Federated Investors, the 5th largest manager of money market funds with over $200 billion in US MMF assets, released its Q1'18 earnings late last week and hosted its earnings call on Friday. Federated Chief Executive Officer and President Chris Donahue, who will keynote our Money Fund Symposium this summer in Pittsburgh (June 25-27), says, "Total money market assets increased slightly from year-end with growth in separate accounts of just under $4 billion offsetting a decrease in money market fund assets of about $3 billion. Our money market mutual fund market share at the end of the quarter was 7.3%, compared to year-end 7.4%." (See Seeking Alpha's Earnings Call Transcript here.)
He explains, "Prime money fund assets increased about 5% in the first quarter to over $30 billion. Assets in our Prime Private Liquidity Fund increased to $730 million in the first quarter, up from about $530 million at year-end. This product and our Prime Collective Fund had just over $1 billion in combined assets at quarter-end up from $845 million at the end of last year. These products preserve the use of amortized cost accounting and do not have the burden of redemption fee and gate provisions."
Donahue continues, "Taking a look now at our most recent asset totals as of April 25, managed assets were approximately $386 billion, including $261 billion in money markets, $64 billion in equities, and $62 billion in fixed income. Money market mutual fund assets were $175 billion. In the institutional channel, RFP and related activity continues to be solid and increased over last year ... with interest in ... high yield, core [and] low duration for fixed income. We began the first quarter with about $65 million in wins that are yet to fund. Total SMA assets ended the quarter [are] at $25.1 billion."
CFO Tom Donahue says, "Revenue was down $9.6 million, compared to Q1 of last year, due to the adoption of the revenue recognition standard, which I mentioned decreased revenue by $8.6 million. A $6.8 million decrease due to a change in a customer relationship that occurred during Q1 2017 and changes in the mix of average money market assets ... impacted revenue by $4.7 million. These decreases were partially offset by an increase of $4.4 million in revenue from higher average equity assets, an increase of $4.3 million due to lower money fund minimum yield waivers and an increase of $1.9 million from higher fixed income assets.... The decrease from Q1 of 2017 was also due to the adoption of the revenue recognition standard, which reduced expenses by $8.7 million, as well as a decrease of $8.6 million in distribution expense, due to changes in the mix of average money market fund assets. The previously discussed change in a customer relationship reduced expenses by $5.3 million."
During the call's Q&A session, Federated was asked about competitive fee waivers in the money fund space (and Goldman cutting fees by 3-5 bps). Chris Donahue responds, "Yes, the pressure is constant and from my experience for decades has never really relented. If you look at our funds on a gross basis, and then of course on a net basis, they are very, very competitive in the industry. So what others are doing for their fees, I really can't address. But we look very, very closely at these numbers pretty much every day to see what the world is doing, and on a gross and net basis we're very, very comfortable with where we are, and [are] well aware ... of what is needed to maintain and enhance our money market business."
They were also asked, Will ultrashort funds will go out of favor as rates go higher? MM CIO Debbie Cunningham comments, "I think at this point like what we’re seeing is a rebound off of what's been a very long and unusually low rate environment -- zero for the short-end.... The ultrashort products were able to capture a pretty nice spread over that zero-rate environment for the better part of the last 10 years.... What we're also working with in today's rising rate environment is a Fed that is telegraphing in a very specific and well-processed way what their intentions are. The dot plot didn't exist in the last rising rate environment that we were in."
She adds, "So, I think both of those things are continuing to keep Ultrashort Funds in favor. In addition, when you look at our own Ultrashort products, they are [in] the very short-end of the spectrum.... If you look at money market funds prior to the last two re-writes of Rule 2a-7, the Ultrashort Funds look a lot like those did then, which were constant NAV product. Now, obviously, they are mark-to-market products that they are not constant NAV. But their movement has been not huge, and the spread over the cash and liquidity products has been substantial enough to keep customers comfortable [with] a good portion of their strategy [or] liquidity bucket positions."
Federated was also asked about "rate sensitivity and money fund customer behavior," and whether they are seeing retail money move from banks to funds. Cunningham answers, "Yes, we're starting to see faster growth. Let me [qualify that] by saying we are starting to see faster growth in funds than in the deposit market. So, if you looked at most recent statistics, the deposit market grew through I think it was February 2018 over the last year at a pace of 2.8%. The fund industry, the money market fund industry to a seven funds grew 6.5%.... The money fund dollars are [still] smaller because it is half of $2.6 trillion base versus half of $10 trillion base for the deposit market. Nonetheless, the percentage growth is finally in the favor of the funds. Specifically, from our own clients' perspective, we are seeing retail customers back into those products and out of deposit products, some into the government funds."
She adds, "Usually, the first quarter [sees] a very large outflow quarter from an industry standpoint, and although it was down some, it was not a huge amount this first quarter, compared to others. But the institutional prime sector is actually the fastest-growing sector.... So, rather than going into the direct market at this point it seems to be taking the path of going into that prime institutional market."
They were also asked about repatriation flows. Chris Donahue tells us, "Right out of the box we had several large clients that make deposits of meaningful amounts. So, we've seen some of it already." But Cunningham adds, "To date I would characterize it as being very short lived. So, what Chris is referencing, certain companies [had] large blocks coming in and remaining for a short period of time and going back out. Presumably those were firms that sort of had a hint as to what was going to happen from a repatriation perspective and knew ... how they were going to use that cash once it came back into the U.S., whether they were paying a special dividend, buying back stock [etc.]. They had a specific use for that cash and it sat in liquidity products, money market funds for a short period of time only."
She continues, "In speaking with clients that have not confirmed any amounts from a repatriation perspective but have every intention of doing so, it seems as though there is quite a lot on the table for reviewing just exactly how they do want to use it, whether it is better off staying where it is for some portion of it, whether they need it for a certain purpose, or whether it can be used more for general balance sheet purposes once it's back in the U.S. I think ... at least 80% of [companies] that could potentially be impacted by repatriation are still in that mode at this point." (Note: Federated also files its latest "10-Q Quarterly Report" with the SEC on Friday.)
