Money Funds Wounded, But for How Long?

As equity markets rebound and returns for money market funds drop, investors are bailing out: Money market funds have suffered $132 billion in outflows this year through July, according to the Investment Company Institute (ICI). This compares with a net outflow of $46.7 billion in 2002, and a net inflow of $375.6 billion in 2001.

Most of the outflow this year, however, has been from institutional funds, ICI noted. But overall, money market fund assets, particularly those held by institutional investors, have grown dramatically over the past few years. Money market funds currently have about $2.2 trillion in assets, up from $1.6 trillion at the end of 2000. Of that $2.2 trillion, $983.1 billion is held by retail investors, and $1.2 trillion by institutions.

Why would a retail investor put cash into money markets? Although they generally don’t provide high returns, “they serve as a substitute for checking accounts and routinely offer check-writing privileges,” noted Louis Harvey, president of Dalbar Inc., a Boston-based mutual fund consulting firm. “They’re a very convenient ‘parking place’ for cash.”

“For people who need safe, very secure, short-term, immediately available cash, it makes sense to keep money in money market funds,” said Michael Vogelzang, president and chief investment officer of Boston Advisors, which manages about $1.7 billion in money-market assets.

Returns data reveal that while money markets won’t make anyone rich, they tend to never lose money over the long term. For the ten years ended August 2003, government and taxable money market funds returned an average annualized 4.1%, versus 2.5% for municipal money market funds.