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May 27, 2003 at 08:00 PM
If interest rates continue to fall, money-fund investors may find themselves in rare territory indeed for investments associated with low risks and low yields: They may actually see negative returns this year. So far in 2003, the average money-market fund has yielded just 0.7% on an annualized basis, net of fees, which average 0.6%, according to researcher iMoneyNet.com.
All it would take to push most funds into the loss zone is for the Federal Reserve to cut interest rates by an additional 50 basis points (or 0.5%) at its June meeting. Then, the average fund’s yield could fall to 0.2% net of fees. Theoretically, on a money-fund investment of $10,000, the average investor would net just $20 after paying a fund company $60 a year in fees.
The real blow of a further rate cut would be to investors in funds that charge above-average expenses. Some 8.4% of the $2.12 trillion in money-fund assets is in funds that yield 0.5% or less. About a quarter of that group yields 0.25% or less. (Those are mainly funds offered by full-service brokerages, so they have extra marketing and sales charges layered in.) These funds could end up paying nothing to investors — or worse yet — effectively charging customers a small fee for keeping their cash in a safe place.
Already, some money-market funds that are part of variable annuities or 401(k) plans (where an account-management fee is added on top of the money-fund fees) are posting negative returns net of fees. Take Trip Jones, a managing director at SunGard Institutional Brokerage. In the first quarter of 2003, he was disheartened to see the return on the money fund in the 401(k) at his prior firm was -0.12%. At the time, Jones was captive to the 401(k) plan, so he couldn’t just choose another money fund or withdraw his stake. But customers who are free to move their money would probably do so if returns went negative, he figures.
