Rising interest rates are turning $4.6 trillion in capital market funds into a source of investment returns

Rising interest rates are turning the $4.6 trillion money market fund sector from a drag on profits into a source of returns, rare good news for asset managers whose fees have been hit hard by falling equity and debt markets.

Average fees for money market funds have shrunk by three-quarters over the past 25 years, falling to 12 basis points in 2021, their lowest level in decades, according to the Investment Company Institute. This has left asset managers scrambling to cover day-to-day costs to keep clients’ returns in positive territory, according to FINANCIAL TIMES.

But the increased yields have allowed them to start charging more fees again as clients fleeing turbulent markets monetize their holdings.

Based on data from iMoneynet, 91 percent of U.S. money market funds waived all or part of their fees in February to avoid passing negative returns on to their clients. By June, that number had dropped to 51 percent, and more funds are expected to start charging full fees in the next few months.

Tim Armor, CEO of the Capital Group, which manages $27 billion in money market funds, said the change “will provide a headwind because higher interest rates mean money managers will eventually be able to stop supporting money market funds.”

BlackRock and State Street, two of the world’s largest fund providers, announced revenue increases from these funds and other cash management products when they published second-quarter earnings last week.

BlackRock, which waived more than $500 million in fund fees in 2021, said it was now charging all its clients the full amount. Quarterly revenue from cash products rose 155 percent year over year to $232 million. The world’s largest money management company also reported net cash inflows of $21 billion, bringing total cash under management to $740 billion.

BlackRock CFO Gary Shedlin said in an interview: “We saw the return of cash as a strategic asset. What we are seeing is a movement of money.”

For its part, State Street Global Advisors has seen inflows of $35 billion into its cash funds this year, including $15 billion in the second quarter. It now has $403 billion in cash assets under management, of which $211 billion is in money market funds.

After giving up $80 million in fees last year and another $10 million in the first quarter, the company canceled its money market fee waiver in the three months ended June 30, said Eric Appauff, the company’s chief financial officer.

The same trends are starting to appear in other places. “The majority of our funds have stopped waiving fees since the last time the Federal Reserve raised interest rates,” said Fidelity, the world’s leading company with more than $900 billion in money market assets.

Vanguard, another very large provider with $338 billion in taxable money, now pays an annual interest rate of 1.22-1.44 percent after expenses, up from 0.01 percent last year. “We are no longer in a position to limit expenses,” the company said.

Higher interest rates also improve profits for brokers who hold clients’ money. Charles Schwab Inc reported Monday that net interest income rose 31 percent year over year in the second quarter.

“Cash management has always been on the sidelines for liquidity,” says Ben Phillips, head of asset management advisory services at Broadridge. But it can now become a big business.”

But while major providers are reporting inflows to cash management departments, money market funds as a whole are not seeing an increase. Based on ICI data, there was $4.6 trillion in money market funds on July 13, which is basically what happened in February.

This is partly due to the slow reaction of retail investors to the interest rate hike, as institutional investors find other instruments to invest their money, such as short-term Treasuries or commercial paper.

According to Shelly Antonevich, senior manager at ICI, “money market funds will have higher returns and that should attract more money, but it will take time.”

In the opinion of the major suppliers that the increase may take place sooner rather than later. “Short-term interest rates are rising, yield curves are flattening, and now the yield curve is inverting, this has not only made money a safe place, but also a more profitable place for investors to wait while they evaluate how to improve their portfolios.” BlackRock CEO Larry Fink said during an earnings call last week. In the future”.

So if the Fed continues to raise interest rates, “within a short period of time you’ll see the benefits of money market money yielding about 2 percent. Then you’ll see money racing in that direction.”

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