Schwab customers are moving from top-notch funds to more secure portfolios

(Bloomberg) – Charles Schwab Corp. saw $8.8 billion in net outflows from its top-tier money market funds this week as investors, rocked by the turmoil in US banks, poured even more money into the brokerage’s other portfolios, which favor government-backed assets.

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Customers transferred money from two Schwab Value Advantage Money funds, which had combined assets of $195 billion as of March 15, the largest redemptions in at least six months, according to company data compiled by Bloomberg. The data covers the three days to March 15th.

In the midst of wild fluctuations in the financial markets, the shift in customer assets should not endanger Schwab. The company’s own government and financial funds had inflows totaling about $14 billion on each of the same three days, according to the company.

The shifts represent customers focused on safety, moving from top-tier money funds to sovereign money funds — “all within Schwab,” Mike Peterson, a company spokesman, said via email. “These shifts from one category to another happen all the time. This one is larger, but part of a broader industry trend and not unique to Schwab.”

broader trend

The flows at Schwab are consistent with the pattern of data from the Investment Company Institute, which shows that industry-wide top-tier fund assets declined $18 billion for the week ended March 15, while total money market fund assets fell $121 billion has increased.

While cash outflows pose a risk for Schwab, the franchise as a whole remains healthy, according to a report by Bloomberg Intelligence. “Schwab’s stronger base of largely FDIC-insured retail deposits is a key prop of contagion outflows,” wrote analysts led by Neil Sipes.

Prime funds differ from government and sovereign money market funds, which have grown in popularity since the 2008 financial crisis and the market crisis at the start of the pandemic in 2020.

prime flows

The main fund outflows began after a weekend that saw Silicon Valley Bank and Signature Bank fail and investors scramble to rate companies like First Republic Bank and PacWest Bancorp. Schwab’s banking unit had $14 billion in unrealized losses on its portfolio of held-to-maturity assets at the end of 2022, prompting the company’s executives to reassure investors this week that it has sufficient liquidity to withstand market volatility to overcome.

“Although its larger exposure to fixed income securities is similar to that of the fallen SVB, we see the risk of unrealized losses as mitigated by the Fed’s easing and Schwab’s ability to generate liquidity organically,” according to Bloomberg Intelligence.

According to Peterson, Schwab’s money market funds are stress-tested for their exposure to changes in interest rates and have daily and weekly liquidity levels that are in excess of regulatory requirements.

Schwab’s shares traded at just $45 on March 13, its lowest intraday price in more than two years. They’re down about 24% since March 8, when depositors fled the Silicon Valley bank and questions about the broader financial system arose. The stock fell 2.8% to $57.88 in regular New York trading on Thursday.

The Schwab funds are among the largest prime money funds in the United States, a product that typically invests in securities issued by financial and non-financial institutions. Prime funds are a source of capital for many of the world’s largest financial institutions, and the Schwab funds held certificates of deposit from Deutsche Bank AG and Truist Bank and commercial paper issued by units of Citigroup Inc. and Bank of America Corp. according to fund documents.

Investors have plunged into Treasury Department and government money market funds over the past week, taking combined money fund assets to a record $5.39 trillion as of March 15, according to Crane Data, a company that specializes in monitoring the industry – dollars brought.

“We’re seeing inflows across the board, generally into all of our liquidity products,” Deborah Cunningham, chief investment officer for global liquidity markets at Federated Hermes Inc., said in an email. “It seems to be coming from bank deposit products more than anything else.”

(Updates with data on inflows of government funds, starting with the first paragraph)

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