in the competitive landscape versus bank deposits? Maybe banks re-pricing deposits up more aggressively? [H]ow long [does] it take institutions to start becoming more attractive to money funds as rates go up?"
Cunningham responds, "Well, it's interesting, from a historical perspective, generally in a rising rate environment money funds lose assets to the direct market whether it's you know repo or deposit instruments. We're not seeing that so much in this case. But we're not seeing a whole lot flow back in. In fact, we're trying to emphasize that at this point, the attractiveness of funds versus bank deposits. The average bank deposit rate, which is a difficult thing to come up with, and it is a varied range, but the average that we can find at this point is right around 53 basis points. Our government funds are yielding 80 plus basis points, our prime funds are yielding about 20 [more]. There's easily 30 to 70 basis points in spread over bank deposits and I think it's just an awareness [issue and] comfort with the new product set.... That's our challenge at this point."
