After a tumultuous week in the market caused by the spreading coronavirus, the Federal Reserve Board cut interest rates yesterday in a surprise 50 basis point intra-meeting move, lowering its Federal funds target rate range to 1.00-1.25 percent. The Fed had cuts rate by a quarter-point three times in 2019, the last one being in October. Money fund yields, which have been flat or inching lower in 2020 to date, are expected to plummet in coming days and should break below the 1.0% level over the next month. The cut comes roughly two weeks prior to the Fed's scheduled March meeting and is the first out-of-meeting cut since the 2008 financial crisis. We review the Fed move, and Fidelity's latest annual report, below.
A posting entitled, "Federal Reserve issues FOMC statement," tell us, "The fundamentals of the U.S. economy remain strong. However, the coronavirus poses evolving risks to economic activity. In light of these risks and in support of achieving its maximum employment and price stability goals, the Federal Open Market Committee decided today to lower the target range for the federal funds rate by 1/2 percentage point, to 1 to 1 1/4 percent. The Committee is closely monitoring developments and their implications for the economic outlook and will use its tools and act as appropriate to support the economy."
According to our Money Fund Intelligence Daily, the Crane 100 Money Fund Index, an average of the 100 largest taxable money funds, yielded 1.41% as of March 2, 2020. Given that these funds' average WAM, or weighted average maturity, is 32 days, this means the Crane 100 should fall below the 1.0% level for the first time since November 2017 in coming weeks and should approach the 0.91% level by early April. The broader Crane Money Fund Average currently yields 1.29%, so it should approach 0.8% after April Fool's Day. Though funds won't have to start waiving partial fees just yet, the next cut no doubt will bite.
In other news, Fidelity Investments, the largest manager of money market mutual funds, released a document entitled, "`Shareholder Update 2019." The annual report, which briefly mentions money market mutual funds in a couple different places, gives a brief review of the asset management giant's varied businesses.
Chairman & CEO Abigail Johnson writes, "For the year, FMR LLC, which represents results from Fidelity Financial Services and FMR's diversified businesses, achieved revenue of $20.9 billion, surpassing last year's revenue of $20.4 billion. Operating income, at $6.9 billion, was 9.5% higher than the $6.3 billion achieved in 2018.... Net asset flows to Fidelity's platform ... totaled $315 billion.... This increase was led by the growth in Fidelity managed accounts, index funds, and money market funds, where flows increased 26%, 49%, and 38%, respectively, over 2018 levels."
The report tells us, "Fidelity's Personal Investing (PI) division delivered another strong year, with assets and client accounts reaching record-high levels.... PI disrupted the industry when it announced that Fidelity customers' core cash holdings in new retail brokerage, retirement, and health savings accounts (HSAs) would be automatically swept into money market products. This move was in stark contrast to many firms that provide no investment choices for clients' core cash holdings or that default customers into low-yielding offerings."
In its "Personal Investing Overview, Fidelity repeats, "In 2019, Fidelity announced that new retail brokerage, retirement, and health savings account (HSA) customers would be automatically swept into higher-yielding money market offerings for their core cash holdings. This move is contrary to many firms that default customers into low-yielding offerings and provide no investment choices for clients' core cash holdings."
The Fidelity Institutional update explains, "Despite three interest rate cuts and a decline in interest-bearing balances, net interest income grew by 2.8%, thanks in large part to other increases in securities finance revenue generated by FCM's Prime Services, which provides a consolidated prime brokerage offering for hedge fund clients.... The FIAM (Fidelity Institutional Asset Management) business achieved strong sales.... FIAM saw rapid growth in the areas of money market and passive investing. Flows into FIAM money market funds grew 133% year over year, and passive flows were up 32%."
Within its Asset Management overview, Fidelity comments, "This year brought record asset flows and strong market tailwinds, bringing total discretionary managed assets to $3.2 trillion, up 26% year over year from $2.5 trillion at year-end 2018.... Growth of discretionary investment products was largely driven by strong inflows into money market funds ($121 billion), index funds ($66 billion), and managed accounts ($49 billion).... Fidelity's broad array of investment strategies -- including index, bond, money market, target-date, and managed account solutions -- increases the likelihood that any redemptions are exchanged into other products on Fidelity's platforms."
They continue, "Overall investment performance was strong across the board in 2019. In aggregate, Fidelity's mutual funds beat 74%, 78%, and 78% of their peers on a one-, three-, and five-year basis, respectively.... AM's Fixed Income division continued to deliver excellent performance. For the one-, three-, and five-year periods, fixed income funds beat 74%, 79%, and 80% of their peers, respectively."
Finally, a table shows that Fidelity's Money Market Funds outperformed 78% of their peers over 1 year (down from 81% last year), 82% of their peers over 3 years (down from 83% last year), and 83% of their peers over 5 years (up from 82% last year). (The table says they use Lipper data and describes it as "Weighted % of peers outperformed.")
According to our Money Fund Intelligence XLS, Fidelity has $794.5 billion in money market fund assets, or a massive 20.1% of the market. Their assets increased by $131.7 billion, or 19.9%, over the past 12 months (through 1/31/20). Meanwhile, total money market fund assets tracked by Crane Data are up $705.6 billion, or 21.7%, over the last 12 months to $3.951 trillion. Fidelity also has $263.7 billion of bond fund assets, or 7.2% of the market (according to our Bond Fund Intelligence XLS with info as of 1/31/20). Fidelity's bond fund assets have risen by $37.9 billion, or 16.8%, over the last 12 months. Bond fund assets hold $3.672 trillion, up $618.0 billion, or 20.2%, over the past year.
