Boom Time for Money Market Funds

Leo Dennis isn’t too thrilled about stocks or bonds these days, and certificates of deposit strike him as a bookkeeping hassle. So where does he park much of his money? Money market mutual funds.

“I’m just at the point where I don’t want to shop around anymore,” says Dennis, head of a Los Angeles company that reproduces antique furniture. “If I’d never heard of the stock market, I’d be happy,” he adds, noting also that bond yields are “too low and there’s too much risk.”

Thanks to investors like Dennis, sales of money market funds have taken off in recent months, continuing to set records in sales and assets despite recent declines in yields.

The boom is attributed to their higher yields over bank products, investor worries about sick savings and loans, aggressive promotions by mutual fund companies and caution about the stock market.

And their growth is a bright spot for a mutual fund industry that otherwise has seen only moderate success since the 1987 stock market crash. Stock and bond mutual funds--which are more profitable for fund companies because of higher sales and management fees--have also been growing in sales and assets, but not at the pace of early 1987 before the crash.

“Money funds have stood out as a competitive leader,” declares Walter S. Frank, chief economist of the Donoghue Organization, a Holliston, Mass., firm that tracks money funds.

Statistics tell the story. Assets in the nation’s taxable money market mutual funds totaled $336.03 billion for the week that ended Wednesday, according to Donoghue’s Money Fund Report newsletter. That was up 27.5% from the beginning of the year. By contrast, assets in money funds only grew 7.3% for all of 1988.

Part of this new-found growth can be attributed to the general convenience of money funds compared to other investments. For instance, money funds often require minimum investments of only $100, and balances are more accessible than bank CDs. Investors can still generally write checks on money funds, paying for anything from the monthly mortgage to credit card bills.

Higher Yields Cited

“Money market funds are becoming a substitute for savings accounts,” proclaims Michael J. Hines, a marketing vice president at Fidelity Investments, the nation’s largest mutual fund company. “They are becoming the savings accounts of the 1990s.”

But experts say the recent boom in funds derives in large part from their superior yields compared to other fixed-income investments. Despite falling gradually from a seven-day compounded yield of 9.62% in mid-April, they still paid an average of 8.58% as of Wednesday, and several funds were offering more than 9%.

That compared to an average yield on bank money market deposit accounts of only 6.45%, while six-month CDs paid an average of 8.26%, according to Bank Rate Monitor, a North Palm Beach, Fla., newsletter.

Money funds--which invest principally in short-term government securities, commercial paper and other safe and liquid instruments--also compare favorably to long-term government bonds. Thirty-year Treasury issues, for example, are yielding only about 8.10%, and their prices could drop if interest rates elsewhere rise.

Another factor is investor caution about stocks. Despite recent records in the Dow Jones industrial index, individual investors express widespread fears of another correction or crash.

“In the long run, the stock market is bad,” says one Venice investor who has been placing additional dollars into money funds in recent weeks. “There’s not much more left in the stock market; there might be one last burst upward before it peters out.”

Absorbing Expenses

Money funds have also been growing because of aggressive promotion of new funds by a number of large fund companies. In particular, fund managers such as Fidelity Investments and Dreyfus have been touting money funds that boost yields by absorbing part or all of their management expenses. Those costs are normally billed to investors by reducing fund yields.

Indeed, eight of the 10 highest-yielding money funds are absorbing part or all of their management expenses, says Brenda Malizia Negus, editor of Donoghue’s Money Fund Report. Among tax-exempt money funds, half are absorbing all of part of such costs, she adds.

One dramatic case in point is Fidelity’s Spartan money fund. Since its introduction in January, its assets have mushroomed to $3.8 billion, making it one of the most successful fund introductions ever. The fund, designed for investors who want to use it as a savings account, for a while was absorbing all management fees and now is only charging 0.1 percentage point of the yield for management fees. That keeps its compounded yield high, now at 9.4%.

In exchange for the lower fees and higher yield, investors are charged for services that other funds normally provide gratis. For example, Fidelity Spartan charges $5 each time an investor switches money into another Fidelity fund and $2 for each check drawn on the account.