Speaker 1: Welcome a trillions.
Speaker 2: I'm Juel Weber and I'm Eric Blchunis.
Speaker 1: Eric. There's some interesting stuff happening in money market funds
Speaker 1: right now, and the flows are something that I really
Speaker 1: want to spend some time talking with you about, because man,
Speaker 1: it is just eye opening what's happening here.
Speaker 2: Yeah, I mean, money market funds have grown by well
Speaker 2: over half a trillion dollars in the first quarter. March
Speaker 2: in particular was ridiculous. Listen to this Statuel. If you
Speaker 2: ranked all mutual funds by March flows, the top twenty
Speaker 2: eight would be money market funds and seventy three out
Speaker 2: of the top one hundred. This is a stat that
Speaker 2: James Sayferd on my team found And again, think about this,
Speaker 2: this is basically what ETFs took in all of last year.
Speaker 2: So this is big boy flows and it's basically diverted.
Speaker 2: We're a bunch of ETF analysts, but we've been completely
Speaker 2: diverted over there because this is a big deal. And
Speaker 2: obviously the reason is because you can get four point
Speaker 2: seven four point eight percent would basically risk free when
Speaker 2: obviously contrasted with a lot of banks will only give
Speaker 2: you fifty sixty basis points in your savings or checking account.
Speaker 2: So that spread has become the story of the year.
Speaker 2: In my opinion, it does link to the whole bank story,
Speaker 2: and I do think banks are now going to have
Speaker 2: to probably raise their rates at some point. And also
Speaker 2: the appeal of a four point eight percent yield and
Speaker 2: a money market fund has actually taken away a lot
Speaker 2: of money from equity flows because there now is like
Speaker 2: an alternative, and so this has become again it's not
Speaker 2: just money markets impacted everything, and it's again it's diverted
Speaker 2: all of our attention.
Speaker 1: And to be clear here money market funds, we're talking
Speaker 1: about cash, right, like something that is like so basic
Speaker 1: and boring, right, but yet cash has become king.
Speaker 2: Yeah, sometimes cash is the sexy thing or the shiny
Speaker 2: object because other things are struggling. But what made Q
Speaker 2: one interesting to me is that equities were up seven percent,
Speaker 2: you know, unlike last year they were down, they were
Speaker 2: up this year. But the idea, I think equities now
Speaker 2: have to work much harder to get your money. So
Speaker 2: if they have another good quarter, I could see maybe
Speaker 2: some money shifting out. But again, almost a five percent
Speaker 2: yield guaranteed banked the nav stays at one dollar. That's
Speaker 2: really compelling, And what we also found was how lucrative
Speaker 2: this is for the asset managers. Unlike other areas, the
Speaker 2: vanguard effect isn't big here. A lot of these money
Speaker 2: funds charged thirty five forty basis points and they took
Speaker 2: in a ton of money. Vanguard does have one, but
Speaker 2: it's sort of an interesting area where the vanguard effect
Speaker 2: is not really in play as much, and we explored
Speaker 2: that too. So there's just so many interesting angles to
Speaker 2: this story.
Speaker 1: Also, Eric, I am not going to be here for
Speaker 1: the rest of the episode because I have to go
Speaker 1: to my brother's wedding in central Oregon.
Speaker 2: Yeah what are you running out to catch a flight
Speaker 2: right now?
Speaker 1: And not quite yet, but it's gonna happen soon. So
Speaker 1: you're gonna have some guests on and you're gonna do
Speaker 1: all this by yourself. You're a big boy. I'm sure
Speaker 1: you can figure it out.
Speaker 2: Uh. Yeah, I'll miss you, but I'll be okay. Is
Speaker 2: this your older or younger brother?
Speaker 1: Four years younger? First time getting married?
Speaker 2: Wow? Wow?
Speaker 1: Bend Oregon and.
Speaker 2: What happens there? I'm picturing like stage coaches for some reason. No, No,
Speaker 2: Oregon Trail.
Speaker 1: Hi, you played Oregon Trail. Yeah, it's high desert man.
Speaker 1: The air smells like juniper. The golf is great. When
Speaker 1: the weather's a little bit nicer, you'd you know, be
Speaker 1: river rafting or something. It's a super it's like an
Speaker 1: outdoor paradise. It's it's truly a special place. This time
Speaker 1: on Trillian's Cash is King.
Speaker 2: All right, So today here we have Katie Greyfield from
Speaker 2: Bloomberg News, Mike Reagan from Bloomberg News, and Nafeas Smith,
Speaker 2: Principal and head of taxable money Markets at Vanguard. Welcome everybody,
Speaker 2: Thank you.
Speaker 3: It's good to be with you this morning.
Speaker 4: Thanks for having me.
Speaker 5: Eric, I'm thrilled to be here.
Speaker 2: So Mike, let's start with you. There's a BusinessWeek cover
Speaker 2: you wrote the cover story. Our team was passing it around.
Speaker 2: We thought it was great. The cover has the number
Speaker 2: four and it's like jacked. It's got like a six pack.
Speaker 2: It's really strong, and it speaks to the four percent
Speaker 2: plus yields on money funds, as if all of a sudden,
Speaker 2: something that is usually boring is really interesting. And so
Speaker 2: just talk about your article and what you some of
Speaker 2: the conclusions you came to Yeah.
Speaker 4: This was one of those Joel ideas where I think
Speaker 4: he and his friends probably having the same conversation that
Speaker 4: me and my friends and everyone's having now these days,
Speaker 4: is that wait a minute, all of a sudden, you
Speaker 4: can get a nice little yield in something as simple
Speaker 4: as a money market fund, or, as my story focused on,
Speaker 4: just write your old bank savings accounts. You know, remember
Speaker 4: a couple of years ago you basically needed to buy
Speaker 4: junk bonds to get four percent yield, and now you
Speaker 4: can get them in something is theoretically as safe as
Speaker 4: a bank savings account. But what's I find very fascinating
Speaker 4: is that yield in this point in time is high
Speaker 4: enough that people it raises eyebrows and they're like, they're
Speaker 4: almost looking at it like a risky asset, and I'm like, no,
Speaker 4: this is a bank savings account. This is what banks
Speaker 4: are supposed to do. But we've been trained to not
Speaker 4: expect yield from these vehicles, whether it be you know,
Speaker 4: a simple savings account or a money market mutual fund,
Speaker 4: from that ultra long era of zero percent interest rates.
Speaker 4: So one really fascinating thing that I noticed in the
Speaker 4: reporting of the story is that last year deposits at
Speaker 4: US banks actually fell for the first time since like
Speaker 4: the nineteen forties. You know, they just tend to steadily
Speaker 4: go up year after year. Last year they fell. I think,
Speaker 4: you know, there's a few different explanations given. One is
Speaker 4: every you know, companies and regular consumers and pop types
Speaker 4: had built up a pretty big savings during the pandemic,
Speaker 4: so they're starting to draw that down. But the other
Speaker 4: issue for banks, obviously is these these yields on money
Speaker 4: market funds. So there is quite an interesting competition among banks.
Speaker 4: The ones that have the wherewithal to raise their rates
Speaker 4: are raising them. Not all are you know, your basic
Speaker 4: chase savings account is still at zero point zero one percent,
Speaker 4: But all of a sudden, these younger, newer banks come
Speaker 4: out four four and a half. I found one above
Speaker 4: five percent. Right as I turned the story in for edit,
Speaker 4: Apple and Goldman came out with their high yield savings
Speaker 4: account above four percent. So it's just amazing how dramatically
Speaker 4: the opportunity set has shifted for investors. You know, even
Speaker 4: just parking your money in the bank can earn you
Speaker 4: a decent yield these days.
Speaker 2: And before we get to the feasts on how money
Speaker 2: markets work and what it's like to run one, Katie,
Speaker 2: real quick. You and I have been covering this on
Speaker 2: the ETF angle, So there's been a flood of money
Speaker 2: into treasury ETFs almost before the money market thing happened.
Speaker 2: So just talk a little bit about the dynamics with
Speaker 2: cash like ETFs.
Speaker 5: It's been really interesting. I mean, I feel like for
Speaker 5: the past year we've been talking about all the billions
Speaker 5: of dollars going into ultrashort duration ETFs. The more interesting
Speaker 5: thing is that for really all of twenty twenty three,
Speaker 5: it's been the money market funds, the traditional old school
Speaker 5: mutual money market funds that have been getting the bulk
Speaker 5: of these inflows versus the ultrashort duration ETFs that you
Speaker 5: and I speak about all the time. But I mean, overall,
Speaker 5: what really catches my attention is that cash and money
Speaker 5: market funds and these ultrashort duration ETFs for so long,
Speaker 5: and for good reasons sort of, the reputation was this
Speaker 5: is a place to park your money, this is haven
Speaker 5: safety seeking behavior. But that's not the case now now people,
Speaker 5: this is a yield hunt.
Speaker 4: Cash is trash, as they used to say, this is
Speaker 4: a trade.
Speaker 2: It's a tactical trade. And so Nafiez, you've seen your
Speaker 2: world get a lot of flows in the past, like
Speaker 2: in March twenty twenty. But again, as casey, that's normally
Speaker 2: a fear play. Now they're yielding something, I guess talk
Speaker 2: a little bit about what it's been like this, You know,
Speaker 2: hundreds of billions coming into money market funds. From your
Speaker 2: point of view, does it change anyway you invest? Are
Speaker 2: you holding the same things you did before? Give us
Speaker 2: some insight into that.
Speaker 3: Sure, Thank you again for the opportunity to speak with
Speaker 3: you all today. But as as noted, over the past month,
Speaker 3: we've seen tremendous inflows into money market funds. So as
Speaker 3: an industry we're up about three hundred and seventy five
Speaker 3: billion since March to ninth in terms of, you know,
Speaker 3: the way we're investing. The industry as a whole continues
Speaker 3: to maintain relatively short weighted average maturities when you consider
Speaker 3: how quickly interest rates have increased since the beginning of
Speaker 3: twenty twenty two. The Fed's been on this journey to
Speaker 3: combat inflation, which has been at a forty year high.
Speaker 3: You have to go back really to like the eighties
Speaker 3: or nine to find as a fast of a rate
Speaker 3: of change in short terms short term interest rates. So
Speaker 3: as a result, there's been this enormous incentive to keep
Speaker 3: money market funds relatively short in terms of interest rate risk.
Speaker 3: And I think that is true across the industry in
Speaker 3: terms of you know, what we've been buying. If you
Speaker 3: look across the industry and money market portfolios, you'll see
Speaker 3: some treasury securities. You'll see repo or repurchase agreements collateralized
Speaker 3: by treasury securities. Typically you'll see a heavy dose of
Speaker 3: US agency securities. This is primarily the federal home loan
Speaker 3: banking system. It's the big issuer in our marketplace. And
Speaker 3: prime products, which are you know, a little bit riskier
Speaker 3: than say a government fund or treasury fund. You'll see
Speaker 3: some short term credit like commercial paper or CDs. The
Speaker 3: opportunity set hasn't necessarily evolved throughout this recent time period.
Speaker 3: Given a rule to a sevens or rule to a
Speaker 3: seven is that the regulatory the sec regulatory framework that
Speaker 3: all money funds a bide buy and those rules are
Speaker 3: pretty prescriptive in terms of what a money fund can
Speaker 3: and cannot do. So you haven't really seen the opportunities
Speaker 3: that evolve over this recent.
Speaker 5: Period and fs, it's great to have you, and I
Speaker 5: think it really speaks to this unique situation that we're
Speaker 5: in that we're talking about mutual funds on what is
Speaker 5: an ETF podcast, and I feel like this whole episode
Speaker 5: has really sort of brought into the light the differences
Speaker 5: between these structures that Okay, Eric and I have been
Speaker 5: talking about ultra short duration ETFs, but that's different from
Speaker 5: a money market mutual fund. I'm hoping that you can
Speaker 5: just walk us through some of the key differences and
Speaker 5: when we talk about money market funds, what we're actually
Speaker 5: talking about.
Speaker 3: Sure a money market fund is it's a type of
Speaker 3: mutual fund that generally seeks to preserve an investor's principle
Speaker 3: and pay some level of income. Therefore, when we think
Speaker 3: of money funds, we typically think of them as having
Speaker 3: lower risk compared to like a fixed income ETF or
Speaker 3: fund or in equity mutual fund. Money market funds, as
Speaker 3: I mentioned, typically invest in high quality, short term debt
Speaker 3: securities that pay income that reflect prevailing interest rates in
Speaker 3: the marketplace. So money market fund rates typically will be
Speaker 3: more responsive to changes in voluntary policy than say like
Speaker 3: a bank deposit rate. In the US, as I mentioned,
Speaker 3: you know, money market funds are governed by Rule to
Speaker 3: A seven under the Investment Company Act of nineteen forty.
Speaker 3: Rule cha A seven dictates limits on many different things
Speaker 3: that money market funds can engage, and they put a
Speaker 3: limit on how much interest rate risk one can take,
Speaker 3: how to define liquidity, how much liquidity a money market
Speaker 3: fund can hold. And there's a whole host of duties
Speaker 3: that are listed in Rule to A seven that are
Speaker 3: money a money market fund manager must comply with. These
Speaker 3: rules have evolved over recent history to make the industry
Speaker 3: you know, much more transparent, much more resilient, which is
Speaker 3: one of the reasons why money market funds are so popular,
Speaker 3: particularly when the market is experiencing turmoil like it did
Speaker 3: back in in March of this year, or back during
Speaker 3: the pandemic.
Speaker 4: You know, Nephiez. As you point out, people turn the
Speaker 4: money market funds to preserve capital, often in times of
Speaker 4: stress in other parts of the market, and their reputation
Speaker 4: is pretty spotless as far as safety. You know, the
Speaker 4: only sort of example I can think of is the
Speaker 4: reserve fund back in the financial crisis that you know,
Speaker 4: quote unquote broke the buck, meaning the share price actually
Speaker 4: dipped slightly below one dollar. I think it was like
Speaker 4: ninety nine point whatever. So regardless of you know, a
Speaker 4: bank account having FDIC insurance, a money market fund doesn't,
Speaker 4: but still comes with it that reputation for being more
Speaker 4: or less riskless. But the one thing I'm wondering is,
Speaker 4: how are you thinking about this debt ceiling issue as
Speaker 4: it approaches. Is that sort of the one risk that
Speaker 4: could threaten a money market fund?
Speaker 3: So I think that the debt sailing of absolutely something
Speaker 3: that we pay attention to. It's something that is on
Speaker 3: the minds of a lot of market participants. Ultimately, our
Speaker 3: base case is that disc gets resolved in the market,
Speaker 3: we'll move past it.
Speaker 2: Let's go over that dollar nave. Why is that so important?
Speaker 2: Because especially if this isn't the money going into money
Speaker 2: market funds now, isn't for safety where you'd be like,
Speaker 2: I need that dollar nav, I'd just have to sleep
Speaker 2: at night. It's a yield play. So why is the
Speaker 2: dollar nav so important? Because when you look at the
Speaker 2: flows in the first quarter, as you said, there were
Speaker 2: hundreds of billions going into money market mutual funds versus
Speaker 2: say forty billion into treasury ETFs. Many of the treasure ETFs,
Speaker 2: I got to say, are cheaper. I mean, yours are comparable,
Speaker 2: but most money market funds are more expensive. We'll get
Speaker 2: to that in a minute. But why And also with
Speaker 2: the ETF you get interroday liquidity and arguably better tax efficiency.
Speaker 2: Is the dollar the stable dollar really that big of
Speaker 2: a deal when it's just a trade to get yield.
Speaker 3: So it depends on your objective, Right, are you after
Speaker 3: capital preservation or are you after a higher return that
Speaker 3: comes typically with additional risk, right, like duration risk or
Speaker 3: credit risk. The stable nav is important, right, even with
Speaker 3: short term debt securities. Right, there's interest rate risk and
Speaker 3: the potential to see your market value drop in the
Speaker 3: event of unexpected increase in short term interest rates. Given
Speaker 3: that we remain in this heightened inflationary environment, it seemed
Speaker 3: to be far from the all clear from the FED
Speaker 3: in terms of getting inflation back down to the fed's
Speaker 3: two percent target. There's a lot of value in the
Speaker 3: capital stability of a money market fund. This is particularly
Speaker 3: true for investors who may not have the clarity, if
Speaker 3: you will, as to when they'll need the cash that
Speaker 3: they have on and you don't necessarily want to be
Speaker 3: stuck with cash on hand and a floating navy product
Speaker 3: right after short term interest rates have gone up. That said,
Speaker 3: for investors who are willing to stomach the chance of
Speaker 3: some capital depreciation or appreciation, there's plenty of ultra short
Speaker 3: and fixed income options that offer a bit more yield
Speaker 3: and potential for capital growth. For example, we've seen investors
Speaker 3: gravitate toward our ultra short term bond ETF VUSB, which
Speaker 3: currently yields roughly twenty basis plants more than our treasury
Speaker 3: money market portfolio. But it's an actively managed fund, right
Speaker 3: and that fund seeks to perform its benchmark, whereas a
Speaker 3: money market fund. Money market funds designed for capital preservation.
Speaker 3: So I think it ultimately depends on what are your objectives.
Speaker 2: And one thing I looked at when I dissected the
Speaker 2: money market mutual fund flows, and it was a little
Speaker 2: bit of surprise to me, was that the quote Vanguard
Speaker 2: effect as I call it, really that the physics don't
Speaker 2: work there when you look at cash like ETFs or
Speaker 2: treasure ETFs, all the money goes to the cheapest products
Speaker 2: like it's basically the asset weighted fee is probably like
Speaker 2: seven to ten basis points when you look at the
Speaker 2: money market mutual fund space, and I know you probably
Speaker 2: love this question because you guys are almost alone in
Speaker 2: your cheapness. You have a thinkers as nine basis points,
Speaker 2: But the one that took in the most money was Fidelity,
Speaker 2: which is forty two basis points JP Morgan and Goldman. Again,
Speaker 2: this isn't really expensive, but when you have ETFs and
Speaker 2: your fund that's below ten BIPs, it just seems like
Speaker 2: the physics don't work the same here. Why are those
Speaker 2: money market funds able to sort of still command that
Speaker 2: fee and largely be immune from the Vanguard effect.
Speaker 3: There's probably a few reasons for this. One may simply
Speaker 3: be the fact that many investors don't think of cash
Speaker 3: as a traditional investment and therefore aren't applying and necessary
Speaker 3: or the same cost focus on that part of their
Speaker 3: portfolios as they would you know, bond fund or aquity
Speaker 3: fun In addition, for much of the last say fifteen years,
Speaker 3: and I think this point was made during the opening,
Speaker 3: money market funds have earned close to nothing right or
Speaker 3: have had their fees waived where all of a sudden,
Speaker 3: now in an environment where that is not the case,
Speaker 3: so might require some additional focus by investors on the
Speaker 3: fact that yields are higher and costs are lower at
Speaker 3: a place at a place like Vanguard. So only in
Speaker 3: the last twelve months or so has Vanguard's cost advantage
Speaker 3: really become apparent to investors once again. So assuming cash
Speaker 3: return stay positive for some duration of time, we do
Speaker 3: hope that investors will allocate tower, lower cost, higher quality
Speaker 3: solutions over time.
Speaker 5: I want to talk a little bit about Mike was
Speaker 5: speaking about at the beginning that you've had this impulse
Speaker 5: for people to take money out of banks, deposits to
Speaker 5: leave banks and go into likes of money market funds, which,
Speaker 5: to your point, it's a place you go where if
Speaker 5: you want to preserve capital. But we've talked a little
Speaker 5: bit about the difference between ETFs and money market funds.
Speaker 5: Maybe you can talk a little bit about whether people
Speaker 5: should be treating money market funds like they're a bank.
Speaker 3: So I think there's a strong argument to be made
Speaker 3: if you're talking about a specific type of money market
Speaker 3: fund and I'm thinking of US treasury funds or government funds.
Speaker 3: So treasury funds will typically invest, you know, at least
Speaker 3: ninety nine and a half percent of their assets. And
Speaker 3: treasury securities right or repot collateralized by treasuries you know,
Speaker 3: government funds will invest at least ninety nine and a
Speaker 3: half percent, and treasuries US agency debt, you know, repo
Speaker 3: collateralized by treasuries. I think we're talking about those types
Speaker 3: of instruments. There's a strong argument that the risk profile
Speaker 3: of those products is very similar to a bank deposit.
Speaker 3: You think about, you know, for a treasury right, it's
Speaker 3: backed by the full faith and credit right of the
Speaker 3: United States. So I think that making the argument that
Speaker 3: the risk profile while certain types of products is similar
Speaker 3: to a bank deposit, I think you can make that argument.
Speaker 4: Nafiz, I'm wondering. So often, when you see a deluge
Speaker 4: of inflows into money market funds, at least back in
Speaker 4: the low interest rate environment, a lot of people took
Speaker 4: that as sort of a bullish sign for the stock
Speaker 4: market and other risky assets, in that there was a
Speaker 4: lot of dry powder sitting on the sidelines. If there
Speaker 4: was a correction in the stock market, maybe that would
Speaker 4: all come back. I wonder if this time is different
Speaker 4: in your mind, you know, with people actually parking it
Speaker 4: there in many cases for the yield rather than the safety.
Speaker 4: Are those flows a little bit more sticky this time
Speaker 4: compared to say, the previous ten years after the financial crisis,
Speaker 4: when it really was just a capital preservation play.
Speaker 3: Yeah, I think it depends on how things evolve here
Speaker 3: in the short term. When you think about what's on
Speaker 3: the horizon, many economists are forecasting for, you know, mild
Speaker 3: recession at some point this year possibly and too early
Speaker 3: next year. You know, when that's on the horizon, that
Speaker 3: creates an incentive right to stay short, to kind of
Speaker 3: focus on capital preservation. So I would say that I
Speaker 3: would expect money marketphone assets to generally be sticky here
Speaker 3: on the short term, and then really it just depends
Speaker 3: on how the economic environment evolves over the next six
Speaker 3: to twelve months.
Speaker 2: So besides people who are short the market, you must
Speaker 2: be one of the rare people actually rooting for FED hikes.
Speaker 3: I think the FED should do whatever they think is
Speaker 3: in the best interests of economic conditions.
Speaker 2: All right, Your PR guys signed off on that one.
Speaker 2: Well done, interestingly, So I researched a Bogel intensely for
Speaker 2: a book I wrote recently, and one of the things.
Speaker 2: I didn't really cover this in my book too much,
Speaker 2: but when I read his book, Character counts give speeches,
Speaker 2: it's all his speeches over the years in like eighty
Speaker 2: two eighty three, Vanguards like has no money. Basically they're
Speaker 2: very small, but their money market funds start to become
Speaker 2: an early hit for them, and he says, I quote,
Speaker 2: the banks want their money back, they don't like it,
Speaker 2: and so that's when banks started launching mutual funds. Vanguard
Speaker 2: was about to steal like a lot more money, but
Speaker 2: they obviously got smart and came out with those themselves.
Speaker 2: So I guess in that whole reputation or I guess
Speaker 2: history of challenging the banks for their money. As Mike's
Speaker 2: question just alluded to, do you think the pressures on
Speaker 2: them to raise their rates? What do you think those
Speaker 2: internal conversations are like, Because you have the interest income,
Speaker 2: which is great revenue, you raise rates, you're gonna lose
Speaker 2: You're gonna cut into that, but you have to also
Speaker 2: balance it with losing money to money market funds.
Speaker 3: It's a great question. And you know, unfortunately I'm not
Speaker 3: a bank cio or treasure right, so I can't you know,
Speaker 3: speculate as to why a bank may or may not
Speaker 3: increase their deposit rates, right, But at the end of
Speaker 3: the day, in my mind, it comes back to what
Speaker 3: is best for investors. When I look at our money
Speaker 3: market fund lineup, which is a government money market fund
Speaker 3: lined up, these are extremely safe, extreme extremely stable products
Speaker 3: that pay a very very competitive rate of interest. And
Speaker 3: so I think that's ultimately what it comes down to
Speaker 3: is that investors should, to the extent that they have
Speaker 3: cash balances, make sure that that cash is working for them,
Speaker 3: make sure that the costs that they're paying are reasonable,
Speaker 3: and if they're not, they should seek out a low
Speaker 3: cost option like a Vanguard money market phone.
Speaker 5: I got to say, I mean, I think I would
Speaker 5: rather be in your shoes, Defeast than being a bank treasurer.
Speaker 5: Just putting that out there, but to your point that
Speaker 5: you're not a bank. Something that the bank executives talk
Speaker 5: about a lot in which we heard on the latest
Speaker 5: round of earnings calls, is that deposits tend to be sticky.
Speaker 5: And when you think about just this incredible amount of
Speaker 5: money that's come into these funds, how sticky would you
Speaker 5: expect that to be? When you know, maybe we start
Speaker 5: to get into some of the environment that Mike has
Speaker 5: talked about that you know, maybe equity start competing again,
Speaker 5: or maybe the FED finally does cut rates. Do you
Speaker 5: expect these newfound inflows to stick around?
Speaker 2: I guess.
Speaker 3: So, speaking from my experience, I would expect the cash
Speaker 3: to be to be sticky. You know, here at Vanguard,
Speaker 3: one of our philosophies right is being disciplined right with
Speaker 3: respect to your goals, right and your your asset allocation.
Speaker 3: You know, typically our investors will you know, will hold
Speaker 3: onto their accounts for a long period of time. So
Speaker 3: it'd be my expectation, given that our flows tend to
Speaker 3: be more retail oriented, that the cash would be relatively
Speaker 3: sticky here in in the short to medium term. I
Speaker 3: wouldn't expect to see a massive outflow cycle.
Speaker 4: Well, I'm thinking about sort of my own accounts, the
Speaker 4: five twenty nine accounts I have, and you're only allowed
Speaker 4: to rebounce them a couple of times a year, so
Speaker 4: that helps to some degree, I imagine if you have
Speaker 4: a bit of a captive audience there. But I'm also
Speaker 4: wondering a feast to the extent that you are seeing
Speaker 4: these inflows. Do you have any sort of insight or
Speaker 4: color on where they're coming from, how they're arriving there
Speaker 4: is are there areas out there who are really advising
Speaker 4: clients to go to cash at this point? Or is
Speaker 4: it self directed accounts? Do you think that are just
Speaker 4: noticing these yields on their own? Any insight on you know,
Speaker 4: what is creating these flows.
Speaker 3: It's a great question, and to be honest, I don't
Speaker 3: have great insight. You know, our investor we have, you know,
Speaker 3: thirty million investors here are a van garden. You know. Ultimately,
Speaker 3: my job is to manage the cash consistent, you know,
Speaker 3: with the mandate. Yeah. I did make a comment that,
Speaker 3: you know, our investor base tends to be somewhat more
Speaker 3: retail oriented. But in terms of, you know, the specific
Speaker 3: channels through which that cash is coming, unfortunately, it's not
Speaker 3: something that I have a lot of insight into.
Speaker 4: Probably a little all the above to some degree.
Speaker 3: I would imagine soon that would be my guess.
Speaker 2: Yeah, And I think broadly, I think institutions, especially when
Speaker 2: you see money market funds grow like by six hundred
Speaker 2: billion in a quarter, I feel like there has to
Speaker 2: be some big fish in there. I don't know if
Speaker 2: retail is capable of that level of movement. I have
Speaker 2: a question from someone on my team who asks about
Speaker 2: the currency market moves. Given that the Euro and the
Speaker 2: pound are up three percent versus the dollar, does the
Speaker 2: currency market impact anything you do?
Speaker 3: We do see some act I'm not a I'm not
Speaker 3: an FX expert, candidly, but you do see you do
Speaker 3: see some impact insofar as if the cost of dollar
Speaker 3: funding changes, You'll see this where banks will alter their
Speaker 3: mix of issuance. Right, they might tap the US markets
Speaker 3: when it's more favorable. I might tap other markets, uh
Speaker 3: if if FX changes. But from our perspective, you know,
Speaker 3: these are obviously US money market funds that I look after.
Speaker 3: So he it's difficult to comment on changes in individual
Speaker 3: interest rates and how that impacts us.
Speaker 4: So talk to us a little bit and a fist
Speaker 4: about what the team looks like managing this fund for
Speaker 4: for just nine basis points, I'm picturing a pretty pretty small,
Speaker 4: nimble team.
Speaker 2: Just it's just you, right, I gotta think right otherwise
Speaker 2: you're not getting paid that much.
Speaker 3: So we're a team of We're a team of six.
Speaker 3: There's two two portfolio managers and four traders. Most of
Speaker 3: us are based here in Malverne. We have a few
Speaker 3: traders in our Scottsdale office, but we're we're one team
Speaker 3: of six across you know, spread across the country. That's
Speaker 3: you know, simultaneously looking after you know, one book of
Speaker 3: business for for Vanguard. Those are just the folks who
Speaker 3: are you know, who have hands on the assets we're
Speaker 3: actually trading the assets. There's a bigger team that supports us.
Speaker 3: We we have a pretty robust credit research capability. That's
Speaker 3: a global capability where we have a team of analysts
Speaker 3: and research associates that are helping us do due diligence
Speaker 3: and issuers that we invest in. We we have a
Speaker 3: investment strategy group that helps us with economic research. So
Speaker 3: the as we've grown and as we've been able to
Speaker 3: increase our scale, that allows us to you know, keep
Speaker 3: costs low right and have these additional resources to help
Speaker 3: us manage money market funds.
Speaker 4: So a basis point and a half for CHI, I guess.
Speaker 2: But when how much does it have an assets? Like
Speaker 2: a trillion dollars, it does add up.
Speaker 1: I would take that, I'll take it.
Speaker 2: But Fidelity's money market fund, just one, yeah, kicks out
Speaker 2: a billion a year in revenue. I did the numbers
Speaker 2: only the Capitol Group American Growth Fund of America, which
Speaker 2: is the largest active management fund in the US. I
Speaker 2: believe those are the only two funds that kick out
Speaker 2: a billion dollars. That was more my point. I'm surprised.
Speaker 2: Not forty two BIPs isn't that much, but at when
Speaker 2: you have that much money in it, it does kick
Speaker 2: out a lot of revenue. So the dollar fees are
Speaker 2: just ginormous on some of these funds. I think there
Speaker 2: is some degree of a captive audience, as you said,
Speaker 2: that doesn't exist in the ETF world, where the customers
Speaker 2: are able to just move around at their will much easier.
Speaker 5: Yeah, I mean, when you think about just the discrepancy
Speaker 5: and flows that we've been talking about, it must be
Speaker 5: some of those sorts of factors. Because if you just
Speaker 5: do the numbers, if you lay out the math there,
Speaker 5: it is a head scratcher.
Speaker 2: It's interesting. So we looked at all of the mutual
Speaker 2: fund companies by flows in the first quarter, and believe
Speaker 2: or not, Fidelity was number one. You know, Fidelity has
Speaker 2: seen outflows out of their active but inflows into their
Speaker 2: index funds, so they've been balancing out a lot. So
Speaker 2: typically they're not number one, they might be on the
Speaker 2: list somewhere. Number two was somebody had been. JP Morgan
Speaker 2: Ubs was on there. Vanguard was sixth, which is rare
Speaker 2: to see Vanguard six. But the percentage of the flows
Speaker 2: from money market funds Vanguard was way an anomaly. Only
Speaker 2: forty two percent of their flows came from money funds,
Speaker 2: whereas everybody else was above eighty five percent. So this
Speaker 2: money market fund surge has completely like created this like
Speaker 2: distortion in the normal sort of leader board activity, at
Speaker 2: least for the first quarter, and we thought that was interesting.
Speaker 2: We dig in through the numbers. I gotta say, for although,
Speaker 2: when you're write no offense in Nefist, but when you're
Speaker 2: writ about money market funds, it doesn't really get the readership.
Speaker 2: So my reads are down this quarter unfortunately. But this
Speaker 2: is the big story.
Speaker 5: Well, ne Feast, I know it's not in the Vanguard
Speaker 5: ethos necessarily. So when you hear Eric say things like
Speaker 5: that that Vanguard is number six, can you believe it?
Speaker 5: I mean, does that fire off any competitive juices on
Speaker 5: your part?
Speaker 3: So when looking at the flows, I guess I would
Speaker 3: encourage to maybe go a level deeper. And you know,
Speaker 3: if you consider kind of the institutional retail breakdown in
Speaker 3: the flows, you know, institutions have you know, definitely dominated
Speaker 3: some of the flow activity, which I think explains some
Speaker 3: of the numbers that you pointed out. When you look
Speaker 3: at it from a retail perspective, I would say, you know,
Speaker 3: Vanguard is captured, it's it's fair share, So I would
Speaker 3: I would just encourage, you know, just take taking a
Speaker 3: look sort of under under the hood when you're when
Speaker 3: you're looking at cash flow data. I mean to answer
Speaker 3: the question about about competitive competitive juices, Yeah, if you will.
Speaker 3: At the end of the day, you know, we we
Speaker 3: try to do the right thing for all shareholders. We
Speaker 3: do have an investor base that tends to be very
Speaker 3: very diss planned, that tends to be rather sticky, and
Speaker 3: we think that that is the best approach for managing
Speaker 3: our money market fund business.
Speaker 1: Yeah.
Speaker 2: I don't know if does competitive juices get you disqualified
Speaker 2: from your job application? I want to win.
Speaker 4: But the feast, you know, we're talking about sort of
Speaker 4: the salad days, the glory days for money market funds
Speaker 4: right now. Not too long ago, it was the opposite story.
Speaker 4: I mean, there was a lot of talk about boy,
Speaker 4: these funds might actually have to go to a negative
Speaker 4: yield because rates were so low. It was actually difficult
Speaker 4: to manage one of these funds and still charge any
Speaker 4: basis point fee at all. On customers talk to us
Speaker 4: about how difficult it was not so long ago to
Speaker 4: manage a money market fund and keep that yield positive.
Speaker 3: So you made the comment about the differences in fees,
Speaker 3: and so from that perspective, I would say it was
Speaker 3: much less difficult for a place like bang Guard, given
Speaker 3: that you know, we enjoy this this expense advantage when
Speaker 3: you look more broadly across across the industry, I think
Speaker 3: that this is the reason why the SEC will soon
Speaker 3: be publishing a new round of reforms in this space,
Speaker 3: and one of those reforms is aimed at at money
Speaker 3: market funds being able to weather when interest rates do
Speaker 3: get very, very low. But when I look at the experience,
Speaker 3: the experience that we've had over the past say fifteen years,
Speaker 3: during periods of zero interest rate policy, we really have
Speaker 3: not had that difficult over time managing our funds.
Speaker 2: So in NAFIEZ, we have a fun way of any
Speaker 2: the podcast, which is we ask every guest what is
Speaker 2: your favorite ETF ticker? I realize as a money market
Speaker 2: mutual fund analyst that could be a stretch, but do
Speaker 2: you have one.
Speaker 3: My favorite ETF ticker? I'm going it's gonna have to
Speaker 3: be a Vanguard fund. I'll go Ultra short b USB nice.
Speaker 2: First person in five years to ever picked that one.
Speaker 2: So congratulations that and that's not only vague we'll give you.
Speaker 2: Normally we don't let you pick your own companies, but
Speaker 2: because you're a fun I'll let it slide. And that
Speaker 2: was such a novel choice. So anyway, Nafiez, Katie, Mike,
Speaker 2: thanks for joining us on Trillions today.
Speaker 3: Thank you so much. It was great to be here.
Speaker 4: Thanks loved it.
Speaker 1: Thanks for listening to Trillions until next time. You can
Speaker 1: find us on the Bloomberg Terminal, Bloomberg dot com, Apple Podcasts, Spotify,
Speaker 1: and wherever else you'd like to listen. We'd love to
Speaker 1: hear from you. We're on Twitter, I'm at Joel Webber Show,
Speaker 1: He's at Eric Baltunas. This episode of Trillions was produced
Speaker 1: by Magnus Hendrickson. Bye