Historically low interest rates, coupled with a torrent of new cash from investors, are forcing many mutual fund companies to close the doors on their Treasury money market funds.
Among the companies that have recently stopped accepting money from new investors into their Treasury funds are Charles Schwab & Co. Inc. of San Francisco,
Fidelity Investments of Boston, The
Goldman Sachs Group Inc. of New York, and
The Vanguard Group Inc. of Malvern, Pa.
By implementing so-called soft closures, the fund companies hope to avoid diluting the funds as a result of purchasing short-term Treasury securities at the current low yields.
In just half a year, from June to December, three-month Treasury bill yields declined to 0.03%, from 1.86%.
Lower yields also have cut into fund profitability. Some fund companies already have been forced to waive management fees on Treasury money funds to avoid paying a negative yield.
"Fund managers are going to be hard-pressed to provide a positive return and still earn their fees," said Geoff Bobroff, a mutual fund consultant in East Greenwich, R.I. "So what we are seeing is people discouraging new investors."
The average monthly return for Treasury money market funds dropped to 0.013% at the end of 2008, from 0.224% at the beginning of the year, according to Lipper Inc. of New York.
"It's such a mad rush for safe yields right now," said Jeff Tjornehoj, a senior research analyst at Lipper. "Yields are being compressed so tightly and so close to zero that something had to give. The funds were under extreme duress."
Amid the financial crisis, investors flocked to Treasury money funds, which were considered safe, high-quality investments. The funds had $675 billion in assets Dec. 31, up 150% from a year earlier.
Some say the rash of closures could be a harbinger of future liquidations or mergers.
"If [fund companies] had to trim the fees a lot, they may want to offload that portfolio through a master feeder program and have the assets managed by another firm," Mr. Tjornehoj said.
"With the current interest rate, you'll see more liquidations of Treasury money market mutual funds because the firms can't afford to run them," said Lou Stanasolovich, president and chief investment officer at Legend Financial Advisors Inc. of Pittsburgh, Pa., which manages $340 million in assets. "They can skinny down their fees. But they'll be forced at some point to liquidate these funds. How long can the fund survive?"
Not everyone is so pessimistic.
"A mutual fund company would be out of its mind to liquidate the only class that has gained money in the past year, even if they are losing money on it," said Peter Crane, president of Crane Data LLC of Westborough, Mass.
Indeed, the average Treasury money fund posted a 1.12% gain in 2008, according to Lipper. By comparison, the Standard & Poor's 500 stock index lost 38.5% and the Dow Jones Industrial Average lost 33.8%, making it the Dow's worst year since 1931, when the country was sinking into the Depression.
Some of the influx of new cash into Treasury money funds also may be attributable to end-of-year "window dressing," said Mr. Crane. That's when money managers buy the year's big winners so the names show up on year-end statements that are sent to clients.
Financial advisers, for their part, are not recommending dramatic changes to clients' Treasury money fund holdings.
If investors have money in Treasury money funds they should keep it there, said Art Grant, president and chief executive of Cadaret Grant & Co. Inc. of Syracuse, N.Y., which has $1.5 billion in assets under management and another $20 billion under advisement.
"The point of these funds it to protect money," Mr. Grant said. "If you're in it for a rate of return, you're in the wrong place to begin with. Investors also need to realize that the interest rates are not going to stay at this level for the entire year."
Rob Isbitts, president and chief investment officer at Emerald Asset Advisors LLC of Weston, Fla., which manages $248 million in assets, also is not moving clients out of Treasury money funds.
E-mail Sue Asci at [email protected].
