Investors yank cash from money market funds

They have pulled $200B out since the market rally began

Jun 14, 2009 @ 12:01 am

By Mark Bruno

Wary investors have been steadily moving assets out of safe — but incredibly low-yielding — money market mutual funds in significant numbers since the U.S. markets bounced off of their lows in early March.

More than $200 billion has been pulled from money market funds since March 11 — just two days after the Standard & Poor's 500 stock index started its nearly 40% ascent through June 8 — according to data from the Investment Company Institute in Washington.

That pace has only accelerated as of late, with $25 billion of these assets yanked from money market funds in the first week of June alone. That suggests that investors are starting to show some confidence in the capital markets.

“People are still nervous, but there's a definite willingness now to get back into the markets that's been absent for months,” said Michael Goodman, president of New York-based Wealthstream Advisors Inc., which has $150 million in assets.

Indeed, much of the recent movement away from money market funds has been driven by retail investors. Institutional money market assets essentially have remained flat at roughly $2.51 trillion since the start of March, according to ICI data.

Retail assets, meanwhile, have dipped 8% during the last three months to $1.25 trillion — their lowest levels since January 2008.

Retail investors “tend to be more reactive” to market activity than institutional investors, which could explain the recent exodus from money funds, said Amy Strong, a research analyst at the Boston-based Financial Research Corp.

With the recent run-up in the markets, some investors have gotten off the sidelines in an attempt to recover at least a portion of the losses that they sustained during the market free fall that began last September.

At the same time, the flight from money market funds is also being fueled by individuals who are simply looking for higher yields on their cash and short-term investments, noted Peter Crane, president of Crane Data LLC, a Westborough. Mass., money fund consultant.

“It's always difficult to measure where exactly the assets are going when they move out of money market funds,” Mr. Crane said. “But with yields on basically all of these funds only slightly above zero, there's one place they are definitely going: Anywhere but money market funds.”

The typical money market fund tracked in the Crane Money Fund Index was yielding 0.29% at the start of last week. As a result, advisers are now looking at a number of other options to boost their clients' returns on short-term holdings.

Short-term-bond funds, for one, appear to be an increasingly popular parking spot: These funds experienced roughly $2.7 billion in net inflows in the month of April alone, according to data from FRC, and more than $9 billion in total assets year-to-date.

By comparison, short-term-bond funds recorded just $2.4 billion in net flows for all of 2008, Ms. Strong pointed out.

Mr. Goodman, for one, noted that he's been looking to allocate some of his clients' cash holdings to ultrashort-term-bond funds in recent months. These are particularly good options when clients don't need to access their cash for six to 12 months, he added, as most of these ultrashort funds have an average maturity of less than one year and have the potential to yield up to 4% to 5%. “And it's pretty unlikely that you'll have any significant loss of principal too,” Mr. Goodman added.

Other advisers say that they've been counseling clients to move out of money market funds and into more standard banking accounts. Traditional savings accounts, for one, are yielding more at the moment than most money market funds, pointed out Everette Orr, founding principal of Orr Financial Planning LLC in McLean, Va., which has $11 million in assets.

The average rate on a bank money market account last week was 1.42%, according to BankRate.com, more than five times the yield on a typical money market mutual fund.

Mr. Orr added that an even better alternative to money market funds at the moment — and one that he's been using for many of his clients — is a ladder approach using certificates of deposit.

He said that he's now dividing clients' cash positions into six buckets. The first sixth of a cash portfolio is placed in a standard savings ac-count, Mr. Orr explained, while the remainder of the holdings are divided up equally among CDs with maturities ranging from one to five years.

Rates on CDs are relatively low at the moment and are expected to increase gradually, he added, so when the one-year CD matures, he expects to advise clients to roll it into a five-year CD that likely will have greater yields. “Then you just keep rolling the one-year over every year, and you can catch that wave of riding rates,” Mr. Orr said.

E-mail Mark Bruno at mbruno@investmentnews.com.

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