Money market funds traditionally have been both a safe vehicle for investors to store money and important to the economy because they generate short-term capital.
Naturally, market events do affect money market fund yields and expenses. For example, less than a year after the Dow Jones Industrial Average peaked in October 2007 at its all-time high of 14,164, money market funds' values eroded. That happened when the Reserve Primary Fund "broke the buck" in September 2008 (net-asset value fell below $1 per share), largely because of exposure to Lehman Brothers debt securities. It was then that investors redeemed their shares of the fund and that money market funds, in general, suffered tremendous net outflows.
To help revive the market, the federal government stepped in. First, the U.S. Treasury announced the Treasury Guarantee Program, which protected shareholder assets in participating money market funds. Second, the Federal Reserve lowered the short-term interest rate, pulling down yields of money market funds. In the four months following the announcement of Treasury's program, money market funds experienced net inflows.
The table at the top of the graphic displays how the downturn and the low yields affected the number of money market funds. That figure held fairly steady from 2006 to 2008, decreasing by only 21 funds in three years. However, more dire times lay ahead. Coinciding with the pullback's timing, the number of money market funds decreased substantially from 2008 to 2009, by 194 funds. An uptick, albeit a very small one, in the number of money market funds took place from 2009 to 2010. At the end of 2010, many mutual fund companies announced plans to liquidate their funds. Because of the announcement, another decrease in money market funds is expected between last year and this one.
The table in the middle shows the median annual yield for all money market funds for the years from 2001 to 2010. For the purposes of this article, money market yields are defined as the average annual rate of return on an investment as paid in dividends or interest per year. Money market fund yields declined at the decade's beginning, but rebounded from 2004 to 2007. In 2008, median yields fell to 1.93%, and the decline continued in 2009, with yields falling to 0.12%. That yield dip in 2008 corresponded with the timing of the 2008 economic downturn and the Reserve Primary Fund's "breaking the buck."
Most recently, in 2010, median money market fund yields hit a decade low of 0.01%. From an investor standpoint, the returns on a $1,000 investment in a money market fund in 2006 and 2010 were drastically different. In 2006, the investment with a 4% yield would have returned $40, whereas in 2010, the return would have been only 10 cents a 0.01% yield. Money market funds have maintained positive yields primarily by waiving expenses.
The table at the bottom displays median money market expenses for the last five years. (When examining this table, keep in mind that expense reporting occurs once per year in the annual report and, depending on the company and the fund, the release month varies. In addition, annual reports are backward-looking, meaning the reported expenses have already happened. For these reasons, expense trends are often slow to react to market conditions or events.)
We have witnessed a dramatic decrease in total expenses for money market funds over the past five years. Median total expenses for money market funds decreased sluggishly from 2006 to 2008, but with the economic downturn beginning in 2008, money market funds began reporting rapidly declining total expense ratios. The median total expense ratio fell 6.8 basis points (bps) from 2008 to 2009. Then from 2009 to 2010, total expenses took a nosedive, decreasing almost 20 bps. During the economic downturn from 2008 to 2010, money market median total expense ratios decreased over 26 bps, equating to nearly 50% of the total expense ratio in 2008. A similar pattern in total expense ratios was seen in both the average and the asset-weighted average.
Management fees of money market funds also dipped during this period, but not to the extent that total expenses did. Median management fees went down a half basis point per year, from 2006 to 2008, and 1.4 bps between 2008 and 2009. The decline became even more dramatic from 2009 to 2010, when it fell 4.6 bps. Since 2008, median management fees have plummeted a total of 6.0 bps. This equated to a 30% decrease in median management fees based on 2008 numbers. During the same period, median total expenses declined nearly 50%. In comparison to total expenses, management fees took a more step-wise decrease. However, the largest decline for both management fees and total expenses was from 2009 to 2010.
Despite low yields, a baseline cost still is needed to operate money market funds. There comes a point where management fees and total expenses cannot decrease further. Total expenses have continued to decrease because expenses, other than management fees, such as non-management expenses and 12b-1/non-12b-1 fees, are being waived. After the dramatic decrease in total expense ratios from 2009 to 2010, it's likely they will begin to level in the next year.
Sasha Franger is the Fiduciary Research Analyst at Lipper.
She specializes in the analysis of mutual fund expenses.
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