Last week, the Board of Federated Hermes Government Obligations Tax-Managed Fund voted to convert it into a "Social" or "Impact" money market fund, we learned from mutual fund news source ignites and from a Prospectus Supplement filing. The ignites article, "$7.5B Federated Hermes Fund Adds Diversity Target for Trading," explains, "The $7.5 billion Federated Hermes Government Obligations Tax-Managed Fund will 'generally seek' to direct trades to women-, minority- and veteran-owned broker-dealers starting on Oct. 1.... The change applies to all three of the fund's share classes. Several other government money funds have also adopted similar trading policies in recent years." Federated's fund will become the third "social" money fund, joining Goldman Sachs and Dreyfus in offering funds that attempt to drive trading business through minority brokerages; it also joins a number of ESG money market funds focused on environmental investment screens.
Federated Hermes' Prospectus Supplement tells us, "On August 14, 2020, the Board of Trustees of Federated Hermes Money Market Obligations Trust, on behalf of its series, Federated Hermes Government Obligations Tax-Managed Fund, approved and authorized an adjustment to the Fund's brokerage allocation methodology, as described. Accordingly, effective October 1, 2020, please add the following disclosure to the Prospectus at the end of the section entitled 'Additional Information Regarding the Security Selection Process:' The Adviser will generally seek to place purchase orders for the Fund's portfolio transactions with women-, minority- and veteran-owned broker-dealers, subject to the Adviser's duty to seek best execution for the Fund's orders.'"
The filing adds, "In addition, effective October 1, 2020, please add the following disclosure to the Statement of Additional Information at the end of the first paragraph under the section entitled 'Brokerage Transactions and Investment Allocation:' 'The Adviser will generally seek to place purchase orders for the Fund's portfolio transactions with women-, minority- and veteran-owned broker-dealers, subject to the Adviser's duty to seek best execution for the Fund's orders.'"
The ignites article continues, "The Goldman Sachs Financial Square Federal Instruments Fund, for example, in December 2018 said it would aim to direct trades to brokerages that are certified by the Federal Home Loan Banks as being owned by women, minorities and disabled veterans. There are 19 brokerages currently on that list, according to the website for the 11 government-sponsored banks. After making the change, the fund's assets doubled to $1.3 billion in July 2019, The Wall Street Journal reported. Apple and JetBlue invested in the fund, the article noted. The fund has continued to grow, and reached $3.3 billion as of July 31, according to its fact sheet."
It also tells us, "JPMorgan Asset Management in May 2019 launched a new share class for two money market funds that is sold only through Academy Securities, a brokerage with strong ties to veterans, Ignites reported. Academy Securities is on the Federal Home Loan Banks' list of diverse and inclusive brokerages. The JPMorgan Prime Money Market Fund's Academy share class represents about 1% of the fund's $84.7 billion in assets as of Aug. 14, according to fund materials. Meanwhile, the Academy share class of the JPMorgan Government Money Market Fund has grown to $2.1 billion. The fund had $185.6 billion in assets as of Aug. 14. More recently, Northern Trust's asset management division recently said it will channel at least 10% of its overall trading volume to minority-owned brokerages."
Ignites quotes our Peter Crane, "Institutional investors are increasingly interested in money funds that weigh environmental, social and governance factors.... Some institutional investors are also adopting similar brokerage policies."
They also write, "Illinois state law, for instance, requires that the Treasurer's Office 'promote and encourage' the use of businesses owned by or under the control of minorities, women, veterans and persons with disabilities, according to a January report. 'Tapping diverse-owned broker-dealers is one of the quickest and best ways to ensure participation [of minority persons, women, qualified veterans and persons with disabilities],' the report notes with respect to two internally managed investment pools. Those two investment pools directed about $45 billion in trades to such brokerages in fiscal year 2019, up from $603 million in fiscal year 2014, the report states."
The ignites update comments, "Federated Investors bought a majority stake in ESG specialist Hermes Investment Management in 2018, and early this year the two firms rebranded as Federated Hermes. About a year ago, the firm disclosed that it had begun integrating ESG factors into the credit analysis for all of its money funds. And several weeks ago, the firm added ESG-related disclosures to several equity and bond funds that aren't explicitly labeled as sustainable funds, Ignites reported. A Federated Hermes spokesperson declined to comment on the new brokerage allocation policy for its Government Obligations Tax-Managed Fund."
A separate ignites new brief, "Northern Trust Sets Diversity Target for Trading," tells us, "Northern Trust's asset management division pledges to channel at least 10% of its trading volume to minority-owned brokerages. The firm now has an 'explicit target' for volume transacted through firms owned or led by ethnic minorities, disabled people and women, president Shundrawn Thomas told FTfm." He comments, "We said that we were going to commit to transacting at least 10% of our trading volume with these minority firms."
The Northern piece adds, "The firm has operated a minority brokerage program for years as well as a program fostering engagement with minority- and women-owned investment managers. 'I am surprised that relatively few of the entities which we work with actually explicitly ask to engage with women-led or ethnically diverse firms,' Thomas said. The investment manager outreach program boasts more than 70 companies, and about a quarter are included in portfolios run by Northern Trust on behalf of clients, Thomas said."
A look at the current Social MMF lineup (largest share class listed) shows a total of $16.1 billion (as of 7/31), including the new Federated fund. These funds (will) include: Federated Hermes Govt Ob Tax-Mg IS (GOTXX, $7.5B), Dreyfus Govt Sec Cash Instit (DIPXX, $5.3B) and Goldman Sachs FS Fed Instr Inst (FIRXX, $3.4B). The list of ESG funds (which we consider separate from Social) totals $6.9B and includes: BlackRock LEAF Direct (LEDXX, $1.2B), DWS ESG Liquidity Inst (ESGXX, $424M), Morgan Stanley Inst Liq ESG MMP I (MPUXX, $4.4B), State Street ESG Liq Res Prem (ELRXX, $683M) and UBS Select ESG Prime Inst Fund (SGIXX, $195M). (Pending: HSBC ESG Prime MMF.) Thus, the total of ESG and Social MMFs is $23.0B. Note: Federated Hermes, Goldman and JPMorgan also have ESG screens across their fund complexes at the analyst level.
For more, see these Crane Data News articles: Federated's Cunningham: Social at Fore of ESG (8/11/20), HSBC Files to Launch ESG Prime Money Market Fund; Proprietary Scoring (2/19/20); Fitch Ratings, ICD Host Webinars on ESG Money Funds, Cash Investing (2/6/20), Goldman Launches Social Class; Tiedemann Adds FICA; CS Green ABCP (1/24/20), Mischler Financial Joins "Impact" or Social Money Market Investing Wave (12/5/19), BNP Insticash Adds ESG Overlay (11/29/19), Dreyfus Launches "Impact" or Diversity Government Money Market Fund (11/21/19), Goldman Adds ESG Screen (11/14/19), Aviva Investors Discusses ESG MMFs; Fitch Rates MS ESG (11/6/19), UBS Asset Mgmt Files to Launch Select ESG Prime Institutional Fund (11/4/19), BlackRock Launches First Offshore ESG MMF; ICS LEAF in EUR, GBP, USD (7/22/19) and SSGA Goes Live with ESG Money Market Fund (7/3/19).
