The Investment Company Institute published a study on "Trends in the Expenses and Fees of Funds, 2019," which tells us, "Average expense ratios for money market funds held steady at 0.25 percent in 2019. Despite the Federal Reserve lowering the federal funds rate in 2019, short-term interest rates remained well above zero and fund advisers kept their use of expense waivers low. Expense waivers had been offered widely during the period of near-zero short-term interest rates that had prevailed in the post–financial crisis era." (Of course, we're about to start seeing fee waivers become prevalent in money funds again -- see below.)
ICI explains, "On an asset-weighted basis, average expense ratios incurred by mutual fund investors have fallen substantially over the past two decades.... The average expense ratio for money market funds dropped from 0.52 percent to 0.25 percent over this period. The average expense ratio of money market funds remained unchanged for the second consecutive year at 0.25 percent in 2019. The past four years have generally been a reversal from the historical trend in which money market fund expense ratios had remained steady or fallen each year since 1996."
They continue, "After 2009 ... other factors pulled down the average expense ratios of these funds -- primarily developments that stemmed from the ultralow interest rate environment. Over 2008-2009, the Federal Reserve sharply reduced short-term interest rates. By 2009, the federal funds rate was hovering at a little more than zero. Gross yields on taxable money market funds (the yield before deducting the fund's expense ratio), which closely track short-term interest rates, fell to all-time lows. This situation remained in stasis from 2010 to late 2015."
The Expense study elaborates, "In this environment, most money market funds adopted expense waivers to ensure that net yields (the yield on a fund after deducting fund expenses) did not fall below zero.... From 2009 to 2015, advisers waived an estimated $35 billion in money market fund expenses.... It was expected that when short-term interest rates rose and pushed up gross yields on money market funds, advisers would reduce or eliminate expense waivers, causing the expense ratios of money market funds to rise somewhat. That, ultimately, is what happened."
It adds, "In 2019, however, this trend reversed -- as global trade tensions intensified and expectations around future global growth fell, the Federal Reserve lowered the federal funds rate three times. These actions were reflected in short-term interest rates and gross yields on money market funds. With gross yields still well above zero, it has been less likely that the net yields of money market funds would fall below zero."
Finally, ICI writes, "Consequently, advisers have pared back the expense waivers they had provided to their money market funds. For example, in 2015, 93 percent of money market fund share classes had expense waivers, and in 2019, an estimated 76 percent of money market fund share classes had expense waivers. Additionally, the expenses waived dropped sharply from an estimated $5.9 billion in 2015 to an estimated $1.2 billion in 2019.... Expense ratios of money market funds remained unchanged in 2019 as funds continued to balance expense waivers with short-term interest rates associated with looser monetary policy."
In other expense news, we learned from newsletter Fund Action that Invesco has filed the first of what likely will be a series of disclosures preparing for fee waivers in the new about-to-be-zero yield environment. The Statement of Additional Information Supplement filing for Invesco's Money Market Funds explains, "This supplement amends the SAI for each of the above referenced funds (each, a 'Money Market Fund' and together, the 'Money Market Funds') and is in addition to any other supplement(s), unless otherwise specified. You should read this supplement in conjunction with the SAI and retain it for future reference."
It states, "The following information is added immediately after the 7th paragraph in the section titled 'Investment Advisory and Other Services' appearing under the heading 'Investment Adviser' in the SAI: Invesco has voluntarily undertaken to waive fees to the extent necessary to assist the Money Market Funds in attempting to maintain a positive yield. There is no guarantee that a Money Market Fund will maintain a positive yield. That undertaking may be amended or rescinded at any time."
Invesco adds, "The following information is added immediately after the last paragraph in the section titled 'Distribution of Securities' appearing under the heading 'Distribution Plan,' as applicable, in the SAI: Invesco Distributors has voluntarily undertaken to waive or reduce 12b-1 fees to the extent necessary to assist the Money Market Funds in attempting to maintain a positive yield. There is no guarantee that a Money Market Fund will maintain a positive yield. That undertaking may be amended or rescinded at any time." Watch for more filings in coming weeks.
In other news, Crane Data published its latest Weekly Money Fund Portfolio Holdings statistics, which track a shifting subset of our monthly Portfolio Holdings collection, yesterday. The most recent cut (with data as of March 27) includes Holdings information from 77 money funds (down 17 from a week ago), which represent $2.131 trillion (down from $2.312 trillion) of the $3.835 trillion (55.6%) in total money fund assets tracked by Crane Data. (Note that our Weekly MFPH are e-mail only and aren't available on the website. For our latest monthly Holdings, see our March 11 News, "March MF Portfolio Holdings: Repo, Treas Up, Agencies, CDs, CP Down.")
Our latest Weekly MFPH Composition summary again shows Government assets dominating the holdings list with Repurchase Agreements (Repo) totaling $813.7 billion (down from $827.0 billion a week ago), or 38.2%, Treasury totaling $664.6 billion (down from $732.9 billion a week ago), or 31.2% and Government Agency securities totaling $452.8 billion (down from $474.6 billion), or 21.3%. Certificates of Deposit (CDs) totaled $66.3 billion (down from $91.7 billion), or 3.1%, and Commercial Paper (CP) totaled $58.6 billion (down from $87.5 billion), or 2.8%. A total of $42.8 billion or 2.0%, was listed in the Other category (primarily Time Deposits), and VRDNs accounted for $31.9 billion, or 1.5%. Funds in our weekly collection shortened maturities substantially; a massive 55.2% of assets matures in 1-7 days.
The Ten Largest Issuers in our Weekly Holdings product include: the US Treasury with $664.6 billion (31.2% of total holdings), Federal Home Loan Bank with $303.4B (14.2%), Fixed Income Clearing Co with $182.9B (8.6%), Federal Reserve Bank of New York with $88.3B (4.1%), BNP Paribas with $68.7B (3.2%), Federal Farm Credit Bank with $65.2B (3.1%), RBC with $60.5B (2.8%), Federal Home Loan Mortgage Co with $51.8B (2.4%), JP Morgan with $41.6B (2.0%) and Fidelity with $41.2B (1.9%).
The Ten Largest Funds tracked in our latest Weekly include: JP Morgan US Govt ($203.2B), Fidelity Inv MM: Govt Port ($175.7B), Goldman Sachs FS Govt ($156.5B), BlackRock Lq FedFund ($137.0B), JP Morgan 100% US Treas MMkt ($117.0B), Wells Fargo Govt MM ($117.0B), Morgan Stanley Inst Liq Govt ($99.3B), Goldman Sachs FS Treas Instruments ($95.8B), BlackRock Lq T-Fund ($81.0B) and State Street Inst US Govt ($78.0B). (Let us know if you'd like to see our latest domestic U.S. and/or "offshore" Weekly Portfolio Holdings collection and summary, or our Bond Fund Portfolio Holdings data series.)
Finally, see more coverage on our "Link of the Day" from yesterday, "Fidelity (Soft) Closes Treasury MMFs." The Financial Times' writes, "Fidelity shuts three Treasury funds to new investors." They comment, "Fidelity said it would stop accepting new money into three money market funds that invest in US Treasuries, as it sought to protect existing investors from the dramatic decline in interest rates since the outbreak of coronavirus.... 'The faster these funds take in new money, the faster returns head to zero,' said Pete Crane, who runs money market fund data provider Crane Data.... 'Fidelity is doing this to protect existing investors.'"
