Federated Hermes reported Q2'25 earnings and hosted its Q2'25 earnings call on Friday. On the call, President & CEO J. Christopher Donahue, comments, "Moving on to money markets, we reached another record high at the end of Q2 for money market fund assets, which increased by $3.1 billion to $468 billion. These assets moved higher in the second quarter despite seasonal factors that often result in lower assets. Money market separate accounts decreased by $5.9 billion, reflecting usual seasonal patterns. Market conditions remained favorable for cash as an asset class. In addition to the appeal of relative safety in periods of volatility, money market strategies present opportunities to earn attractive yields compared to alternatives such as bank deposits and direct investments in T-bills and commercial paper."
He continues, "We are actively participating in the development of tokenized money market funds and digital asset infrastructure and continue to rigorously explore opportunities ranging from tokenized share classes to offering fully digitized assets. Over the past several years, we have engaged with a broad array of innovators and well-regarded financial institutions to identify and evaluate opportunities in the digital assets arena, accompanying -- going along with a significant amount of knowledge gained and experience along the way. We are subadvisor for the Superstate Short Duration U.S. Government Securities Fund, a private tokenized fund that has assets of about $425 million."
Donahue says, "It was also recently announced that Federated Hermes will participate in the launch of a collaborative initiative between Bank of New York and Goldman Sachs that will use blockchain technology to maintain a record of their customers' ownership of select money market funds. This is a significant step towards enhancing the utility and transferability of the existing money market fund shares. Our participation highlights our commitment to the digital asset space where we expect ongoing innovation and growth."
He tells the call, "Our estimate of money market mutual fund market share, including sub-advised funds was about 7.11% at the end of the second quarter, up slightly from about 7.10% at the end of the first quarter. Now looking at recent asset totals as of the last few days, managed assets were approximately $854 billion, including $642 billion in money markets, $91 billion in equities, $98 billion in fixed income, $20 billion in alternative private markets, $3 billion in multi-asset. Money market mutual fund assets were $476 billion."
During the Q&A Patrick Davitt from Autonomous Research, asks, "On the back of your stablecoin tokenization comments, I think it would be helpful maybe if you could update us on your broader thoughts around the extent to which you think these products could disintermediate the traditional money fund business? Or do you see it more as incremental to that traditional money fund cash exposure?"
Donahue answers, "Baseline, we would see it as incremental. New customers, new things. There's not an avalanche of use [cases for] these things right now. And don't forget, the basic thing ... people with cash want ... daily liquidity at par. They're willing to go with a stablecoin that doesn't pay a yield, but then they also would like a respectable daily yield."
He states, "We think that the Goldman-Bank of New York methodology where Goldman creates a platform, Bank of New York is the custody and transfer agent and the money fund sits there, just like it always sat there as a money fund, and yet someone else is taking care of the tokenization. So from the customer standpoint, it is, in fact, a tokenized money fund. But from the money fund operator standpoint, it's operating a regular 2a-7 money fund in order to provide daily liquidity at par. So this is a very sound strategy. I'm not saying it's the only one that will go into the future, but overall, we think that's a very good one. One of the reasons that people are getting excited about this is because you can get 7/24 activity trade anytime, but you still have to work out some of the mechanics of who gets the dividend."
Donahue adds, "The way our program will work with BNY and Goldman right now is whoever owns the token at the end of the day is going to get the dividend. And this is not as much a tokenized money fund as others have to full tokenized money funds. So our overall view is that you have to play in this space. And we are talking to people, I got a list of them, and ... many of them [include] European players where we're dealing with all the ideas of innovation. I can't go through all of them with you. The one with the Bank of New York and Goldman, obviously, has been made public, as have Superstate."
Money Market CIO Deborah Cunningham comments, "The only thing I'd add is, right now, we think this is the tip of the iceberg, Patrick. This is, for our current products that are on this platform, a different way to distribute. So we distribute through various types of intermediaries, through states, through insurers, through broker-dealers, through banks. We distribute directly. This is another way of distributing our product, and in the process, turning it into a ledger product that has better transferability than a typical money market fund share does."
She explains, "So we think it's a very clever and new way to be able to distribute product. And as Chris mentioned, there's lots of innovation that we think can happen that provide additional bells and whistles to why this is a product that will take over, to some degree, the future. But that's not what is in existence today. What is in existence today is a traditional money fund being distributed to a different group of clients, particularly from a collateralization standpoint. So ... stablecoins, you mentioned, they need to be backed by something. They need to be backed by Treasury bills or money funds containing those Treasury bills. That's what the GENIUS Act is all about. Money funds will provide that collateral, and we will provide it on chain so that the ease of use is basically seamless. But lots of innovation to come as it exists today, distribution changes that are beneficial."
Asked about money funds benefiting from falling rates, Cunningham says, "It's been alive and well, Patrick, ... from the second half of 2024 and all of 2025 year-to-date, so for the last year. But it's not really started in earnest because what we saw in Fed rate cuts at the end of 2024 didn't materialize into anything yet in 2025. So it's one of those 'wait till you see the whites of their eyes' sort of thing, I think, as far as volume goes. But we were basically flat on a money fund asset basis for the second quarter.... May and June are more confirmation of what we've been saying on the institutional side from a rotation into money funds and out of direct securities, whereas April was more based on what the situation was happening from an economic and a fiscal standpoint."
Asked about stablecoins and T-bills, Cunningham responds, "The current size of the stablecoin market is about $250 billion, very concentrated in 2 coins, basically. And then the assets that are backing those 2 coins. Tether and Circle are basically in Treasury securities.... What happens with the GENIUS Act is there's now more definition as to what needs to be backing a stablecoin, and it's very short Treasuries or Treasury-backed repo. [Whether it's] ultimately $1 trillion, $2 trillion, it's -- put your finger in the air. I'm not sure where the number goes, but it's somewhere ... drastically above where it is in the $250 billion market today."
Donahue adds, "One of the other features of the GENIUS Act was to not allow stablecoins to pay interest or return. So the people who ought to be concerned about the $2 trillion going into stablecoins are the ones who have deposit accounts with little or no interest, and how does that dynamic exactly work? ... But it's important to note that the stablecoin can't pay a yield."
Finally, on the potential size of the new sectors, he says, "It is very, very difficult to say what that kind of number would be. We haven't done any numbers on that. `Both Debbie and I believe it's incremental to the business. But as with any of these things, especially when you're doing blockchain, you've got a lot of a lot of people on there first in order to have it grow. It's a little bit of a chicken/egg thing. So everybody is working on it now, and there's a lot of excitement and a lot of articles and all of that, but the assets are not yet there. We're ready for when it goes, but it's just hard for us to say."
