Money fund woes fuel manager flight

One driver: new, more costly regulatory burden, experts say

Aug 16, 2009 @ 12:01 am

By David Hoffman

More asset managers are getting out of the money market fund business because the regulatory and market environment often makes offering such funds unprofitable.

Aston Asset Management LLC of Chicago, formerly ABN AMRO Asset Management Holdings Inc., became the fifth firm in two years to leave the money fund business when in July it liquidated its money funds, according to Crane Data LLC, a Westborough, Mass., money fund consulting firm.

The others are Calamos Advisors LLP of Naperville, Ill., Credit Suisse Asset Management LLC of New York, Munder Capital Management of Birmingham, Mich., Utendahl Capital Management LP of New York and Monarch Investment Advisors LLC of Beverly Hills, Calif.

Janus Capital Group Inc. of Denver and Putnam Investment Management LLC of Boston have exited the institutional-money-fund business but still offer retail money funds.

Not all the groups were willing to discuss why they got out of the business, but Munder chief executive John Adams said in a statement last September that his firm made the decision to exit because “the money market mutual fund business re-quires a scale and focus no longer consistent with our long-term business goals and objectives.”

Other money fund players are coming to the same conclusion, said Connie Bugbee, managing editor at iMoneyNet, a Westborough, Mass., research firm.

“I think without a doubt we're seeing [consolidation] on a small scale, and it will continue,” she said.

One reason is, asset managers that offer money funds are dealing with a new, more expensive regulatory environment.

The Department of the Treasury's Temporary Guarantee Program for Money Market Funds helped stave off a run on money funds last year after the Reserve Primary Fund, advised by Reserve Management Co. Inc. of New York, saw its net asset value fall below $1 in September — making it the second money fund in history to “break the buck.” But it also increased costs for all money funds.

The program's participation fees, when combined with prior fees, amount to 0.04% to 0.06% of a participating fund's net assets on an annualized basis over the term of the program.

That may not sound like a lot, but with money fund yields at all-time lows — some are actually yielding nothing — any additional cost is a burden.

OTHER REGULATIONS

And even though the program is set to expire Sept. 18, the Securities and Exchange Commission is weighing additional regulations that could make it difficult for asset managers to continue to offer money funds.

For example, the SEC is considering shortening the maximum average portfolio maturity for money market funds to 60 days, from 90 days.

The idea is that securities that have a shorter period remaining until maturity generally exhibit a low level of volatility and thus provide greater assurance that the money market fund will be able to maintain a stable share price.

But shortening the average portfolio maturity restricts the flexibility of money fund managers, potentially reducing their ability to reach for yield, Ms. Bugbee said.

That may be in the best interests of investors, but it handicaps money fund managers in a low-yield environment.

And low yields are a big concern among money fund managers.

Largely because of low yields, assets in money funds stood at $3.6 trillion July 29, down $196 billion, or 5.1%, from their level at Dec. 31, according to Crane Data.

And because interest rates aren't expected to rise anytime soon, assets will decline by a total of 10% by the end of the year, predicts Peter Crane, president of Crane Data.

“In general, low rates put pressure on the entire system,” said Joseph Machi, a vice president and director of alliances at Federated Investors Inc. of Pittsburgh. “It has created more opportunities for consolidation.”

It has benefited companies such as Federated, the third-largest money fund manager, with $294 billion in money fund assets at the end of July, according to Crane.

During the past few months, Fifth Third Asset Management Inc. of Cincinnati, a unit of Fifth Third Bancorp, and Nationwide Asset Management LLC of Columbus, Ohio, a unit of Nationwide Mutual Insurance Co., outsourced money fund management to Federated, according to Crane.

Other firms that have benefited from the current environment in-clude Fidelity Investments of Boston, the largest money fund manager, with $506.33 billion in money fund assets, which received money fund assets from Capital One Asset Management LLC of New Orleans, a unit of Capital One Financial Corp. of McLean, Va.

State Street Global Advisors of Boston, the 18th-largest money fund manager, with $49.68 billion in such assets, received money fund assets from Neuberger Berman LLC of New York.

SIZE AND SCALE

Firms such as Federated, Fidelity and SSgA are able to run money funds because they have the size and scale to make it work, said Robert Lee, an analyst with Keefe Bruyette & Woods Inc. of New York.

“If you have enough critical mass, if you have enough assets, you can afford to pay for the credit analyst and the marketing,” he said. “It's still a profitable business.”

However, it isn't a profitable business for many smaller asset managers, Mr. Lee said.

That became clear for many of the smaller players following the collapse of Lehman Brothers Holdings Inc. of New York and the ensuing credit crisis, he said.

“I'd say for many companies, it was a wake-up call that it [managing money funds] required greater resources than they had,” Mr. Lee said.

Couple that with the low-rate environment and the pressure that that puts on revenue, and it seems certain that consolidation will continue, he said.

Some “fringe” players may get out of the money fund business, Mr. Crane said, but unlike other industry experts, he doesn't think that many smaller players will leave the field.

“I disagree that there will be a widespread consolidation, primarily because there hasn't been,” he said. “Who in their right mind would leave now, after what we have been through?”

E-mail David Hoffman at -dhoffman@investmentnews.com.

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