0:00 Intro
This is the EPFR Exchange Podcast. All opinions expressed by Cam, Kirsten, or our podcast guests are solely of their own opinions and do not reflect the opinion of EPFR. This podcast is for informational purposes only and should not be relied upon for investment decisions.
0:20 Kirsten Longbottom
Hello everyone—I’m Kirsten Longbottom from EPFR’s research team and I’m joined on today’s Exchange Podcast by Jay McLaughlin, who directs EPFR’s iMoneyNet sales and account management efforts, as well as our guest Tim Schiltz from Schwab Asset Management. Welcome both!
0:40 Tim Schiltz
Thanks, Kirsten.
0:41 Jay McLaughlin
Thanks.
0:43 Kirsten Longbottom
Today we will be discussing what has by some measures been a banner year for US liquidity funds, especially if inflows are your key measure of success. The group of US Money Market Funds tracked by EPFR have taken in over $1 trillion so far this year, by far a full-year record.
However, this only tells part of what is – more than ever – a complicated story. To a degree, Money Market Funds gain is pain for US regional banks as their deposit bases migrate. Those expanding asset bases are also keeping the industry in the forefront of regulatory minds, with another suite of reforms current on the drawing board. That would be the third reform in the last decade.
Before we dive in, I’d like to welcome Tim and ask him to share a bit about his background and his work with Schwab’s money market funds. Tim?
1:39 Tim Schiltz
Kirsten, Thanks – I appreciate you having me. Jay, good to see you. I know Jay from my history in the industry. My background is I've been in the industry about 30 years. 23 years of those has been focused on the cash products. And the last eight years specifically been running product management and innovation at Schwab Asset Management.
At Schwab, as many probably have seen, we've seen our money fund balances grow and we'll talk a little bit about that. Schwab Asset Management currently manages $460 billion in money market funds across all three categories. We do offer prime, government, and municipal money market funds.
Our focus is primarily though, however, on the retail sector. While a lot of the growth has come from retail and obviously, we'll talk about that growth here shortly, we finally started to see institutional picking up as well. And the fact that “all ships rise in a rising sea” we're kind of in that boat today where rates are at. We've been the beneficiary of that. The other unique thing is money funds are only sold on our platform through our financial consultants through the RIA’s custodian at Charles Schwab. And again, like I mentioned, we've seen great growth in our money fund balances over the last couple of years and it has a lot to do with the record high rates. Again, I appreciate you having me on the podcast today Kirsten, and I look forward to chatting.
3:20 Kirsten Longbottom
Absolutely. We're excited you’re here and excited to hear any recent insights you have. So, Jay, I think it would be helpful if we could give a quick overview of what you've been seeing in the iMoneyNet data over the past 18 months.
3:36 Jay McLaughlin
Thanks Kirsten. It's great to be here with you and Tim today. As Tim mentioned, our histories go back quite some ways so glad we could spend some time catching up. As Tim mentioned, it's been a kind of a remarkable period for money market funds over the last few years. Assets and yields have been performing very, very strongly over that time period.
What we're seeing from a yield perspective when looking at our All-Taxable Average, which is our most commonly used benchmark for iMoneyNet, that benchmark right now is just north of 5%. When we look at top yielding Government Money Market Funds, those funds right now are yielding about 5.3% Looking at Prime Funds, those funds right now are getting close to 5.5%. So really remarkable performance. We haven't seen that in, as Tim had mentioned, about 20 years.
I think as interest rates have risen, Americans have been moving money from low paying bank accounts to higher yielding options such as money market funds. The majority of large US banks have posted declines in their deposit paces over the last year, year and a half. So, with asset flows very positive here in the US, the trends that started with COVID have been further enhanced by the banking issues from earlier this year have really caused a spike in assets.
When we look at all US assets year-to-date, they're up about 18%, and over the last year up about 23%. As Tim mentioned, this has been driven in large part by US retail assets. When we look through that lens, YTD retail funds are up about 29%, and over the last year up about 40%. And the last one we'd look at institutional assets, YTD those funds are up about 13%, and over the last year up about 15% so starting to come around from an institutional perspective.
Then briefly, I would mention what we're seeing from the WAM and WAL perspective, both government and prime portfolios have been gradually increasing over the last six months. We're now approaching levels last seen in early 2022. Portfolio managers are lengthening portfolios during this time with the expectation that we're at or near the highest for this this current interest rate tightening cycle.
6:37 Kirsten Longbottom
Tim, a river fresh money is obviously welcome, and we've seen that in what Jay has just explained, 18 and 23% for retail and institutional is quite impressive. But scaling up to absorb it poses some challenges, and it can leave as fast as it arrives. How are you viewing these recent developments?
7:00 Tim Schiltz
I think the recent developments – Jay touched on this – as money's been coming out of the banking industry, clients are looking for options and obviously the volatility in the market both on the equity side, as well as the fixed income side, clients are looking for something that's going to give them that return. And as we mentioned, we're at decade highs, the highest rates we've seen in 20 years. And I still believe that there's still room for both the bank and money funds to exist and clients should think about it that way because clients look at their bank as providing their day-to-day transactional assets and can in some cases provide for their savings and investment bucket.
But as banks tend to slowly raise rates, money funds are taking advantage of the rates that are available in the money market investments. That being said, with rates being as high as they are, money market funds have been a great complement for the banks in my opinion. As we continue to see growth as I noted earlier at $460 billion in assets, that's a significant growth over where we were. Well over $250 billion from where we've been over the last couple years. But again, I think that has a lot to do with clients looking at where they can get return in the market, clearly the fact that you can get between 5% and 5.5% in an investment that is being structured to preserve capital and provide high levels of liquidity with a quality rate of return. The fact that they're finally finding that in money funds, they're finding that home there.
As I said, with money funds, it's really about being a complementary to all the other investment options that are out there. And in this particular case, what we're seeing is the industry's moved a lot of money into the money funds sector. If the future of that changes, if we see rates starting to go down, which we'll talk about here in a little bit, you may see money flowing back, whether it's to the market. Again, I think the fact that the way the Fed has positioned themselves currently, we're starting to see the market starting to react to that and it may be favorable for money to start moving back into the markets and potentially, back toward the banking environment as well.
9:28 Kirsten Longbottom
Interesting. Jay, in your overview you mentioned the strong retail component to recent flows. Is this unusual compared to institutional assets?
9:42 Jay McLaughlin
I don't think so. I think this phenomenon we've seen during past interest rate tightening cycles where retail assets pick up first and then institutional pick up a bit more slowly than retail. I think there's a few factors that might be at play here. Institutional investors typically would have access to more nimble investment options and a wider variety of cash investment options, some of which might be more quick to react to the rising rates. We've kind of seen that and those different investment options have increased over time.
Then I think another factor may be that with the shocks to the system that we've seen with COVID and the regional banking crisis, those have likely driven some investments from the stock market to money market funds, which is more of a factor in the retail space where institutional tends to be more focused on cash management. I think those are those are probably a couple of factors at play so there could be kind of a further follow-through for the institutional funds in terms of asset levels.
11:04 Kirsten Longbottom
Tim, do you have a different or a similar take on that?
11:08 Tim Schiltz
Oh, it's very, very similar take to what Jay mentioned. Again, as I mentioned earlier, a lot of clients still do their daily cash management through the bank, but from a broker dealer perspective or brokerage perspective, they are looking at it from an investment perspective and a part of their entire portfolio. I see cash being a core part of people's investment portfolios, whereas during, zero rate environments, the allocation to cash becomes little to nothing, and clients want to be invested. The core corporations always have that operational need for cash so they tend to be more steady in their asset growth. But as Jay mentioned, the retail sector has grown quite a bit faster and we've seen that at Schwab as well. And I think that has a lot to do with the fact that clients are taking advantage of the high rates that they can get. And they're starting to-- their financial consultants are talking to them about cash as it pertains to part of their entire investment portfolio and not just a cash position for day-to-day expenses.
12:17 Kirsten Longbottom
It's no secret that lawmakers and regulators are very responsive to the pain that we've seen in the banking sector. Do you think that this is one of the drivers for the latest round of reforms? I know Jay, you've definitely mentioned that and has that kind of been hitting US money market funds?
12:37 Tim Schiltz
Yeah, I think we're definitely going to see a hit in the money fund world, as we continue to build out for reform. I mean, the intent that regulators put the rules into place for was to improve transparency and resilience of money funds. As I mentioned earlier, I've been in this industry for over 20 years so this being the third round of money fund reform that we've gone through since 2008, this round tends to be more focused on what we saw happen, coming out of the pandemic and improving that transparency. Again, I would say that the resiliency of money funds has been proven out over the years. And part of that I think led to some of the changes in the rules that the SEC proposed i.e. removing the liquidity thresholds for liquidity fees and the redemption gates as an example. I think they saw that there was some resilience in those funds. But at the same time, what we experienced was we didn't reach the levels that they thought they would reach and in so doing, when they did, we saw a lot of pushback and unfortunately, negative consequences of having such high thresholds.
I think the changes that they proposed, while supportive and I think the industry across the board is working to implement those solutions, I also think the regulator's viewed some of this as hey, we understand where those changes were back from 2014 that may not have been as beneficial. Maybe they've gone a little further than we would want them to. I think some of the changes when you think about mandatory liquidity fees for the prime, institutional, and institutional municipal money funds. Those have created significant changes in the money fund industry.
But overall, again, I think we're very supportive that there's more transparency, more information out there. I don't think there's another investment product in the marketplace that has the transparency that money market funds do. I have no problem sharing what we're doing and how we're doing it so clients can feel safe and secure when they do buy money funds.
14:58 Jay McLaughlin
I would just kind of further add on, Tim, to your point. I know we're really interested in a few of the elements. I think what was eventually put forth was a bit more measured than some of the initial ideas that potentially might have been put into regulation. But we're always interested in collecting the data and I know with the updates to form in dash MFP where funds would need to provide the names of investors with greater than 5% ownership is kind of interesting in terms of, how that would be reported out, and then how potentially that may drive investor behavior: Will it drive especially on the institutional side investors towards larger funds so that they can make sure that they're well-built beneath that 5% ownership? Or will it potentially cause some investors to look to spread their assets over a number of different fund families? Yeah, some interesting things that may come about from the most recent round of regulation.
16:16 Kirsten Longbottom
I know obviously, we've touched on a bit of the high interest rate environment. Do we think that there's a rates forecast, do we expect to get a cut in 2024? Or what are your expectations around that?
16:31 Jay McLaughlin
Yeah I guess I think at this point, I have to say we get a cut in 2024. I think, this week's CPI and PPI prints were supportive of that idea. It feels like we're probably seeing the peaks of this cycle, but I know the Fed still leaving themselves some wiggle room in terms of their feedback and I think they're going to remain cautious. But I think this week's data was very supportive of the highs being in.
17:13 Kirsten Longbottom
Tim, do you have anything to add on that front?
17:16 Tim Schiltz
I think I'm aligned with Jay. I think the numbers that we saw this week are positive for the markets and they're positive overall. I think the division still is a little bit higher for longer. We are well over 5% and I don't think rates are just going to plummet. I do think they'll be cautious in their moves. As we've looked at the industry data and what we're – again, depending on who you read, my crystal ball is definitely not any clearer than anybody else's – but as you look across the industry, I think people believe that we're going to see a lower rate environment. When that happens, that's still in question. The market data is saying that the probability of a cut in the first half of the year is pretty high, and that there's potential for more cuts throughout the end of the year, putting us somewhere in that mid to high 4% range by the end of 2024. If I had a clear crystal ball, I don't know if I would be doing this job. But I think at the same time, I think, we're all in this boat together. And the information that we're seeing is still positive for money funds.
18:33 Kirsten Longbottom
Well, thank you both. That was quite an insightful episode. And we definitely hope that you, Tim, would join us back on an episode in the future and we can talk about money market funds and the trend that it has continued or maybe not, we will see. But nonetheless, we invite EPFR and industry experts to discuss timely trends, driving financial markets aimed at arming global investors with a deeper understanding of where money is moving and why. If you ever have a topic you would like to discuss or are interested in joining for an episode, please don't hesitate to reach out. Thank you, Jay. Thank you, Tim. I appreciate your time today.
19:18: Tim Schiltz
Kirsten, thanks for having me. Jay, good to see you as always.
19:22 Jay McLaughlin
Yeah, thanks Tim. Good to see you. Thanks, Kirsten.
19:23 Outro
Thanks for listening to the EPFR Exchange Podcast for more information, visit epfr.com or epfr.buzzsprout.com. Interested in joining Cam and Kirsten to talk fund flows and allocation data? Or have a suggestion for the topic of a future podcast? Email us directly at podcast@epfr.com.