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Speaker 1: Welcome a trillions.

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Speaker 2: I'm Juel Weber and I'm Eric Blchunis.

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Speaker 1: Eric. There's some interesting stuff happening in money market funds

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Speaker 1: right now, and the flows are something that I really

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Speaker 1: want to spend some time talking with you about, because man,

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Speaker 1: it is just eye opening what's happening here.

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Speaker 2: Yeah, I mean, money market funds have grown by well

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Speaker 2: over half a trillion dollars in the first quarter. March

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Speaker 2: in particular was ridiculous. Listen to this Statuel. If you

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Speaker 2: ranked all mutual funds by March flows, the top twenty

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Speaker 2: eight would be money market funds and seventy three out

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Speaker 2: of the top one hundred. This is a stat that

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Speaker 2: James Sayferd on my team found And again, think about this,

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Speaker 2: this is basically what ETFs took in all of last year.

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Speaker 2: So this is big boy flows and it's basically diverted.

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Speaker 2: We're a bunch of ETF analysts, but we've been completely

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Speaker 2: diverted over there because this is a big deal. And

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Speaker 2: obviously the reason is because you can get four point

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Speaker 2: seven four point eight percent would basically risk free when

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Speaker 2: obviously contrasted with a lot of banks will only give

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Speaker 2: you fifty sixty basis points in your savings or checking account.

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Speaker 2: So that spread has become the story of the year.

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Speaker 2: In my opinion, it does link to the whole bank story,

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Speaker 2: and I do think banks are now going to have

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Speaker 2: to probably raise their rates at some point. And also

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Speaker 2: the appeal of a four point eight percent yield and

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Speaker 2: a money market fund has actually taken away a lot

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Speaker 2: of money from equity flows because there now is like

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Speaker 2: an alternative, and so this has become again it's not

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Speaker 2: just money markets impacted everything, and it's again it's diverted

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Speaker 2: all of our attention.

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Speaker 1: And to be clear here money market funds, we're talking

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Speaker 1: about cash, right, like something that is like so basic

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Speaker 1: and boring, right, but yet cash has become king.

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Speaker 2: Yeah, sometimes cash is the sexy thing or the shiny

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Speaker 2: object because other things are struggling. But what made Q

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Speaker 2: one interesting to me is that equities were up seven percent,

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Speaker 2: you know, unlike last year they were down, they were

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Speaker 2: up this year. But the idea, I think equities now

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Speaker 2: have to work much harder to get your money. So

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Speaker 2: if they have another good quarter, I could see maybe

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Speaker 2: some money shifting out. But again, almost a five percent

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Speaker 2: yield guaranteed banked the nav stays at one dollar. That's

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Speaker 2: really compelling, And what we also found was how lucrative

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Speaker 2: this is for the asset managers. Unlike other areas, the

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Speaker 2: vanguard effect isn't big here. A lot of these money

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Speaker 2: funds charged thirty five forty basis points and they took

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Speaker 2: in a ton of money. Vanguard does have one, but

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Speaker 2: it's sort of an interesting area where the vanguard effect

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Speaker 2: is not really in play as much, and we explored

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Speaker 2: that too. So there's just so many interesting angles to

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Speaker 2: this story.

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Speaker 1: Also, Eric, I am not going to be here for

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Speaker 1: the rest of the episode because I have to go

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Speaker 1: to my brother's wedding in central Oregon.

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Speaker 2: Yeah what are you running out to catch a flight

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Speaker 2: right now?

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Speaker 1: And not quite yet, but it's gonna happen soon. So

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Speaker 1: you're gonna have some guests on and you're gonna do

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Speaker 1: all this by yourself. You're a big boy. I'm sure

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Speaker 1: you can figure it out.

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Speaker 2: Uh. Yeah, I'll miss you, but I'll be okay. Is

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Speaker 2: this your older or younger brother?

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Speaker 1: Four years younger? First time getting married?

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Speaker 2: Wow? Wow?

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Speaker 1: Bend Oregon and.

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Speaker 2: What happens there? I'm picturing like stage coaches for some reason. No, No,

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Speaker 2: Oregon Trail.

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Speaker 1: Hi, you played Oregon Trail. Yeah, it's high desert man.

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Speaker 1: The air smells like juniper. The golf is great. When

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Speaker 1: the weather's a little bit nicer, you'd you know, be

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Speaker 1: river rafting or something. It's a super it's like an

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Speaker 1: outdoor paradise. It's it's truly a special place. This time

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Speaker 1: on Trillian's Cash is King.

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Speaker 2: All right, So today here we have Katie Greyfield from

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Speaker 2: Bloomberg News, Mike Reagan from Bloomberg News, and Nafeas Smith,

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Speaker 2: Principal and head of taxable money Markets at Vanguard. Welcome everybody,

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Speaker 2: Thank you.

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Speaker 3: It's good to be with you this morning.

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Speaker 4: Thanks for having me.

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Speaker 5: Eric, I'm thrilled to be here.

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Speaker 2: So Mike, let's start with you. There's a BusinessWeek cover

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Speaker 2: you wrote the cover story. Our team was passing it around.

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Speaker 2: We thought it was great. The cover has the number

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Speaker 2: four and it's like jacked. It's got like a six pack.

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Speaker 2: It's really strong, and it speaks to the four percent

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Speaker 2: plus yields on money funds, as if all of a sudden,

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Speaker 2: something that is usually boring is really interesting. And so

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Speaker 2: just talk about your article and what you some of

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Speaker 2: the conclusions you came to Yeah.

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Speaker 4: This was one of those Joel ideas where I think

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Speaker 4: he and his friends probably having the same conversation that

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Speaker 4: me and my friends and everyone's having now these days,

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Speaker 4: is that wait a minute, all of a sudden, you

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Speaker 4: can get a nice little yield in something as simple

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Speaker 4: as a money market fund, or, as my story focused on,

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Speaker 4: just write your old bank savings accounts. You know, remember

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Speaker 4: a couple of years ago you basically needed to buy

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Speaker 4: junk bonds to get four percent yield, and now you

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Speaker 4: can get them in something is theoretically as safe as

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Speaker 4: a bank savings account. But what's I find very fascinating

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Speaker 4: is that yield in this point in time is high

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Speaker 4: enough that people it raises eyebrows and they're like, they're

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Speaker 4: almost looking at it like a risky asset, and I'm like, no,

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Speaker 4: this is a bank savings account. This is what banks

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Speaker 4: are supposed to do. But we've been trained to not

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Speaker 4: expect yield from these vehicles, whether it be you know,

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Speaker 4: a simple savings account or a money market mutual fund,

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Speaker 4: from that ultra long era of zero percent interest rates.

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Speaker 4: So one really fascinating thing that I noticed in the

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Speaker 4: reporting of the story is that last year deposits at

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Speaker 4: US banks actually fell for the first time since like

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Speaker 4: the nineteen forties. You know, they just tend to steadily

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Speaker 4: go up year after year. Last year they fell. I think,

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Speaker 4: you know, there's a few different explanations given. One is

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Speaker 4: every you know, companies and regular consumers and pop types

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Speaker 4: had built up a pretty big savings during the pandemic,

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Speaker 4: so they're starting to draw that down. But the other

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Speaker 4: issue for banks, obviously is these these yields on money

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Speaker 4: market funds. So there is quite an interesting competition among banks.

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Speaker 4: The ones that have the wherewithal to raise their rates

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Speaker 4: are raising them. Not all are you know, your basic

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Speaker 4: chase savings account is still at zero point zero one percent,

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Speaker 4: But all of a sudden, these younger, newer banks come

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Speaker 4: out four four and a half. I found one above

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Speaker 4: five percent. Right as I turned the story in for edit,

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Speaker 4: Apple and Goldman came out with their high yield savings

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Speaker 4: account above four percent. So it's just amazing how dramatically

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Speaker 4: the opportunity set has shifted for investors. You know, even

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Speaker 4: just parking your money in the bank can earn you

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Speaker 4: a decent yield these days.

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Speaker 2: And before we get to the feasts on how money

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Speaker 2: markets work and what it's like to run one, Katie,

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Speaker 2: real quick. You and I have been covering this on

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Speaker 2: the ETF angle, So there's been a flood of money

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Speaker 2: into treasury ETFs almost before the money market thing happened.

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Speaker 2: So just talk a little bit about the dynamics with

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Speaker 2: cash like ETFs.

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Speaker 5: It's been really interesting. I mean, I feel like for

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Speaker 5: the past year we've been talking about all the billions

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Speaker 5: of dollars going into ultrashort duration ETFs. The more interesting

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Speaker 5: thing is that for really all of twenty twenty three,

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Speaker 5: it's been the money market funds, the traditional old school

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Speaker 5: mutual money market funds that have been getting the bulk

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Speaker 5: of these inflows versus the ultrashort duration ETFs that you

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Speaker 5: and I speak about all the time. But I mean, overall,

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Speaker 5: what really catches my attention is that cash and money

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Speaker 5: market funds and these ultrashort duration ETFs for so long,

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Speaker 5: and for good reasons sort of, the reputation was this

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Speaker 5: is a place to park your money, this is haven

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Speaker 5: safety seeking behavior. But that's not the case now now people,

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Speaker 5: this is a yield hunt.

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Speaker 4: Cash is trash, as they used to say, this is

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Speaker 4: a trade.

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Speaker 2: It's a tactical trade. And so Nafiez, you've seen your

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Speaker 2: world get a lot of flows in the past, like

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Speaker 2: in March twenty twenty. But again, as casey, that's normally

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Speaker 2: a fear play. Now they're yielding something, I guess talk

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Speaker 2: a little bit about what it's been like this, You know,

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Speaker 2: hundreds of billions coming into money market funds. From your

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Speaker 2: point of view, does it change anyway you invest? Are

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Speaker 2: you holding the same things you did before? Give us

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Speaker 2: some insight into that.

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Speaker 3: Sure, Thank you again for the opportunity to speak with

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Speaker 3: you all today. But as as noted, over the past month,

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Speaker 3: we've seen tremendous inflows into money market funds. So as

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Speaker 3: an industry we're up about three hundred and seventy five

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Speaker 3: billion since March to ninth in terms of, you know,

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Speaker 3: the way we're investing. The industry as a whole continues

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Speaker 3: to maintain relatively short weighted average maturities when you consider

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Speaker 3: how quickly interest rates have increased since the beginning of

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Speaker 3: twenty twenty two. The Fed's been on this journey to

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Speaker 3: combat inflation, which has been at a forty year high.

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Speaker 3: You have to go back really to like the eighties

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Speaker 3: or nine to find as a fast of a rate

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Speaker 3: of change in short terms short term interest rates. So

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Speaker 3: as a result, there's been this enormous incentive to keep

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Speaker 3: money market funds relatively short in terms of interest rate risk.

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Speaker 3: And I think that is true across the industry in

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Speaker 3: terms of you know, what we've been buying. If you

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Speaker 3: look across the industry and money market portfolios, you'll see

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Speaker 3: some treasury securities. You'll see repo or repurchase agreements collateralized

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Speaker 3: by treasury securities. Typically you'll see a heavy dose of

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Speaker 3: US agency securities. This is primarily the federal home loan

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Speaker 3: banking system. It's the big issuer in our marketplace. And

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Speaker 3: prime products, which are you know, a little bit riskier

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Speaker 3: than say a government fund or treasury fund. You'll see

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Speaker 3: some short term credit like commercial paper or CDs. The

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Speaker 3: opportunity set hasn't necessarily evolved throughout this recent time period.

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Speaker 3: Given a rule to a sevens or rule to a

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Speaker 3: seven is that the regulatory the sec regulatory framework that

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Speaker 3: all money funds a bide buy and those rules are

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Speaker 3: pretty prescriptive in terms of what a money fund can

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Speaker 3: and cannot do. So you haven't really seen the opportunities

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Speaker 3: that evolve over this recent.

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Speaker 5: Period and fs, it's great to have you, and I

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Speaker 5: think it really speaks to this unique situation that we're

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Speaker 5: in that we're talking about mutual funds on what is

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Speaker 5: an ETF podcast, and I feel like this whole episode

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Speaker 5: has really sort of brought into the light the differences

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Speaker 5: between these structures that Okay, Eric and I have been

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Speaker 5: talking about ultra short duration ETFs, but that's different from

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Speaker 5: a money market mutual fund. I'm hoping that you can

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Speaker 5: just walk us through some of the key differences and

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Speaker 5: when we talk about money market funds, what we're actually

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Speaker 5: talking about.

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Speaker 3: Sure a money market fund is it's a type of

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Speaker 3: mutual fund that generally seeks to preserve an investor's principle

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Speaker 3: and pay some level of income. Therefore, when we think

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Speaker 3: of money funds, we typically think of them as having

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Speaker 3: lower risk compared to like a fixed income ETF or

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Speaker 3: fund or in equity mutual fund. Money market funds, as

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Speaker 3: I mentioned, typically invest in high quality, short term debt

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Speaker 3: securities that pay income that reflect prevailing interest rates in

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Speaker 3: the marketplace. So money market fund rates typically will be

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Speaker 3: more responsive to changes in voluntary policy than say like

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Speaker 3: a bank deposit rate. In the US, as I mentioned,

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Speaker 3: you know, money market funds are governed by Rule to

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Speaker 3: A seven under the Investment Company Act of nineteen forty.

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Speaker 3: Rule cha A seven dictates limits on many different things

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Speaker 3: that money market funds can engage, and they put a

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Speaker 3: limit on how much interest rate risk one can take,

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Speaker 3: how to define liquidity, how much liquidity a money market

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Speaker 3: fund can hold. And there's a whole host of duties

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Speaker 3: that are listed in Rule to A seven that are

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Speaker 3: money a money market fund manager must comply with. These

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Speaker 3: rules have evolved over recent history to make the industry

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Speaker 3: you know, much more transparent, much more resilient, which is

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Speaker 3: one of the reasons why money market funds are so popular,

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Speaker 3: particularly when the market is experiencing turmoil like it did

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Speaker 3: back in in March of this year, or back during

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Speaker 3: the pandemic.

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Speaker 4: You know, Nephiez. As you point out, people turn the

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Speaker 4: money market funds to preserve capital, often in times of

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Speaker 4: stress in other parts of the market, and their reputation

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Speaker 4: is pretty spotless as far as safety. You know, the

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Speaker 4: only sort of example I can think of is the

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Speaker 4: reserve fund back in the financial crisis that you know,

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Speaker 4: quote unquote broke the buck, meaning the share price actually

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Speaker 4: dipped slightly below one dollar. I think it was like

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Speaker 4: ninety nine point whatever. So regardless of you know, a

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Speaker 4: bank account having FDIC insurance, a money market fund doesn't,

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Speaker 4: but still comes with it that reputation for being more

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Speaker 4: or less riskless. But the one thing I'm wondering is,

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Speaker 4: how are you thinking about this debt ceiling issue as

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Speaker 4: it approaches. Is that sort of the one risk that

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Speaker 4: could threaten a money market fund?

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Speaker 3: So I think that the debt sailing of absolutely something

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Speaker 3: that we pay attention to. It's something that is on

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Speaker 3: the minds of a lot of market participants. Ultimately, our

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Speaker 3: base case is that disc gets resolved in the market,

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Speaker 3: we'll move past it.

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Speaker 2: Let's go over that dollar nave. Why is that so important?

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Speaker 2: Because especially if this isn't the money going into money

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Speaker 2: market funds now, isn't for safety where you'd be like,

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Speaker 2: I need that dollar nav, I'd just have to sleep

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Speaker 2: at night. It's a yield play. So why is the

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Speaker 2: dollar nav so important? Because when you look at the

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Speaker 2: flows in the first quarter, as you said, there were

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Speaker 2: hundreds of billions going into money market mutual funds versus

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Speaker 2: say forty billion into treasury ETFs. Many of the treasure ETFs,

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Speaker 2: I got to say, are cheaper. I mean, yours are comparable,

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Speaker 2: but most money market funds are more expensive. We'll get

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Speaker 2: to that in a minute. But why And also with

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Speaker 2: the ETF you get interroday liquidity and arguably better tax efficiency.

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Speaker 2: Is the dollar the stable dollar really that big of

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Speaker 2: a deal when it's just a trade to get yield.

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Speaker 3: So it depends on your objective, Right, are you after

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Speaker 3: capital preservation or are you after a higher return that

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Speaker 3: comes typically with additional risk, right, like duration risk or

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Speaker 3: credit risk. The stable nav is important, right, even with

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Speaker 3: short term debt securities. Right, there's interest rate risk and

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Speaker 3: the potential to see your market value drop in the

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Speaker 3: event of unexpected increase in short term interest rates. Given

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Speaker 3: that we remain in this heightened inflationary environment, it seemed

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Speaker 3: to be far from the all clear from the FED

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Speaker 3: in terms of getting inflation back down to the fed's

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Speaker 3: two percent target. There's a lot of value in the

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Speaker 3: capital stability of a money market fund. This is particularly

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Speaker 3: true for investors who may not have the clarity, if

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Speaker 3: you will, as to when they'll need the cash that

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Speaker 3: they have on and you don't necessarily want to be

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Speaker 3: stuck with cash on hand and a floating navy product

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Speaker 3: right after short term interest rates have gone up. That said,

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Speaker 3: for investors who are willing to stomach the chance of

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Speaker 3: some capital depreciation or appreciation, there's plenty of ultra short

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Speaker 3: and fixed income options that offer a bit more yield

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Speaker 3: and potential for capital growth. For example, we've seen investors

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Speaker 3: gravitate toward our ultra short term bond ETF VUSB, which

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Speaker 3: currently yields roughly twenty basis plants more than our treasury

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Speaker 3: money market portfolio. But it's an actively managed fund, right

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Speaker 3: and that fund seeks to perform its benchmark, whereas a

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Speaker 3: money market fund. Money market funds designed for capital preservation.

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Speaker 3: So I think it ultimately depends on what are your objectives.

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Speaker 2: And one thing I looked at when I dissected the

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Speaker 2: money market mutual fund flows, and it was a little

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Speaker 2: bit of surprise to me, was that the quote Vanguard

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Speaker 2: effect as I call it, really that the physics don't

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Speaker 2: work there when you look at cash like ETFs or

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Speaker 2: treasure ETFs, all the money goes to the cheapest products

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Speaker 2: like it's basically the asset weighted fee is probably like

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Speaker 2: seven to ten basis points when you look at the

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Speaker 2: money market mutual fund space, and I know you probably

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Speaker 2: love this question because you guys are almost alone in

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Speaker 2: your cheapness. You have a thinkers as nine basis points,

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Speaker 2: But the one that took in the most money was Fidelity,

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Speaker 2: which is forty two basis points JP Morgan and Goldman. Again,

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Speaker 2: this isn't really expensive, but when you have ETFs and

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Speaker 2: your fund that's below ten BIPs, it just seems like

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Speaker 2: the physics don't work the same here. Why are those

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Speaker 2: money market funds able to sort of still command that

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Speaker 2: fee and largely be immune from the Vanguard effect.

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Speaker 3: There's probably a few reasons for this. One may simply

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Speaker 3: be the fact that many investors don't think of cash

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Speaker 3: as a traditional investment and therefore aren't applying and necessary

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Speaker 3: or the same cost focus on that part of their

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Speaker 3: portfolios as they would you know, bond fund or aquity

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Speaker 3: fun In addition, for much of the last say fifteen years,

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Speaker 3: and I think this point was made during the opening,

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Speaker 3: money market funds have earned close to nothing right or

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Speaker 3: have had their fees waived where all of a sudden,

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Speaker 3: now in an environment where that is not the case,

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Speaker 3: so might require some additional focus by investors on the

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Speaker 3: fact that yields are higher and costs are lower at

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Speaker 3: a place at a place like Vanguard. So only in

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Speaker 3: the last twelve months or so has Vanguard's cost advantage

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Speaker 3: really become apparent to investors once again. So assuming cash

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Speaker 3: return stay positive for some duration of time, we do

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Speaker 3: hope that investors will allocate tower, lower cost, higher quality

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Speaker 3: solutions over time.

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Speaker 5: I want to talk a little bit about Mike was

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Speaker 5: speaking about at the beginning that you've had this impulse

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Speaker 5: for people to take money out of banks, deposits to

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Speaker 5: leave banks and go into likes of money market funds, which,

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Speaker 5: to your point, it's a place you go where if

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Speaker 5: you want to preserve capital. But we've talked a little

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Speaker 5: bit about the difference between ETFs and money market funds.

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Speaker 5: Maybe you can talk a little bit about whether people

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Speaker 5: should be treating money market funds like they're a bank.

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Speaker 3: So I think there's a strong argument to be made

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Speaker 3: if you're talking about a specific type of money market

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Speaker 3: fund and I'm thinking of US treasury funds or government funds.

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Speaker 3: So treasury funds will typically invest, you know, at least

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Speaker 3: ninety nine and a half percent of their assets. And

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Speaker 3: treasury securities right or repot collateralized by treasuries you know,

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Speaker 3: government funds will invest at least ninety nine and a

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Speaker 3: half percent, and treasuries US agency debt, you know, repo

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Speaker 3: collateralized by treasuries. I think we're talking about those types

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Speaker 3: of instruments. There's a strong argument that the risk profile

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Speaker 3: of those products is very similar to a bank deposit.

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Speaker 3: You think about, you know, for a treasury right, it's

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Speaker 3: backed by the full faith and credit right of the

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Speaker 3: United States. So I think that making the argument that

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Speaker 3: the risk profile while certain types of products is similar

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Speaker 3: to a bank deposit, I think you can make that argument.

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Speaker 4: Nafiz, I'm wondering. So often, when you see a deluge

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Speaker 4: of inflows into money market funds, at least back in

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Speaker 4: the low interest rate environment, a lot of people took

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Speaker 4: that as sort of a bullish sign for the stock

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Speaker 4: market and other risky assets, in that there was a

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Speaker 4: lot of dry powder sitting on the sidelines. If there

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Speaker 4: was a correction in the stock market, maybe that would

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Speaker 4: all come back. I wonder if this time is different

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Speaker 4: in your mind, you know, with people actually parking it

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Speaker 4: there in many cases for the yield rather than the safety.

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Speaker 4: Are those flows a little bit more sticky this time

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Speaker 4: compared to say, the previous ten years after the financial crisis,

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Speaker 4: when it really was just a capital preservation play.

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Speaker 3: Yeah, I think it depends on how things evolve here

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Speaker 3: in the short term. When you think about what's on

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Speaker 3: the horizon, many economists are forecasting for, you know, mild

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Speaker 3: recession at some point this year possibly and too early

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Speaker 3: next year. You know, when that's on the horizon, that

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Speaker 3: creates an incentive right to stay short, to kind of

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Speaker 3: focus on capital preservation. So I would say that I

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Speaker 3: would expect money marketphone assets to generally be sticky here

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Speaker 3: on the short term, and then really it just depends

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Speaker 3: on how the economic environment evolves over the next six

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Speaker 3: to twelve months.

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Speaker 2: So besides people who are short the market, you must

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Speaker 2: be one of the rare people actually rooting for FED hikes.

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Speaker 3: I think the FED should do whatever they think is

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Speaker 3: in the best interests of economic conditions.

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Speaker 2: All right, Your PR guys signed off on that one.

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Speaker 2: Well done, interestingly, So I researched a Bogel intensely for

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Speaker 2: a book I wrote recently, and one of the things.

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Speaker 2: I didn't really cover this in my book too much,

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Speaker 2: but when I read his book, Character counts give speeches,

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Speaker 2: it's all his speeches over the years in like eighty

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Speaker 2: two eighty three, Vanguards like has no money. Basically they're

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Speaker 2: very small, but their money market funds start to become

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Speaker 2: an early hit for them, and he says, I quote,

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Speaker 2: the banks want their money back, they don't like it,

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Speaker 2: and so that's when banks started launching mutual funds. Vanguard

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Speaker 2: was about to steal like a lot more money, but

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Speaker 2: they obviously got smart and came out with those themselves.

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Speaker 2: So I guess in that whole reputation or I guess

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Speaker 2: history of challenging the banks for their money. As Mike's

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Speaker 2: question just alluded to, do you think the pressures on

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Speaker 2: them to raise their rates? What do you think those

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Speaker 2: internal conversations are like, Because you have the interest income,

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Speaker 2: which is great revenue, you raise rates, you're gonna lose

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Speaker 2: You're gonna cut into that, but you have to also

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Speaker 2: balance it with losing money to money market funds.

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Speaker 3: It's a great question. And you know, unfortunately I'm not

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Speaker 3: a bank cio or treasure right, so I can't you know,

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Speaker 3: speculate as to why a bank may or may not

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Speaker 3: increase their deposit rates, right, But at the end of

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Speaker 3: the day, in my mind, it comes back to what

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Speaker 3: is best for investors. When I look at our money

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Speaker 3: market fund lineup, which is a government money market fund

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Speaker 3: lined up, these are extremely safe, extreme extremely stable products

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Speaker 3: that pay a very very competitive rate of interest. And

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Speaker 3: so I think that's ultimately what it comes down to

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Speaker 3: is that investors should, to the extent that they have

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Speaker 3: cash balances, make sure that that cash is working for them,

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Speaker 3: make sure that the costs that they're paying are reasonable,

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Speaker 3: and if they're not, they should seek out a low

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Speaker 3: cost option like a Vanguard money market phone.

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Speaker 5: I got to say, I mean, I think I would

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Speaker 5: rather be in your shoes, Defeast than being a bank treasurer.

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Speaker 5: Just putting that out there, but to your point that

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Speaker 5: you're not a bank. Something that the bank executives talk

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Speaker 5: about a lot in which we heard on the latest

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Speaker 5: round of earnings calls, is that deposits tend to be sticky.

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Speaker 5: And when you think about just this incredible amount of

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Speaker 5: money that's come into these funds, how sticky would you

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Speaker 5: expect that to be? When you know, maybe we start

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Speaker 5: to get into some of the environment that Mike has

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Speaker 5: talked about that you know, maybe equity start competing again,

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Speaker 5: or maybe the FED finally does cut rates. Do you

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Speaker 5: expect these newfound inflows to stick around?

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Speaker 2: I guess.

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Speaker 3: So, speaking from my experience, I would expect the cash

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Speaker 3: to be to be sticky. You know, here at Vanguard,

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Speaker 3: one of our philosophies right is being disciplined right with

437
00:23:38,480 --> 00:23:42,879
Speaker 3: respect to your goals, right and your your asset allocation.

438
00:23:44,160 --> 00:23:48,200
Speaker 3: You know, typically our investors will you know, will hold

439
00:23:48,200 --> 00:23:51,280
Speaker 3: onto their accounts for a long period of time. So

440
00:23:51,320 --> 00:23:55,199
Speaker 3: it'd be my expectation, given that our flows tend to

441
00:23:55,280 --> 00:23:58,560
Speaker 3: be more retail oriented, that the cash would be relatively

442
00:23:58,600 --> 00:24:01,639
Speaker 3: sticky here in in the short to medium term. I

443
00:24:01,640 --> 00:24:05,399
Speaker 3: wouldn't expect to see a massive outflow cycle.

444
00:24:06,080 --> 00:24:08,080
Speaker 4: Well, I'm thinking about sort of my own accounts, the

445
00:24:08,119 --> 00:24:10,880
Speaker 4: five twenty nine accounts I have, and you're only allowed

446
00:24:10,920 --> 00:24:12,600
Speaker 4: to rebounce them a couple of times a year, so

447
00:24:12,640 --> 00:24:15,840
Speaker 4: that helps to some degree, I imagine if you have

448
00:24:15,960 --> 00:24:18,680
Speaker 4: a bit of a captive audience there. But I'm also

449
00:24:18,720 --> 00:24:22,520
Speaker 4: wondering a feast to the extent that you are seeing

450
00:24:22,520 --> 00:24:26,159
Speaker 4: these inflows. Do you have any sort of insight or

451
00:24:26,280 --> 00:24:29,640
Speaker 4: color on where they're coming from, how they're arriving there

452
00:24:29,760 --> 00:24:33,080
Speaker 4: is are there areas out there who are really advising

453
00:24:33,119 --> 00:24:36,080
Speaker 4: clients to go to cash at this point? Or is

454
00:24:36,119 --> 00:24:38,560
Speaker 4: it self directed accounts? Do you think that are just

455
00:24:38,680 --> 00:24:42,560
Speaker 4: noticing these yields on their own? Any insight on you know,

456
00:24:42,800 --> 00:24:46,719
Speaker 4: what is creating these flows.

457
00:24:46,800 --> 00:24:49,160
Speaker 3: It's a great question, and to be honest, I don't

458
00:24:49,359 --> 00:24:55,199
Speaker 3: have great insight. You know, our investor we have, you know,

459
00:24:55,280 --> 00:24:59,520
Speaker 3: thirty million investors here are a van garden. You know. Ultimately,

460
00:24:59,520 --> 00:25:02,480
Speaker 3: my job is to manage the cash consistent, you know,

461
00:25:02,520 --> 00:25:05,560
Speaker 3: with the mandate. Yeah. I did make a comment that,

462
00:25:05,960 --> 00:25:09,520
Speaker 3: you know, our investor base tends to be somewhat more

463
00:25:09,680 --> 00:25:14,200
Speaker 3: retail oriented. But in terms of, you know, the specific

464
00:25:14,760 --> 00:25:17,119
Speaker 3: channels through which that cash is coming, unfortunately, it's not

465
00:25:17,640 --> 00:25:19,440
Speaker 3: something that I have a lot of insight into.

466
00:25:19,560 --> 00:25:21,520
Speaker 4: Probably a little all the above to some degree.

467
00:25:21,520 --> 00:25:23,520
Speaker 3: I would imagine soon that would be my guess.

468
00:25:23,600 --> 00:25:26,920
Speaker 2: Yeah, And I think broadly, I think institutions, especially when

469
00:25:26,960 --> 00:25:29,720
Speaker 2: you see money market funds grow like by six hundred

470
00:25:29,760 --> 00:25:31,280
Speaker 2: billion in a quarter, I feel like there has to

471
00:25:31,320 --> 00:25:33,520
Speaker 2: be some big fish in there. I don't know if

472
00:25:33,560 --> 00:25:44,240
Speaker 2: retail is capable of that level of movement. I have

473
00:25:44,240 --> 00:25:48,160
Speaker 2: a question from someone on my team who asks about

474
00:25:48,160 --> 00:25:52,000
Speaker 2: the currency market moves. Given that the Euro and the

475
00:25:52,040 --> 00:25:55,040
Speaker 2: pound are up three percent versus the dollar, does the

476
00:25:55,080 --> 00:25:56,960
Speaker 2: currency market impact anything you do?

477
00:25:59,119 --> 00:26:01,320
Speaker 3: We do see some act I'm not a I'm not

478
00:26:01,320 --> 00:26:05,000
Speaker 3: an FX expert, candidly, but you do see you do

479
00:26:05,080 --> 00:26:09,639
Speaker 3: see some impact insofar as if the cost of dollar

480
00:26:09,640 --> 00:26:14,760
Speaker 3: funding changes, You'll see this where banks will alter their

481
00:26:14,840 --> 00:26:19,120
Speaker 3: mix of issuance. Right, they might tap the US markets

482
00:26:19,160 --> 00:26:21,679
Speaker 3: when it's more favorable. I might tap other markets, uh

483
00:26:21,760 --> 00:26:25,720
Speaker 3: if if FX changes. But from our perspective, you know,

484
00:26:25,760 --> 00:26:27,960
Speaker 3: these are obviously US money market funds that I look after.

485
00:26:28,080 --> 00:26:31,840
Speaker 3: So he it's difficult to comment on changes in individual

486
00:26:31,920 --> 00:26:34,720
Speaker 3: interest rates and how that impacts us.

487
00:26:35,880 --> 00:26:38,359
Speaker 4: So talk to us a little bit and a fist

488
00:26:38,359 --> 00:26:41,240
Speaker 4: about what the team looks like managing this fund for

489
00:26:41,400 --> 00:26:44,520
Speaker 4: for just nine basis points, I'm picturing a pretty pretty small,

490
00:26:44,600 --> 00:26:45,160
Speaker 4: nimble team.

491
00:26:45,280 --> 00:26:48,439
Speaker 2: Just it's just you, right, I gotta think right otherwise

492
00:26:48,440 --> 00:26:49,520
Speaker 2: you're not getting paid that much.

493
00:26:51,720 --> 00:26:54,520
Speaker 3: So we're a team of We're a team of six.

494
00:26:55,320 --> 00:26:58,480
Speaker 3: There's two two portfolio managers and four traders. Most of

495
00:26:58,560 --> 00:27:00,840
Speaker 3: us are based here in Malverne. We have a few

496
00:27:00,840 --> 00:27:04,359
Speaker 3: traders in our Scottsdale office, but we're we're one team

497
00:27:04,400 --> 00:27:07,560
Speaker 3: of six across you know, spread across the country. That's

498
00:27:07,640 --> 00:27:10,800
Speaker 3: you know, simultaneously looking after you know, one book of

499
00:27:11,160 --> 00:27:14,800
Speaker 3: business for for Vanguard. Those are just the folks who

500
00:27:14,880 --> 00:27:18,120
Speaker 3: are you know, who have hands on the assets we're

501
00:27:18,160 --> 00:27:22,800
Speaker 3: actually trading the assets. There's a bigger team that supports us.

502
00:27:23,280 --> 00:27:26,960
Speaker 3: We we have a pretty robust credit research capability. That's

503
00:27:26,960 --> 00:27:30,119
Speaker 3: a global capability where we have a team of analysts

504
00:27:30,160 --> 00:27:33,840
Speaker 3: and research associates that are helping us do due diligence

505
00:27:33,880 --> 00:27:38,120
Speaker 3: and issuers that we invest in. We we have a

506
00:27:38,320 --> 00:27:43,560
Speaker 3: investment strategy group that helps us with economic research. So

507
00:27:44,080 --> 00:27:47,919
Speaker 3: the as we've grown and as we've been able to

508
00:27:47,960 --> 00:27:50,320
Speaker 3: increase our scale, that allows us to you know, keep

509
00:27:50,359 --> 00:27:53,840
Speaker 3: costs low right and have these additional resources to help

510
00:27:53,920 --> 00:27:55,200
Speaker 3: us manage money market funds.

511
00:27:55,400 --> 00:27:59,720
Speaker 4: So a basis point and a half for CHI, I guess.

512
00:27:59,600 --> 00:28:01,840
Speaker 2: But when how much does it have an assets? Like

513
00:28:02,080 --> 00:28:04,040
Speaker 2: a trillion dollars, it does add up.

514
00:28:05,280 --> 00:28:06,440
Speaker 1: I would take that, I'll take it.

515
00:28:06,520 --> 00:28:09,480
Speaker 2: But Fidelity's money market fund, just one, yeah, kicks out

516
00:28:09,480 --> 00:28:11,679
Speaker 2: a billion a year in revenue. I did the numbers

517
00:28:12,040 --> 00:28:14,720
Speaker 2: only the Capitol Group American Growth Fund of America, which

518
00:28:14,800 --> 00:28:18,600
Speaker 2: is the largest active management fund in the US. I

519
00:28:18,640 --> 00:28:20,320
Speaker 2: believe those are the only two funds that kick out

520
00:28:20,320 --> 00:28:23,480
Speaker 2: a billion dollars. That was more my point. I'm surprised.

521
00:28:24,640 --> 00:28:27,440
Speaker 2: Not forty two BIPs isn't that much, but at when

522
00:28:27,440 --> 00:28:29,480
Speaker 2: you have that much money in it, it does kick

523
00:28:29,520 --> 00:28:32,399
Speaker 2: out a lot of revenue. So the dollar fees are

524
00:28:32,440 --> 00:28:36,040
Speaker 2: just ginormous on some of these funds. I think there

525
00:28:36,080 --> 00:28:38,600
Speaker 2: is some degree of a captive audience, as you said,

526
00:28:38,840 --> 00:28:42,280
Speaker 2: that doesn't exist in the ETF world, where the customers

527
00:28:42,320 --> 00:28:45,120
Speaker 2: are able to just move around at their will much easier.

528
00:28:45,560 --> 00:28:49,080
Speaker 5: Yeah, I mean, when you think about just the discrepancy

529
00:28:49,120 --> 00:28:51,080
Speaker 5: and flows that we've been talking about, it must be

530
00:28:51,520 --> 00:28:53,760
Speaker 5: some of those sorts of factors. Because if you just

531
00:28:53,880 --> 00:28:56,600
Speaker 5: do the numbers, if you lay out the math there,

532
00:28:57,440 --> 00:28:58,480
Speaker 5: it is a head scratcher.

533
00:28:58,600 --> 00:29:00,680
Speaker 2: It's interesting. So we looked at all of the mutual

534
00:29:00,680 --> 00:29:03,480
Speaker 2: fund companies by flows in the first quarter, and believe

535
00:29:03,560 --> 00:29:06,680
Speaker 2: or not, Fidelity was number one. You know, Fidelity has

536
00:29:06,760 --> 00:29:08,960
Speaker 2: seen outflows out of their active but inflows into their

537
00:29:08,960 --> 00:29:11,080
Speaker 2: index funds, so they've been balancing out a lot. So

538
00:29:11,080 --> 00:29:12,720
Speaker 2: typically they're not number one, they might be on the

539
00:29:12,720 --> 00:29:16,440
Speaker 2: list somewhere. Number two was somebody had been. JP Morgan

540
00:29:16,760 --> 00:29:19,920
Speaker 2: Ubs was on there. Vanguard was sixth, which is rare

541
00:29:19,920 --> 00:29:23,120
Speaker 2: to see Vanguard six. But the percentage of the flows

542
00:29:23,120 --> 00:29:27,280
Speaker 2: from money market funds Vanguard was way an anomaly. Only

543
00:29:27,320 --> 00:29:29,680
Speaker 2: forty two percent of their flows came from money funds,

544
00:29:29,760 --> 00:29:32,480
Speaker 2: whereas everybody else was above eighty five percent. So this

545
00:29:32,600 --> 00:29:35,760
Speaker 2: money market fund surge has completely like created this like

546
00:29:35,840 --> 00:29:40,840
Speaker 2: distortion in the normal sort of leader board activity, at

547
00:29:40,920 --> 00:29:43,880
Speaker 2: least for the first quarter, and we thought that was interesting.

548
00:29:44,200 --> 00:29:46,840
Speaker 2: We dig in through the numbers. I gotta say, for although,

549
00:29:47,120 --> 00:29:49,640
Speaker 2: when you're write no offense in Nefist, but when you're

550
00:29:49,640 --> 00:29:52,120
Speaker 2: writ about money market funds, it doesn't really get the readership.

551
00:29:52,600 --> 00:29:55,000
Speaker 2: So my reads are down this quarter unfortunately. But this

552
00:29:55,040 --> 00:29:55,800
Speaker 2: is the big story.

553
00:29:56,200 --> 00:29:58,480
Speaker 5: Well, ne Feast, I know it's not in the Vanguard

554
00:29:58,560 --> 00:30:01,680
Speaker 5: ethos necessarily. So when you hear Eric say things like

555
00:30:01,720 --> 00:30:04,320
Speaker 5: that that Vanguard is number six, can you believe it?

556
00:30:04,360 --> 00:30:07,640
Speaker 5: I mean, does that fire off any competitive juices on

557
00:30:07,720 --> 00:30:08,160
Speaker 5: your part?

558
00:30:09,080 --> 00:30:11,360
Speaker 3: So when looking at the flows, I guess I would

559
00:30:11,440 --> 00:30:14,480
Speaker 3: encourage to maybe go a level deeper. And you know,

560
00:30:14,480 --> 00:30:18,440
Speaker 3: if you consider kind of the institutional retail breakdown in

561
00:30:18,440 --> 00:30:21,760
Speaker 3: the flows, you know, institutions have you know, definitely dominated

562
00:30:22,240 --> 00:30:25,120
Speaker 3: some of the flow activity, which I think explains some

563
00:30:25,160 --> 00:30:28,280
Speaker 3: of the numbers that you pointed out. When you look

564
00:30:28,320 --> 00:30:30,720
Speaker 3: at it from a retail perspective, I would say, you know,

565
00:30:30,840 --> 00:30:34,480
Speaker 3: Vanguard is captured, it's it's fair share, So I would

566
00:30:34,520 --> 00:30:37,320
Speaker 3: I would just encourage, you know, just take taking a

567
00:30:37,320 --> 00:30:40,360
Speaker 3: look sort of under under the hood when you're when

568
00:30:40,360 --> 00:30:43,280
Speaker 3: you're looking at cash flow data. I mean to answer

569
00:30:43,360 --> 00:30:49,320
Speaker 3: the question about about competitive competitive juices, Yeah, if you will.

570
00:30:49,640 --> 00:30:51,480
Speaker 3: At the end of the day, you know, we we

571
00:30:51,560 --> 00:30:56,560
Speaker 3: try to do the right thing for all shareholders. We

572
00:30:56,600 --> 00:30:59,520
Speaker 3: do have an investor base that tends to be very

573
00:30:59,600 --> 00:31:02,920
Speaker 3: very diss planned, that tends to be rather sticky, and

574
00:31:02,960 --> 00:31:06,800
Speaker 3: we think that that is the best approach for managing

575
00:31:06,800 --> 00:31:08,080
Speaker 3: our money market fund business.

576
00:31:08,360 --> 00:31:08,560
Speaker 1: Yeah.

577
00:31:08,560 --> 00:31:11,480
Speaker 2: I don't know if does competitive juices get you disqualified

578
00:31:11,920 --> 00:31:16,160
Speaker 2: from your job application? I want to win.

579
00:31:17,920 --> 00:31:21,400
Speaker 4: But the feast, you know, we're talking about sort of

580
00:31:20,880 --> 00:31:24,320
Speaker 4: the salad days, the glory days for money market funds

581
00:31:24,360 --> 00:31:27,840
Speaker 4: right now. Not too long ago, it was the opposite story.

582
00:31:27,840 --> 00:31:29,520
Speaker 4: I mean, there was a lot of talk about boy,

583
00:31:29,520 --> 00:31:31,320
Speaker 4: these funds might actually have to go to a negative

584
00:31:31,360 --> 00:31:34,800
Speaker 4: yield because rates were so low. It was actually difficult

585
00:31:34,960 --> 00:31:38,760
Speaker 4: to manage one of these funds and still charge any

586
00:31:38,800 --> 00:31:41,880
Speaker 4: basis point fee at all. On customers talk to us

587
00:31:41,880 --> 00:31:45,120
Speaker 4: about how difficult it was not so long ago to

588
00:31:45,640 --> 00:31:48,120
Speaker 4: manage a money market fund and keep that yield positive.

589
00:31:49,840 --> 00:31:54,200
Speaker 3: So you made the comment about the differences in fees,

590
00:31:55,200 --> 00:31:57,720
Speaker 3: and so from that perspective, I would say it was

591
00:31:58,240 --> 00:32:01,240
Speaker 3: much less difficult for a place like bang Guard, given

592
00:32:01,280 --> 00:32:07,520
Speaker 3: that you know, we enjoy this this expense advantage when

593
00:32:07,560 --> 00:32:11,120
Speaker 3: you look more broadly across across the industry, I think

594
00:32:11,160 --> 00:32:15,560
Speaker 3: that this is the reason why the SEC will soon

595
00:32:15,680 --> 00:32:20,800
Speaker 3: be publishing a new round of reforms in this space,

596
00:32:21,680 --> 00:32:25,600
Speaker 3: and one of those reforms is aimed at at money

597
00:32:25,600 --> 00:32:30,200
Speaker 3: market funds being able to weather when interest rates do

598
00:32:30,280 --> 00:32:32,959
Speaker 3: get very, very low. But when I look at the experience,

599
00:32:33,000 --> 00:32:36,120
Speaker 3: the experience that we've had over the past say fifteen years,

600
00:32:36,200 --> 00:32:40,480
Speaker 3: during periods of zero interest rate policy, we really have

601
00:32:40,600 --> 00:32:44,000
Speaker 3: not had that difficult over time managing our funds.

602
00:32:44,640 --> 00:32:46,200
Speaker 2: So in NAFIEZ, we have a fun way of any

603
00:32:46,640 --> 00:32:49,680
Speaker 2: the podcast, which is we ask every guest what is

604
00:32:49,720 --> 00:32:52,520
Speaker 2: your favorite ETF ticker? I realize as a money market

605
00:32:52,640 --> 00:32:54,880
Speaker 2: mutual fund analyst that could be a stretch, but do

606
00:32:54,920 --> 00:32:56,880
Speaker 2: you have one.

607
00:32:56,880 --> 00:32:58,840
Speaker 3: My favorite ETF ticker? I'm going it's gonna have to

608
00:32:58,880 --> 00:33:02,840
Speaker 3: be a Vanguard fund. I'll go Ultra short b USB nice.

609
00:33:02,880 --> 00:33:05,360
Speaker 2: First person in five years to ever picked that one.

610
00:33:05,480 --> 00:33:09,200
Speaker 2: So congratulations that and that's not only vague we'll give you.

611
00:33:09,240 --> 00:33:10,960
Speaker 2: Normally we don't let you pick your own companies, but

612
00:33:10,960 --> 00:33:13,200
Speaker 2: because you're a fun I'll let it slide. And that

613
00:33:13,280 --> 00:33:16,480
Speaker 2: was such a novel choice. So anyway, Nafiez, Katie, Mike,

614
00:33:16,520 --> 00:33:17,960
Speaker 2: thanks for joining us on Trillions today.

615
00:33:18,400 --> 00:33:19,800
Speaker 3: Thank you so much. It was great to be here.

616
00:33:20,280 --> 00:33:21,640
Speaker 4: Thanks loved it.

617
00:33:27,040 --> 00:33:29,560
Speaker 1: Thanks for listening to Trillions until next time. You can

618
00:33:29,600 --> 00:33:34,000
Speaker 1: find us on the Bloomberg Terminal, Bloomberg dot com, Apple Podcasts, Spotify,

619
00:33:34,160 --> 00:33:36,440
Speaker 1: and wherever else you'd like to listen. We'd love to

620
00:33:36,440 --> 00:33:39,600
Speaker 1: hear from you. We're on Twitter, I'm at Joel Webber Show,

621
00:33:39,680 --> 00:33:43,840
Speaker 1: He's at Eric Baltunas. This episode of Trillions was produced

622
00:33:43,840 --> 00:33:45,920
Speaker 1: by Magnus Hendrickson. Bye