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Money market funds: A cost for playing it safe

Nothing is simple in investing any more, not even money market funds.

Where any old money market fund would do in the good old days before the financial world fractured, now you've got a dilemma on your hands. Use a conservative fund and make close to zero in returns, or reach for higher returns and take on extra risk.

Money market funds are the preferred parking spot for investors right now. While mutual fund industry assets tracked by the Investment Funds Institute of Canada fell 20 per cent in the past year to $491-billion, money market funds swelled by 24 per cent to $72-billion. That means close to $15 of every $100 invested in funds is in a money market product.

These funds are not guaranteed and can, in theory, lose money. But the expectation of the people using them is that they will be kept safe while earning modest returns.

Today, though, money market fund returns are fading away. Current fund returns in some cases project out to almost nothing in the next 12 months, and the situation will only get worse if borrowing costs do the expected and fall further at the Bank of Canada rate-setting this Tuesday.

"You'd almost be paying to have your money held in safe-keeping," said Morningstar Canada analyst Philip Lee.

Money market funds hold short-term borrowings issued by governments and, in some cases, corporations. The average term of the paper held in money market funds must be 90 days. Late this week, Government of Canada 90-day T-bills offered a yield of 0.64 per cent, while U.S. government 90-day bills were at 0.26 per cent.

These returns look all the more pitiful when you compare them with the average 1.03-per-cent ownership fee built into money market funds. These fees exceed returns in many cases, and there are a few funds where fees have come close to eclipsing returns altogether.

As a result, some fund companies have been lowering the fees they charge on money market funds. You won't hear about this because fee cuts are only spelled out in periodically issued documents for regulators and investors. But they are happening at companies such as CI Investments and Invesco Trimark.

"In response to several interest rate cuts by the U.S. Federal Reserve Board and the Bank of Canada, Invesco Trimark has or will be temporarily waiving fund operating expenses and/or reducing management fees on all of its money markets funds to help maintain positive yields for investors," Aysha Mawani, the firm's vice-president of corporate affairs, said in an e-mail.

Ms. Mawani said further adjustments will most likely be made after the Bank of Canada rate setting next week.

That's good news for people invested in the Trimark Interest Fund, with $178-million in assets and a management expense ratio of 1.82 per cent as of the most recently posted information. The current yield on this fund - that's the estimated 12-month return based on very recent results - was listed at 0.01 per cent on the website late this week.

If rates were to fall and no action was to be taken on the MER of a fund in this position, then returns could in theory go negative.

Unlike other kinds of mutual funds, money market fund units don't fluctuate in value. Instead, they're pegged at $10 and investors receive their gains as interest. If all a fund's interest payments are soaked up to pay fees, then that threatens the $10-per-unit valuation.

Other companies are almost certain to take similar measures to, first, allow clients to make a token return in money market funds and, second, to preserve the $10 net asset value of these funds.

"I wouldn't be too worried," said Dan Hallett, an independent mutual fund analyst who works with investment advisers. "Although there's nothing to say you can't lose money in a money market fund, other than a long history of [the fund industry] avoiding that and the PR nightmare that would ensue if a firm ever did allow this to happen."

Reducing fees is one way for money market fund managers to deal with meagre interest rates. Another is to take advantage of the higher returns offered by short-term borrowings issued by the corporate sector.

There are actually two types of money market funds - a T-bill version that holds only short-term borrowings issued by federal and provincial governments, and a broader type that mixes in corporate borrowings like banker's acceptances and asset-based corporate paper, or ABCP.

As of Jan. 31, the RBC Canadian Money Market Fund had 55.7 per cent of its holdings in ABCP. The current yield for this fund as of late this week was 1.50 per cent, which compared with 0.51 per cent for RBC Canadian T-Bill.

The ABCP in RBC Canadian Money Market - it has also shown up in other funds like PH&N Canadian Money Market, Investors Canadian Money Market and TD Canadian Money Market - is similar in name only to the stuff that seized up back in 2007 and caused problems for a few money market funds that held it. Investors in these funds might have faced losses if their fund companies hadn't held the line on the $10 net asset value.

The ABCP used by RBC and others is described as being bank-sponsored, which means a higher level of quality and stability. DBRS Ltd. gives almost all bank-sponsored ABCP a rating of R1 (high), which is its best rating.

Jonathan Hartman, vice-president of investment products at RBC Asset Management, said the comparatively strong returns for RBC Canadian Money Market can be explained by its holdings in bank-sponsored ABCP.

"We are very comfortable with the profile of these assets," Mr. Hartman said.

DBRS monitors bank-sponsored ABCP on a monthly basis and hasn't found cause to put a single rating up for review. But the fact that we're in a recession is reason for caution about these securities, which are based on baskets of mortgages, auto loans and leases, and credit card receivables. Should defaults surge in these rough economic conditions, these securities could be negatively affected.

This brings us back to the money market fund conundrum for investors - play it supersafe and make next to nothing in returns, or be a little aggressive and add a theoretical element of risk.

Mr. Hallett's advice for anyone maxed out on investing stress: "I think you're better to stick with something safe. If you want to have zero doubt about all of this, you almost can't go wrong if it says T-bill in the name."


With interest rates at low levels because of the recession, money market fund returns have fallen to extremely low levels in some cases. Here's a look at various money market funds and how they're faring lately.

Most recentlyCurrentAssets
Funddisclosed MER (%)Yield (%)($-millions)
The top four widely accessible money market funds by assets
RBC Cdn Money Market0.891.56,188
CIBC Money Market1.130.465,004
TD Cdn Money Market0.920.64,643
Scotia Money Market1.140.932,189
Four widely accessible money market funds with fees at the low end
PH&N Cdn Money Market D0.491.59696
Mackenzie Sentinel Cash Mgt0.531.26480
Saxon Money Market Fund IS0.531.5230
Altamira T-Bill0.631.04130
Four widely accessible money market funds with fees at the high end
Primerica Cdn Money Market1.840.0230
Trimark Interest DSC1.820.01178
AGF Cdn Money Market Acct1.580.01527
BMO Guardian Cdn MM Mutual1.530.5151


- Current yield is an estimated return for the next 12 months based on recent short-term results; these yields reflect the impact of fees.

- Some fund companies are lowering their money market fund fees, so actual fund MERs at the moment may be lower than displayed here.

- MER stands for management expense ratio, a measure of a fund's fees as a percentage of its assets.


© 2007 The Globe and Mail. All rights reserved.

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