Record inflows into US money market funds in 2023 have triggered a multibillion-dollar fee bonanza for the asset management industry, which for years treated the product as a loss-leader.
US money market fund providers – such as Fidelity, Vanguard and Charles Schwab – collectively earned $7.6bn in fees in 2023 as assets passed $6.3tn, according to government figures.
That was more than $1bn higher than in 2022 and a jump of around 35 per cent from 2021, before US interest rates began to rise, according to the data from the Office for Financial Research, a government agency.
“We’ve been hit by a wall of cash. It’s just too hard to ignore an asset class that is giving you 5.5 per cent, risk free,” said Kim Hochfeld, global head of cash at State Street Global Advisors, where cash funds grew by 34 per cent this year.
Much of the phenomenon is due to retail investors keen to capitalise on high yields and the perceived safety of government debt.
Money funds, which invest in very short-term securities and offer daily access, are dominated by a handful of very large players led by Fidelity, Vanguard, JPMorgan and BlackRock.
The providers compete for cash with bank accounts and have benefited from more than a trillion dollars in inflows driven by rising interest rates and, earlier in the year, concern about instability among regional banks.
For the year as a whole the total has eclipsed even 2020, when cash flooded into money funds during the early stages of the pandemic.
The big jump in revenues comes as a relief for money market funds. It follows a period when returns on short-term safe assets were so low many providers had to forgive part of their fees to avoid charging customers to put money in. BlackRock reported waiving a total of $607mn in fees between 2020 and 2022.
The fees are calculated by multiplying average assets under management with asset-weighted average fees. The Investment Company Institute, a trade association, reports that average fees were 13 basis points last year, the most recent figures available.
“The fees they get are not amazing,” says Alex Blostein, an analyst at Goldman Sachs. But they “are still a meaningful tailwind and the only asset class for traditional asset managers that has shown any material growth this year”.
What happened in 2023?
Since the start of the year, EPFR data shows that investors have poured a record $1.17tn into US money market funds. Total assets reached $6.35trn by the end of November, according to the OFR.
The huge flows were triggered by the Fed’s aggressive campaign of interest rate rises, which pushed official US borrowing costs up to a range of 5.25 to 5.5 per cent, from near zero as recently as March 2022. That in turn pushed the average yield on a bucket of government-focused institutional money market funds tracked by the ICI to 5.21 per cent as of December 15.
Inflows into money market funds accelerated in March, when the collapse of Silicon Valley Bank and other lenders piled pressure on the broader financial sector and sparked a flight to safety from ordinary deposit accounts. The regional banking ructions eventually subsided, but they prompted many customers to take a hard look at the returns they were getting on deposits. Cash has continued to flood into money funds: November marked the biggest month for net inflows since the spring, according to the ICI.
Who are the big winners?
Fidelity is the single largest manager of US money market funds with more than $1.26tn in assets, up 29 per cent from the start of the year to the end of November, the most recent comprehensive OFR data shows. JPMorgan has leapt into second place with $700bn after growth of more than 55 per cent. Vanguard is third at $575bn, up 29 per cent. Charles Schwab saw the biggest percentage increase, with assets jumping more than 68 per cent to $465bn.
The 10 largest money fund managers control about 80 per cent of the assets, the data shows. “It’s a relatively consolidated space, fewer than ten players control a vast chunk of the market,” said Goldman’s Blostein. “The fact that it’s a relatively concentrated market collecting those fees is important. The revenue pool is being split among fewer managers.”
Not all asset managers break out their revenue from cash management products. But BlackRock’s revenue from the business shot up from $470mn in 2021 to $864mn last year, and it should handily beat that figure in 2023. Goldman has reported that it is on track to reap about $1.1bn for 2023, up from about $970mn last year, and Federated’s third quarter money market revenue was triple the comparable figure in 2021.
“A couple of years ago we were writing checks to support our money funds,” said State Street’s Hochfeld. “Those days are long over. Margins are back.”
By contrast, Schwab’s money fund flows came at the expense of its bank, where it had been holding customer cash balances and earning profits from investing that money. Schwab was forced to draw down on expensive lines of credit in order to cover the outflows without selling assets at a discount.
What will happen next?
Investors are now betting that the Fed will start aggressively cutting rates next year — a scenario that could push down short-term Treasury yields and prompt some investors to start moving out of cash. But some of the biggest players, including BlackRock, Goldman Sachs and Federated Hermes, said they believe that the inflows will persist.
Peter Crane, who has been collecting and publishing data on the US money fund market for 18 years, said the pile-in shows “no signs of stopping”. He said the gap between money market yields and interest on deposits — which, while rising, remain below 1 per cent on many bank accounts — would still be “humongous”, even if the Fed were to slash rates to 3 per cent.
Indeed, falling interest rates are likely to add to the inflows, at least initially, if history is any guide. While rates are rising, institutional investors such as pension funds and insurers typically buy short-term assets such as government bills and commercial paper directly because they can earn a slightly higher yield on those instruments versus money market funds.
But when rates are levelling off, they have historically shifted into money vehicles, because yields on funds normally remain elevated for a few weeks longer than their underlying holdings as Treasury yields start to fall. The average maturity of money market funds in mid-December was 36 days, according to Crane Data.
“We don’t see some of the drivers changing in terms of asset gathering,” said Beccy Milchem, BlackRock’s head of International Cash Management. “For institutional investors, in past cycles when we have been approaching interest rate cuts, money market funds have been able to outperform.”
Interest spreads to Europe
Money market fund inflows have also picked up across the Atlantic, following $10bn of outflows in 2022. But an injection of $83.2bn into western European vehicles this year is still dwarfed by the cascade into US funds.
Investors and analysts attribute this disparity in large part to the asset class being dominated by institutional investors, who — like their US peers — prefer to buy assets directly during periods of monetary policy tightening.
But European money funds are also expected to garner inflows next year if rates stabilise or start to decline and commercial investors look for ways to hold on to yields for as long as possible. “Europe is catching up,” BlackRock’s Milchem said. According to Milchem, the failure of Credit Suisse and several US banks “has caused clients to focus on diversification and not putting all their eggs in one basket. Money funds are an automatic way to spread risk”.
“We are seeing new use cases where people are looking for a place to put collateral and regulatory cash,” she added.
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