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Trying to Outrun Low Interest Rates

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As they cope with the lowest interest rates in decades, some sponsors of money-market mutual funds are looking for ways to cut the costs of running those portfolios.

The fund firms have a financial incentive to do so: With the Federal Reserve’s target short-term interest rate now just 1%, some money funds simply aren’t earning enough interest from their portfolios to cover all the fees and other expenses outlined in their prospectuses. So the managers of the funds are waiving some of their usual fees or paying other fund expenses themselves in order to keep the funds’ yields positive and their share prices from slipping below the steady $1 that money funds aim to maintain.

One possibility for some fund firms is to combine multiple money funds into one larger portfolio that can operate more efficiently. In January, citing potential cost savings, Munder Capital Management merged the $50 million Munder Money Market Fund into the $1 billion Munder Funds Cash Investment/A (MIAXX).

Other funds may consider adding new fees, such as per-check charges for check writing, although that doesn’t appear to have happened yet, says Peter Crane, vice president and managing editor at iMoneyNet Inc., a money fund research firm in Westborough, Mass. Imposing such fees would transfer some expenses from a fund’s asset base to the individual fund shareholders.

Another fund option for fund operators is to turn the portfolio management of their money funds over to other asset management companies, whose larger money fund operations enable them to do the job at lower cost. That’s obviously not an easy decision for fund firms, though, because it would typically involve eliminating a business unit and staff.