Last week, Federated Investors' President & CEO Chris Donahue presented at RBC Capital's Markets 2019 Financial Institutions Conference, where he answered questions on money fund growth, the shift from deposits and whether money funds will reclaim their previous record level of $4 trillion. He commented, "Some of the factors are things that continue from last year. If you look at the overall rate picture, with rates of about 2.4-2.5 in a money market fund, you're getting about what you get in a 3-year Treasury. This is a good setup for the viability of the underlying decision to go into a money market fund if you happen to be in 'pause mode.' So now that assets in the industry have crossed $3 trillion, [it's] almost like the return to the thrilling days of yester-year."
He explained, "Back in the old days, the money was in deposits, and we would have to get single tickets and show the importance of the service of a money fund and the yield on a money fund to make the thing grow like we are today. So, if you look at the dynamics, yes deposits are still increasing but at a much slower rate. Banks and broker-dealers that have banks are tightly managing their deposit "beta".... When those instruments are paying 20 basis points or 30 basis points, and something over 2% is available in a money market fund, 200 basis points makes a difference. That engine has only yet started to get its feet."
Donahue continues, "For us, we're up about $12 billion so far this year ... about $4 billion on the mutual funds side, and about $8 billion on the separate accounts side. A lot of the separate account side is seasonal. But on both sides, it's not unrelated to the basic level of rates and to the difference between what you can get in a money fund versus what you can get in a deposit. Of course, [it helps to have] an outstanding product that does what it says and has continued to do so even when it was being deprecated in the marketplace by high rollers."
He told the RBC event, "On a macro level, back before '08, there were over 200 purveyors of money market funds. Today, if you look at the list it's about 50, and frankly only the top 20 or 25 actually collect assets and make it a business. That's a macro trend that continues where people are continuing to get out of this business, so that's one thing. In terms of fees, back when I was a child, we were able to charge 1% for a money fund. Those days are more or less over and you see a lot of changes throughout and it's not in the cards for any increases in fees in money market funds."
Donahue stated, "However, some interesting dynamics have occurred. If you look at quarter to quarter, our actual net-revenue rate on money funds, they have stabilized.... The fee pressure is an inevitable part of every aspect of the investment management business. You just have to run faster, work better and do a great job. But in the money market fund business there is one other factor, and that is that increased regulation has been a driver of this consolidation in the business because it creates oligopoly. That's what more regulation does. You only have a few players left who really matter on big mandates, and some of the bigger customers want to be diversified among 2, 3, or 4 of the money market fund shops. This dynamic is not going to change."
He also commented, "On the fund side, the dynamic has been that a lot of broker dealers have opened up deposit banks and moved the money from the actual money market fund or sweep because of the change in rules into deposit accounts. This has been a really good move for the broker dealers who have done this. But there is now a [big spread] in the rate that is available. Not only a difference of 20 basis points between 'govies' and prime, but the difference between what's paid on a deposit account and what's paid on a money fund account."
When asked if money funds will break their previous $3.9 trillion mark, Donahue added, "It's just steady growth.... [Whether the Fed moves again] really isn't going to influence a lot of getting our way to $4 trillion dollars for money funds. The efforts by people like us to continuingly tell the story and show the beauty of a money market fund, which I consider ... the 8th Wonder of the World, is part of the effort as well. The money market fund industry kept all these funds intact, offering the service to clients when the rates were 0 or 1 basis point. This was not a pleasant experience, but it really showed commitment and it showed that the customers wanted the cash management service. The money market fund is as much as a customer service as it is an investment product; because of that we think its going to be a steady growth to that magic $4 trillion-dollar mark."
In other news, the Investment Company Institute released its latest "Money Market Fund Holdings" summary on Wednesday (with data as of Feb. 22, 2019). This monthly update reviews the aggregate daily and weekly liquid assets, regional exposure, and maturities (WAM and WAL) for Prime and Government money market funds. (See our Feb. 12 News, "March Money Fund Portfolio Holdings: Treasuries Rebound; CP, CDs Up.")
The MMF Holdings release says, "The Investment Company Institute (ICI) reports that, as of the final Friday in February, prime money market funds held 25.9 percent of their portfolios in daily liquid assets and 42.4 percent in weekly liquid assets, while government money market funds held 59.7 percent of their portfolios in daily liquid assets and 78.3 percent in weekly liquid assets." Prime DLA rose from 25.8% in January, and Prime WLA dipped from 42.5% the previous month. Govt MMFs' DLA declined from 61.0% in January and Govt WLA decreased from 79.0% that month.
ICI explains, "At the end of February, prime funds had a weighted average maturity (WAM) of 33 days and a weighted average life (WAL) of 66 days. Average WAMs and WALs are asset-weighted. Government money market funds had a WAM of 28 days and a WAL of 90 days." Prime WAMs were the same as last month, and WALs rose by one day. Govt WAMs shortened by one days from January levels and Govt WALs rose by two days the last month.
Regarding Holdings By Region of Issuer, ICI's release tells us, "Prime money market funds’ holdings attributable to the Americas rose from $256.98 billion in January to $273.50 billion in February. Government money market funds' holdings attributable to the Americas rose from $1,811.68 billion in January to $1,855.33 billion in February." The Prime Money Market Funds by Region of Issuer table shows Americas-related holdings at $273.5 billion, or 43.5%; Asia and Pacific at $120.4 billion, or 19.2%; Europe at $228.9 billion, or 36.4%; and, Other (including Supranational) at $6.0 billion, or 0.9%. The Government Money Market Funds by Region of Issuer table shows Americas at $1.855 trillion, or 79.0%; Asia and Pacific at $120.6 billion, or 5.1%; and Europe at $366.5 billion, or 15.6%.
Finally, J.P. Morgan also recently published a "February taxable MMF holdings update," which tells us, "Total taxable MMF AUMs rose $47bn in February. Prime funds rose $29bn and government/agency funds added $21bn, while Treasury funds were mostly unchanged (-$2bn). MMFs have continued to see banner inflows in 2019, continuing the trend from late last year -- total year-to-date inflows have been about $110bn above what has been typical in recent years. These inflows have been driven mostly by prime funds, both retail (+$32bn) and institutional (+$35bn), and by institutional government funds (+$31bn). With risk appetite low given the recent volatility in the financial markets, we suspect both retail and institutional investors have generally been hiding out in cash for the time being."
The update reads, "Dealer repo with MMFs registered $1,074bn, a modest $4bn decline month over month. There was some rotation from Japanese banks (-$21bn) into US (+$15bn) and Canadian (+$10bn) banks, and from Agency repo (-$26bn) into Treasury repo (+$21bn). French banks dropped $6bn to $236bn, but it still seems that BIS's recent proposal to require banks to report their leverage exposure measures as daily averages in addition to snapshots has not yet significantly affected behavior. FICC sponsored repo rose $7bn to $102bn, and FICC remained the second largest individual counterparty."
It continues, "Away from repo, government funds increased their allocations to Treasury bills by $43bn amid $150bn of net T-bill issuance in February. Government funds also added $16bn of Treasury FRNs, while fixed-rate Treasury coupons dropped $21bn. Total holdings of Agencies were unchanged. Government MMFs remain large buyers of SOFR floaters, increasing their holdings by $12bn to $39bn. Of the more than $70bn of SOFR floaters that have been issued to date, about 78% has come from GSEs, so it's not surprising that government funds have played a large role, taking down over half of all SOFR issuances so far."
In conclusion, they write, "Prime funds also added Treasuries in February -- total holdings rose $27bn month over month. Prime funds exposure to Yankee banks also rose modestly, largely due to increased exposure to CP and CDs. On the individual bank level changes were idiosyncratic, although most of the largest issuers saw increases. The weighted average life of bank CP/CD held by prime MMFs increased by 8 days to 115 days. The weighted average maturity of bank CP/CD also rose, from 44 days to 48 days. Australian banks continued to have the longest WAL, at 147 days, followed by the Canadian banks at 130 days."
