Money market fund activity increases in response to rising rates

Increasing returns allow fund managers to raise fees as investors flee volatile markets

Money market fund activity increases in response to rising rates

For asset managers whose fees have been severely impacted by declining equities and debt markets, rising interest rates offer a bit of unexpected good news as they shift the US$4.6-tn money market fund sector from a drag on profitability into a source of earnings.

Data from the Investment Company Institute show that average fees on money market funds decreased by 75% over the past 25 years and dropped 12 basis points in 2021, their lowest level in decades, reported the Financial Times. Asset managers were left to fund ongoing expenses to maintain favorable customer returns.

However, increasing returns have given fund managers the ability to increase fees at an opportune time while investors fleeing volatile markets convert their assets to cash.

Data from iMoneyNet shows 91% of US money market funds waived all or a portion of their fees in February of this year to prevent passing along bad returns to their clients.

That percentage fell to 51% by June, and additional funds are anticipated to begin charging full fees in the coming 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”, Tim Armour, chief executive of Capital Group, told the Times. His firm manages US$27bn in money market funds.

In their recently released second-quarter financial results, BlackRock and State Street, two of the largest global money fund providers, highlighted improvements in their revenue from these funds and other cash management products.

BlackRock announced that it is now charging all its customers the full price, after waiving more than US$500 million in fees on money products in 2021. Cash product revenue for the quarter increased by 155% year over year to US$232 million. The largest money manager in the world also disclosed US$21 billion in net cash inflows, bringing the total cash under administration to $740 billion.

US$35 billion have been invested into State Street Global Advisors' cash funds so far this year, with US$15 billion coming in the second quarter. There are currently US$211 billion in money market funds and US$403 billion in cash assets under administration.

It stopped waiving money market fees in the three months that ended June 30, according to chief financial officer Eric Aboaf, after doing so for the first quarter and forgoing US$10 million in fees and $80 million in the previous year.

“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 optimize their portfolios for the future,” BlackRock chief executive Larry Fink said.