“The return of liquidity”: the money market fund sector benefits from the rise in interest rates

Rising interest rates turn the $4.6 billion money market fund industry from a drag on profits to a revenue earner in rare good news for asset managers whose fees have been hit hard affected by the fall in equity and debt markets.

Average fees for money market funds have fallen 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. This left asset managers to cover day-to-day costs to keep client returns in positive territory.

But rising yields have allowed fund managers to start pricing more just in time for profits, as clients fleeing market turmoil turn their holdings into cash.

As of February this year, 91% of US money market funds were waiving some or all of their fees to avoid passing on negative returns to their clients, according to data from iMoneyNet.

By June, that figure had fallen to 51%, and more funds are expected to start charging full fees in the coming months.

The change “will provide a significant tailwind as rising rates mean fund providers can finally stop subsidizing money market funds,” said Tim Armour, chief executive of Capital Group, which manages $27 billion in funds. of the money market.

BlackRock and State Street, two of the world’s largest providers of money market funds, touted their increased revenue from these funds and other cash management products when they reported second-quarter results on Friday.

BlackRock, which waived more than $500 million in fees on money market funds in 2021, said it now charges the full amount to all of its customers. Quarterly cash product revenue increased 155% year-on-year to $232 million. The world’s largest fund manager also reported $21 billion in net cash inflows, bringing total assets under management to $740 billion.

“We saw the return of cash as a strategic asset. What we see is money in motion,” Chief Financial Officer Gary Shedlin said in an interview.

State Street Global Advisors recorded inflows of $35 billion in cash this year, including $15 billion in the second quarter. It now has $403 billion in assets under management, including $211 billion in money market funds.

After waiving $80 million in fees last year and $10 million in the first quarter, it eliminated money market fee waivers in the three months to June 30, chief financial officer Eric said. Aboof.

The same tendencies are manifest elsewhere. Fidelity, the global leader with more than $900 billion in money market assets, said “the majority of our funds have moved away from fee waivers since the Federal Reserve’s last rate hike.”

Vanguard, another very large provider with $338 billion in taxable funds, now pays an annualized rate of 1.22-1.44% after expenses, down from 0.01% last year. “We are no longer in a position where we limit spending,” the company said.

Rising interest rates also flatter the profits of brokers who hold client cash. Charles Schwab reported on Monday that net interest income rose 31% year-over-year in the second quarter.

“Cash management has always been something that was offered on the side as a liquidity [benefit]. Now that can be a destination,” said Ben Phillips, head of asset management advisory services at Broadridge.

Although major providers are reporting inflows into their cash management services, money market funds as a whole are not seeing increases. There was $4.6 billion parked in money market funds on July 13, essentially the same as in February, Data show HERE.

This is partly because retail investors react slowly to rising rates and institutional investors find other vehicles for their cash, such as short-term treasury bills or commercial paper. and opt for separately managed accounts.

“Money market fund yields will increase and this should attract more money. . .[but] it takes time,” said Shelly Antoniewicz, senior director at ICI.

The biggest suppliers say the increase could happen sooner rather than later.

“Soaring short-term rates, flattening yield curves and now an inverted yield curve have made money not only a safe place, but also a more profitable place for investors who wait while they assess how to optimize their portfolios for the future,” the BlackRock chief said. said executive Larry Fink during Friday’s earnings call.

If the Fed continues to raise rates, “in a short period of time, you would see money market rate funds offering a yield of around 2%. You’re going to see money flowing in there,” Fink added.