How I Invest with David Weisburd
00:00:00 · David Weisburd, Christopher Donahue
[00:00:00] S0: You mentioned you have $400,000,000,000 in cash. It's still blowing my mind. Maybe you could double click on why there's only a couple entities that manage so much cash. [00:00:09] S1: The oligopolization, if you will, of the cash management money market fund industry occurred for several reasons. One is regulation. All regulation oligopolizes by definition because they put up barriers, moats, whatever you wanna call it. [00:00:26] S0: It's what Bill Garley calls regulatory capture. [00:00:29] S1: That's what's called regulatory capture. Exactly correct. Next thing you need is size. Don't use the word scale. Use the word size because size alone oligopolizes the business because someone won't go in to a $500,000,000 money fund if they have a $100,000,000. They go, holy cats. If I redeem, that place is shut down. I had [00:00:51] S0: the CEO of iCapital, Lawrence Calcano, and he got a number over 100,000,000,000,000 in retail coming into the private market. When I hear somebody that's worked at a firm for over fifty, to some people that might sound boring or uninteresting. To me, it's fascinating because to me, that's fifty plus years of compounding knowledge and compounding experience within a single context. I'm curious in terms of how the organization has evolved and what advantage has continued to compound after five generations. [00:01:24] S1: I have said So, [00:01:28] S0: Chris, what do most investors fundamentally misunderstand about cash?
00:01:28 · David Weisburd, Christopher Donahue
[00:01:28] S0: Chris, what do most investors fundamentally misunderstand about cash? [00:01:33] S1: What they misunderstand about cash is it adds enormous financial flexibility to their profile. And what I mean by that is if you have a good cash component, you will not get forced to sell when things are in a problem. You will have the flexibility to be able to take care of opportunities as they wash up on your beach. And you will be able to take care of your own needs if you have so many months or whatever of cash available. And this is how corporations look at it too. What are my needs? What do I have to do? What am I planning for? What's going to happen? Did I have a big IPO? Money coming in? Do I have a big acquisition? I got to pile up money for money going out. All of these things come together to make a cash component. [00:02:22] S0: And why cash? Why not just liquid securities or other highly liquid instruments?
00:02:22 · David Weisburd, Christopher Donahue
[00:02:22] S0: And why cash? Why not just liquid securities or other highly liquid instruments? [00:02:29] S1: Back in the day, I was a salesman for Federated Hermes selling bank trust departments on using money funds. And over here in Newark, there was a bank that did modern cash management in the seventies, and it consisted of a stolen shopping cart, passbooks for the local S and L, and a plastic sheet. They would wheel the whole thing down to the S and L to post the interest. Well, it was so easy to do a money fund, and it took care of all of that problem. Another bank across the street was rolling T bills, and they had people. They had rolled T bills, that's in there for when they were coming due, whether to sell them or not. And it was a lot of operational difficulty, and you had to figure it out. A money fund solves that almost instantly and without a variation in NAV because what they want is a dollar in dollar out liquidity at par. [00:03:30] S0: And you invest a staggering $700,000,000,000 worth of cash in treasuries. Why is it that Federated Hermes have amassed this amount of cash? Isn't that more or less a commodity?
00:03:30 · David Weisburd, Christopher Donahue
[00:03:30] S0: And you invest a staggering $700,000,000,000 worth of cash in treasuries. Why is it that Federated Hermes have amassed this amount of cash? Isn't that more or less a commodity? [00:03:45] S1: Well, first of all, it's about 400 of the 700 is in govies. The rest is in munis and in prime securities as well. So... With that difference. But the same question obtained. Why do we have a of cash? Do you could go buy all those things? Absolutely. But the whole thing about a money market fund and the liquidity is it's as much a cash management service as it is an investment. That means it's gotta have good governance around it so that you know where's the money, how's it gonna work, how have you worked, have you worked for fifty years, what is the size of the operation that you have? If you have a big pot of money, dollars 100,000,000, are you going to put it somewhere where you have a challenge in liquidity, or you blow up the fund by asking for your money? Do you have a diversification of clientele such that all those clients, broker dealers, individuals, corporations, pension plans, endowments? They're all moving at different paces with different amounts, which adds a strength to the money fund. What's the regulation look like? Well, you've got to have regulation, and that's good. We have very good relationships with the SEC. But I think the thing you need the most is trust. And the trust is a combination of all of those things, plus Federated Hermes tradition of knowing the people and what we've done for over fifty years of doing this business. Maybe you
00:03:45 · Christopher Donahue, David Weisburd
[00:03:45] S1: Well, first of all, it's about 400 of the 700 is in govies. The rest is in munis and in prime securities as well. So... With that difference. But the same question obtained. Why do we have a of cash? Do you could go buy all those things? Absolutely. But the whole thing about a money market fund and the liquidity is it's as much a cash management service as it is an investment. That means it's gotta have good governance around it so that you know where's the money, how's it gonna work, how have you worked, have you worked for fifty years, what is the size of the operation that you have? If you have a big pot of money, dollars 100,000,000, are you going to put it somewhere where you have a challenge in liquidity, or you blow up the fund by asking for your money? Do you have a diversification of clientele such that all those clients, broker dealers, individuals, corporations, pension plans, endowments? They're all moving at different paces with different amounts, which adds a strength to the money fund. What's the regulation look like? Well, you've got to have regulation, and that's good. We have very good relationships with the SEC. But I think the thing you need the most is trust. And the trust is a combination of all of those things, plus Federated Hermes tradition of knowing the people and what we've done for over fifty years of doing this business. Maybe you [00:05:13] S0: could double click on why there's only a couple entities that manage so much cash. There's a number
00:05:13 · David Weisburd, Christopher Donahue, S2
[00:05:13] S0: could double click on why there's only a couple entities that manage so much cash. There's a number [00:05:22] S1: of reasons for that. The oligopolization, if you will, of the cash management money market fund industry occurred for several reasons. One, a minor... Or a secondary reason is regulation. All regulation oligopolizes by definition because they put up barriers, moats, whatever you want to [00:05:43] S0: call it. It's what Bellagolet calls regulatory capture. [00:05:45] S2: This episode is presented by Juniper Square, the operations partner for private markets.