How I Invest with David Weisburd
00:05:45 · S2, Christopher Donahue, David Weisburd
[00:05:45] S2: This episode is presented by Juniper Square, the operations partner for private markets. [00:05:52] S1: That's what's called regulatory capture. Exactly correct. And whatever regulation there is, that's its effect. I don't exactly like it, but I think it is a given. That score, yes. 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 into a $500,000,000 money fund if they have $100,000,000 They go, Holy cats. If I redeemed, that place is shut down. And you say, Okay, well, what if I have tons of money and decide I want to do one? Well, that's really nice, except that you don't have the ability to get other customers and start moving like a calliope among your clients so that not everybody is doing the same thing at the same time. So it is a combination of regulation, of size, and of experience, and how long you've been in it. So when we came out with the... We were made effective in January of 'seventy two. There was one money fund out ahead of the three of us, and then there were three of us made effective that day. Well, we're still three of the top money funds from the seventies. It hasn't changed. Those guys are still big competitors just like always. [00:07:13] S0: It's wild. It really makes me think about in the stablecoin market because a lot of people are trying to figure out in the stablecoin market how many competitors are there gonna be because it's it's a similar model. What do you think about the stablecoin market market?
00:07:13 · David Weisburd, Christopher Donahue
[00:07:13] S0: It's wild. It really makes me think about in the stablecoin market because a lot of people are trying to figure out in the stablecoin market how many competitors are there gonna be because it's it's a similar model. What do you think about the stablecoin market market? [00:07:26] S1: Talk about it on the money funds first, then get into that. So there used to be over 200 firms offering money market funds. Today, it's less than 50. Now only 20 of them are really competitively getting big amounts of money from big customers. So over time, you've seen that happen. I think you will see a similar thing happen. I don't think the stablecoins are going anywhere. The key to them will be, will they offer a dollar in and out? And then there were some of them that came out that didn't exactly work out that way, and they went the way of the dodo birds. So, you've got to be able to have daily liquidity at par. You cannot take undue risk with what you're having behind the curtain in terms of the security of those funds. And that's where the big mistakes occur. They go, well, we... You know, it's 90% just like you do your money funds. But this 10%, yeah, that's sport fishing. We won't do it. And that's where you run the risk of not being able to... So if they do it right, then they'll they'll be good, [00:08:33] S0: and they'll have winners and losers. And we welcome them to the foray. And Federated Hermes has made a decision, a very strategic decision, not to compete with your customers. Talk to me about that decision. And are you guys leaving a lot of money on
00:08:49 · Christopher Donahue
[00:08:49] S1: the tip? The answer to that. Last part would be, yeah, we probably are, but that isn't the point. Back in the seventies, when interest rates went below passbook rates, we found out that we could really do well selling money market funds to bank trust departments because it was a cash management service. So even though the yield was below passbook rates, you could get a half a point more somewhere, we found tremendous interest in it. And so when others in the industry went retail, we went institutional. And did we leave money on the table? Would it have been better to have gone retail? Who knows? We were a little company and federated trying to survive, And we felt that was the best thing to do at that time. So, we've now used it as a strength because when big customers look at money fund providers, they go, Well, wait a second. I've got to divide my money into at least three of them. They want diversification too. And each one of them goes down. Or they have a problem with them, but they want to diversify again. Remember, they want their cash back. So they get all three of them, and they say, oh, wait. Look at Federated. Look at those guys. They're not gonna take my client. So they'll be one of the ones that that we put in there. The other people, you know, they're after the client, directly. But we are... Go through intermediaries and are very happy with where we are right now.
00:10:20 · David Weisburd
[00:10:20] S0: You mentioned you have $400,000,000,000 in cash. It's still blowing my mind. But give me a sense for your customer base. Are these large banks? Are these large nonprofits? Who who are the types of customers?
00:10:34 · Christopher Donahue
[00:10:34] S1: The 400 was the 400 of 700 that's in Govies. So the other 300, we still have 700 total. And in terms of the customers, they are retail customers who come through basically broker dealers. And these are the individuals who are managing their life. And they have regular needs, tuitions, vacations, all the things that are going on. And they're running a big portfolio, and it's a lot of the things, like I said at the beginning, where they don't want to be forced to sell, and they want to be able to take care of opportunities and flexibility. So, there's a big retail component. And when there's a retail component, those guys like higher yields. Anything with a four handle is great. Three is good. Five is nirvana. If it's a five point something, that's nirvana. And so, rates are now going to be higher for longer. Retail customers, this is going to be fine. A lot of them are perfectly sanguine with a larger portion of their money and money funds, even though the market may go up and up because they go 4.5%, 4%. Maybe I don't want to make a decision. So that's retail. Then you've got the bank trust I've talked a lot about. That's a service they offer to their customers. And we like to say, as I discovered calling on them, that 20% of their money is in cash all the time anyway. And that's just because of the lifeblood of their customers doing the same kinds of things. They're doing estate planning, tax relief. They're doing all these things. And no matter what happens, they end up with 20% cash even though the market's exploding. The institutions, depending on what kind they are, endowments, they've got to look at what their uses of cash are. The pension plans are governing that way. The corporations have a pretty sharp CFO or treasurer who has a platform now who looks at all of the funds, where he has all his money, how he's doing on the yield, and where he wants to go, and whether he wants to go out the yield curve, because maybe he can do an ultra short fund or a different type of fund going out the yield curve a little bit because he's gonna have the money a little longer. So that's pretty much an array of the customer base.
00:12:49 · David Weisburd, Christopher Donahue
[00:12:49] S0: And let's just take corporation. You mentioned a lot of the is required on a daily basis, and let's say it's a corporation. What's a small portfolio in terms of thirty year treasuries, money markets, and how should investors think about how to build a portfolio around their cash? [00:13:07] S1: Well, if it's a corporation, the odds of them owning a thirty year bond are almost nonexistent. What what the corporation in that example is thinking about is what is the CFO... What is the strategy? What is our cost of capital? Are we doing acquisitions? Are we building plants? All of the regular needs of a corporation are baked in there. It's completely different than what, say, an institution, a pension plan, or retail investor would do or a charity of some kind. Each one of those has individual cash needs. What we preach is, at BASE, you have to decide what's a proper amount of cash, so you stay safe on base. You don't want to be hanging 10, and then you are forced to sell, forced to do something you don't want to do, miss out, all the things I've said before. And all of those people have a different array of answers for that. And a lot of them will balance the short term cash, really short term cash, with a longer term cash, maybe up to two years, and go back and forth between those kinds of products. But they're all looking at it the same way. I want my cash when I need it. What do I need it for? And I really want daily liquidity at par on that part of it.