On Friday, Bloomberg published "Worst Time for Money Funds as Europe Crisis Adds to Woes," (not available online yet), which discusses the multiple pressures on the money fund business. It says, "Kevin Kennedy says it's tougher now to be a money-fund manager than at any point in his three decades in the business. The industry's annual revenue has fallen 62 percent since 2008 to $4.5 billion, according to Crane Data LLC in Westborough, Massachusetts. Funds charge half as much per dollar invested, and assets have shrunk 23 percent. Europe's debt crisis is squeezing the supply of securities available for purchase."
The article quotes Western Asset Kennedy, "who helps manage $114 billion in cash funds for the unit of Baltimore's Legg Mason Inc.," "I haven't seen an environment like this in my lifetime."
Bloomberg writes, "Money-market mutual funds, with $2.64 trillion in assets in the U.S., are confronting their biggest challenges since they first appeared in 1971. Having survived mass withdrawals of assets by investors following the September 2008 collapse of the $63 billion Reserve Primary Fund, they now face Treasury yields near record lows, a shrinking supply of available debt and potential new restrictions from regulators. Most managers have been forced to cut fees to keep customer returns above zero, and some have abandoned the business."
It continues, "Firms that have sold or shuttered funds include Atlanta-based SunTrust Banks Inc., which dealt assets run by its RidgeWorth Capital Management unit to Pittsburgh's Federated Investors Inc. last year, and San Jose, California-based EBay Inc.'s PayPal, which closed its money fund in July. The number was also reduced by mergers and acquisitions such as San Francisco-based Wells Fargo & Co.'s 2009 takeover of Wachovia Corp. Charles Schwab Corp., the largest independent brokerage by client assets, closed its $23.7 billion U.S. Treasury Money Fund as a sweep option for new account holders."
The article continues, "Funds have struggled with low yields on their investments since the Federal Reserve began lowering its benchmark interest rate in 2007 to spur lending and economic growth. When short-term rates neared zero in December 2008, they initially affected only fund customers by reducing returns. Eventually, fund yields fell so far that most providers were forced to cut fees to prevent negative returns. The average annual fee charged by money funds tracked by Crane Data fell to 0.18 percent in August from 0.37 percent three years earlier."
Bloomberg also writes, "European bank debt, which money funds turned to in order to lift their yield, has become too risky for many providers as the region struggles to keep the Greek sovereign debt crisis from spreading. Funds reduced securities from the Euro area by $50 billion in August, bringing their holdings tied to institutions in the region to $316 billion, said Alex Roever, head of short-term fixed-income strategy at New York-based JPMorgan Chase & Co.... The European sovereign crisis has worsened a supply shortage of safe, short-term debt that money funds can invest in. The amount of securities money funds can buy fell from a peak of $12 trillion in 2008 to $9.1 trillion, according to a September report by the International Monetary Fund. Much of the reduction has come in segments that gave money funds their highest-yielding holdings."
They write, "The U.S. Securities and Exchange Commission's staff is expected to propose changes by early 2012 that providers say will increase costs and may spoil the appeal of money funds. The agency favors a plan that would force funds to create capital buffers equaling 1 percent to 3 percent of assets to protect against losses, three people familiar with the regulator's deliberations said in July. The extra expense would be borne by fund companies or passed on to investors. Staff may also propose that funds abandon their fixed share price in favor of one that fluctuates with the daily market value of holdings, a move industry leaders have said would destroy the appeal of money funds. Any proposal would be followed by a public comment period and then require approval by SEC commissioners."
Finally, Bloomberg says, "Declining yields and falling revenue won't deter investment firms focused on staying in the business long-term, said Joseph Lynagh, head of retail money funds at Baltimore's T. Rowe Price Group Inc." They quote Lynagh, "It's a troubled product at this point, and we're not making much money on it. But if you take a longer-term perspective, this, like all cycles, will change."
