Asset managers including Invesco Funds Group Inc, Nations Funds and Pioneer Investments have cut fees on money-market funds to avoid handing investors massive losses on holdings many consider as secure as bank deposits.
The companies' bind stems from the Federal Reserve's 11 interest rate cuts last year. The central bank's effort to revive the economy sliced short-term rates to their lowest level in 40 years. Some money-market funds charge nearly as much in fees as they are now earning on their investments.
The yield of the average taxable money-market fund this week dropped to a record low of 1.51 percent. The average tax-free money-market fund's yield fell to 0.92 percent. In contrast, Pioneer Cash Reserves Fund posted a yield of 0.33 percent. The fund, which had charged expenses ranging from 1.02 percent to 2 percent on its various share classes, last week agreed to lower its management fee by 0.1 percentage point.
"We want to maintain a competitive yield as interest rates decline," said Bruce Speca, managing director of marketing at Pioneer, a unit of UniCredito Italiano SpA. "We'll continue to monitor yields on a daily basis and will consider waiving fees going forward if necessary."
Investors added record sums to money-market funds last year as stock prices fell for the second year in a row. Money funds garnered US$400 billion through November, boosting their assets to US$2.3 trillion, according to the Investment Company Institute. The previous record was US$235 billion in 1998.
Stock or bond mutual funds whose expenses exceed their gains can recoup their costs by drawing down fund assets, producing negative returns for investors.
That isn't a viable option for money-market funds, which aim to maintain a constant share price US$1, and thus never to hand investors a loss. No money-market fund for individual investors has ever "broken the buck" by letting its share price drop below US$1, said Peter Crane, vice president of iMoneyNet Inc, a Westborough, Massachusetts firm that tracks money-market funds.
A money-market fund whose earnings from the short-term debt it buys don't cover its expenses could recoup them either by letting its share price fall, or by deducting shares from client accounts, Crane said. Either option would produce a loss.
Fund companies are likelier to cut their expenses to avoid the stigma of losing money, and the outflows that likely would follow, Crane said.
Funds that have trimmed their expenses in the last several weeks include Invesco Cash Reserves. Invesco, a unit of London's Amvescap Plc, temporarily waived a portion of the 1.8 percent expense ratio on the fund's US$61 million level-load share class, spokeswoman Molly Cisneros said. "We are really interested in protecting our shareholders and maintaining the integrity of the US$1" share price, she said.
Nations Funds, a unit of Bank of America Corp, reduced expenses on the B and C share classes of its Nations Muni Reserves Fund by a quarter percentage point to 1.05 percent and 0.95 percent in December, Joe Fazzino, a Bank of America spokesman, confirmed. He declined to say whether the reduction was permanent or temporary.
The US$75 million OCC New York Municipal Portfolio, a money market fund exempt from both federal and New York State income taxes managed by Oppenheimer Capital LP, a unit of Germany's Allianz AG, temporarily waived a quarter percentage point of its 1 percent expense ratio, according to a regulatory filing.
Value Line Inc in December dropped the expenses of its US$12 million Value Line Tax Exempt Fund to 0.88 percent from 1.28 percent and likely will keep it at that level, vice president David Henigson said.
Few money-market funds have expense ratios high enough to consume all of their investment income. The average money fund's expense ratio is 0.61, and Vanguard Group's tax-exempt money market funds charge as little as 0.18 percent, according to iMoneyNet.
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