Fee waivers were in the news Friday as the Financial Times wrote, "US money market funds waive fees to stave off negative returns." The FT tells us, "US asset managers are cutting the fees they charge for money market funds after the dramatic decline in yields on the short-term debt they rely on threatened to leave clients with negative returns. Federated Hermes, Fidelity and TIAA-CREF, which manage some of the largest money market funds, have already waived fees on several products. Vanguard, another large manager, said it has not yet needed to waive fees but remained committed to keeping investors' returns positive." They quote, "Peter Crane, who runs information provider Crane Data, said other managers were likely to follow suit, adding: 'The last time rates went to zero we saw most funds cut expenses in half.'"
The FT piece explains, "The Federal Reserve slashed its target for short-term interest rates by 1.5 percentage points to between zero and 0.25 per cent when coronavirus ripped through global markets. That has dragged the three-month Treasury yield down to just 0.14 per cent. Despite those meagre returns, spooked investors have poured cash into money market funds. Industry assets have risen by more than $1tn since the beginning of March to $4.8tn, according to data from the Investment Company Institute. The flows have pushed the funds to buy debt that is yielding close to zero, dragging down overall returns."
It continues, "Federated said it had lowered fees on more than 30 money market funds. TIAA-CREF has waived fees on two funds that invest in government debt and government-backed securities. Fund managers do not have to publicly disclose incremental fee changes on funds, which can change daily. Instead, they disclose a yield that investors earn, which has expenses already deducted."
The article adds, "The average yield across all types of money market funds fell 0.2 percentage points in April to just 0.19 per cent, down from 1.31 per cent at the start of the year, according to Crane Data. Yields on Treasury-focused money market funds have fallen to just 0.11 per cent.... Some strategists have raised concerns that as returns sink, money market funds could lose their appeal as a haven for cash, prompting an exodus by investors. However fund managers pointed to the fact that the last time the Fed's lower bound dropped to zero, between 2009 and the end of 2015, money market fund assets remained steady at more than $2.5tn."
Finally, the FT writes, "Money market funds could come under even more pressure should the Fed follow its peers in Japan and Europe and push its main policy rate below zero. Investors recently moved to price in such a move by next year, but rebuttals from a range of central bank officials, including chairman Jay Powell, have since pared back those bets."
The publication ThinkAdvisor also recently published, "How Asset Managers are Addressing the Threat of Negative Yields." They write, "It may never happen, but that hasn't stopped firms from taking preemptive steps. The most popular and safest investments during the COVID-19 pandemic are under threat from potentially negative interest rates, and asset managers are responding. In a FAQ for investors, TIAA said it was waiving expenses for its CREF Money Market Account and for the TIAA-CREF Money Market Fund, an investment option within its TIAA Access annuity product, to prevent negative yields because current short-term rates are too low to cover those expenses."
They continue, "In another sign of negative rate fears for money market funds, Fidelity Investments in mid-March waived fees on several U.S. Treasury and U.S. government money market funds sold exclusively through intermediaries -- which tend to have higher expense levels than other funds -- in order 'to maintain positive net yields on those share classes.'"
This piece adds, "In another effort to protect money fund investors against negative yields, Fidelity announced in late March that it was closing three money market funds to new investors outside of retirement plans that had established that option by March 31.... Vanguard made the same decision for its Treasury Money Market Fund in mid-April, closing the fund to new investors because net new flows would threaten an even lower yield."
In related news, a new Prospectus Supplement for Gabelli U.S. Treasury Money Market Fund explains, "Effective May 28, 2020, (the 'Effective Date') initial purchases by new accounts of the Fund's shares, either directly or through the exchange privileges described in the Prospectus under 'Exchange of Shares' in amounts exceeding $5 million will require preapproval by the Fund by calling 1-800 GABELLI. The Fund reserves the right to reject any purchase order if, in the opinion of the Fund's management, it is in the Fund's best interest to do so. Existing shareholders may continue to purchase additional shares of the Fund after the Effective Date, as set forth in the Prospectus. These changes will have no effect on existing shareholders' ability to redeem shares of the Fund as described in the Prospectus."
For more on fee waivers, zero and negative yields, see these Crane Data News pieces: Yields Inch Towards Zero, Outflows; T Rowe Waivers; Weekly Holdings (5/27/20), Crane Discusses Record MMF Assets, Zero Yields, Regs on First Webinar (5/26/20), Barron's, Wiener: TIAA Going Negative?, Federated Hermes Earnings Call Talks Govt MMFs, Zero Yields, Waivers (5/4/20), ICI: MMF Assets Break $4.5 Trillion; Vanguard Soft Closes Treasury MMF (4/17/20), ICI on Expense Ratio Trends; Fee Waiver Filing; Weekly MF Holdings (4/1/20) and, Fidelity (Soft) Closes Treasury MMFs (3/31/20).
