And that would, in most instances, be money market funds. So our outlook is very positive with regard to flows and somewhat of a shift that occurs based on 2022 and 2023 being mostly retail into institutional coming a lot from the 2024 being institutionally driven.
Ken Worthington: Great. Thank you very much.
Operator: Your next question is coming from Adam Beatty with UBS.
Adam Beatty: Thank you and good morning. Just wanted to follow up on your most recent comments and get some additional thoughts around retail behavior. Obviously, strong flows over the year as rates have gone up, but I’m still seeing articles in the press about folks with “high yield” savings accounts that are paying 10 or 20 bips. That suggests maybe more retail inertia than some might have supposed. I just wanted to get your thoughts around how long a tail, how much of a time lag there might be with continuing inflows in retail and maybe even strengthening. And then on the backside of maybe some rate cuts, how sticky that money might be in your money market funds. Thank you.
Deborah Cunningham: Sure. And let me just start with a little bit of a history lesson. If you go back prior to the financial problems in 2008, deposits at that point were in the little over $8 trillion area. They ran up to something that was close to 20 trillion, just under 20 trillion during the zero rate environment that started from a 2008 standpoint and then really continued through the pandemic with just a year and a half or so, 2016 and 17 of higher rates. So ultimately, deposit products doubled not because of the attractiveness of the yield, but because there really wasn’t any yield in the marketplace. And the concern was from a safety perspective, they thought retail trades went into deposits in that environment. What you’ve seen over the course of the last year and a half has been a small reversal of that, which is why I’m not saying that the retail trade is done.
Certainly, it’s not surprising that with money funds increasing 1.2 trillion in the past year, deposits are decreasing 1 trillion, that those two numbers are equitable. Having said that, there’s still 17 trillion left in deposits out there, many of which, as you note, are in the 10, 20, 30 basis point camp from a payment perspective. So the expectations would be that that trade continues. Certainly, when you look at deposit betas from a banking perspective for their deposit products, they have been loath to increase with markets as rates are increasing, but have been very quick to decrease. Now I’m not sure that that will be the case at this point in this scenario, given that they haven’t gone up very far to begin with, but in all cases, I think the retail trade has been awakened and it will continue.
I think it will be matched basically by the institutional trade in 2024, but certainly will be a factor that continues to contribute to the flows in this market.
Adam Beatty: That’s a great perspective. Thank you, Debbie. I just want to turn to compensation, particularly around incentives. Tom gave some guidance around 1Q and the step up there, but just wanted a reminder on what drives incentive comp. Recently we’ve had pretty strong markets, obviously very strong asset growth in the money market funds and separate accounts, but also some outflows in some of the long-term funds. So if you could just put some context around what really drives incentive comp. Thank you.
Thomas Donahue: Adam, of course, we recalibrate for the year. And I did say we expect that incentive comp line to go up for the year. And to kind of break it down, in the sales group, they are paid based on how sales go. In the investment management side of things, they’re primarily compensated on performance. And then, the operation side is on how well the company does. So we expect to continue to grow. We expect pretty good sales, and we’re expecting the investment performance to uptick. So that’s why I come in and we expect the company earnings to grow. So that’s why I’m saying I expect the comp to go up.
Adam Beatty: Got it. Appreciate it. Thanks very much.
Operator: Your next question for today is coming from Bill Katz with TD Cowen.
William Katz: Great. Thank you very much. Just a couple of questions this morning. First of all, thank you for taking the question. Just to push back a little bit on sort of the money market dynamic, how sticky is the benefit to the institutional argument if ultimately the Fed funds does go down, follows the path, and you get equilibrium between the T-bill or direct market and money markets, let’s say, a year from now? So is this more transitory in scope or do you think that there are higher highs here just given the structure of the market?
Christopher Donahue: Well Bill, first of all, welcome back. And my answer to that is higher highs and higher lows. And Debbie is closer to the market on that, and I’ll let her comment.
Deborah Cunningham: Certainly, Bill. How sticky? I think very sticky. Ultimately, institutional investors generally have more options than the retail investor does. But once a trend is begun given what market, in response to what market conditions are, it stays for a while. So in what I’ll call flat to inverted or declining rate environment, you’re going to see institutional investors in a product that has more duration associated with it. Now, institutional investors in the zero percent rate environment ultimately became more, more measured about how their cash was put into play in the market. They created buckets essentially from a cash perspective operating cash, which is very short-term overnight type needs. And then what would be strategic cash and core cash, depending upon transactions and maybe longer-term needs of their firms.
