Money market mutual fund yields are dropping hard and that's causing a number of firms to waive some fees and close funds to new investors.
Breaking the buck is always the big headline -- that's when a money fund's net asset value, or NAV, falls below $1 per share -- but that's not the real danger at this point. The immediate threat is a negative yield.
When the income that the fund receives from investments is lower than expenses, something's got to give or it will result in a negative yield. While a firm may partially waive fees, expenses have to be paid and, eventually, the situation can worsen to the point where the fund breaks the buck. But there are several things that fund companies can do to ease the negative yield situation and head off the more distant possibility of breaking the buck.
Treasury funds most at risk
The negative yield problem is most seriously affecting Treasury money funds which, at this point, are invested in extraordinarily low-yielding securities. Prime money funds, which can invest in somewhat riskier, but higher-yielding commercial paper, are sporting yields that, while low, are still well above expenses for all but the most expensive funds.
“The risk to investors is way overblown.”
For example, compare Vanguard Prime Money Market Fund (VMMXX) with an expense ratio of 0.28 percent and a seven-day yield of 1.64 percent to Fidelity's U.S. Treasury Money Market Fund (FDLXX), now closed to new investors, with an expense ratio of 0.45 percent and a seven-day yield of 0.20 percent.
"The risk to investors is way overblown," says Peter Crane, publisher of Crane Data and Money Fund Intelligence. "Investment managers, of course, have protected investors from a lot of losses. You likely would have seen other funds break the buck last year had advisers not stepped in to purchase securities. But investors, as far as the rates they're getting, have to be resolved to the new reality, which is yields of 2 percent, 1 percent, or less. They all stink but it beats the 40 percent losses you're seeing in the broader market."
Reduce fees or cut off new moneyAs mentioned, in addition to purchasing troubled securities as many fund companies did last fall, firms can also protect the yield by reducing fees or closing funds to new investors. When new cash comes into a fund it's used to buy additional securities which, right now, are paying very low yields. That reduces the overall return to current investors. By cutting off new money, the fund can keep its yield propped up longer.
"We're already seeing action by certain fund companies to support current investors in Treasury money funds," says Jeff Tjornehoj, senior research analyst at Lipper. "That way they preserve the portfolio of higher-yielding securities and don't have to go shopping for lower-yielding ones just to accept new money. (Funds) everywhere are cutting expenses. Among Treasury money funds, many firms are cutting expenses to keep the yield above zero or, at the very minimum, at zero."