Yie-Hsin Hung, President and Chief Executive Officer of State Street Investment Management. Yie-Hsin, thank you so much for being with us. Always a pleasure to speak with you. One of the reasons why I love speaking with you is because you can take a look at the flows and just how much people are rearranging ahead of some of this data and, frankly, in the wake of the performance that we've already seen. I'm just wondering how much you're seeing people withdraw cash following the momentum unwind or, frankly, taking cash that they had in money market funds and starting to deploy it in more significant ways.
You know, what we've seen all year is that money is moving into money market funds. It hasn't really shifted even though the market regime has changed. And I think in large part because expectations of yields remaining at more elevated levels than they've been is attractive, and it's an opportunity to leverage it for opportunistic moves into the market, but it is becoming what we see as a durable asset class.
So it's a durable asset class at a time where people are expecting the Fed to likely remain on hold or potentially raise rates at some point. I'm just wondering what it would take to unlock that eight trillion dollars in money market funds or wherever it is right now to go into the financing of the data center build out that we see every single day with Intel necessarily raising another fifteen billion dollars in equity as they were just announcing?
Well, you know, what we've seen is that investors are really wanting to barbell their portfolios. So they're leaning into a lot of the AI story where the growth is in the market, and second quarter earnings are a really good example of that. Same time, lots of money are flowing into the fixed income market. We see asset classes like cash, gold, commodities, private markets as sort of like the anchor to a lot of portfolios. So I'm not sure we're necessarily going to see that much of a shift.
Private markets is the anchor for individual, like, wealth portfolios or institutions or both? Has that sort of shifted since earlier this morning — so earlier, earlier this year, I meant.
Mostly from an institutional standpoint. You know, we've focused a lot on private credit. We continue to see institutions move in, in large part because private credit tends to have floating rate interest rates. So that's attractive in this environment. Where we've been focused as a firm is really on the investment grade sector, introducing modest exposures into three ETFs we launched with Apollo and introducing private equity, private credit, and real estate into our target date fund series. Modest amounts, ten percent, but it adds added diversification and an opportunity for individual investors to take the longest horizon investment that they have and benefit from the value creation we're seeing in the private markets.
When you look at financial markets and this year alone, do you think it would matter if the Fed raised interest rates? Would that change your allocation?
Not significantly. We are overweight equities today, U.S. first primarily, emerging market secondarily. And I think it's really on the backs of tremendous corporate earnings strength. We think that the economy is in pretty good shape. Although from our perspective, we believe the Fed really should hold steady on rates, and that's what we're calling for for the balance of this year. But to the extent the Fed does move and it's already indicated it has more of an inclination to move faster but gradually. We think the economy is robust still, but at the same time, where our worries are on the labor market. And so that's why we view interest rates being steady as a better price.
Concerned about with the labor market? It's been kind of this no hire, no fire paralysis really for a while.
Exactly. And, you know, I think with the Friday report, it showed the labor economy being a little bit weaker. It's not a really strong source of inflation. And it's really that inflation picture that guides us to say, this is not a time to be raising rates.
You know, there's a big discussion right now in the Federal Reserve and frankly in markets about artificial intelligence and how inflationary it's going to be versus the productivity boom that a lot of people are talking about. We're seeing, for example, the idea that you are seeing growth continue to accelerate even with some of the inflationary components tied to labor, for example, come in. What are you seeing at State Street in particular of how you're deploying some of the AI tools, the efficiency versus the cost?
You know, I think it is still early days for a lot of companies. I mean, clearly, every single company is investing heavily as we are at State Street. Where we see tremendous opportunities is with, you know, very significant processes, data intensive, sometimes very manual efforts, enormous efficiency gains. But we also see revenue opportunities too as we think about streamlining our investment process post trade, if you will, and then also customizing to clients, being able to provide what we do for very, very large institutions all the way through to individual investors.
We've seen already the financial industry contract a little bit on a headcount front. I just wonder from your vantage point, how you think about the growth of State Street as it surpasses six trillion dollars and its footprint, its headcount footprint in response to the greater efficiency that you can do? Is it just grow the assets by keeping the footprint the same? Is it potentially shrinking the total size of the employee base versus the overall assets?
