BlackRock, the 5th largest manager of U.S. money market funds with $171 billion and the 2nd largest manager of money funds outside the U.S. with $64 billion, announced second quarter earnings yesterday and made several comments relevant to the money market mutual fund business. Crane Data's Money Fund Intelligence XLS shows BlackRock's domestic money fund assets declining by 7.1% in the quarter and 31.7% over the past year vs. an industry average of 14.1% for the quarter and 24.0% for the year.
The company's earnings release quotes Chairman & CEO Lawrence Fink, "While the money market industry continues to contract in favor of bank deposits, the effect on our revenues is significantly less than the headline effect on new business flows and AUM. More significantly, recent reports show that non-financial businesses hold more cash and cash equivalents on their balance sheets than at any time over the past 50 years. As fears over sovereign credit risk and the economic recovery abate, these balances will be a powerful source for market flows, M&A and business investment."
BlackRock's release adds, "Cash management closed the quarter with $279.2 billion AUM. Outflows of $24.9 billion were consistent with industry trends. Outflows spanned all regions, including $16.9 billion from clients in the Americas and $8.0 billion from investors in EMEA. Similarly, we experienced net redemptions from investors in all client categories, including $21.7 billion from institutional clients and $3.2 billion from retail and high net worth investors. We expect rates to remain low and, consequently, we do not expect the flow trend to reverse in the near-term."
On yesterday's conference call, Fink commented, "It's important to note about cash -- I've said this in the last few quarters -- as we continue to have low rates ... the money market business is not as competitive as bank deposits. Banks are still offering higher rates than money market funds. But ... banks are building so much cash and now 2-year Treasuries [are] trading around 60 bps, [so] we are now beginning to see the banks bring down their deposit rates.... [T]he competitive arbitrage between banks deposits and money funds is narrowing. So we don't believe, going forward, we're going to see the type of outflows [we've been seeing].... And quite frankly, we may start seeing, as an industry, more inflows if 2-year Treasuries continue to trade where they're trading now. And if they trade even lower, then banks are going to have a problem offering 30 or 40 basis points for overnight money versus money market funds."
One analyst asked, "How do regulatory reform and other issues like [potential] money market capital charges might potentially affect the industry and BlackRock?" Fink answered, "FinReg doesn't speak about money market funds. That's a separate issue the SEC is working on. We've had meetings with the SEC as recently as two weeks ago. The big issue for money market funds is going to be, 'Does the SEC demand variable NAVs?' That to me is the most important issue related to the money market business."
Finally, he added, "In terms of capital charges, our proposal has been to have capital charges that we could build over a number of years. We believe we need to find ways of making sure that money market funds are as competitive as any bank deposits. So we believe were the industry to go to the next level, we have to have as competitive a product in the money market industry as bank deposits. When the FDIC guaranteeing up to $250,000 in deposits now, we need to make sure we have some form of safety for investors. And I do believe the [disclosure of a delayed] shadow NAV is a good start. I do believe a liquidity bank, which we're in favor of, is a very good first step.... [But] at this moment I don't see any real threats to the financial situation related to money market funds."
See also our July 20 Crane Data News "BlackRock Makes The Case Against Floating the Net Asset Value". Note too that Federated Investors releases earnings late Thursday and will host a conference call Friday at 9am.
