This month, MFI interviews David R. Jones, President & CEO of CastleOak Securities. CastleOak Securities is a minority-owned dealer and one of the first firms to offer both an online money market trading portal and a D&I share class in the money fund space. We discuss the latest in diversity, corporate investing and cash below in our Q&A. (Note: The following is reprinted from the August issue of Money Fund Intelligence, which was published on Aug. 5. Contact us at info@cranedata.com to request the full issue or to subscribe, and let us know too if you'd like to see our latest list of ESG, Social and D&I share class money market funds.)
MFI: Give us some history. Jones: I founded the firm back in 2006, and we've grown CastleOak to be one of the largest diverse investment banks on Wall Street. We've got six offices around the country and are headquartered in New York. We’ve grown the firm from four individuals ... and now we've got over 55 employees. We focus on the capital markets for our clients, and that includes primary issuance, both in debt and equity, and also the secondary trading that goes along with that. On the fixed income side, back in 2010 when I brought Dan Davis and his team on, that's when we got into the Treasury, Agency and Money Market space. We've got a very strong presence on the secondary side in the front end of the curve.
In 2011, we got into the portal business by starting a partnership with State Street, where we launched our Money Fund Access program, giving our broker clients access to over 20 different money market fund families through our dedicated portal. Over the years, we've had assets grow to over $16 billion on that portal. Last year, we hired in two more seasoned professionals to augment our existing Money Fund Solutions team, so now we feel like we have a lot of depth and experience on the bench.
Also, just recently we launched our designated share classes, in partnership with Morgan Stanley. We've got two funds with them, Morgan Stanley Institutional Liquidity Government and MSILF ESG Prime. So, we've got a great combination of products for our clients who are managing their cash, whether they want to buy direct, whether they want to use managers to invest in funds, or whether they want to go direct to designated share class.
Our clients are the bluest of blue-chip corporate issuers, institutional investors, and government entities. We have the largest money management clients, which are the most sophisticated investors -- the BlackRocks, the Wellingtons of the world -- all the way down to billion-dollar asset managers like Pugh Asset Management and Garcia Hamilton.
MFI: Talk about D&I investing today. Jones: D&I [diversity & inclusion] investing has been around for a while. It started with folks understanding that doing business with diverse suppliers was a good idea when their employees or their customers were diverse. Later on, it transferred into supplier diversity -- buying widgets from minority-owned companies and things like that. Now it's across the board in professional services like banking and legal services.
Unfortunately, this momentum has come about because of many, many tragic events like the death of George Floyd. But the spotlight is there now. I don't want to say it's not always been at the C-suite level, but now it is clearly a C-suite conversation for corporations. In most major corporations, it is permeating throughout the firm. [They're looking at] what people are doing, what corporations are doing, not only internally -- are they hiring a diverse workforce? -- but also in terms of who folks are doing business with. They're concerned about doing business and doing good at the same time. They're looking beneath the surface for substance as well, which benefits firms like ours.
MFI: Did D&I start with governments? Jones: It starts at the top and [yes], the governments and municipalities ... it evolved on that side earlier. But now you're seeing that there are more diverse people at the upper echelons of corporate America. So that is resonating with them and you're starting to see that push. Senior executives are spotlighting or highlighting the need for diversity. There's still a long way to go, there's no doubt about that. But I think it is getting to where corporate America is following suit and allowing diverse managers and diverse broker dealers the opportunity to participate. When you see corporations like Verizon, AT&T, Apple and those caliber companies including diverse firms in their syndicates or in the funds that they're investing in, others look at this and realize that they should be doing the same thing. So, it's snowballing.
We are benefiting from that. We are well positioned. We have a very good coverage plan throughout our organization, public and private. It's always been in our DNA. We're not relying on others to do our calling; we're doing our calling ourselves. When people know you're out there, you've been consistent about the quality of the firm and its people, and clients know who they're doing business with ... it helps.
MFI: Are these deals exclusive? Jones: The strength of our firm has been based on the relationships we've developed. We're not out there just saying, 'Hey, just do business with us because we're a minority-owned firm.' We develop relationships. I would say that the deals we have are somewhat unique. We don't have an exclusive agreement with Morgan Stanley, but we're the only minority firm they're working with in the share class space. I think there are others out there who have multiple relationships. We also have a strong relationship with State Street on the portal side. These are world class firms that could do business with anyone, but they have partnered with us.
I don't think the larger firms are just like, 'Come one, come all and we'll do a partnership.' You've got to court some corporate clients. Especially in the money fund space, gathering assets is key. I think a lot of the larger fund managers are looking at this as a way they can increase assets under management, saying, 'If folks are putting money in these designated share classes, we should look into that.' In our world, we're doing the same thing. That's the name of our game. We're trying to increase the assets, not only in our portal but also in our share class.
There are some funds out there that are sort of stand-alone -- that's all they do in the space. We do feel we're differentiated in that we have experts across the curve in the fixed-income space. This is just one quiver in our arsenal, so we can meet a client's needs wherever they may be. But in particular on the short end, we feel that we are experts there. These are just a couple of the products, the fund portal and the share class, that we can offer to our clients. If they want to go direct, we can help them in managing their short-term liquidity needs.
MFI: What's your biggest priority? Jones: We think we've had a successful launch to our designated share classes with Morgan Stanley. But we just added a charitable donation component to them, because we see that there are some clients that would like to be able to have their assets generate fees to go to a charity. We're working diligently and just announced that we're going to be donating part of our revenue to the United Negro College Fund (UNCF). We feel that their mission aligns with ours. We do see that this is getting traction, that the charitable component is important to a lot of our clients.
But the transparency of exactly what's going to these charities needs to be in the spotlight as well. There are plenty of firms that have funds that have announced things like that, but when you look through the lens and try to find out how much is actually being donated, you really can't find that out. We've announced that we're going to donate 2 basis points of the assets invested directly in our share class to charity. We can help our clients track their ESG-related spending in a clear and straightforward way.
MFI: What are customers saying? Jones: Let me say, they are happy they're getting some income on their cash, that's for sure. There have been a lot of headwinds of late.... It's really hard to get people focused. As you talk about money market reform, people want to keep their ear to what's going on, but nobody really knows exactly what's happening.... I think as we look at, 'What are their priorities?' Capital preservation is key. Liquidity is key, and yield is up there. Now that they're getting more yield, they're getting more interested in what's going on in the marketplace and in where they can put their money for more yield.... So, we're optimistic going into the second half of the year, with full fees being paid, yields rising, etc. We're optimistic about our asset growth.
MFI: What about revenue sharing? Jones: This is a low margin business, so when you start talking about third-party distributors and platforms, the fees start getting chopped up pretty quickly. But I do think that you get the assets on the portal [almost any way you can]. Our model is not about saying 'Let's go to zero and see what we can do.' We want to be fair as we gather assets.... We're not willing to disrupt the marketplace in terms of how business is done. I'm not shy to say, and our clients appreciate, that this is a for-profit business. We've got to be competitive. But it's hard to do business and do good with our charitable component if we're waiving fees.
MFI: Any other thoughts? Jones: The first half of the year was challenging. [In] our portal and money fund business, revenue was down because we had compressed fees. Now we're back to the full fee levels. We're very optimistic as people look at where they can get yield in the short end that our corporate clients will be back in money funds. I do think that there's still money on the sidelines and people are looking for that yield.... We're optimistic that we can move the needle there.
We're also coming from a lower base. You've got $5 trillion in money funds, and less than 1% of those funds are invested in D&I share class funds. Our funds in particular -- we're like $1.3 billion or so in the designated share class -- we feel there's a good opportunity for us to grow our assets.
