Federated Investors' President & CEO J. Christopher Donahue presented at the Deutsche Bank's Global Financial Services Conference on Tuesday, where he answered questions on a number of topics involving money market funds, including the expected shift of assets from bank deposits, pending legislation to reverse the floating NAV, and 2% yields. We quote from Donahue's comments below, and we also review the latest on money market fund assets. (Note: Federated's Donahue will also keynote next month's Crane's Money Fund Symposium, which will be held June 25-27 at the Westin Convention Center Pittsburgh. Registrations are still being taken, and we hope to see you in Pittsburgh later this month!)
When asked about money funds and Federated's asset mix, Donahue answered, "As an owner operator, we love all revenues, just like we love all of our children. So we don't [look at it] exactly like that [that they want to add equity assets]. `On the other hand, we would expect that percentage of money funds and liquidity revenue to come down, because we expect to grow the lion's share [from their new acquisition] Hermes.... We are working on other things as well to grow the non-money market fund, fixed income, and equity assets.... `So we are not [pushing too hard on] that, because we would accept any numbers that are available on the money market fund side."
He was also asked about pricing pressure and fee waivers, and responded, "There has been no time in the many, many decades that I have been involved in the mutual fund business, since filing our first money market fund back in the mid-1970s, when there wasn't price competition. Whether it is intensifying or not is hard to say. What really happened was when the Fed and the SEC got together and closed down a trillion dollars of prime funds and plopped them all into government funds, that caused a different dynamic in the marketplace."
Donahue continued, "However, you've seen deposits reach over $10 trillion [while] money funds [are] just under $3 trillion, [but you've seen] recently the trends where the growth in those deposits are less than the growth in money funds. [Growth in MMFs is] off of a smaller base, but still, it is consistent with trends that have occurred beforehand when the banks don't pay all the interest [out] when interest rates go up. [Like we've seen with the latest Fed hike] they don't [send] all that down to their customers."
He explained, "They now call that 'deposit beta' -- we have a fancy term for that. Well, okay, fine. What that means is that the clients that are in a position to demand the full market rate -- you can get 2% on your money fund right now -- [are asking] 'Where is my 2%?' [They're asking] 'Am I getting 20 bps or am I getting 2% Am I in a deposit sweep account where someone else is getting the 2% and I am getting 20bps?' Sooner or later these things start to change around."
Donahue added, "So, we do not find any reason we could not have $4 trillion back in money funds, which is the number it had back after the crash. That is not an impossible thing. So at base, the money fund is a great provider of service to the industry. I often gave speeches where I call it the 'Eighth Wonder of the World' because it has such perfect pricing with such vigorous competition, [and is] right at the spearhead of the capital markets.... Then important people with power decided they did not like them, and they were dented, not ruined, but dented."
He was also asked, "Do you see a big shift coming back to money markets very soon?" Donahue commented, "No. A big shift, I would not phrase it like that nor would I phrase it as catalytic because it has to come from the bottom. When the customers see that, it becomes important to keep the customers happy with where their cash is. A lot of intermediaries can make the speech 'Hey, it [rates] really does not matter and it has not mattered for a long time. It was 1 bps, so what is the deal?' So this will take time. We see the green chutes of it, but it will take time."
Finally, Donahue was asked about regulatory and legislative issues. He said, "We are working on a bill going through Congress, H.R. 2319, on the Senate side it's S.1117, which has been marked up in the House and has had a hearing in the Senate. We now have some 75 or so Congress people and Senators who are cosponsors of that bill. All that simply does is restore the money fund to the 2010 amendment which is designed to enhance the resiliency of money funds. So this gets rid of the four-digit net asset value, gets rid of the natural person requirement and gets rid of fees and gates, and this would be terrific. Other than that, I do not think the SEC is going to change anything on the regulatory side on the money funds."
In other news, ICI released its latest "Money Market Fund Assets" report yesterday, which showed money fund assets rising in the latest week, after being flat or down the previous 4 weeks in a row. Money fund assets turned positive for the year-to-date for the first time in 2018. `They've increased by $2 billion, or 0.1%, and they've increased by $192 billion, or 7.2%, over 52 weeks.
ICI writes, "Total money market fund assets increased by $14.98 billion to $2.84 trillion for the week ended Wednesday, May 30, the Investment Company Institute reported today. Among taxable money market funds, government funds increased by $14.82 billion and prime funds increased by $690 million. Tax-exempt money market funds decreased by $538 million." Total Government MMF assets, which include Treasury funds too, stand at $2.238 trillion (78.8% of all money funds), while Total Prime MMFs stand at $463.2 billion (16.3%). Tax Exempt MMFs total $139.5 billion, or 4.9%.
They explain, "Assets of retail money market funds increased by $22 million to $1.03 trillion. Among retail funds, government money market fund assets decreased by $987 million to $629.94 billion, prime money market fund assets increased by $1.16 billion to $263.74 billion, and tax-exempt fund assets decreased by $155 million to $131.79 billion." Retail assets account for over a third of total assets, or 36.1%, and Government Retail assets make up 61.4% of all Retail MMFs.
ICI's release adds, "Assets of institutional money market funds increased by $14.95 billion to $1.81 trillion. Among institutional funds, government money market fund assets increased by $15.81 billion to $1.61 trillion, prime money market fund assets decreased by $473 million to $199.43 billion, and tax-exempt fund assets decreased by $383 million to $7.71 billion." Institutional assets account for 63.9% of all MMF assets, with Government Inst assets making up 88.6% of all Institutional MMFs.
