News Archives: May, 2021

Crane Data's latest Money Fund Market Share rankings show assets were higher among most of the largest U.S. money fund complexes in April. Money market fund assets increased $61.7 billion, or 1.3%, last month to $4.988 trillion. Assets have increased by $240.7 billion, or 5.1%, over the past 3 months, and they've increased by $202.1 billion, or 3.9%, over the past 12 months through April 30, 2021. The biggest increases among the 25 largest managers last month were seen by BlackRock, Goldman Sachs, Federated Hermes, Invesco and Dreyfus, which grew assets by $24.5 billion, $18.3B, $13.0B, $11.0B and $10.4B, respectively. But big declines in April were seen by JP Morgan, SSGA, Fidelity, Northern and HSBC, which decreased by $10.4 billion, $10.1B, $9.8B, $5.3B and $5.1B, respectively. Our domestic U.S. "Family" rankings are available in our MFI XLS product, our global rankings are available in our MFI International product. The combined "Family & Global Rankings" are available to Money Fund Wisdom subscribers. We review the latest market share totals below, and we also look at money fund yields in April.

Over the past year through April 30, 2021, BlackRock (up $66.1B, or 15.2%), First American (up $21.6B, or 23.2%), Vanguard (up $19.1B, or 4.0%), Morgan Stanley (up $17.4B, or 7.7%), Dreyfus (up $8.5B, or 4.2%), Wells Fargo (up $6.1B, or 3.1%) and T. Rowe Price (up $5.7B, or 13.9%) were the largest gainers. These complexes were followed by HSBC (up $5.3B, or 13.3%), Columbia (up $3.8B, or 26.0%) and Alliance Bernstein (up $747M, or 4.8%). BlackRock, Goldman Sachs, JP Morgan, Dreyfus and Federated Hermes had the largest asset increases over the past 3 months, rising by $121.0B, $60.7B, $26.6B, $17.6B and $16.7B, respectively. The largest decliners over 3 months included: Fidelity (down $30.5B, or -3.3%), Schwab (down $12.6B, or -7.5%), Wells Fargo (down $8.7B, or -4.3%), Vanguard (down $6.6B, or -1.3%) and Northern (down $5.7B, or -3.4%).

Our latest domestic U.S. Money Fund Family Rankings show that Fidelity Investments remains the largest money fund manager with $883.9 billion, or 17.7% of all assets. Fidelity was down $9.8 billion in April, down $30.5 billion over 3 mos., and down $69.6B over 12 months. BlackRock ranked second with $546.6 billion, or 11.0% market share (up $24.5B, up $121.0B and up $66.1B for the past 1-month, 3-mos. and 12-mos., respectively). Vanguard remained in third with $491.5 billion, or 9.9% market share (down $449M, down $6.6B and up $19.1B). JP Morgan ranked fourth with $449.4 billion, or 9.0% of assets (down $10.4B, up $26.6B and down $20.6B for the past 1-month, 3-mos. and 12-mos.), while Goldman Sachs took fifth place with $363.9 billion, or 7.0% of assets (up $18.3B, up $60.7B and down $37.9B).

Federated Hermes was in sixth place with $347.5 billion, or 5.0% of assets (up $13.0 billion, up $16.7B and down $61.0B), while Morgan Stanley was in seventh place with $248.7 billion, or 5.0% (up $4.3B, up $14.1B and up $17.4B). Dreyfus ($225.1B, or 4.5%) was in eighth place (up $10.4B, up $17.6B and up $8.5B), followed by Wells Fargo ($194.1B, or 3.9%, up $854M, down $8.7B and up $6.1B). Northern was in 10th place ($162.0B, or 3.2%; down $5.3B, down $5.7B and down $6.7B).

The 11th through 20th-largest U.S. money fund managers (in order) include: Schwab ($156.3B, or 3.1%), American Funds ($154.2B, or 3.1%), SSGA ($139.9B, or 2.8%), First American ($136.3B, or 2.7%), Invesco ($82.6B, or 1.7%), UBS ($57.8B, or 1.2%), T Rowe Price ($49.7B, or 1.0%), HSBC ($39.4B, or 0.8%), DWS ($33.0B, or 0.7%) and Western ($31.3B, or 0.6%). Crane Data currently tracks 65 U.S. MMF managers, unchanged from last month.

When European and "offshore" money fund assets -- those domiciled in places like Ireland, Luxembourg and the Cayman Islands -- are included, the top 10 managers appear as Fidelity, BlackRock, JP Morgan, Vanguard, Goldman Sachs, Federated Hermes, Morgan Stanley, Dreyfus/BNY Mellon, Wells Fargo and Northern. Global Money Fund Manager Rankings include the combined market share assets of our MFI XLS (domestic U.S.) and our MFI International ("offshore") products.

The largest Global money market fund families include: Fidelity ($896.2 billion), BlackRock ($738.7B), JP Morgan ($655.2B), Vanguard ($491.5B) and Goldman Sachs ($481.3B). Federated Hermes ($357.2B) was sixth, Morgan Stanley ($301.3B) was in seventh, followed by Dreyfus ($247.1B), Wells Fargo ($195.0B) and Northern ($187.4B) which round out the top 10. These totals include "offshore" U.S. Dollar money funds, as well as Euro and Pound Sterling (GBP) funds converted into U.S. dollar totals.

The May issue of our Money Fund Intelligence and MFI XLS, with data as of 4/30/21, shows that yields were flat in April for almost all of our Crane Money Fund Indexes. The Crane Money Fund Average, which includes all taxable funds covered by Crane Data (currently 747), was flat at 0.02% for the 7-Day Yield (annualized, net) Average, the 30-Day Yield was also unchanged at 0.02%. The MFA's Gross 7-Day Yield was unchanged at 0.10%, the Gross 30-Day Yield was also unchanged at 0.10%.

Our Crane 100 Money Fund Index shows an average 7-Day (Net) Yield of 0.02% (unch) and an average 30-Day Yield also unchanged at 0.02%. The Crane 100 shows a Gross 7-Day Yield of 0.10% (unch), and a Gross 30-Day Yield of 0.10% (unch). Our Prime Institutional MF Index (7-day) yielded 0.03% (unch) as of April 30, while the Crane Govt Inst Index was unchanged at 0.02%, the Treasury Inst Index was unchanged at 0.01%. Thus, the spread between Prime funds and Treasury funds is 2 basis points, and the spread between Prime funds and Govt funds is 1 basis point. The Crane Prime Retail Index yielded 0.02% (unch), while the Govt Retail Index was 0.01% (unch), the Treasury Retail Index was also 0.01% (unchanged from the month prior). The Crane Tax Exempt MF Index yielded 0.01% (unch) in April.

Gross 7-Day Yields for these indexes in April were: Prime Inst 0.17% (unch), Govt Inst 0.07% (unch), Treasury Inst 0.07% (unch), Prime Retail 0.16% (down a basis point), Govt Retail 0.07% (unch) and Treasury Retail 0.07% (unch). The Crane Tax Exempt Index was unchanged at 0.13%. The Crane 100 MF Index returned on average 0.00% over 1-month, 0.00% over 3-months, 0.00% YTD, 0.05% over the past 1-year, 1.22% over 3-years (annualized), 1.00% over 5-years, and 0.52% over 10-years.

The total number of funds, including taxable and tax-exempt, was up 15 at 917. There are currently 747 taxable funds, up 11 from the previous month, and 170 tax-exempt money funds (up 4 from last month). (Contact us if you'd like to see our latest MFI XLS, Crane Indexes or Market Share report.

The May issue of our flagship Money Fund Intelligence newsletter, which was sent to subscribers Friday morning, features the articles: "ICI's PWG Comment Defends MMFs; Crane Celebrates 15th," which excerpts from ICI's comment letter to the SEC; "Big Fund Companies Respond to SEC, PWG Report Reforms," which highlights comment letters from the largest money fund complexes; and, "ICI 2021 Fact Book Shows Money Fund Trends in '20," which reviews ICI's annual statistical work. We also sent out our MFI XLS spreadsheet Friday a.m., and updated our Money Fund Wisdom database query system with 4/30/21 data. (MFI, MFI XLS and our Crane Index products are all available to subscribers via our Content center.) Our May Money Fund Portfolio Holdings are scheduled to ship on Tuesday, May 11, and our May Bond Fund Intelligence is scheduled to go out Friday, May 14.

MFI's lead article says, "The big news last month was the submission of comment letters to the SEC ahead of potential changes to money fund regulations. We quote from mutual fund trade association, the Investment Company Institute, who writes, 'Money market funds did not cause the stresses in the short-term funding markets last March. US public institutional and retail prime money market funds accounted for just 19% of the reduction in financial and nonfinancial commercial paper outstanding during the week-ended March 18.... Other market participants accounted for 81% of the decline.... In addition, even at the height of the liquidity crisis, money market funds, including institutional prime money market funds, still had liquidity to meet new redemptions if they had meaningful opportunity to use part of their 30% weekly liquid asset buffers.'"

The ICI continues, "To the extent policymakers seek to mitigate the possibility of future distress in the short-term funding markets, they should prioritize the examination of the activities and behavior of all market participants. Only by doing so will policymakers make progress toward their goal of making the financial system more resilient in the face of a liquidity shock of the nature experienced in March 2020."

Our second article reads, "Following the April 12 deadline, we've been detailing comment letters to the SEC in response to its 'Request for Comment on Potential Money Market Fund Reform Measures in President's Working Group Report.' Below we highlight excerpts of the letters submitted by the largest money fund complexes. (Note: For more, please join us for our webinar, 'Handicapping Money Fund Reforms,' Thursday, May 20 from 2-3pmET.)"

The piece continues, "Fidelity Investments explains, 'While we view the PWG Report as a productive first step in considering potential reform measures, we encourage the SEC to now narrow the range of options under consideration by eliminating those options that have no nexus to the events of 2020 and therefore would not achieve any of the goals for reform stated in the PWG Report. The details of any measures that the SEC wishes to pursue further remain to be considered and, as such, we anticipate having more viewpoints to offer once more of these details are made public."

The "ICI Fact Book" article tells readers, "ICI's new '2021 Investment Company Fact Book' looks at the crazy events of 2020 and the huge inflows into Government money market funds. Overall, money funds assets were $4.333 trillion at year-end 2020, making up 18.1% of the $23.9 trillion in overall mutual fund assets. Retail investors held $1.529 trillion, while institutional investors held $2.804 trillion."

ICI tells us, "In 2020, money market funds received $691 billion in net new cash flows, up from $553 billion in 2019.... Government money market funds received substantial inflows ($835 billion) while prime money market funds and tax-exempt money market funds had outflows of $111 billion and $33 billion, respectively."

MFI also includes the News piece, "MMF Assets Stay Strong in April." It says, "Crane's MFI shows assets rising $62.2 in April to $4.991 trillion, but ICI's weekly "Money Market Fund Assets" report shows MMFs falling $‚Äč17.2 billion to $4.512 trillion in the latest week."

An additional News brief, "Powell Hits MMFs on 60 Minutes," tells us, "Federal Reserve Chair Jerome Powell discussed money funds during a recent '60 Minutes.' He comments, "Most parts of the financial system made it through quite a stress test last year, [but] some parts of the financial system had to be bailed out again, places like money market funds ... where we had to step in again and provide liquidity.... There's a structural issue and we know this, and it really is time to address it decisively."

Our May MFI XLS, with April 30 data, shows total assets increased $62.2 billion in April to $4.991 trillion, after jumping $151.0 billion in March, rising $30.8 billion in February and $5.6 billion in January. Assets decreased $6.7 billion in December, $11.7 billion in November, $46.8 billion in October, $121.2 billion in September, $42.3 billion in August, $44.2 billion in July and $113.0 billion in June. Our broad Crane Money Fund Average 7-Day Yield was unchanged at 0.02%, our Crane 100 Money Fund Index (the 100 largest taxable funds) also remained flat at 0.02%.

On a Gross Yield Basis (7-Day) (before expenses are taken out), the Crane MFA and the Crane 100 both stand at 0.10%. Charged Expenses averaged 0.08% for the Crane MFA and 0.08% for the Crane 100. (We'll revise expenses on Monday once we upload the SEC's Form N-MFP data for 4/30.) The average WAM (weighted average maturity) for the Crane MFA and Crane 100 was 40 (down two days from the previous month) and 42 days (down two days) respectively. (See our Crane Index or craneindexes.xlsx history file for more on our averages.)

A press release entitled, "Morgan Stanley Investment Management and CastleOak Securities, L.P. Debut New Share Class," tells us, "Morgan Stanley Investment Management ('MSIM') and CastleOak Securities, L.P. ('CastleOak'), an industry-leading, minority-owned, boutique investment bank are pleased to announce an expansion of their long-standing partnership by debuting two new co-branded share class offerings that provide clients an expanded menu of short-term cash investment services. As clients increasingly look to maximize their social impact, these two new products provide a solution that brings together CastleOak's strong institutional relationships and Morgan Stanley's unparalleled investment experience." (For more on the MS CastleOak Shares, see our recent Crane Data News: Morgan Stanley's Wachs, Crane Talk ESG, Social Money Funds on Webinar (5/4/21), and Morgan Stanley Files for CastleOak Shares; Bond Fund Symposium Today (3/25/21).)

It continues, "CastleOak shares of the Morgan Stanley Institutional Liquidity Funds Government (ticker COSXX) and ESG Money Market Fund Portfolios (ticker OAKXX) are now available, enabling clients to help meet their primary cash investment goals of principle preservation and liquidity, while supporting their Diversity & Inclusion (D&I) efforts in a transparent and meaningful way."

David R. Jones, President & CEO of CastleOak Securities, L.P., comments, "Morgan Stanley Investment Management has been an outstanding partner.... The Morgan Stanley team recognized the expertise, experience, and relationships of an independent investment bank like ours. Launching these new share classes gives our clients yet another way to meet their ESG goals without compromising the standards they expect when choosing where to put their money to work." The release also says, "The addition of new share classes underscores CastleOak's ongoing efforts to expand its Money Fund Access web-based liquidity solutions platform."

Morgan Stanley's Fred McMullen adds, "This partnership is a unique opportunity for Morgan Stanley Investment Management to team up with a best-in-class firm like CastleOak to deliver treasury management solutions that can help companies advance their D&I objectives.... We are proud to be working together on this exciting product offering."

In related news, State Street Global Advisors' Will Goldthwait spoke yesterday at the 2021 New England AFP Annual Conference," and briefly discussed ESG and D&I in money market funds during a presentation. When asked, "Is ESG here to stay?" Goldthwait responds, "Yeah, without a doubt it is. There's no question in my mind. I think the way it's in cash right now will change.... I'm not alone in saying this [but] ESG ultimately is going to be something that just is part of your overall investment process."

He tells us, "I think cash is a great example of how this is happening. We use a proprietary R-factor score, what we call the responsibility factor, and we have that score on all of the credits on our credit approved list. Now, the R-factor doesn't cover 100 percent of the credits, but for all of our credits on that credit approved list that have an R-factor score, that goes into our decision-making process, even if it's a non-ESG fund. We can see that score, we're looking at it, and we're trying to reward those companies that have higher R-factor scores. So, in a way, even though we only have one ESG fund in the U.S. right now that's up and running, we are looking at that R-factor across our entire investment process.... So, I think that's the evolution of ESG in cash."

Goldthwait continues, "We've been managing ESG portfolios since 1985 in the equity space, and the fixed income space since 1995. And typically, what that is, is exclusionary methods. You take a certain sector with certain companies and you exclude them from the portfolio and you set up an index that has those credits or those sectors excluded, and then that's what you benchmark against.... Now what we're seeing is a tilt. So rather than an exclusionary basis, there's a tilt towards those that have higher ESG scores, or in our case higher R-factor scores. There's no reason that we can't apply that across our entire cash strategy."

He says to the NEAFP, "The other thing I'll mention regarding D&I and minority broker-dealers is, we're looking very hard at this. We had already been trading with minority broker-dealers.... So we're just increasing those efforts, and we're just trying to spread that across all of our Government and Treasury [MMF] strategies. [We're] looking hard at those trade volumes, looking hard at those metrics and applying that really across all of our strategies."

Finally, Goldthwait adds, "Now, we have to be thoughtful about that. Right? I mean, as everyone knows, Government funds are huge, they're billions and billions and billions of dollars. So you can't take a smaller broker-dealer and overwhelm them with huge tickets. You have to be very thoughtful and considerate and sort of help them grow, and that's what we're committed to doing. We want to see that part of the broker-dealer community grow and we want to try to help them do that." (Note: The New England AFP online conference continues today, and ICI's 2021 Virtual General Membership Meeting also starts today.)

For more on ESG and "Social" MMFs, see also: Northern Renames Diversity Shares Siebert Williams; Safened Platform (4/20/21); JP Morgan Launches "Empower" Share Class to Support Minority Banks (2/24/21); Invesco Files for Cavu Secs Class (12/18/20); ESG and Social MMF Update: Mischler News, Green Deposits, Reg Debate (12/4/20); Goldman Launches Social Class; Tiedemann Adds FICA; CS Green ABCP (1/24/20); Mischler Financial Joins "Impact" or Social Money Market Investing Wave (12/6/19); and Dreyfus Launches "Impact" or Diversity Government Money Market Fund (11/21/19).

Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics Tuesday, which track a shifting subset of our monthly Portfolio Holdings collection. The most recent cut (with data as of April 30, 2021) includes Holdings information from 49 money funds (down 23 funds from a week ago), which represent $1.624 trillion (down from $1.999 trillion) of the $4.888 trillion (33.2%) in total money fund assets tracked by Crane Data. (Our Weekly MFPH are e-mail only and aren't available on the website.)

Our latest Weekly MFPH Composition summary again shows Government assets dominating the holdings list with Treasury totaling $833.0 billion (down from $1.018 trillion a week ago), or 51.3%, Repurchase Agreements (Repo) totaling $720.4 billion (down from $489.0 billion a week ago), or 25.9% and Government Agency securities totaling $198.0 billion (down from $235.8 billion), or 12.2%. Commercial Paper (CP) totaled $66.4 billion (down from $88.4 billion), or 4.1%. Certificates of Deposit (CDs) totaled $45.7 billion (down from $62.9 billion), or 2.8%. The Other category accounted for $42.8 billion or 2.6%, while VRDNs accounted for $18.0 billion, or 1.1%.

The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $833.0 trillion (51.3% of total holdings), Federal Home Loan Bank with $112.7B (6.9%), BNP Paribas with $44.1B (2.7%), RBC with $38.7B (2.4%), Federal Farm Credit Bank with $36.3B (2.2%), Federal Reserve Bank of New York with $36.1B (2.2%), Fixed Income Clearing Corp with $35.7B (2.2%), Federal National Mortgage Association with $33.1B (2.0%), JP Morgan with $26.9B (1.7%) and Credit Agricole with $24.9B (1.5%).

The Ten Largest Funds tracked in our latest Weekly include: JPMorgan US Govt MM ($216.4 billion), Wells Fargo Govt MM ($145.1B), Fidelity Inv MM: Govt Port ($132.3B), Morgan Stanley Inst Liq Govt ($121.4B), JP Morgan 100% US Treas MMkt ($104.4B), Dreyfus Govt Cash Mgmt ($104.0B), First American Govt Oblg ($98.1B), State Street Inst US Govt ($83.7B), JPMorgan Prime MM ($76.5B) and Morgan Stanley Inst Liq Treas Sec ($62.0B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary, or our Bond Fund Portfolio Holdings data series.)

In other news, S&P Global Ratings published "U.S. Domestic 'AAAm' Money Market Fund Trends (First-Quarter 2021)," which tells us, "Rated U.S. MMFs finished the first quarter of 2021 with sizable positive flows. Government funds remained the driving force behind this trend, highlighting their growing favor among investors. For the first quarter, government MMF assets increased nearly 9%, reaching levels akin to the peak of 2020, and prime fund assets remained consistent with the previous quarter end. Overall, for the first quarter, U.S. domestic PSFR assets increased to $3.2 trillion, from $2.98 trillion."

The update tells us, "Large purchases of Treasury bills were ongoing in government funds--along with an uptick in Treasury notes--as managers moved from agency securities. Agency and floater exposures hit a low by quarter-end, reflective of low rates. Several managers were awaiting the introduction in this quarter of the Bloomberg Short-Term Bank Yield Index (BSBY), an alternative money market reference rate to SOFR (Secured Overnight Financing Rate), which may reignite interest in floating rate instruments."

S&P adds, "Prime funds have slowly begun to reposition themselves to slightly mirror pre-pandemic times. For instance, while Treasury bills remained a valuable tool for overnight liquidity, there was less emphasis on usage. Average T-bill exposures decreased to 3%, the lowest concentration since before the COVID-19 pandemic. Managers also increased their bank deposit and asset-backed commercial paper exposures. The Federal Reserve's Money Market Mutual Fund Liquidity Facility officially ended, but the pressing issue for prime funds is the likelihood of regulatory reform as the SEC seeks public comments on potential reform measures for MMFs during the quarter."

S&P also published "European 'AAAm' Money Market Fund Trends (First-Quarter 2021)," which comments, "European-domiciled MMFs we rate had mixed results during the first quarter of 2021 as euro and sterling-denominated MMFs had negative flows of 20% and 8%, respectively, while U.S. dollar funds saw a 1% increase from Dec. 31, 2020. Comparatively, since the first quarter of 2020, the three currencies showed asset growth of 16% (euro), 7% (sterling), and 18% (U.S. dollar), continuing to emphasize the demand for MMFs, despite low and negative yielding investments."

They write, "During the past 12 months, money market funds have been in the spotlight again and tested by the wider market impact of COVID-19, yet the MMFs we rate all had their 'AAAm' ratings affirmed in 2020. Going forward, we'll continue our weekly surveillance and regular interactions with MMF fund managers, and we expect that ratings will hold up."

Also, Fitch Ratings also published several fund ratings actions. The first, "Fitch Assigns 'AAAmmf' Rating to the North Carolina Investment Pool-Liquid Portfolio," explains, "Fitch Ratings has assigned a 'AAAmmf' money market fund (MMF) rating to the North Carolina Investment Pool-Liquid Portfolio (NCIP). The commingled local government investment pool was established pursuant to North Carolina's state code as a statutory trust for the benefit of the North Carolina local governments, and is governed by a board of trustees that are representatives of participant units of local government. PFM Asset Management LLC (PFMAM) serves as the pool's investment adviser and administrator. NCIP was established to invest idle funds of its participants in various high-quality money market investments, in accordance with North Carolina General Statutes. NCIP seeks to maintain a stable NAV of $1.00."

Another release, "Fitch Rates COLOTRUST EDGE 'AAAf'/'S1'," states, "Fitch Ratings has assigned a 'AAAf' International Fund Credit Quality Rating (FCQR) and a 'S1' Fund Market Risk Sensitivity Rating (MRSR) to COLOTRUST EDGE. The pool was established as an authorized investment for local government participants, pursuant to Colorado state regulatory requirements. The COLOTRUST program is supervised by a board of trustees comprised of eligible local government participants of the program. Public Trust Advisors, LLC (PTA) serves as the investment advisor and administrator for the pool."

A third LGIP release, "Fitch Rates FLCLASS Enhanced Cash 'AAAf'/'S1'," adds, "Fitch Ratings has assigned a 'AAAf' International Fund Credit Quality Rating (FCQR) and a 'S1' Fund Market Risk Sensitivity Rating (MRSR) to FLCLASS Enhanced Cash. The pool was established as an authorized investment for local government participants, pursuant to Florida state regulatory requirements. The FLCLASS program is supervised by a board of trustees comprised of eligible local government participants of the program. Public Trust Advisors, LLC (PTA) serves as the investment advisor and administrator for the pool."

Finally, a fourth release, "Fitch Rates Goldman Sachs Financial Square Federal Instruments Fund 'AAAmmf'," says, "Fitch Ratings has assigned a 'AAAmmf' rating to the Goldman Sachs Financial Square Federal Instruments Fund. The fund is a Rule 2a-7 registered government money market fund managed by Goldman Sachs Asset Management, L.P."

Late last month, Crane Data hosted an ESG & Social Money Fund Update webinar, which featured a discussion between our Peter Crane and Morgan Stanley's Global Head of Liquidity Product Scott Wachs. The two talked about ESG Prime MMFs, Social Govt MMFs, and Diversity private-labelled share classes. We also discuss asset flows, fee waivers and future MMF reforms. Below, we quote from our discussion. (Note: Crane Data Subscribers and Attendees may access the Powerpoint and recording for the "ESG & Social Money Fund Update" here, and mark your calendars for our next webinar, "Handicapping Money Fund Reforms," which will take place May 20 (Thursday) from 2-3pm EDT.)

After introducing the ESG webinar, Crane comments on asset growth, saying, "What's underappreciated ... is the steady build up prior to that [March 2020] super spike. Asset-wise, it's the best of times for money funds. You had back-to-back 20% gain years in '19 and '20. In '21, when it looked like a lot of that cash was eroding, now March [2021] saw strong inflows too. So that's the good news ... assets are very strong, very robust. The Government MMF assets are almost record level."

Wachs tells us, "Yes, [investors in 2020] didn't know ... when and how they would be able to obtain and spend their money, or what options they may have for investment. Obviously, many companies held off investing [over] concerns about the path of the coronavirus and the path of the economy. There are certainly a number of firms as well that took advantage of government programs to build up their cash for things like payroll, and to continue to maintain their resources so they could more easily open back up when the environment became better. We certainly saw money come into our Government funds. While in March of last year there was a fairly rapid decline in Prime funds for several weeks, the bounce back was pretty quick as well."

He continues, "You look at the beginning of this year, and we've continued to see growth in money market funds, both in Government funds, but also in Prime funds as well for us at Morgan Stanley. When I think about why we've seen that uptick in Government funds, particularly in the last month or so, I think about it from a corporate treasurers' standpoint and what their options are to invest their cash. If you look at Treasuries, what's happening in the market is that Treasury rates have been so incredibly low, to buy an overnight treasury you're talking about yields of two or three basis points."

Wachs adds on rates, "I think everyone has a yield floor in place for their Government money market funds, they range from one to two, three, sometimes four basis points.... But if you think about executing a trade in a money market fund versus executing a trade in a Treasury, all of those fundamental characteristics that cause investors to historically really like money market funds continue to be very, very attractive. In a Government money market fund, you have the constant net asset value, you have same-day liquidity, so ease of access to your cash, and the execution is very easy. Treasuries are not quite as strong on all of those points, and particularly the execution process.... When yields for a Treasury are in the same neighborhood as the Government money market funds, I think a lot of corporate treasurers will choose to buy the Government money market fund."

Crane comments, "Looking at the yields, [the environment] has been as close as you really can get to zero without going negative.... Compressed spreads, Prime yielding barely anything above Governments and fee waivers. The expenses charged on money funds are hitting record lows. In 2009 through 2015 money fund expenses, roughly were cut from 0.3% on average to 0.15%, now, they've been cut this time from 0.3% to 0.1%, even below 10 basis points. Scott, talk about the yields, how brutal? How low? And, fee waivers?"

Wachs responds, "The low yield environment is biting all of us.... I think some of the stats that you just rattled off are pretty much on target in terms of the impact. We're very hopeful, especially given some upticks in the economy right now, that the zero-rate environment this time is not going to last anywhere near as long as it did last time. But there's no doubt in the immediate time frame, the low-rate environment is hurting from a manager standpoint, from an investor standpoint, and from an intermediary standpoint."

He also says, "I think when you think about ESG and sustainability, Morgan Stanley as a firm has had a long history of focus on sustainability. We've been thinking about sustainability as a firm probably for over ten years at this point. So, it's core to the values of Morgan Stanley. We've have expertise and experience in ESG and sustainable investing in businesses across the firm, so we have a lot of organizational history and knowledge in the space. As we thought about our money market fund platform and as we've spoken to clients, we realized this was not only important to Morgan Stanley as the firm, but also to our clients as well. So, we thought about the best way to serve our clients in that regard. We thought about our money market fund lineup and the best way to serve our clients on this topic was to develop an ESG money market fund."

Wachs explains, "We didn't want it to be sort of a plain vanilla ESG money market fund. We wanted it to be one that was very robust and very consistent with a strong recognition of ESG and ESG process.... That's so important to clients, and that's so important to Morgan Stanley as a firm. We decided to convert one of our existing small Prime funds to the ESG Money Market Portfolio, and we did this in October of 2019. It's been quite successful to date and that fund is again, I think, one of the most robust ESG funds in the market."

He tells us, "I want to also just spend a moment talking about how we think about socially conscious funds. And here's how we make that definitional distinction between ESG funds and socially conscious funds, because they really kind of overlap a little bit. `When I think about a ESG fund, I think about a fund that has ESG specific considerations in its investment process, following certain investment guidelines, processes and objectives that are ESG related. A socially conscious fund, in the way we think about it, implements certain considerations from an operational or executional perspective. We have our Government Securities Fund, which is a socially conscious fund in that we trade with D&I [diversity and inclusion] broker dealers. So, for the purchase trades that we do in the Government Securities Fund, we seek to do those trades with D&I broker dealers. So that's not part of the investment decision process in terms of the types of securities you're going to buy, but it's part of the execution of the trading process. Both are important in driving adoption and change in the industry more broadly."

Wachs adds, "The third leg of this ESG and socially conscious dimension is private labeled share classes. This is where there is a share class that is launched and offered by a fund manager in conjunction with the D&I broker dealer.... You'll see a number that have been offered to date and there are a few that are pending as well. We actually filed in March for a private labeled share class, the CastleOak Shares.... It's still in registration, so I can't really say much more than that."

Crane states, "Let's talk on each of these a little bit more. The ESG and the Prime, to me, was really the first wave, but it got hampered by the issues for Prime overall.... Of course, Prime is under the gun now, it's under scrutiny because of the gates and fees, the floating NAV. It's a real shame because prior to coronavirus, it was making a very nice recovery. Prime was coming back, yields were rising, we almost had 2% yields in money funds.... And then all of a sudden it stopped.... If Prime funds are all [invested in] banks, can you really differentiate? And then, of course.... I took a [look at all the] Prime ESG funds ... and then it hit me, they don't have Treasuries."

Wachs replies, "I think sometimes when you think about ESG in the money market fund space, it's a little bit challenging to think about what does that really mean in terms of scoring issuers and looking at issuers? It's not quite as clear as maybe in the equity space ... where you have a much greater variety of industries that you tend to be investing in. But, even in the limited set of issuers that we all look at in the money market fund space, we're looking at the highest quality credits, that's all that money market funds tend to invest in anyway. But even in that context, you look at the ESG factors: environmental, social and governance. There are factors that are ones that you can differentiate on. Things like how diverse is the board of the bank? How do they think about lending to minority communities? How have they responded to the broader social issues that exist today?"

Crane then says, "Let's talk about the Social now. You mentioned doing business through diverse and inclusive and minority dealers is the primary way. These are all Government money funds. The Federal Home Loan Bank has their list of D&I dealers, and I think this really was a crucial step in letting a lot of the government funds have something to hang their hat on. Saying here's the list, Federal Home Loan Bank puts it out, so ask them if you want to do business through us. We're using their list. I know you guys converted a government fund. That's the other thing is that a lot of these government funds were already at least a few billion dollars ... having that heft can't hurt, right?"

Wachs answers, "Absolutely. We were in, I think, a pretty good position to think about this because of the breadth of our Government and Treasury fund complex. This is something that we have thought about for years. Having a very deep Government fund complex, having a Government Securities fund, a Government and Repo fund, a Treasury Securities fund [and] a Treasury and Repo fund ... all ... extremely successful. They all have had very strong scale, which is attractive. That gave us the opportunity to think across the spectrum of Government and Treasury funds as to how to best put in place a D&I trading overlay. The other thing that I think put us in a very good place is that again, because our firm has had a focus on sustainability and D&I for a number of years, a good many of the dealers listed on that Federal Home Loan list are dealers that our firm and our team have relationships with. So, it [wasn't] new to us, when we put this overlay in place on our Government Securities Fund at the beginning of this year.... We really just institutionalized and emphasized to a greater degree the work that we're doing with these D&I broker dealers."

Federated Hermes hosted its quarterly earnings call (see the Seeking Alpha transcript here) on Friday, and fee waivers and virtually zero rates were the big topic of discussion. Federated's release explains, "Money market assets were $419.1 billion at March 31, 2021, down $32.2 billion or 7% from $451.3 billion at March 31, 2020 and down $1.2 billion or less than 1% from $420.3 billion at Dec. 31, 2020. Money market fund assets were $297.2 billion at March 31, 2021, down $38.9 billion or 12% from $336.1 billion at March 31, 2020 and down $4.7 billion or 2% from $301.9 billion at Dec. 31, 2020."

It explains, "Revenue decreased $18.0 million or 5% percent primarily due to an increase in 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). For further information, see "Impact of voluntary yield-related fee waivers" below. This decrease was partially offset by an increase in revenue due to higher average equity and fixed-income assets and an increase in revenue from alternative/private markets assets primarily related to revenue of a previously nonconsolidated entity being recorded in operating revenue beginning March 2020. During Q1 2021, Federated Hermes derived 75% of its revenue from long-term assets (49% from equity, 16% from fixed-income and 10% from alternative/private markets and multi-asset), 24% from money market assets, and 1% from sources other than managed assets."

President & CEO J. Christopher Donahue says on the call, "Moving to money markets, assets were down about $1 billion in Q1 from year-end. Our money market fund market share including sub advised funds at quarter-end, was about 7.4%, down slightly from the year-end market share of 7.8%. While we've seen longer-term interest rates increased recently, short-term interest rates remain at historic lows, with yields on money market securities dropping to the low single-digits over the last couple of months. As a result, minimum yield waivers were greater than anticipated in the first quarter, and certain money market separate accounts have begun to be impacted in a similar way. Minimum yield waivers are expected to increase again in the second quarter before declining over the rest of the year, as we noted in our press release. As usual, we experienced waivers for competitive purposes as well."

He continues, "Against the challenging interest rate and yield environment, money market funds continue to show their resilience and value to investors, issuers, and the overall financial system. The most recent ICI statistics show $4.5 trillion in money fund assets, up from $4.3 trillion since year-end and $3.6 trillion at the end of 2019. We believe that the lower interest rate challenge will pass despite the Fed's current stance. It's hard not to conclude that the pandemic recovery and the massive stimulus being unleashed will not lead to interest rate increases."

Donahue tells us, "We also believe that as we enter another round of the 40-plus years of money market fund regulatory discussions, the truth is that the March 2020 market disruptions in the midst of the global pandemic were in no way caused by money market funds. The essential role money market funds play in our capital markets will be recognized by regulators. We expect the regulatory process to follow the data. Any regulatory changes should be based on facts, not false narratives, and should preserve issuers and investors ability to utilize money market funds."

CFO Thomas Donahue says, "Total revenue for the quarter was down from the prior quarter due to the increased negative impact of minimum yield waivers of $27 million, fewer days costing $9.3 million, lower money market assets costing $6.4 million, and lower performance fees.... As noted in the press release, negative impact from operating income from minimum yield waivers on money market mutual funds and certain separate accounts may range from $35 million to $45 million during the second quarter. This range is based on gross yields on government money market portfolios of 3 to 10 basis points. The historically low yields are being driven by technical factors at the front-end of the yield curve. In March, we began taking on more of the impact of the low rates through waivers as we were not able to further reduce distribution expenses on certain funds and separate accounts. This was largely responsible for the higher than forecasted Q1 waivers and the higher forecast range for Q2."

He adds, "We believe that minimum yield waivers are likely to peak in Q2 and we expect short-term rates to increase in Q3 and Q4. The amount of minimum yield waivers and the impact on operating income will vary based on a number of factors, including among others interest rates, the capacity of distributors to absorb waivers, asset levels, and flows. Any changes in these factors can impact the amount of minimum yield waivers, including in a material way."

During the Q&A, Money Market CIO Deborah Cunningham explains, "Some of the more specific factors about our outlook have to do with currently where overnight rates are trading, which is in the one basis point, maybe one to two basis range.... [T]hroughout most of 2020 ... overnight rates have been somewhere in the neighborhood of five to eight basis points. Our expectation would be because of various processes that the Fed has already gone through by increasing their RRP counterparty limits.... We do believe that we will see some technical adjustments to that reverse repo rate ... up to a level [of] five basis points. Commensurate with that would be likely an IOER of 5 basis points. What this does not only raises the floor from an overnight perspective by that amount of basis points, but it also raises the money market yield curve by upwards of probably three to five basis points depending upon what part of the curve you're looking at. So that plays directly through as we invest in those markets on a daily basis to the yields of the fund and thus the waivers."

She also says, "So ... the technical adjustments that we hope are coming in the second quarter from the Fed with regard to the RRP and IOER rates should be extremely helpful. Then ... debt ceiling issues start to impact in the beginning of the third quarter. Once that [is] past us, we believe that the money market yield curves which on the Prime side, like the BSBY curve, which I'll note I'm using that instead of LIBOR now, the Bloomberg Short Term Bank Yield Index, a new gauge that we think is helpful on the Prime side. That curve is already backed up maybe one to three basis points since the beginning of the year really starting in the fourth quarter of last year. But the [T-bill] curve, where the majority of our assets lie from a Government fund standpoint, has actually declined and gotten less steep by anywhere from one to three basis points."

Cunningham comments, "So we think we start in the third quarter to have the bill curve start to normalize a little bit more. Also at that point, it's our expectation that because of the economic recovery, we should be seeing an improvement in where we see our current standard inflation measures. And the Fed will need to begin to address those -- that issue, the target rate. And we think that they start that process by beginning to announce cutbacks in their bond buying late in the second half of 2021, which then sets the stage for further economic recovery, further inflationary issues in 2022 at which point we think the Fed will react by increasing by 25 basis points. So the point ... is that even without the Fed adjusting the target Fed funds rate, we think that there is a huge benefit with some of the technical adjustments that they can and will likely do that will improve the products from a gross yield stand point, which obviously helps waivers. But ... true target adjustments don't come until sometime in 2022 later in the year, more than likely."

In response to another question, she responds, "The large majority of our $430 billion in assets under management in the liquidity space is in the Government product area, roughly two thirds of it. As such, those portfolios generally have about 40% to 60% of their composition of their assets in overnight securities. So, 50% of five basis points gives you two and a half basis points on two thirds of the assets. The other asset classes, the Prime products, and the Tax Free products and then the remaining portion of the Government products would be more impacted by what the curve does as opposed to what overnights do, and we think that impact is more along the lines of maybe a basis point or two."

When asked, if "the money market fund business was a profitable business," Tom Donahue replies, "It is not generating losses, it is still a profitable good thing to be doing." On consolidation, Chris Donahue comments, "Yes, there will be more of those come along.... Each step in this process from prior to the big recession of 2008-2009 as I mentioned before, there were over 200 people doing money market funds. Now, if you look at the list it's 50 or so. And a lot of those are just in it, because they totally control the money in and out. And as time evolves and as these things occur, people decide they're going to throw in the towel. And then we work out a deal not unlike we worked our with PNC that works out for everybody. And as I always like to say we are a warm and loving home for any money market fund assets."

Finally, when asked about sharing fee waivers, Chris Donahue adds, "Generally as rates go down in this period, and in the last period, we have shared pro rata with our distribution partners. [But] as rates ... get down to where there's no more sharing -- i.e. the distribution partner is receiving zero -- there's no more sharing that they can do and we take the brunt of the hit.... And that's what you saw -- late in the first quarter.... The distribution savings couldn't go ... any lower and it hit all to us."