Money market funds, an increasingly popular place to park cash, will need to raise fees or close to new money to remain profitable as yields hover at near-zero, according to industry managers.
The funds, which manage $3,800bn and have seen big cash inflows, are reeling from frozen credit markets, subprime exposure and a crisis of confidence triggered by one fund “breaking the buck”, or returning investors less than they paid in.
The US Federal Reserve last week cut its target interest rate to between zero and 0.25 per cent, from one per cent.
Jim McDonald, who runs taxable money market funds for T Rowe Price, said: “You can’t make money in this situation. If short-term interest rates stay where they are, it’s virtually impossible to run a government [bond] fund and make any money. You can close the fund, that’s one option.”
Vanguard last week closed two of its money market funds to institutional investors, while Credit Suisse said it would quit managing money market funds in the US and liquidate $8bn in assets across its three funds.
David Glocke, a portfolio manager at Vanguard, said: “It just doesn’t make any sense to take in money in this environment, it would dilute yields for existing investors.”
Investors poured $550bn into government money market funds – which invest mostly in US Treasuries – in the six months to the end of November, in an unprecedented flight to safety.
The cost of running money market funds is greater than the fees charged. Usually, the difference is not great, and the funds are able to pick up profit on excess yield.
However, the gap between costs and fees has widened, and yields have plummeted. The average yield on a Treasury retail fund was 0.34 per cent at the end of November, compared with 2.9 per cent last December, according to iMoneyNet, an industry tracker. About one in 10 money funds yields nothing.
Mr McDonald said: “Our Treasury fund yield was net 50 basis points after investor fees, and our expense is 47 basis points. If assets remain unchanged and we continue to roll over securities, our fund will run out of yield in February.
“The board has to make a decision about whether they waive fees. I am not advocating this, but you can also tell shareholders that they will have to pay a fee, an extra fee above what the portfolio earns.”
Fidelity, the biggest money market operator, has already reimbursed small amounts of fees on five funds.
Mr Glocke said: “Interest-rate sensitive investors will start to look for alternatives . . . the Fed is trying to force investors out of a low-risk environment.”