(Bloomberg) – Charles Schwab Corp. was hit by $8.8 billion in net outflows from its top-tier money market funds this week as investors scrutinized the brokerage firm’s resilience amid questions about the health of the financial industry at large.
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Clients withdrew money from two Schwab Value Advantage Money funds that had combined assets of $195 billion as of March 15, the largest withdrawals in at least six months, according to company data compiled by Bloomberg. The data covers the three days to March 15th.
Schwab’s own government and financial funds saw inflows on each of the three days, while its prime funds saw outflows, according to the company.
Prime funds differ from government and Treasury 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. Industry-wide prime fund assets fell $18 billion in the week ended March 15, while total money market fund assets rose $121 billion, according to data from the Investment Company Institute.
Though outflows pose a risk, the entire Schwab franchise 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.
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.
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“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,” analysts at Bloomberg Intelligence said.
According to Mike Peterson, a company spokesman, 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. The company’s top-tier funds have seen significant asset growth over the past year, he said.
“In an environment of rising interest rates, we’ve had clients benefiting from rapidly rising yields, and now with market volatility, we’d expect clients are seeking the relative safety of government money,” Peterson said in an email. “Within our money market funds, we see a rotation from prime funds to sovereign wealth funds, which is typical for this market environment.”
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 US, 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.”
(Adds total prime fund outflows and adds context in fourth and fifth paragraphs)
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