May 9, 2011

Lipper's Fund Trends Report Points to Money Markets, Target Dates, ETF Assets

To attract more investors, money market funds must find a way to offer higher yields

Fund trends to watch in 2011 include the effect of low yields on money markets, target-date funds’ greater popularity and the ballooning of exchange-traded fund assets, says Lipper in a recently published report.

In “Trends Influencing the U.S. Fund Industry – 2011 Edition,” Lipper fiduciary research analyst Sasha Franger writes that three major developments will color the funds markets this year:

  1. Historically low yields will cause money market funds to suffer outflows
  2. Target-date funds will continue to grow in prominence
  3. Assets of exchange traded funds (ETFs), which totaled over $1.5 trillion as of year-end 2010, will continue to grow

“Low money market yields has been a persistent issue,” said Franger in a phone interview on Monday. “Recently, we’ve even seen some large players exiting money market funds.”

In 2010, she noted, low yields also made the list of fund trends to watch in addition to management fee revenues and fast-growing equity fund classifications in commodities, natural resources and region-specific developing markets.

Franger wrote the 2011 report in conjunction with the Lipper Fund Awards held in March.

According to Franger’s report, money market fund yields have fallen considerably from their 2007 high of 4.36%. In 2008, yields fell to 1.93%, and the decline continued in 2009 with yields falling to 0.12%. Most recently in 2010, money market fund yields were at a decade low of 0.01%.

“By the end of 2010, a number of mutual fund companies had decided to liquidate their money market funds due to these low yields. While money market fund flows have picked up a bit in 2011, money market funds will need to find a way to offer higher yields if they are going to attract more investors,” Franger writes.

Overall, open-end mutual fund assets reached their highest point at over $12 trillion in May 2008, according to the report from Lipper, a Thomson Reuters company. At that time, 59% of assets were in equity funds, 28% of assets were in money market funds and 13% of assets were in fixed income funds.

Less than a year later, mutual funds had lost over $3 trillion in assets, but by the end of 2010 assets surpassed their previous high in 2008, reaching a new high of $12.24 trillion. However, the asset composition of the mutual fund industry has changed with the economic

downturn. Since the 2008 high, Franger notes, the percentage of fixed income fund assets has grown to 20% as of December 2010 and money market fund assets have declined to 22%.

As for target-date funds, 52 new fund inceptions were added in 2010—a development that came despite the Securities and Exchange Commission’s closer scrutiny of these funds after the 2008 financial crisis.

There are now 1,401 active open-end target-date funds in Lipper’s database, including all classes of shares, and 42 separate target-date series contain the 1,401 funds, Franger writes. Ninety-one percent of target-date funds are funds of funds, and the remaining 9% are traditional mutual funds and funds of ETFs. Many target-date funds are largely comprised of index funds.

Vanguard and BlackRock dominate the ETF space with over 71% of the assets, and 46 other companies have ETF assets under management, according to Franger.

She notes that a recent poll from Ignites, a Financial Times website covering the fund industry, found that ETFs along with collective investment trusts are “the biggest threat to mutual funds for the coming year.”

At present, there are 1,118 open-end ETFs active in Lipper’s database, and over 71% had their initial public offering in the past four years, Franger writes. Assets of ETFs totaled over $1.5 trillion as of Dec. 31, 2010.

“ETFs are growing in prominence, and actively managed mutual funds will need to find ways to compete with them,” Franger writes in her conclusion.

Read “Equity Funds Have Strong Q1’11, Lipper Data & Analysis Show” at AdvisorOne.com.

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