Federated Investors hosted its Fourth Quarter earnings call Friday morning and discussed a number of topics involving money market funds. President & CEO J. Christopher Donahue commented, "As the Federal Reserve raised short-term interest rates four times in 2018, Federated's wide range of liquidity products offered competitive yields for investors seeking cash-management solutions. Federated's money market assets [funds and SMAs] increased nearly $38 billion in the fourth quarter, crossing the $300 billion threshold." Federated reported, "Money market mutual fund assets were $208.5 billion at Dec. 31, 2018, up $23.0 billion or 12% from $185.5 billion at Dec. 31, 2017, and up $25.5 billion or 14% from $183.0 billion at Sept. 30, 2018."
Donahue added, "We saw positive money market fund flows from a variety of our institutional and intermediary clients during the quarter. Prime money fund assets increased about $7 billion or 18% from about $38.2 billion in Q3 to $45.1 billion in Q4. Our money market fund market share, including sub-advised funds, at year-end was 7.9%, up from 7.3% at the end of the third quarter." (See the earnings release here and the earnings call transcript from Seeking Alpha here.)
When asked what's been driving gains, Donahue responded, "What it really represents is repeating the sounding joy of many, many decades in the money market fund business and a long-term, steady commitment to it. Over the years we really don't lose clients, we just have clients move money. When you're set up this way and you get a confluence of factors in the marketplace, like for example increased volatility, like for example risk off, like for example banks aggressively managing their betas on their deposits, you have a situation where money market fund flows come in. But if you haven't developed the relationships and the products in advance, it doesn't come to the home team like it did here."
Debbie Cunningham, Money Market CIO, elaborated, "I would just emphasize three specific reasons. Chris hit on all of them -- rates are above inflation at this point, so interest rates are something that are earning something for the underlying client; volatility in the longer term, fixed income and equity markets [means it] is a great place to have a safety point in the liquidity markets; and the preponderance of bank products that are now paying something that's grossly under what is being earned in money market funds."
On the "huge quarter for the money market business," she stated, "I think to some degree, the volatility in the longer-term fixed income and the equity markets drove a substantial amount of the sales that occurred in the fourth quarter, and the allocations that customers were making to liquidity products were higher than necessarily they had historically been. Add to the fact that [we're now] two-plus years post the reforms that took place to the money market funds in 2016, and I think that they were happy to have that additional allocation in these products. Having said that, there was substantial amounts of what I'd call recurring types of sales also, but definitely the volatility in the marketplace is something that was driving certain clients to increase those allocations."
Asked about the Fed reducing its balance sheet, Cunningham noted, "Given the supply that is needed from a Treasury perspective to continue to fund the deficit, with the expectation of continued issuance once we're ... past the issue with the debt ceiling in the end of the first quarter, early parts of second quarter, ... we'll continue to see supply increase in the Treasury sector. Obviously that is impacting then not only the Treasury sector but commercial paper or other types of credit sectors.
"What would potentially change the equation a little bit more than the balance sheet would be if Treasury decided to change their funding model. The additional funding that they've done in 2018 was substantially in the money market sector, Treasury bills. They added a new bill, they increased settlement [to] two settlements per week in the Treasury bill market, and ultimately if they change that strategy and go back to something that's longer-term issuance, that may have some impact, although still that could be used as collateral in the repo market, which has also been growing in 2018 and '19. So, the outlook is still pretty good even if the Fed cuts back their balance sheet, not as attractive but still pretty good."
When asked about LGIPs and SMAs, Cunningham said, "I think Chris mentioned our 2a-7 assets are a little over $200 billion, our total liquidity assets are a little over $300 billion. A substantial portion of that is in the local government investment pool sector, separate accounts, and in the end of the fourth quarter and during the first quarter, generally speaking, those types of accounts are gathering assets. So they are collecting taxes, they are collecting receipts from the various constituents within their pools, and it's not until late in the first quarter, into the second quarter and third quarter that they actually start to pay those out. It's a very seasonal business, and if you look historically, that seasonality has been there since we started our first government investment pool management, which was back in early 2002 with Texas."
She added, "What has basically changed over the course of the last several years has been with interest rates now above zero in that sector, you've got more municipalities, more school districts participating in those pools. Even though the seasonality is identical as it's been historically, the overall base and the volume has actually increased because of the higher rate environment."
In response to a question based on the Fed being on hold and potentially easing, Cunningham shared these insights: "From the Fed's perspective, we're actually not in the camp of them being on hold at this point. We think their processes may ... scrutinized.... But we are still of the thinking that ... they are likely to add two more moves to their tightening schedule, bringing them to what we think would be clearly in their neutral rate zone for 2019.... We probably think it's more second, maybe third or fourth-quarter related, and for that reason we're not real excited with what the yield curve is giving us right now. We're keeping our weighted average maturities a little bit shorter. We have generally the longer end of our barbell situated in the shorter end, not all the way out at 12- and 13-months sector, which is as far out as we can go."
She explained, "Generally, the first quarter is, from an industry perspective, one that is a negative volume quarter. I don't know whether we'll see that this year or not. We didn't last year. But traditionally it is a negative volume quarter, not necessarily related to rates or what's happening on an expectation basis. I don't know that we see anything different, though, based on the Fed moving two times in 2019 or being on hold."
Finally, Federated was asked about changes in advertising and marketing strategies to raise awareness about the higher rates now available. Raymond Hanley, President of Federated Investors Management Co., jumped in to field that one. "We have a couple things there. We have a PR effort where our friend Debbie here spends a pretty significant amount of time on the airwaves, and then we have a lot of other portfolio managers and client portfolio managers out and about, talking about rates and talking about the market and talking about whatever else is going on, so that's from a PR standpoint."
Donahue commented, "Well over time, there have been dramatic shifts from what would be regular advertising to digital and social media advertising. It's been a dramatic shift inside of how we’re allocating those dollars." Hanley added, "It's not exactly on your question of advertising, but we have maintained and expanded a sales force dedicated to the growth of that business. So a lot of that promotion and contact and growth happens due to the good efforts of the sales force."
