Schwab clients are switching from premium funds to more secure portfolios

(Bloomberg) — Charles Schwab Corp. this week saw net outflows of $8.8 billion from its prime money market funds as investors, shaken by US bank turmoil, pushed even more money into the brokerage’s other portfolios that favor government-backed assets.

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

Amid the wild swings in financial markets, the shift in client assets is unlikely to jeopardize Schwab. The company’s own government and treasury funds had inflows totaling about $14 billion in each of the same three days, according to the company’s data.

The shifts represent safety-focused clients moving from top-tier money funds to government money funds — “all within Schwab,” Mike Peterson, a company spokesperson, said via email. “Those shifts from one category to another happen all the time. This one is bigger, but part of a wider industry trend and not unique to Schwab.”

Broader trend

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

While the fund outflow poses a risk to Schwab, the overall franchise remains healthy, according to a report from Bloomberg Intelligence. “Schwab’s stronger base of primarily FDIC-insured retail deposits is key support for contagion outflows,” analysts led by Neil Sipes wrote.

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

Prime streams

The outflow of top-notch funds began after a weekend in which Silicon Valley Bank and Signature Bank failed and investors rushed to review companies like First Republic Bank and PacWest Bancorp. assets at the end of 2022, leading corporate executives to reassure investors this week that it has enough liquidity to overcome market volatility.

“While the increased exposure to fixed income securities resembles that of the fallen SVB, we see the risk of unrealized losses as mitigated by the Fed’s support and Schwab’s ability to generate liquidity organically,” Bloomberg Intelligence said.

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

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

The Schwab Funds are among the largest prime money funds in the US, a product that typically invests in securities issued by financial institutions and non-financial companies. Prime funds are a source of capital for many of the world’s largest financial institutions, and the Schwab funds had certificates of deposit from Deutsche Bank AG and Truist Bank, as well as commercial paper issued by parts of Citigroup Inc. and Bank of America Corp., according to fund filings.

According to Crane Data, a firm that specializes in monitoring the industry, investors have flooded Treasury and government money market funds over the past week, pushing combined assets of money funds to a record $5.39 trillion as of March 15.

“We are experiencing inflows across the board, generally across 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 mainly from bank deposits.”

(Updates with data on government money inflows, from the first paragraph)

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