Federated Investors' President & CEO Chris Donahue spoke Wednesday at Bank of America Merrill Lynch's "Banking and Financial Services Conference" in New York, where he talked about money market funds and the need to "be ready for all activities" in the post-MMF reform world. He also discussed consolidation, as well as a range of other money market fund issues, including the stickiness of assets thus far. Also, we review a story in U.K.-based publication Treasury Today called, "Why Size Matters for MMF Sponsors," which also discusses consolidation in the MMF industry and why reforms may accelerate the trend.
Donahue says, "The amazing thing is that our customers, and most money market fund customers, have stayed throughout this entire period of low rates, derision from regulators, and consternation [about] what's going to happen. If you look at the recent surveys, 70 to 80 percent of people say, 'If we're in these prime funds, we're going to stay there in any event.' But ... the customers are not fully focused on it in terms of actually moving -- that's going to be next year. So you can read all the announcements where there's $235 billion worth of money going to move from Prime to Govie, and you can see estimates all over the lot as to what that will be, but we haven't seen that yet in our client base."
He continues, "What we have done is construct products, buckets, to catch clients in all areas. Earlier this week we put out the institutional funds -- the ones that will have 4 zeros and will be called floating NAV funds. We've done the retail funds earlier this year, and we talk about having a private fund that we will perhaps start offering in the first quarter.... We talk about creating collective funds as well." (See our Nov. 17 News, "Federated Designates Inst MMFs.")
Donahue added, "We have a family of $10 billion in a handful of international funds that can also work in this way. Our answer is -- be ready for all activities. And we think this is the best answer." He also believes there is an opportunity to capture deposits from large banks that are pushing money off their balance sheets due to regulatory restrictions.
On the recent consolidation trend, Donahue said talks have picked up, but the trend has been ongoing for some time. "Before 2008, there was over 200 firms offering money market funds. In 2014 that dropped to 84. Today that number is in the low 60s, so you've seen a steady decline. Right now, 95% of the assets are in the top twenty five, so there's still a few that are looking for a warm and loving home for their money funds.... And as recently shown by the BofA maneuver, even large amounts of money can move. We're in it for the long haul and we think there will be continuing opportunities among those offering the services to do consolidation." He added, "The fact that there are 140 less players doesn't really feel like there's that much less competition. The customers don't want to put all of their money market fund assets with one player so they're going to be diversified."
On the impact of rising interest rates, Donahue said this cycle probably won't be like past cycles when there were initial outflows. "Back in 2003-2005, you did see some of that, and you saw some money move because they could do better direct. However, this time around, the people that are in the money funds already have been 'decanted' of a yield attitude, because they've been getting zero or one basis point for one heck of a long time. So, if they were interested in yield, they're already out of the system, which means that basically the people that are in money funds today are in it because it's a cash management system. So we don't foresee a big movement out of funds because of that rate move." Also, he said, when rates rise, hopefully in December, "that that will set the stage for us recapturing a good bit of the waivers, and I think everyone else as well in this business will be doing the same thing."
In other news, the Treasury Today article explains, "Treasurers who park cash in money market funds may have noticed that their investment options have become somewhat narrower over recent years. But the trend towards greater industry consolidation may not be entirely set in stone. Blackrock's striking acquisition this month of Bank of America Corp's money market fund (MMF) business is expected to be followed by more deals as regulatory change and historically low interest rates drive industry consolidation on both sides of the Atlantic."
It continues, "The money fund business really favours large players, because they can leverage the liquidity business as part of their broader strategy," says Marina Cremonese, Assistant Vice President, Analyst at Moody's Investor Services. "It is a business that can be profitable but it needs size for that. But in the current environment with low interest rates, many fund sponsors have been waiving their fees and that means their profits have been reduced." Those pressures have in turn led to a reduction in the number of funds, both in the US and Europe."
The piece continues, "In the past few years we have seen Federated Investors agree to acquire $1.1bn in assets from Huntington Asset Advisors, Aberdeen Asset Management purchase Scottish Widows Investment Partnership (SWIP) from Lloyds and RBS selling its MMF business to Goldman Sachs. Now in the US, the number of providers offering stable net asset value (CNAV) funds has fallen to 70 from 133 in 2008; in Europe, meanwhile, 38 fund complexes offering CNAV products have been reduced to 25 over the same period."
The Treasury Today article adds, "[Industry consolidation] is particularly acute in the US," says Vanessa Robert, Vice President, Senior Credit Officer at Moody's Investor Service.... "Regulation is a key factor," Robert says. "It is weighing heavily on the already challenging landscape for money funds and it might accelerate this trend. The ability for mid-tier sponsors to thrive has been materially reduced."
It continues, "The competitive landscape is not immutable though. This is because the money fund industry's main competitors for corporate liquidity, the banks, have their own regulatory pressures to contend with right now, not least the implementation of the Liquidity Coverage Ratio (LCR) which came into effect in January 2015.... A recent survey by J.P. Morgan Asset Management of 408 CIOs, treasurers and other senior corporate decision-makers across the globe suggests this could be a big opportunity for the MMF industry. Almost half of the survey respondents said that their banks had encouraged them to move non-operational deposits off the banks' balance sheet, while a significant number (20%) indicated that they plan to increase their allocations to MMFs in 2016."
Finally, Treasury Today adds, "Perhaps this is why some smaller asset managers have actually been looking to expand their MMF offerings despite the apparent amalgamating forces the industry is currently subject to. UBS Global Asset Management (UBS GAM), ranked in 2015 as the 23rd largest asset manager by measure of assets under management (AUM), is one example. This year UBS GAM launched two new CNAV funds denominated in euro and sterling, to take advantage of the cash being reallocated from the banks to MMFs."
