Tom Grzymala, a financial planner, has been spurning money-market funds for his clients since the fall, when their yields began dropping to unprecedented levels.
"We don't use money-markets very much any more," said Grzymala, president of Alexandria Financial Associates Ltd in Virginia. "The interest rate is so low. It's just not there."
The average taxable money-market fund's yield declined to a record 1.45 percent last week, while the average tax-free money fund's yield dropped to 0.99 percent, according to iMoneyNet Inc, a Westborough, Mass. firm that tracks money funds.
January, normally a banner month for inflows into money-market funds, this year brought the smallest increase in assets in at least five years, iMoneyNet said.
Money-market fund assets grew by US$52.6 billion, or 2.3 percent, in January. On average, money fund assets have increased 4.4 percent in January over the last five years. Money left the funds in the last two weeks.
"The party is definitely over for money fund assets," said Peter Crane, vice president of iMoneyNet. He predicts money-market fund assets will rise slightly or fall this year as investors balk at low yields.
Money-market funds are mutual funds that invest in short-term debt such as Treasury bills and corporate commercial paper. They aim to maintain a share price of US$1. For many investors, money-market funds are the functional equivalent of bank deposits.
Last year, the combined assets of money-market funds grew to US$2.29 trillion of the US$6.97 trillion in mutual funds as investors sought refuge from a second year of falling share prices.
January is normally the strongest month of the year for money-fund inflows in part because that's when investors receive yearend bonus payments, iMoneyNet's Crane said. Of the record US$374.6 billion that flowed into money-market funds last year, US$103 billion came in January, according to the Investment Company Institute, the fund industry association.
Layoffs and declining corporate profits led to smaller bonus payments last year than last year. Wall Street firms probably paid US$10 billion in bonuses last year, compared with US$14.3 billion in 2000, according to the New York State comptroller's office.
At the same time, investors are less inclined to invest in money-market funds because the funds are paying less interest than ever.
Money market funds pay dividends at rates linked to the overnight bank lending rate set by the Federal Reserve. As the Federal Reserve since January 2001 lowered the federal funds rate 11 times to 1.75 percent from 6.5 percent, money-market fund yields dropped to all-time lows.
In some cases, money market funds with expense ratios higher or nearly as high as the federal funds rate have had to cut their costs in order to keep from losing money. Fund groups including MFS Investment Management, Invesco Funds Group Inc, Nations Funds and Pioneer Investments have waived expenses to keep them in line with interest rates.
Six months ago, Grzymala clients living off their investments had three years' worth of income in a money-market fund. Today, he is apt to use Strong Advantage Fund or Dreyfus Short Term Income Fund, short-term bond funds with higher yields, instead.
"Nothing looks good right now," said Bruce Bent II, president of Reserve Funds, which manages about US$15 billion of money-market fund assets. "Short-term rates are no fun, the market's no fun. Nobody wants to do anything, it's just a roiling boil of the same money."
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