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Rising interest rates are turning the US$4.6-trillion money market fund sector from a drag on profits into a source of earnings in a rare piece of good news for asset managers whose fees have been hit hard by falling equity and debt markets.
Average fees for money market funds shrank by three quarters over the past 25 years and fell to 12 basis points in 2021, their lowest level in decades, according to the Investment Company Institute (ICI). That left asset managers covering day-to-day costs to keep returns for customers in positive territory.
But rising returns have allowed fund managers to start charging more just in time to profit as customers fleeing turbulent markets move their holdings into cash.
In February, 91 per cent of U.S. money market funds were waiving all or part of their fees to avoid passing on negative returns to their customers, according to data from iMoneyNet.
By June, that figure had dropped to 51 per cent, and more funds are expected to start charging full fees in the next few months.
The change “will provide a significant tailwind because rising rates mean fund providers will finally be able to stop subsidizing money market funds,” says Tim Armour, chief executive officer of Capital Group, which manages US$27-billion in money market funds.
BlackRock Inc. and State Street Global Advisors, two of the biggest global money market fund providers, touted increases in their revenue from these funds and other cash management products when they published second-quarter earnings on Friday.
BlackRock, which waived more than US$500-million in fees on money funds in 2021, said it’s now charging all its customers the full amount. Quarterly revenue from cash products rose 155 per cent year-over-year to US$232-million. The world’s biggest money manager also reported US$21-billion in net cash inflows, bringing total cash assets under management to US$740-billion.
“We’ve seen the return of cash as a strategic asset. What we’re seeing is money in motion,” said Gary Shedlin, BlackRock’s chief financial officer, in an interview.
State Street Global Advisors has seen inflows of US$35-billion into its cash funds this year including US$15-billion in the second quarter. It now has US$403-billion in cash assets under management, including US$211-billion in money market funds.
After forgoing US$80-million in fees last year and US$10-million in the first quarter, it eliminated money market fee waivers in the three months ended June 30, chief financial officer Eric Aboaf said.
The same trends are showing up elsewhere. Fidelity Investments Inc., the global leader with more than US$900-billion in money market assets, says that “the majority of our funds have exited fee waivers since the last Federal Reserve rate hike.”
The Vanguard Group Inc., another very large provider with US$338-billion in taxable money funds, is now paying an annualized rate of 1.22 to 1.44 per cent after expenses, up from 0.01 per cent last year. “We are no longer in a position where we are limiting expenses,” the company says.
Rising interest rates are also flattering the profits of brokers who hold client cash.
Charles Schwab Corp. reported Monday that net interest revenue was up 31 per cent year-over-year in the second quarter.
“Cash management was always something that was offered on the side as a liquidity [benefit]. Now it can be a destination,” says Ben Phillips, head of asset management advisory services at Broadridge Financial Solutions.
Although big providers are reporting inflows to their cash management services, money market funds as a whole are not seeing an increase. There was US$4.6-trillion parked in money market funds on July 13, basically the same as in February, ICI data show.
That’s partly because retail investors react slowly to rising rates and institutional investors are finding other vehicles for their cash such as short-term Treasury bills or commercial paper and are opting for separately managed accounts.
“The yields on money market funds will go up and that should attract more money ... [but] it takes a while,” says Shelly Antoniewicz, a senior director at ICI.
The biggest providers say the increase could happen sooner rather than later.
“Surging short-term rates, flattening yield curves and now an inverted yield curve has made cash not just a safe place, but also a more profitable place for investors to wait as they evaluate how to optimize their portfolios for the future,” BlackRock chief executive officer Larry Fink said on Friday’s earnings call.
If the Fed continues to raise rates, “within a short period of time, you would see money market rates funds providing about a 2 per cent return. You’re going to see money run into that,” Mr. Fink added.
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