what some dudes will do for a buck
October 25, 2002
Money Funds Slash Their Fees
To Stay at $1 Net Asset Value
By KAREN DAMATO
Staff Reporter of THE WALL STREET JOURNAL
Some money-market mutual funds, concerned about "breaking the buck" if they fall below the standard $1 net asset value, have temporarily cut their expense charges to avoid the possibility of posting negative returns.
The fee-cutting moves by fund-management firms are prompted by the fact that money-market portfolios are earning the lowest returns on their investments since the funds were invented more than 30 years ago. Any future declines in market interest rates will add to the pressure on fund firms to waive fees in order to hold their shares at the constant $1 net asset value that money funds always strive to maintain.
The average taxable money fund sold to individual investors currently is yielding 1.03% after expenses are subtracted from portfolio earnings, according to iMoneyNet, of Westborough, Mass. The money funds with the highest expense charges have already reached -- or are hovering near -- the point at which their portfolio earnings aren't sufficient to cover their usual fees, resulting in fee cuts being put into place.
The current money-fund yield squeeze isn't affecting the very largest money funds sold to retail investors, such as the $57.6 billion Fidelity Cash Reserves, yielding 1.50%, and the $51.5 billion Schwab Money Market Fund, at 1.10%. The largest funds typically have average to below-average expenses.
The funds currently with near-zero yields do include some smaller money funds offered by large and well-known fund firms. These particular funds have far-higher-than-average fees because a big portion of those fees are being used to compensate stockbrokers or other financial advisers for selling fund shares.
Delaware Investments, for example, since April has trimmed 0.25 percentage point off what had been the 1.92% expense ratio on two share classes of its Delaware Cash Reserve Fund. The firm is prepared to reduce the expense charges further "if need be," says Jeffrey Kellogg, Delaware's head of retail mutual-fund product management.
"Our objective is to maintain the NAV stability of the product and to maintain a positively yielding product," he says. Even with the waiver, the Class B and C shares of Delaware Cash Reserve, with combined assets of $49.9 million, are yielding just 0.08%, according to the latest weekly data from iMoneyNet.
J. & W. Seligman & Co. has been reimbursing expenses to keep the yield of Seligman Cash Management Fund's B, C and D share classes from falling below the current 0.10%, according to a recent shareholder report.
The sponsor of Money Market ProFund with a current yield on its Service Class shares of just 0.02%, isn't waiving fees but is prepared to do so, says Michael Sapir, chairman of ProFund Advisors LLC. "Our intent would be to not allow the fund to break the buck," he says.
Mr. Sapir doesn't expect any fund company to allow its money-fund shares to drop below $1 or "break the buck," something that fund companies have always sought to avoid. "I think the industry views maintaining the buck as a moral obligation," he says. "Most mutual fund companies would be very reluctant to allow their money-market fund to break the buck because that would result in a tremendous amount of attention and bad publicity."
The Securities and Exchange Commission has been in contact with a number of fund companies about the near-zero money-fund yields and is continuing to monitor the situation, says Robert Plaze, an assistant director in the agency's Investment Management Division. But he agrees that it is unlikely that any fund company would allow its money fund to break the buck. "I don't think anybody should panic or be overly concerned right now."
The average expense ratio at taxable retail money funds was 0.75% in September, iMoneyNet says. The charges can be a full percentage point higher on some funds' Class B and Class C shares because those shares include an extra 0.75% or 1% charge to pay selling agents.
Investors look to money funds as a super-safe parking place for cash and as a refuge from the past few years' stock-market turbulence. While the returns on their cash have tumbled along with market interest rates, money-fund investors have at least been confident in the return of their cash.
History suggests that fund companies will indeed waive fees or reimburse their money funds for other expenses to the degree necessary to keep their funds from breaking the buck. Over the years, numerous fund companies have bailed out money funds that risked breaking the buck because of securities that went bad.
That was the case in 1994, when money funds faced losses on derivative securities, and in 1997 when Mercury Finance defaulted on commercial paper held by some money funds. (Money funds haven't faced similar credit-quality problems lately.)
Still, a money fund can break the buck. In 1994, Community Bankers U.S. Government Money-Market Fund shut down after derivatives losses led its net asset value to fall below $1. The $82 million-asset fund, which sold shares to community banks but not to individuals, paid investors 94 cents a share at liquidation.
Prospectuses for money funds typically state that the funds aim to maintain a stable $1 NAV but may not be able to do so. A $1 NAV isn't required by law, Mr. Plaze of the SEC says. Rather, fund regulations allow money funds to keep their NAVs at $1 as long as the value of the underlying assets doesn't vary by a half penny or more in either direction. If the value of the underlying assets slips out of that band, the fund is required to modify the NAV accordingly.
"The regulatory concern of the commission is that the securities are priced fairly, not that $1 is maintained" as the share price, Mr. Plaze says.
The significantly higher returns of the highest-yielding money funds are often powered in part by their far lower expenses. The highest yielding taxable retail fund in the latest iMoneyNet survey was PayPal Money Market Fund, at 1.78%. The $139.5 million fund subtracted an annualized 0.10% in expenses from its portfolio earnings in September, iMoneyNet said. Money funds near the top of the yield tables frequently use fee waivers and expense reimbursements to boost their money-fund yields in an effort to attract more business from investors.
Investors who expect to keep a significant sum in a money fund for a significant time period should carefully consider expense levels in selecting a fund.
Fund companies say Class B and Class C money funds are designed to be short-term parking places for investors temporarily shifting money out of related Class B and C stock or bond funds. Investors in those money funds who anticipate keeping money on the sidelines for a long time may want to weigh any back-end charges that would be required to shift to a far less expensive money fund. The lowest cost money funds typically include many "no load" funds that are sold directly to investors without any sales commissions.
Meanwhile, investors who have seen their money-fund yields drop unpleasantly close to zero can check fund documents or check with financial advisers or fund companies for indications of those companies' fee-waiver plans. The current prospectus for Pioneer Cash Reserves Fund indicates in a footnote that Pioneer has limited its management fee to 0.15%, rather than its usual 0.40% of assets, since April. Further, it says, "in the future, if necessary, Pioneer may further limit the fund's expenses for any class of shares or waive a portion of its management fee to maintain a net asset value of $1.00." |
