Money fund assets 'bleed out' as low interest rates persist, managers say

Zero interest rates mean zero help for money fund managers, who are battling outflows, business pressures and, potentially, new regulations

Aug 24, 2009 @ 1:38 pm

By Sue Asci

The continued zero interest rate environment may be presenting a bigger challenge to money market mutual fund managers than rule changes proposed by the Securities and Exchange Commission, several managers told participants today at the Money Fund Symposium in Providence, R.I.

“If all of the [SEC] proposals come to fruition, the industry continues,” said Deborah Cunningham, chief investment officer for the Pittsburgh-based Federated Investors Inc. “Investors may lose out on a couple of basis points of yield. But it would not cause major issues.”

Under the proposed SEC rules, money funds would be prohibited from purchasing illiquid securities and anything less than the highest-quality securities. Additionally, they would be required to hold a certain percentage of assets in cash or Treasury securities so they could be converted to cash easily. New disclosure requirements would also go into effect.

The current low interest rate environment, however, will likely put even more pressure on money fund managers, said speakers at the conference, which is sponsored by Crane Data LLC of Westborough, Mass.

The low interest rates being maintained by the Federal Reserve have caused the yields of many money market mutual funds to approach zero. Many fund firms have waived fees in order to keep yields positive.

At the same time, assets in money funds have declined substantially.

Money market funds now hold $3.6 trillion in assets, a 7% decline from its peak of $3.9 trillion in January 2009.

“Low yields are a big driver and investors will move out more on the risk curve,” said David Sylvester, head of money markets for the Wells Fargo Funds, offered by San Francisco-based Wells Fargo & Co.

“I think shareholders are becoming complacent about quality and liquidity and expressing more of a preference for yield,” he added. “I think fund balances will continue to shrink and investors will continue to bleed out.”

Investors are expected to continue removing assets from money funds, said Pete Crane, president of Crane Data LLC, who estimates that money market assets could decline 10% by the end of the year.

Still, money funds added $892 billion in assets in the last two years, representing a growth of 33%, he said. “We're not dead yet,” Mr. Crane said.

As of Aug. 21, the average annualized yield on the Crane 100 Index of top 100 money market mutual funds was 0.13%.

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