Mutual fund industry trade association the Investment Company Institute, which will host its annual General Membership Meeting next week in Washington (May 20-22) and which will release its annual "Mutual Fund Fact Book" then too, published a study entitled, "Trends in the Expenses and Fees of Mutual Funds, 2013" yesterday. (See the press release here.) The "Trends study (see pages 9-11) comments on "Money Market Funds," "The average expense ratio of money market funds fell to 17 basis points in 2013, a 1 basis point drop from 2012. Money market fund expense ratios have remained steady or fallen each year since 1994." (ICI's chart, which uses Lipper data shows money fund expenses dropping from 49 bps in 2000 to 42 bps in 2003, and 35 bps in 2008.)

It explains, "Declines in money market fund expense ratios from 2004 to 2009 reflected a number of factors. First, the average expense ratio of retail share classes of money market funds declined 9 basis points (Figure 7; from 58 bps to 49 bps). The average expense ratio of institutional share classes declined by less, only 4 basis points (from 30 bps to 26 bps). At the same time, however, the market share of institutional share classes increased substantially (Figure 8). Because institutional share classes serve fewer investors with larger average account balances than do retail share classes, they tend to have lower expense ratios. Thus, the increase in the institutional market share helped reduce the average expense ratio of all money market funds."

ICI's study continues, "By contrast, the market share of institutional share classes of money market funds has decreased slightly since 2009, indicating that other factors have been pushing down the average expense ratios of these funds -- primarily developments stemming from the current low interest rate environment." ICI's chart shows the market share of Institutional money funds at 55% in 2004, 64% in 2008, and 66% in 2013. It also shows Retail expenses falling from 49 bps in 2009 to 32 bps in 2010, 25 bps in 2011, 21 bps in 2012, and 19 bps in 2013. Institutional money fund expense ratios were 26 bps in 2009, 21 bps in 2010, 18 bps in 2011, 16 bps in 2012 and 16 bps in 2013.

It tells us, "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 had hit historic lows, both hovering just above zero. Yields on money market funds, which closely track short-term interest rates, also tumbled (Figure 9). 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 and fell to a low of 13 basis points at the end of 2013." (Note: ICI uses iMoneyNet data for its gross and net yield, and waiver data.)

ICI's research says, "In this setting, money market fund advisers increased expense waivers to ensure that net yields (the yields after deducting fund expense ratios) did not fall below zero. Waivers raise a fund's net yield by reducing the expense ratio that investors incur. Historically, money market funds often have waived expenses, usually for competitive reasons. For example, in 2006, before the onset of the financial crisis, 62 percent of money market fund share classes were waiving at least some expenses (Figure 10). By the end of 2013, that figure had risen to 99 percent."

The piece adds, "Fund advisers and their distributors pay for these waivers, forgoing profits and bearing more, if not all, of the costs of running the funds. Money market funds waived an estimated $5.8 billion in expenses in 2013, more than four times the amount waived in 2006 (Figure 11). These waivers substantially reduced revenues of fund advisers. If gross yields on money market funds rise, advisers might reduce or eliminate waivers, which could cause expense ratios to rise somewhat." The study shows total "waivers" increasing from $1.3 billion in 2004 to $1.8 billion in 2008, $4.5 billion in 2010, and $4.8 billion in 2012.

Finally, the ICI "Trends" study explains in its introduction, "Fund expenses cover portfolio management, fund administration and compliance, shareholder services, recordkeeping, certain kinds of distribution charges (known as 12b-1 fees), and other operating costs. A fund's expense ratio, which is shown in the fund's prospectus and shareholder reports, is the fund's total annual expenses expressed as a percentage of its net assets. Unlike sales loads, fund expenses are paid from fund assets. Many factors affect a mutual fund's expenses, including its investment objective, its assets, the average account balance of its investors, the range of services it offers, fees that investors may pay directly, and whether the fund is a load or no-load fund."

Crane Data's latest expense data show money funds averaging 0.12% (our Crane Money Fund Average) for all taxable funds and 0.14% for the largest funds (our Crane 100 MF Index). Funds' gross yields average 0.13% (Crane MFA) and 0.16% (Crane 100), respectively. For more on individual fund expense information, see our Money Fund Intelligence XLS and see our historical Crane Indexes for data going back to 2006.

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