- The Washington Times - Thursday, November 21, 2002

Money-market funds, seen as a safe haven for cash, have lulled investors with the promise that their principal plus some interest payments would always be there for a rainy day. But investors might need to rethink that view.
The Federal Reserve's decision this month to cut its key federal funds rate by a half-percentage point to 1.25 percent means investors seeking a stable income will have precious little now that yields have fallen to their lowest in money funds' 31-year history.
Even worse, investors might not have their principal to count on. That's because with dwindling yields, money funds with the highest expense charges are near if not past the point where the portfolio earnings aren't sufficient to cover their usual fees.
That means fund companies may have to dip into the principal to pay their bills. Although analysts believe companies will avoid that by cutting costs, they advise investors to be vigilant and stick to money funds' traditional goal to hold cash short-term.
"We get very lackadaisical," said Martin F. Kurtz, a certified financial planner in Moline, Ill. "Money-market funds have maintained their dollar share value for so many years. But there is no guarantee on them."
The average taxable money fund for individual investors is currently yielding 1.05 percent after expenses are subtracted from portfolio earnings, according to money-fund tracker IMoneyNet, of Westborough, Mass.
After the Fed's rate cut, 73 of the 1,735 money funds were in danger of posting a negative yield, and were expected to cut expenses to avoid losses of principal, including the John Hancock and Munder money-market funds, IMoneyNet says.
The largest money funds, such as Fidelity Cash Reserves and Vanguard money-market funds, were not in immediate danger since they tend to have average to lower-than-average expenses.
"It's still only the highest expense broker-sold types of funds that are being forced to waive fees," said Peter G. Crane, managing editor at IMoneyNet. If the Fed were to cut rates by another half-point, however, 384 funds with $151 billion in assets would be affected, he said.
Investors are responding. They yanked $157.62 billion from money-market funds this year through September, compared with inflows of $266.22 billion last year, according to the Investment Company Institute. Total assets this year came to $2.16 trillion.
The Securities and Exchange Commission has contacted several fund companies about near-zero money-fund yields and is monitoring the situation, said Robert Plaze, an assistant director in the agency's Investment Management Division.
The main concern, Mr. Plaze said, is that the securities are being priced fairly. He added that he doesn't think companies will allow negative yields to happen.
"I don't think anybody should panic or be overly concerned right now," Mr. Plaze said.
Instead, analysts advise investors to re-examine their cash investments. Money funds are the safest way to protect investors' principal in the short term before major purchases, such as buying a home or paying for college, since stocks or bonds are much more volatile.
"Monies you need in a short-term horizon should be parked there," said Peter Rizzo, director of money-fund ratings at Standard & Poor's. "If you're the most prudent investor, you won't leave money in a money-market fund for more than a year."
More income-oriented investors willing to put their principal at risk, meanwhile, should consider short-term bond funds or real estate investment trusts.
For longer-term investors, "if you're in a money funds because you're taking shelter from the stock market and are looking for a good time to get back in, some of the money is going to be tempted to go into stocks," IMoneyNet's Mr. Crane said.
For greater safety, financial planners advise investors choosing money funds to invest with larger companies that tend to have lower costs, and to review their monthly statements regularly to make sure yields don't fall below zero.
The money fund paying the highest yield also isn't necessarily the best, they add.
"Every snake-oil salesman in the world is coming out with promises of higher yields," Mr. Crane said. "Banks are paying 1 percent. So anything paying a 3 percent yield or more, you can assume you're taking on a significant amount of risk."

ASSOCIATED PRESS


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