Federated Investors' Vice President and CFO Thomas Donahue presented Tuesday at a Deutsche Bank Global Financial Services Conference and discussed acquisitions, brokerage sweeps and bank deposits. (See Federated’s press release.) Donahue comments, "The biggest thing about acquisitions is: what's going to happen with the money? Is it going to stay? What's the stability? And can we grow? So you have the roll-ups, and that's really a stability question. Who are the clients? How is it sold? Which funds are they merging into? Like in the PNC deal, we have great merger [opportunities]. They're merging into our funds that have excellent track records. We think we have a pretty good capability of maintaining these assets."
He was asked, "To what extent are people still shifting cash from lower yielding bank deposits in the system your money funds?" Donahue responds, "So we look at money funds as a long-term business. So what's going on [currently], that's nice and we'll deal with it, and we've been dealing with it since 1973. We expect the business to grow.... [Versus] the deposit market, money funds have had a pretty significant yield [advantage] and we've had a pretty good run here collecting assets. There's trillions of dollars there, [and we see] that as an opportunity.... We continue to be able to see and expect to grow."
Regarding brokerage sweeps, Federated Head of Investor Relations Ray Hanley comments, "So we offer a money market-based sweep product, and that's been stable. Over the last several years, we have seen brokers who have converted to deposit-based programs. You know that still can happen and does happen on occasion. But what we've also seen is the ability to have money flow into money market alternatives out of deposit-based sweep products, because the money fund alternative offers literally a couple hundred basis point yield advantage.... There's been a lot of publicity even in the mainstream press over the last several months about how low deposit rates are, and contrasting that to the favorable deposits available in money market alternatives. So that's benefited us at the retail level ... and it's also benefited us even at the institutional level."
Hanley adds, "It continues to be a very favorable macro for us, even with the Fed on pause.... It's never happened in past up cycles that that deposit rate caught up to money market rates. So there's still a pretty wide spread there. And even when we put that on hold [with] a flat yield curve, we expect that positive macro to stay in place. And don't forget with the flat curve ... the money fund yield looks even better than extending out [the curve]."
Donahue explain, "If they cut rates ... the bigger dynamic with the money fund is what's going on in the equity markets. We seem to always benefit where things are in trouble on the money front side in terms of collecting people's flight to safety.... We're pretty significant benefactors of that. And we always seem to keep more of the assets, higher highs and higher lows ... our guy calls it."
On zero rates, they say, "We're experienced with that. [W]e dealt with zero rates for years and ... big-time waivers that cost us hundreds of millions of dollars in operating cash flow [which] our clients shared with us. As we went down, they went down and the asset level stayed pretty consistent with we've always thought about it. As I said in the beginning, this is a long-term business for us. It's a money management cash management business. It's not viewed as an investment vehicle. They're using it to manage their cash. And that's how we look at it."
When asked about "roll-ups," Donahue tells us, "In terms of roll ups and money funds, we [look at] all the players who we've done them with in the past -- they're our customers, that's our attitude. Okay, we have to go through a bidding process. We have to win the investment bankers and negotiations, but they're our customers. So we treat them like our customers, which means we take care of their clients and have a smooth transition and continue to have their clients have no issues, no hiccups, no problems in the deal. So ... when it's time to exit ... it's not up to us it's up to the client, to the money fund provider, because if they control the asset they don't have to exit. They can stay as long as they want and they won't have problems and they manage it properly."
Finally, he says, "But if they want to focus on other things and not bother with that anymore, then we have been the go-to player. Go back and look at the history of who we've done them with. Then you can we have a list of who else is out there, but it's not like a calling effort is going to make that happen.... When we get into the negotiations and if we get into ... the second round we do very well."
In other news, Crane Data's Brokerage Sweep Intelligence report shows rates unchanged in the latest week. But yields on brokerage cash remain slightly higher than at the start of the year and substantially higher than a year ago. Our latest Brokerage Sweep Intelligence Index, an average of the 11 largest brokerage firms' "sweep" rates, continues to yield 0.24% for balances under $50K, 0.25% for balances under $100K, 0.31% for balances under $250K, 0.39% for balances under $500K, 0.44% for balances under $1 million, 0.63% for balances under $5 million and 0.76% for balances over $5 million. A year earlier, average sweep rates were 0.14% (under $100K), 0.18% (under $250K), 0.23% (under $500K), 0.25% (under $1M), 0.37% (under $5M), and 0.46% (under $5M).
Fidelity is still offering by far the highest FDIC-insured sweep rates among the $100K balance tier, with a yield of 0.79% as of May 24. RW Baird occupies the No. 2 spot in the weekly survey, paying out 0.55% on its $100K tier. Raymond James ranks third with a rate of 0.40% at the $100K tier, followed by Schwab's 0.33% rate. Ameriprise, UBS and Wells Fargo are all yielding 0.25% on balances of $100K. E*Trade and Morgan Stanley offer just 0.15%, Merrill pays 0.14% and TD Ameritrade ranks last at just 0.10%.
For more on brokerage sweeps, see these Crane Data News articles: Brokerage Sweep Rates Inch Down, But Raymond James Raises; Weekly" (5/23/19), Brokerage Sweep Rates Flat; MS, E*Trade Earnings; TD Lowers Rates (4/23/19), BNY Keeps Dreyfus Name on Money Funds; Brokerage Sweep Rates Flat (3/5/19), Edward Jones Latest to Shift to FDIC Sweeps; ICI: MMFs Break $3T in '18 (1/31/19), Schwab, Brokerages Discuss Sweeps, Money Funds on Earnings Calls (1/25/19), SF Chronicle on Brokerage Sweeps; Bloomberg on Europe Rejecting RDM (11/28/18), TD Ameritrade, Morgan Stanley on Sweeps; Money Fund Assets Rebound (10/26/18) and Money Fund Yields, Sweep Rates Move Higher; WSJ on Savings, Deposits (10/18/18).
