Low yields undermining money funds
By Josh Friedman
Los Angeles Times
The continuing slide in interest rates could cause bigger headaches soon for money market mutual funds, which already are paying record low yields.
The trend in rates also is making it more critical for money fund shareholders to pay attention to the management fees their funds charge, financial advisers say.
Yields on Treasury securities dropped across the board on Wednesday as a weak April retail sales report raised the chances of another official Federal Reserve rate cut, analysts said.
The 10-year T-note yield slid to 3.52 percent from 3.61 percent Tuesday, falling through the 40-year low of 3.56 percent reached in mid-March. Shorter-term yields also fell, with the three-month T-bill yield hitting 1.05 percent, down from 1.08 percent.
It is the short-term rates that have the $2.1-trillion money fund business on edge: The average seven-day yield on taxable money funds remained at a record low 0.70 percent this week, according to fund tracker IMoneyNet.com. If the Fed cuts its benchmark rate in June from the 1.25 percent to, say, 1 percent or 0.75 percent, it would drive down by an equivalent amount yields on the short-term corporate and government IOUs owned by money funds.
The danger is that, for some funds, another sharp drop in market rates would push fund yields closer to zero after management fees are deducted.
For many funds, the only answer would be to waive some management fees — which many are doing, and many more may be forced to do, said Peter Crane, editor of IMoneyNet's Money Fund Report.
The alternative is that a fund might begin to have a "negative" yield, meaning its share value would fall below the $1 level. That's a risk the fund industry doesn't want to entertain because investors have become conditioned to believe it's impossible to lose principal in money market funds.
"We will not allow negative yields in the fund," said Steve Ward, head of the management group for the Schwab Money Market and other in-house funds at Charles Schwab Corp.
Whether the fund actually waives expenses would depend on "competitive conditions" within the industry as well on how deeply the Fed cuts rates, experts said.
Some funds already are shaving their fees to maintain certain yield floors on their higher-cost funds.
"We're calibrating our reimbursement to make certain the yield stays at (or above) 0.05 percent," said a spokeswoman for Pioneer Funds, referring to the broker-sold class B and C shares of the Pioneer Cash Reserves Fund.
Money fund managers are limited in the moves they can make to try to keep yields up. Under federal rules, the weighted average maturity of the securities they own must be 90 days or less, for example.
Still, some are taking steps. Portfolio manager Denise Tabacco of American Century Prime Money Market Fund said she has partially hedged against the possibility of another Fed rate cut by investing a portion of assets in one-year CDs paying 1.20 percent, a return that would look better in the event the Fed eases credit again.
Her fund's average maturity now is 70 days, she said, versus an industry average of 55 days.
Depressed money fund yields industrywide illustrate why shareholders should be vigilant about the management expenses their funds charge, experts say.
With the average gross money fund yield at 1.30 percent, the average annualized expense ratio of 0.60 percent eats up nearly half that return, leaving a net yield of 0.70 percent, IMoneyNet reports.
Industrywide, Class A fund shares, which carry an upfront fee but lower ongoing expenses, and "no load" funds, which are bought directly by investors and carry no middleman fees, generally are not in as dire straits as higher-cost share classes, Crane said.
Of the 1,755 funds in IMoney-Net's database, 128 are yielding 0.25 percent or less. About half of those are waiving a portion of fees to buffer yield, Crane estimated.
About 385 funds with $178 billion, or 8.4 percent of the industry, yield 0.50 percent or less, he said.
