Investors in many of the largest money-market mutual funds
haven’t received any benefit from the Federal Reserve’s Dec.
16 increase in its target short-term interest rate. Recent yields are
unchanged from the levels of Dec. 15 at 13 of the 20 largest share
classes of “prime” money funds for individuals, according to Crane Data LLC, a
Westborough, Mass., firm that tracks money-market funds. These include
funds from Bank of New York Mellon Corp.’s Dreyfus Funds, Federated
Investors Inc., Charles Schwab Corp. and T. Rowe Price
Money funds buy very short-term debt and aim to maintain a
steady $1 share price. Prime funds buy corporate debt in addition to government
issues. This tally excludes one fund on Crane Data’s list of the largest prime
funds, American Funds Money Market Fund, because it is in the process of
reshaping itself as a government-only money fund. The major reason that many
money funds’ yields haven’t risen along with interest rates in the market is
that fund companies have taken advantage of the increase to cut back on funds
over the past few years of near-zero rates. In some cases, the funds’ yields
continue at just 0.01%, or a mere $1 a year on a $10,000 holding.
By contrast, according to Crane Data, yields have risen over
the same period on some lower-expense money funds that had lower subsidies in
place, or none at all. That includes the $110.3 billion “Investor” share class
of the Vanguard Prime Money Market Fund, the largest prime money fund for
individuals, where the yield rose to 0.37% from 0.15% according to Crane Data.
With money funds, as with other mutual funds, the fund’s
management fee and other operating expenses are subtracted from what the
portfolio earns in interest and dividends. The remaining income is paid out to
fund investors. Fund companies are clearly hungry to collect the fees they have
lost out on over recent years, even as money-fund holders wish for the chance
to earn more on the cash reserves they have parked in these low-risk funds.
Joseph Lynagh, a money-market portfolio manager for T.
Rowe Price Group, says the firm hasn’t earned a management fee on the $6.4
billion T. Rowe Price Prime Reserve Fund for nearly seven years. With the
recent rate increase, the fund’s interest earnings are now sufficient to cover
part of its operating expenses. But the firm continues to waive its 0.34%
management fee and to cover 0.04 percentage points of the fund’s 0.19% in other
expenses so that it can sustain its 0.01% yield, Mr. Lynagh says.
Ryan Robson, a general partner at a unit of brokerage
Edward D. Jones & Co., said the firm was happy to see a rate increase from
the Fed because Edward Jones Money Market Fund had been essentially fully
subsidized since 2009 by its adviser, a limited partnership jointly owned by
Edward Jones and a subsidiary of asset manager Federated Investors.
As a result of the rate increase, he said, the adviser has
been able to lower the amount of fees that it waives. The yield on the fund’s
“Investor” share class, which has $11.4 billion in assets, hasn’t risen from
0.01%, its level before the Fed raised rates.
Some money funds have higher fees than others to compensate
financial advisers that sell them. And fees are generally higher on money funds
used as “sweep” accounts in brokerage accounts. With those arrangements, excess
cash in a brokerage account is regularly swept into the money fund and
withdrawn from that fund when needed for securities purchases.
The $40.5 billion Schwab Cash Reserves fund—the
second-largest prime money fund for individuals, according to Crane
Data—charges a higher fee than some other Schwab money funds because it is a
sweep fund, said a Schwab spokeswoman. The fund’s yield has remained at
0.07% since mid-December. The Schwab fund may charge as much as 0.70% in total
expenses per its prospectus, but the fund company has capped the expenses at
0.66% and is currently waiving 0.39 percentage points of that.
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