Rising interest rates are turning the $4.6tn 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. 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 of this year 91 per cent of US money market funds were waiving all or part of their fees in order 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 tail wind because rising rates mean fund providers will finally be able to stop subsidising money market funds”, said Tim Armour, chief executive of Capital Group, which manages $27bn in money market funds.
BlackRock and State Street, two of the biggest global money 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 $500mn in fees on money funds in 2021, said it is now charging all its customers the full amount. Quarterly revenue from cash products rose 155 per cent year on year to $232mn. The world’s biggest money manager also reported $21bn in net cash inflows, bringing total cash assets under management to $740bn.
“We’ve seen the return of cash as a strategic asset. What we are seeing is money in motion,” chief financial officer Gary Shedlin said in an interview.
State Street Global Advisors has seen inflows of $35bn into its cash funds this year including $15bn in the second quarter. It now has $403bn in cash assets under management, including $211bn in money market funds.
After forgoing $80mn in fees last year and $10mn in the first quarter, it eliminated money market fee waivers in the three months to June 30, chief financial officer Eric Aboaf said.
The same trends are showing up elsewhere. Fidelity, the global leader with more than $900bn in money market assets, said that “the majority of our funds have exited fee waivers since the last Federal Reserve rate hike”.
Vanguard, another very large provider with $338bn in taxable money funds, is now paying an annualised 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 said.
Rising interest rates are also flattering the profits of brokers who hold client cash. Charles Schwab reported Monday that net interest revenue was up 31 per cent year on 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,” said Ben Phillips, head of asset management advisory services at Broadridge.
Though big providers are reporting inflows to their cash management services, money market funds as a whole are not seeing an increase. There was $4.6tn parked in money market funds on July 13, basically the same as February, ICI data show.
That is 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,” said 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 optimise their portfolios for the future,” BlackRock chief executive 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,” Fink added.