Federated Hermes hosted its Q2'22 quarterly earnings call on Friday, which contained comments on money fund asset flows, regulations, fee waivers and more. (See their press release, "Federated Hermes, Inc. reports second quarter 2022 earnings.") CEO Chris Donahue comments, "Now moving to money markets, assets increased about $19 billion in the second quarter compared to the first quarter, with nearly all of the growth coming from money market funds. The funds benefited from higher yields [and] from continued elevated liquidity levels in the financial system. Money Funds also benefited from higher yields relative to deposit alternatives. Our money market mutual fund market share, which includes sub-advised funds, was about 7.3% at the end of the second quarter up from 6.9% at the end of the first quarter. With the recent increases in short-term interest rates, money fund minimum yield-related waivers have nearly ceased. We continue to believe that the higher short-term rates will benefit money market funds over time particularly as compared to deposit rates."

He explains, "Taking a look at recent total assets, managed assets were approximately $631 billion, including $436 billion in money markets, $82.5 billion in equities, $88 billion in fixed income, $21.5 billion in alternative private markets and $3 billion in multi-asset. Money market mutual fund assets were at $296 billion."

Tom Donahue tells us, "Total revenue for the quarter increased $41 million or 13% from the prior quarter due mainly to lower money market fund minimum yield-related waivers of $66.3 million, an additional day in the quarter and higher carried interest and performance fees, partially offset by lower average long-term assets, which reduced revenue by $22.6 million and lower average money market assets, which reduced revenue by $9 million. Q2 carried interest and performance fees were $2.5 million compared to about $100,000 in Q1. Operating expenses increased $33 million or 14% in Q2 compared to Q1, driven by $48.5 million of higher distribution expense from lower money market fund minimum yield related waivers.... With short-term rates higher in Q2, the negative impact on operating income from money market fund minimum yield-related waivers decreased to about $500,000 compared to $18 million in Q1. These waivers are now de minimis."

During the Q&A, Chris Donahue is asked about recent flows and says, "It's very, very, very difficult to make a long-term comment on a couple of weeks. We have big clients, I'm looking at the list and you've got $2 billion, $4 billion, $6 billion, $3 billion days, up and down so far here in July. It's just tough to make a prognostication from that."

Money Market CIO Debbie Cunningham comments, "We had a preauthorized client departure from about a year ago that was set for this summer. So we had some outflows in May. They started in May, June, July they got larger. If you mix those out, that single one large client that has moved into another type of product with their underlying client flows we are above the industry flows with that sort of data. So basically, large clients, similar to what Chris was saying, in this case, preauthorized that we knew about and were not surprised."

On MMF fee waivers, President Ray Hanley responds, "The yield improvement happened even coming out of Q1 continued into Q2. And of course, some of that came late. So the waiver recovery was nearly complete. You'll still see a little bit of -- in your terms, normalization in Q3, but it's largely complete. So yes, the geography is at this point, reflective of what it will look like based on the current assets, current channels, current funds, and all of that can change.... But that would be based on client changes, not the yield waivers."

Asked about pending regulations, Chris Donahue answers, "We continue to repeat the sounding joy of the beauty of money market funds. We continue our efforts to talk with all of the Commissioners, to talk to the staff, and even to talk to Treasury when we can about the importance of these money funds in the market. The only update that I would [is the] timing. The rumors are, note rumors, that perhaps in October they might finalize the rule. What will be in it? I don't know. As you know, our comments have been that swing pricing is a plague on money funds, and it's a novel plague in that it's never been tried before. And we have also commented that, all you have to do is detach the fees and gates from the liquidity requirements, and you're all set to go, and let the Boards decide how to run these funds and use all the tools they have in order to do the best fiduciary response for the customers. So that's a little summary -- 'just fix what was broken, declare victory and move on' has been our message."

Given a question on the outlook for the money fund business, Donahue responds, "From a longer-term perspective, ... the increase in the money supply [has gone] up, on average, 7% over a long, long period. And the money funds ... both the industry and Federated, [with] Federated going up slightly higher. What that tells you is that as the money stock goes up, people need to put it somewhere. And money market funds as a group are a very, very valuable and efficacious place for short-term cash, whether or not people are worried about inflation or up-rates or down-rates or whatever. So, these things have proven for half a century [to be] very resilient securities and places for short-term cash. We would expect that to continue. I would certainly expect, especially given what the Fed has done, to see increased flows. All of that is subject to whatever the SEC comes up with, which probably doesn't get put into effect until sometime in '23."

Cunningham adds, "I would say at this point, we are very optimistic. We are still looking at a Fed that is increasing rates.... We are not even six months into the process, and generally, ... it takes about six months for increasing rates to impact other types of specifics in the marketplace. So, we think that they are gaining control, but certainly not there yet. Our expectation will continue to see larger increases front-ended, so another 75 basis points likely in September.... If you look at a terminal rate of somewhere in the 3.5% to 4% area, and that holding then for maybe about six months or so.... But agreeing with what Chris was saying, the flows are incoming, the money stock has increased, and we are not at zero rates anymore. So, it's a good environment for people to take cover; it's a good environment for new cash flows to be placed; it's a good environment for people to earn something in a positive sense versus other asset classes at this point."

Finally, when asked about bond fund redemptions, Hanley comments, "If you look at high yield collectively where we had about $860 million of redemptions in Q2, that's now more like about $170 million. And, again, there have been challenges with that asset class.... On the ultra-short side, it's all part of the spectrum of what's happening with liquidity options. Chris mentioned micro-shorts having some inflows. Obviously, cash has had inflows. When you get the kind of rate movement that Debbie has talked about, and you had clients who moved out to ultra-short when money market yields were down close to zero, and you could get 1% or plus or minus at an ultra-short, there is less reason to do that now. So certainly ... some of that money that's left ultra-short's washed up into the money market part of the complex. But the pace of the net redemptions looks to be decreasing. It went down slightly in Q2 compared to Q1, and it's trending to be down more again, through the very early part of Q3."

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