Higher interest rates? Federated Investors hopes so
For years, Federated Investors has watched money flow out of its accounts that have the lowest risk and lowest reward: U.S. Treasury funds, state and municipal bonds, certificates of deposit, and other safe, short-term investments.
Now, with the reward for investors getting a little bit sweeter, the Downtown investment firm might be poised to reverse that trend away from money market funds.
Higher interest rates could mean a turnaround in Federated’s money market products, which have been hit as people put more money into the stock market instead.
In a conference call with analysts on Friday, Federated reported thirdquarter earnings jumped to $309 million, or 59 cents a share, compared with $278 million, or 56 cents a share, during the year-ago quarter.
Those results beat Wall Street expectations of 55 cents a share, and investors rewarded the company with an 8 percent bump in stock price in midday trading.
The higher profits came mostly from Federated’s acquisition of Hermes Fund Managers Limited, a London-based investment management firm, completed in July.
But Federated also saw a boost because its total money market assets hit $264 billion, up 8 percent from the year-ago quarter. That brought in $1.5 million in revenue during the third quarter, according to the company.
“We are definitely seeing a movement back into money market funds,” said Deborah Cunningham, the company’s chief investment officer of global money markets, on Friday’s earnings call.
“Our assets are higher,” she continued. “The industry’s assets are higher. And I think this is probably reflective of both investors getting comfortable ... but, in addition, just higher interest rates in general.”
More people, for example, could start choosing to store their money in certificate of deposit accounts, or CD accounts, which are fetching higher returns.
“There is real money on the line if there is a turn back to money market funds,” three JPMorgan analysts wrote earlier this year in a research note, which updated their expectations for Federated.
The growth will be relatively slow. Total U.S. money market assets dropped from $4 trillion in 2008 to about $3 trillion today, Ms. Cunningham explained, and a little bit of interest rate growth likely won’t make up the difference any time soon.
Plus, asset managers like Federated, which make money from the fees they charge investors, largely waived those fees after the financial crisis in 2008 to keep competitive. Those fee waivers continued this year at Federated — a risk to future earnings, the JPMorgan research note said.
Money market assets, which make up 28 percent of Federated’s revenue, are still generating about half the revenue they did 10 years ago, according to the JPMorgan analysts.
“While flows have improved ... we hesitate to call the turn in Federated’s money market fund business,” the analysts wrote.