Last week, the Investment Company Institute, the trade association for mutual funds, published a study entitled, "Trends in the Expenses and Fees of Mutual Funds, 2012," which features a number of comments and statistics on money fund expenses. Under the section, "Money Market Fund Expense Ratios Drop, Reflecting Fee Waivers." ICI writes, "The average expense ratio of money market funds was 17 basis points in 2012, a drop of 4 basis points since 2011. Over two decades, expenses incurred by investors in money market funds dropped 67 percent, from 52 basis points in 1993 to the 2012 level. Expense ratios have fallen sharply in the past few years as the great majority of money market funds waived expenses to ensure that net returns to investors remained positive in the current low interest rate environment. When short-term interest rates rise from their current historic lows, advisers may reduce or eliminate waivers, and money market fund expense ratios could rise."
The ICI study points out that money funds fell by 1/3 from 1993 (52 basis points on asset-weighted average) through 2006 (40 bps), due to the growth in assets and institutional funds, then fell by another 1/3 through 2012 to 17 bps due to the Fed’s zero yield policies. The report explains, "Until 2009, the declining average expense ratio of money market funds largely reflected an increase in the market share of institutional share classes of money market funds. Because institutional share classes serve fewer investors with larger average account balances, they tend to have lower expense ratios than retail share classes of money market funds. Thus, the increase in the institutional market share helped reduce the industrywide average expense ratio of all money market funds."
It adds, "By contrast, the market share of institutional share classes of money market funds dropped slightly in 2010 and 2011 (to 65 percent from 68 percent in 2009) and held steady in 2012. This indicates that other factors pushed down the expense ratios of these funds. Primarily, the steep plunge in the average expense ratio of money market funds reflects developments stemming from the current low interest rate environment."
ICI explains, "In 2007 and 2008, to stimulate the economy and respond to the financial crisis, the Federal Reserve sharply reduced short-term interest rates. By early 2009, the federal funds rate and yields on U.S. Treasury bills hit historic lows, both hovering just above zero. Yields on money market funds, which closely track short-term interest rates, also tumbled. The average gross yield (the yield before deducting fund expense ratios) on taxable money market funds has remained below 25 basis points since February 2011. `In this setting, money market fund advisers increased expense waivers to ensure that fund net yields (the yields after deducting fund expense ratios) did not fall below zero."
They tell us, "Waivers raise a fund's net yield by reducing the expense ratio that investors incur. Historically, money market funds have often waived expenses, usually for competitive reasons. For example, in 2006, before the onset of the financial crisis, 60 percent of money market fund share classes were waiving expenses. By the end of 2012, 97 percent of money market fund share classes were waiving at least some expenses."
Finally, ICI writes, "Expense waivers are paid for by money market fund advisers and their distributors, who forgo profits and bear more, if not all, of the costs of running money market funds. Money market funds waived an estimated $4.8 billion in expenses in 2012, nearly four times the amount waived in 2006. These waivers substantially reduced revenues of fund advisers. If gross yields on money market funds rise, advisers may reduce or eliminate waivers, which could cause expense ratios on money market funds to rise somewhat. Finally, in 2012, assets in lower-cost money market funds increased. This movement of assets into lower-cost funds likely contributed to the reduction in the average expense ratio of money market funds."
