Chris Donahue of Federated Hermes says the money market fund business has consolidated into a few dominant firms because regulation, size and experience reward scale.
Donahue predicts stablecoins will consolidate the way money market funds did, with a dollar-in, dollar-out promise and daily par liquidity as the key test.
Donahue says Federated Hermes' private markets business could grow bigger than its entire current firm, but only with strong underlying products, pointing to $25bn in assets and recent London and Chevy Chase deals.
Federated Hermes bets its money fund trust on private markets
Federated Hermes has spent five decades as one of the few winners in money market funds, a business where regulation and scale have cut the field from over 200 firms to under 50. Donahue argues that cash is a permanent core holding for institutions, which keeps that franchise growing. He believes the trust earned holding clients' cash can carry the firm into private markets, which could outgrow today's entire company if the products are good.
Takeaways
Money funds are a regulated, scale-driven oligopoly. Regulation, size and experience shrank the field from over 200 money fund providers to fewer than 50. Large investors will not put money into a small fund, so scale compounds. Federated Hermes has ranked among the top money funds since January 1972.
Hold cash first, not as leftover money. Bank trust departments keep about 20% in cash at all times, and corporate treasurers set aside cash before anything else. A proper cash cushion gives flexibility so investors are never forced to sell when things go wrong. Donahue expects rates higher for longer.
Selling through intermediaries became a competitive edge. When rivals chased retail, Federated Hermes sold to institutions through intermediaries. That now helps with large clients who want to diversify providers. The model runs on investment advisory and administrative fees, with about 230 salespeople. Prime funds yield about 15 basis points above government funds.
Stablecoins will consolidate the way money funds did. Donahue sees the test as a dollar-in, dollar-out promise with daily liquidity at par. Projects that failed to hold a dollar in and out already went the way of the dodo, and he expects the field to narrow as money funds did.
Private markets could outgrow the entire firm. Private markets hold $25bn, against roughly $100bn each in equities and fixed income. Recent deals include Chevy Chase real estate, London infrastructure and a 700m euro private credit vehicle yielding 7.5% to 8%. Cash-business trust transfers only with good products.
AI is for quality, not job cuts. Donahue calls AI an opportunity and commits to keeping at least 2,000 employees, since efficiency implies cuts. The firm uses AI to grade every investor call and asks interns to pay $20 a month to learn it. He likens AI risk to product liability.
An honor code anchors culture across acquisitions. Donahue's father founded the firm with two friends from the same Pittsburgh high school, and principles like letting people paint their own picture persist. After buying Hermes in 2018, Federated adopted its honor code, adding the word fiduciary. Over 95% of Hermes staff signed voluntarily.
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On this episode 2
Show 1
Growth outlook by business
The money stock has grown about 6% a year. The money fund industry grew about 8%, and Federated Hermes' money funds almost 9%. Donahue expects money funds to keep growing.
Equity and fixed income should double every ten years, and private markets should grow faster. David Weisburd cited iCapital CEO Lawrence Calcano's view that retail money flowing into private markets could exceed $100tn.