Welcome a trillions.
I'm Juel Weber and I'm Eric Blchunis.
Eric. There's some interesting stuff happening in money market funds right now, and the flows are something that I really want to spend some time talking with you about, because man, it is just eye opening what's happening here.
Yeah, I mean, money market funds have grown by well over half a trillion dollars in the first quarter. March in particular was ridiculous. Listen to this Statuel. If you ranked all mutual funds by March flows, the top twenty eight would be money market funds and seventy three out of the top one hundred. This is a stat that James Sayferd on my team found And again, think about this, this is basically what ETFs took in all of last year. So this is big boy flows and it's basically diverted.
We're a bunch of ETF analysts, but we've been completely diverted over there because this is a big deal. And obviously the reason is because you can get four point seven four point eight percent would basically risk free when obviously contrasted with a lot of banks will only give you fifty sixty basis points in your savings or checking account. So that spread has become the story of the year. In my opinion, it does link to the whole bank story, and I do think banks are now going to have
to probably raise their rates at some point. And also the appeal of a four point eight percent yield and a money market fund has actually taken away a lot of money from equity flows because there now is like an alternative, and so this has become again it's not just money markets impacted everything, and it's again it's diverted all of our attention.
And to be clear here money market funds, we're talking about cash, right, like something that is like so basic and boring, right, but yet cash has become king.
Yeah, sometimes cash is the sexy thing or the shiny object because other things are struggling. But what made Q one interesting to me is that equities were up seven percent, you know, unlike last year they were down, they were up this year. But the idea, I think equities now have to work much harder to get your money. So if they have another good quarter, I could see maybe some money shifting out. But again, almost a five percent
yield guaranteed banked the nav stays at one dollar. That's really compelling, And what we also found was how lucrative this is for the asset managers. Unlike other areas, the vanguard effect isn't big here. A lot of these money funds charged thirty five forty basis points and they took in a ton of money. Vanguard does have one, but it's sort of an interesting area where the vanguard effect is not really in play as much, and we explored
that too. So there's just so many interesting angles to this story.
Also, Eric, I am not going to be here for the rest of the episode because I have to go to my brother's wedding in central Oregon.
Yeah what are you running out to catch a flight right now?
And not quite yet, but it's gonna happen soon. So you're gonna have some guests on and you're gonna do all this by yourself. You're a big boy. I'm sure you can figure it out.
Uh. Yeah, I'll miss you, but I'll be okay. Is this your older or younger brother?
Four years younger? First time getting married?
Wow? Wow?
Bend Oregon and.
What happens there? I'm picturing like stage coaches for some reason. No, No, Oregon Trail.
Hi, you played Oregon Trail. Yeah, it's high desert man. The air smells like juniper. The golf is great. When the weather's a little bit nicer, you'd you know, be river rafting or something. It's a super it's like an outdoor paradise. It's it's truly a special place. This time on Trillian's Cash is King.
All right, So today here we have Katie Greyfield from Bloomberg News, Mike Reagan from Bloomberg News, and Nafeas Smith, Principal and head of taxable money Markets at Vanguard. Welcome everybody, Thank you.
It's good to be with you this morning.
Thanks for having me.
Eric, I'm thrilled to be here.
So Mike, let's start with you. There's a BusinessWeek cover you wrote the cover story. Our team was passing it around. We thought it was great. The cover has the number four and it's like jacked. It's got like a six pack. It's really strong, and it speaks to the four percent plus yields on money funds, as if all of a sudden, something that is usually boring is really interesting. And so just talk about your article and what you some of the conclusions you came to Yeah.
This was one of those Joel ideas where I think he and his friends probably having the same conversation that me and my friends and everyone's having now these days, is that wait a minute, all of a sudden, you can get a nice little yield in something as simple as a money market fund, or, as my story focused on,
just write your old bank savings accounts. You know, remember a couple of years ago you basically needed to buy junk bonds to get four percent yield, and now you can get them in something is theoretically as safe as a bank savings account. But what's I find very fascinating is that yield in this point in time is high enough that people it raises eyebrows and they're like, they're almost looking at it like a risky asset, and I'm like, no, this is a bank savings account. This is what banks
are supposed to do. But we've been trained to not expect yield from these vehicles, whether it be you know, a simple savings account or a money market mutual fund, from that ultra long era of zero percent interest rates. So one really fascinating thing that I noticed in the reporting of the story is that last year deposits at US banks actually fell for the first time since like the nineteen forties. You know, they just tend to steadily go up year after year. Last year they fell. I think,
you know, there's a few different explanations given. One is every you know, companies and regular consumers and pop types had built up a pretty big savings during the pandemic, so they're starting to draw that down. But the other issue for banks, obviously is these these yields on money market funds. So there is quite an interesting competition among banks. The ones that have the wherewithal to raise their rates
are raising them. Not all are you know, your basic chase savings account is still at zero point zero one percent, But all of a sudden, these younger, newer banks come out four four and a half. I found one above five percent. Right as I turned the story in for edit, Apple and Goldman came out with their high yield savings account above four percent. So it's just amazing how dramatically
the opportunity set has shifted for investors. You know, even just parking your money in the bank can earn you a decent yield these days.
And before we get to the feasts on how money markets work and what it's like to run one, Katie, real quick. You and I have been covering this on the ETF angle, So there's been a flood of money into treasury ETFs almost before the money market thing happened. So just talk a little bit about the dynamics with cash like ETFs.
It's been really interesting. I mean, I feel like for the past year we've been talking about all the billions of dollars going into ultrashort duration ETFs. The more interesting thing is that for really all of twenty twenty three, it's been the money market funds, the traditional old school mutual money market funds that have been getting the bulk of these inflows versus the ultrashort duration ETFs that you
and I speak about all the time. But I mean, overall, what really catches my attention is that cash and money market funds and these ultrashort duration ETFs for so long, and for good reasons sort of, the reputation was this is a place to park your money, this is haven safety seeking behavior. But that's not the case now now people, this is a yield hunt.
Cash is trash, as they used to say, this is a trade.
It's a tactical trade. And so Nafiez, you've seen your world get a lot of flows in the past, like in March twenty twenty. But again, as casey, that's normally a fear play. Now they're yielding something, I guess talk a little bit about what it's been like this, You know, hundreds of billions coming into money market funds. From your point of view, does it change anyway you invest? Are you holding the same things you did before? Give us some insight into that.
Sure, Thank you again for the opportunity to speak with you all today. But as as noted, over the past month, we've seen tremendous inflows into money market funds. So as an industry we're up about three hundred and seventy five billion since March to ninth in terms of, you know, the way we're investing. The industry as a whole continues to maintain relatively short weighted average maturities when you consider how quickly interest rates have increased since the beginning of
twenty twenty two. The Fed's been on this journey to combat inflation, which has been at a forty year high. You have to go back really to like the eighties or nine to find as a fast of a rate of change in short terms short term interest rates. So as a result, there's been this enormous incentive to keep money market funds relatively short in terms of interest rate risk. And I think that is true across the industry in
terms of you know, what we've been buying. If you look across the industry and money market portfolios, you'll see some treasury securities. You'll see repo or repurchase agreements collateralized by treasury securities. Typically you'll see a heavy dose of US agency securities. This is primarily the federal home loan banking system. It's the big issuer in our marketplace. And prime products, which are you know, a little bit riskier than say a government fund or treasury fund. You'll see
some short term credit like commercial paper or CDs. The opportunity set hasn't necessarily evolved throughout this recent time period. Given a rule to a sevens or rule to a seven is that the regulatory the sec regulatory framework that all money funds a bide buy and those rules are pretty prescriptive in terms of what a money fund can and cannot do. So you haven't really seen the opportunities that evolve over this recent.
Period and fs, it's great to have you, and I think it really speaks to this unique situation that we're in that we're talking about mutual funds on what is an ETF podcast, and I feel like this whole episode has really sort of brought into the light the differences between these structures that Okay, Eric and I have been talking about ultra short duration ETFs, but that's different from
a money market mutual fund. I'm hoping that you can just walk us through some of the key differences and when we talk about money market funds, what we're actually talking about.
Sure a money market fund is it's a type of mutual fund that generally seeks to preserve an investor's principle and pay some level of income. Therefore, when we think of money funds, we typically think of them as having lower risk compared to like a fixed income ETF or fund or in equity mutual fund. Money market funds, as I mentioned, typically invest in high quality, short term debt securities that pay income that reflect prevailing interest rates in
the marketplace. So money market fund rates typically will be more responsive to changes in voluntary policy than say like a bank deposit rate. In the US, as I mentioned, you know, money market funds are governed by Rule to A seven under the Investment Company Act of nineteen forty.
Rule cha A seven dictates limits on many different things that money market funds can engage, and they put a limit on how much interest rate risk one can take, how to define liquidity, how much liquidity a money market fund can hold. And there's a whole host of duties that are listed in Rule to A seven that are
money a money market fund manager must comply with. These rules have evolved over recent history to make the industry you know, much more transparent, much more resilient, which is one of the reasons why money market funds are so popular, particularly when the market is experiencing turmoil like it did back in in March of this year, or back during the pandemic.
You know, Nephiez. As you point out, people turn the money market funds to preserve capital, often in times of stress in other parts of the market, and their reputation is pretty spotless as far as safety. You know, the only sort of example I can think of is the reserve fund back in the financial crisis that you know, quote unquote broke the buck, meaning the share price actually dipped slightly below one dollar. I think it was like
ninety nine point whatever. So regardless of you know, a bank account having FDIC insurance, a money market fund doesn't, but still comes with it that reputation for being more or less riskless. But the one thing I'm wondering is, how are you thinking about this debt ceiling issue as it approaches. Is that sort of the one risk that could threaten a money market fund?
So I think that the debt sailing of absolutely something that we pay attention to. It's something that is on the minds of a lot of market participants. Ultimately, our base case is that disc gets resolved in the market, we'll move past it.
Let's go over that dollar nave. Why is that so important? Because especially if this isn't the money going into money market funds now, isn't for safety where you'd be like, I need that dollar nav, I'd just have to sleep at night. It's a yield play. So why is the dollar nav so important? Because when you look at the flows in the first quarter, as you said, there were hundreds of billions going into money market mutual funds versus say forty billion into treasury ETFs. Many of the treasure ETFs,
I got to say, are cheaper. I mean, yours are comparable, but most money market funds are more expensive. We'll get to that in a minute. But why And also with the ETF you get interroday liquidity and arguably better tax efficiency. Is the dollar the stable dollar really that big of a deal when it's just a trade to get yield.
So it depends on your objective, Right, are you after capital preservation or are you after a higher return that comes typically with additional risk, right, like duration risk or credit risk. The stable nav is important, right, even with short term debt securities. Right, there's interest rate risk and the potential to see your market value drop in the
event of unexpected increase in short term interest rates. Given that we remain in this heightened inflationary environment, it seemed to be far from the all clear from the FED in terms of getting inflation back down to the fed's two percent target. There's a lot of value in the
capital stability of a money market fund. This is particularly true for investors who may not have the clarity, if you will, as to when they'll need the cash that they have on and you don't necessarily want to be stuck with cash on hand and a floating navy product
right after short term interest rates have gone up. That said, for investors who are willing to stomach the chance of some capital depreciation or appreciation, there's plenty of ultra short and fixed income options that offer a bit more yield and potential for capital growth. For example, we've seen investors gravitate toward our ultra short term bond ETF VUSB, which currently yields roughly twenty basis plants more than our treasury
money market portfolio. But it's an actively managed fund, right and that fund seeks to perform its benchmark, whereas a money market fund. Money market funds designed for capital preservation. So I think it ultimately depends on what are your objectives.
And one thing I looked at when I dissected the money market mutual fund flows, and it was a little bit of surprise to me, was that the quote Vanguard effect as I call it, really that the physics don't work there when you look at cash like ETFs or treasure ETFs, all the money goes to the cheapest products like it's basically the asset weighted fee is probably like seven to ten basis points when you look at the money market mutual fund space, and I know you probably
love this question because you guys are almost alone in your cheapness. You have a thinkers as nine basis points, But the one that took in the most money was Fidelity, which is forty two basis points JP Morgan and Goldman. Again, this isn't really expensive, but when you have ETFs and your fund that's below ten BIPs, it just seems like the physics don't work the same here. Why are those money market funds able to sort of still command that fee and largely be immune from the Vanguard effect.
There's probably a few reasons for this. One may simply be the fact that many investors don't think of cash as a traditional investment and therefore aren't applying and necessary or the same cost focus on that part of their portfolios as they would you know, bond fund or aquity fun In addition, for much of the last say fifteen years, and I think this point was made during the opening, money market funds have earned close to nothing right or have had their fees waived where all of a sudden,
now in an environment where that is not the case, so might require some additional focus by investors on the fact that yields are higher and costs are lower at a place at a place like Vanguard. So only in the last twelve months or so has Vanguard's cost advantage really become apparent to investors once again. So assuming cash return stay positive for some duration of time, we do hope that investors will allocate tower, lower cost, higher quality solutions over time.
I want to talk a little bit about Mike was speaking about at the beginning that you've had this impulse for people to take money out of banks, deposits to leave banks and go into likes of money market funds, which, to your point, it's a place you go where if you want to preserve capital. But we've talked a little bit about the difference between ETFs and money market funds. Maybe you can talk a little bit about whether people should be treating money market funds like they're a bank.
So I think there's a strong argument to be made if you're talking about a specific type of money market fund and I'm thinking of US treasury funds or government funds. So treasury funds will typically invest, you know, at least ninety nine and a half percent of their assets. And treasury securities right or repot collateralized by treasuries you know, government funds will invest at least ninety nine and a half percent, and treasuries US agency debt, you know, repo
collateralized by treasuries. I think we're talking about those types of instruments. There's a strong argument that the risk profile of those products is very similar to a bank deposit. You think about, you know, for a treasury right, it's backed by the full faith and credit right of the United States. So I think that making the argument that the risk profile while certain types of products is similar to a bank deposit, I think you can make that argument.
Nafiz, I'm wondering. So often, when you see a deluge of inflows into money market funds, at least back in the low interest rate environment, a lot of people took that as sort of a bullish sign for the stock market and other risky assets, in that there was a lot of dry powder sitting on the sidelines. If there was a correction in the stock market, maybe that would
all come back. I wonder if this time is different in your mind, you know, with people actually parking it there in many cases for the yield rather than the safety. Are those flows a little bit more sticky this time compared to say, the previous ten years after the financial crisis, when it really was just a capital preservation play.
Yeah, I think it depends on how things evolve here in the short term. When you think about what's on the horizon, many economists are forecasting for, you know, mild recession at some point this year possibly and too early next year. You know, when that's on the horizon, that creates an incentive right to stay short, to kind of
focus on capital preservation. So I would say that I would expect money marketphone assets to generally be sticky here on the short term, and then really it just depends on how the economic environment evolves over the next six to twelve months.
So besides people who are short the market, you must be one of the rare people actually rooting for FED hikes.
I think the FED should do whatever they think is in the best interests of economic conditions.
All right, Your PR guys signed off on that one. Well done, interestingly, So I researched a Bogel intensely for a book I wrote recently, and one of the things. I didn't really cover this in my book too much, but when I read his book, Character counts give speeches, it's all his speeches over the years in like eighty
two eighty three, Vanguards like has no money. Basically they're very small, but their money market funds start to become an early hit for them, and he says, I quote, the banks want their money back, they don't like it, and so that's when banks started launching mutual funds. Vanguard was about to steal like a lot more money, but they obviously got smart and came out with those themselves. So I guess in that whole reputation or I guess
history of challenging the banks for their money. As Mike's question just alluded to, do you think the pressures on them to raise their rates? What do you think those internal conversations are like, Because you have the interest income, which is great revenue, you raise rates, you're gonna lose You're gonna cut into that, but you have to also balance it with losing money to money market funds.
It's a great question. And you know, unfortunately I'm not a bank cio or treasure right, so I can't you know, speculate as to why a bank may or may not increase their deposit rates, right, But at the end of the day, in my mind, it comes back to what is best for investors. When I look at our money market fund lineup, which is a government money market fund lined up, these are extremely safe, extreme extremely stable products
that pay a very very competitive rate of interest. And so I think that's ultimately what it comes down to is that investors should, to the extent that they have cash balances, make sure that that cash is working for them, make sure that the costs that they're paying are reasonable, and if they're not, they should seek out a low cost option like a Vanguard money market phone.
I got to say, I mean, I think I would rather be in your shoes, Defeast than being a bank treasurer. Just putting that out there, but to your point that you're not a bank. Something that the bank executives talk about a lot in which we heard on the latest round of earnings calls, is that deposits tend to be sticky. And when you think about just this incredible amount of money that's come into these funds, how sticky would you
expect that to be? When you know, maybe we start to get into some of the environment that Mike has talked about that you know, maybe equity start competing again, or maybe the FED finally does cut rates. Do you expect these newfound inflows to stick around?
I guess.
So, speaking from my experience, I would expect the cash to be to be sticky. You know, here at Vanguard, one of our philosophies right is being disciplined right with respect to your goals, right and your your asset allocation. You know, typically our investors will you know, will hold onto their accounts for a long period of time. So it'd be my expectation, given that our flows tend to be more retail oriented, that the cash would be relatively
sticky here in in the short to medium term. I wouldn't expect to see a massive outflow cycle.
Well, I'm thinking about sort of my own accounts, the five twenty nine accounts I have, and you're only allowed to rebounce them a couple of times a year, so that helps to some degree, I imagine if you have a bit of a captive audience there. But I'm also wondering a feast to the extent that you are seeing these inflows. Do you have any sort of insight or color on where they're coming from, how they're arriving there is are there areas out there who are really advising
clients to go to cash at this point? Or is it self directed accounts? Do you think that are just noticing these yields on their own? Any insight on you know, what is creating these flows.
It's a great question, and to be honest, I don't have great insight. You know, our investor we have, you know, thirty million investors here are a van garden. You know. Ultimately, my job is to manage the cash consistent, you know, with the mandate. Yeah. I did make a comment that, you know, our investor base tends to be somewhat more
retail oriented. But in terms of, you know, the specific channels through which that cash is coming, unfortunately, it's not something that I have a lot of insight into.
Probably a little all the above to some degree.
I would imagine soon that would be my guess.
Yeah, And I think broadly, I think institutions, especially when you see money market funds grow like by six hundred billion in a quarter, I feel like there has to be some big fish in there. I don't know if retail is capable of that level of movement. I have a question from someone on my team who asks about the currency market moves. Given that the Euro and the pound are up three percent versus the dollar, does the currency market impact anything you do?
We do see some act I'm not a I'm not an FX expert, candidly, but you do see you do see some impact insofar as if the cost of dollar funding changes, You'll see this where banks will alter their mix of issuance. Right, they might tap the US markets when it's more favorable. I might tap other markets, uh if if FX changes. But from our perspective, you know, these are obviously US money market funds that I look after.
So he it's difficult to comment on changes in individual interest rates and how that impacts us.
So talk to us a little bit and a fist about what the team looks like managing this fund for for just nine basis points, I'm picturing a pretty pretty small, nimble team.
Just it's just you, right, I gotta think right otherwise you're not getting paid that much.
So we're a team of We're a team of six. There's two two portfolio managers and four traders. Most of us are based here in Malverne. We have a few traders in our Scottsdale office, but we're we're one team of six across you know, spread across the country. That's you know, simultaneously looking after you know, one book of business for for Vanguard. Those are just the folks who are you know, who have hands on the assets we're actually trading the assets. There's a bigger team that supports us.
We we have a pretty robust credit research capability. That's a global capability where we have a team of analysts and research associates that are helping us do due diligence and issuers that we invest in. We we have a investment strategy group that helps us with economic research. So the as we've grown and as we've been able to increase our scale, that allows us to you know, keep costs low right and have these additional resources to help us manage money market funds.
So a basis point and a half for CHI, I guess.
But when how much does it have an assets? Like a trillion dollars, it does add up.
I would take that, I'll take it.
But Fidelity's money market fund, just one, yeah, kicks out a billion a year in revenue. I did the numbers only the Capitol Group American Growth Fund of America, which is the largest active management fund in the US. I believe those are the only two funds that kick out a billion dollars. That was more my point. I'm surprised. Not forty two BIPs isn't that much, but at when you have that much money in it, it does kick out a lot of revenue. So the dollar fees are
just ginormous on some of these funds. I think there is some degree of a captive audience, as you said, that doesn't exist in the ETF world, where the customers are able to just move around at their will much easier.
Yeah, I mean, when you think about just the discrepancy and flows that we've been talking about, it must be some of those sorts of factors. Because if you just do the numbers, if you lay out the math there, it is a head scratcher.
It's interesting. So we looked at all of the mutual fund companies by flows in the first quarter, and believe or not, Fidelity was number one. You know, Fidelity has seen outflows out of their active but inflows into their index funds, so they've been balancing out a lot. So typically they're not number one, they might be on the list somewhere. Number two was somebody had been. JP Morgan Ubs was on there. Vanguard was sixth, which is rare to see Vanguard six. But the percentage of the flows
from money market funds Vanguard was way an anomaly. Only forty two percent of their flows came from money funds, whereas everybody else was above eighty five percent. So this money market fund surge has completely like created this like distortion in the normal sort of leader board activity, at least for the first quarter, and we thought that was interesting.
We dig in through the numbers. I gotta say, for although, when you're write no offense in Nefist, but when you're writ about money market funds, it doesn't really get the readership. So my reads are down this quarter unfortunately. But this is the big story.
Well, ne Feast, I know it's not in the Vanguard ethos necessarily. So when you hear Eric say things like that that Vanguard is number six, can you believe it? I mean, does that fire off any competitive juices on your part?
So when looking at the flows, I guess I would encourage to maybe go a level deeper. And you know, if you consider kind of the institutional retail breakdown in the flows, you know, institutions have you know, definitely dominated some of the flow activity, which I think explains some
of the numbers that you pointed out. When you look at it from a retail perspective, I would say, you know, Vanguard is captured, it's it's fair share, So I would I would just encourage, you know, just take taking a look sort of under under the hood when you're when you're looking at cash flow data. I mean to answer the question about about competitive competitive juices, Yeah, if you will. At the end of the day, you know, we we
try to do the right thing for all shareholders. We do have an investor base that tends to be very very diss planned, that tends to be rather sticky, and we think that that is the best approach for managing our money market fund business.
Yeah.
I don't know if does competitive juices get you disqualified from your job application? I want to win.
But the feast, you know, we're talking about sort of the salad days, the glory days for money market funds right now. Not too long ago, it was the opposite story. I mean, there was a lot of talk about boy, these funds might actually have to go to a negative yield because rates were so low. It was actually difficult to manage one of these funds and still charge any
basis point fee at all. On customers talk to us about how difficult it was not so long ago to manage a money market fund and keep that yield positive.
So you made the comment about the differences in fees, and so from that perspective, I would say it was much less difficult for a place like bang Guard, given that you know, we enjoy this this expense advantage when you look more broadly across across the industry, I think that this is the reason why the SEC will soon be publishing a new round of reforms in this space, and one of those reforms is aimed at at money market funds being able to weather when interest rates do
get very, very low. But when I look at the experience, the experience that we've had over the past say fifteen years, during periods of zero interest rate policy, we really have not had that difficult over time managing our funds.
So in NAFIEZ, we have a fun way of any the podcast, which is we ask every guest what is your favorite ETF ticker? I realize as a money market mutual fund analyst that could be a stretch, but do you have one.
My favorite ETF ticker? I'm going it's gonna have to be a Vanguard fund. I'll go Ultra short b USB nice.
First person in five years to ever picked that one. So congratulations that and that's not only vague we'll give you. Normally we don't let you pick your own companies, but because you're a fun I'll let it slide. And that was such a novel choice. So anyway, Nafiez, Katie, Mike, thanks for joining us on Trillions today.
Thank you so much. It was great to be here.
Thanks loved it.
Thanks for listening to Trillions until next time. You can find us on the Bloomberg Terminal, Bloomberg dot com, Apple Podcasts, Spotify, and wherever else you'd like to listen. We'd love to hear from you. We're on Twitter, I'm at Joel Webber Show, He's at Eric Baltunas. This episode of Trillions was produced by Magnus Hendrickson. Bye