Federated Hermes, the 6th largest manager of money market funds, reported Q2'20 earnings late last week and held an earnings call on Friday. (See the earnings call transcript here from Seeking Alpha.) The company's earnings release explains, "Money market assets were a record $457.6 billion at June 30, 2020, up $124.5 billion or 37% from $333.1 billion at June 30, 2019 and up $6.3 billion or 1% from $451.3 billion at March 31, 2020. Money market fund assets were $344.8 billion at June 30, 2020, up $113.5 billion or 49% from $231.3 billion at June 30, 2019 and up $8.7 billion or 3% from $336.1 billion at March 31, 2020."
It continues, "Revenue increased $39.2 million or 12% primarily due to higher average money market assets, an increase in revenue from alternative/private markets primarily due to the revenue of a previously nonconsolidated entity being recorded in operating revenue beginning March 2020 and higher performance fees. These increases in revenue were partially offset by voluntary fee waivers related to certain money market funds in order for those funds to maintain positive or zero net yields (voluntary yield related fee waivers) and a decrease in revenue due to lower average equity assets.... During Q2 2020, Federated Hermes derived 55% of its revenue from long-term assets (34% from equity assets, 12% from fixed income assets and 9% from alternative/private markets and multi-asset), 44% from money market assets and 1% from sources other than managed assets."
Federated's release adds, "Operating expenses increased $26.9 million or 11% primarily due to increased incentive compensation and increased distribution expenses associated with higher average money market fund assets. The distribution expenses include a reduction resulting from voluntary yield–related fee waivers. During the three and six months ended June 30, 2020, voluntary yield-related fee waivers totaled $20.0 million and $20.4 million, respectively. These fee waivers were partially offset by related reductions in distribution expenses of $18.0 million and $18.3 million, respectively, such that the net negative pre-tax impact to Federated Hermes was $2.0 million and $2.1 million for the three and six months ended June 30, 2020, respectively."
During Q2 earnings call, Federated President & CEO Chris Donahue tells us, "Moving to money markets, assets increased about $6 billion in the second quarter to a record high of $458 billion with growth in money market funds of about $8.7 billion, partially offset by seasonal declines in separate account assets of $2.4 billion. Money market assets reached a high of $483 billion in late May in advance of tax payments, usage of CARE funds and other uses of cash. Our money market share including the sub advised funds at quarter end was 8.1% down fractionally from 8.8% at the end of the first quarter. Now taking a look at recent asset totals and movements; managed assets were approximately $629 billion, including $452 billion in money markets, $80 billion in equities, $75 billion in fixed income, $18 billion in alternative and $4 billion in multi-assets. The money market mutual fund assets were $339 billion."
CFO Tom Donahue comments, "Total revenue for the quarter was up slightly from the prior quarter, due mainly to a higher money market assets generating $30.5 million in additional revenue ... and higher performance fees of $5.4 million, partially offset primarily by money fund minimum yield waivers of $19.6 million.... The decrease in distribution expense compared to the prior quarter was due the impact of minimum yield waivers which reduced distribution expense by $17.6 million, partially offset by an increase of $10.5 million primarily from higher money market fund assets.... The impact of money fund yield-related fee waivers on operating income in Q2 was about $2 million. Based on recent assets and expected yields, the impact of these waivers on operating income in Q3 could increase to about $4 million. Of course multiple factors impact waiver levels and we expect these factors and their impact to vary."
During the Q&A, Money Market CIO Deborah Cunningham says, "As for the Fed moves, they absolutely were extremely helpful during the quarter by changing their repo rates and procedures from a timing perspective that really influenced where overnight rates are and for our government products that can have upwards of greater than 50% in that type of market. It was extremely helpful. So what basically we saw was an increase in the repo rates that we were using on an overnight basis in those funds by let's say seven, eight basis points somewhere in that neighborhood and they have generally kind of leveled off.... So for example, they just as opposed to being down in the one to two to three basis point camp where they spend a good part of the beginning of the quarter and the end of the first quarter. So we have 10% in overnight and an extra nine basis points in repo."
When asked about waivers going forward, Tom Donahue answers, "We mentioned $4 million which would be up from our estimate of $2 million in the third quarter, and we stay very close with Debbie and her team on their forecasts. As I've said before, that's what we use when we project out one quarter. If you were to ask Debbie what's she going to say for the rest of the year and she will say well, the rates will be similar to the third quarter, but probably a little bit lower and that would make our waivers be a little bit higher. But we only like to talk about one quarter."
Regarding bank deposit rates vs. money funds, Chris Donahue says, "Overall, we always like to 'repeat the sounding joy' of the fact that the clients are in there for daily liquidity apart and the yield is a secondary consideration. And this is a cash management service as much as it is an investment. Therefore, [in the] overall long-term, big picture, we are looking at higher highs and higher lows on our charts as the ebb and flow of money market activities change.... And this has been true since we got into this business in the mid-70s."
Cunningham adds, "If you look at most bank deposit rates, they're at a basis point. So there [the lowest] on the totem pole from an earnings perspective. If you look at the gross yields on our money market funds for the government sector, it's about 25 basis points. Gross yields on our prime funds are currently about 37 basis points, so about 12 basis points over [this]. If you look at the growth rate of assets on a year-to-date basis for bank deposits versus money market funds ... bank deposits have grown by a little over 12% [YTD vs. money] market funds in total [at] about 17%. So again, although the numbers on a base -- average or base level are different, the growth rates has been higher in money market products. And I do believe that [is] given very, very, very low rates that are available on bank deposits."
One analyst asks about revenue sharing and fee waivers, and Tom Donahue tells him, "We ... put in a lot of effort, the last time in the low cycle to meet with everybody and work through the sharing arrangement and pro-rata thought process. We were very successful the last time around, and we're still getting asked by our partners for increased participation that they get versus us. But on terms of the waiver sharing, we have not seen any, any issue with our structure and sharing arrangements."
Finally, another analyst asks, "Can provide any color on institutional ... money markets ... shifting into short duration strategies just to get a little bit more income?" Donahue responds, "`It is very, very difficult [to track] and we don't usually make a speech about how many moved from money markets into other products. As you know from history, we deal with most of these clients on an anonymous basis and so we can't exactly track the cash flow."
