Aon Pulling Plug on Money Market Fund
Insurance broker Aon Corp. is liquidating a money-market mutual fund with $1.9 billion in assets as falling interest rates make it more difficult for money funds, among the safest investments, to avoid losses. And Aon may not be alone.
“We’ve seen interest rates decline so sharply that there are alternative investments providing better returns,” said Michael Conway, Aon’s senior investment officer and president of Aon Funds Inc.
Aon’s Money Market Fund is yielding 1.28%, down from 2.06% a year ago. Yields on such funds may continue to fall after the Federal Reserve cut its benchmark interest rate by a half-point last week to 1.25%, although bond yields jumped Thursday on better-than-expected economic news.
Money funds, which typically have investments with maturities of 13 months or less, are particularly sensitive to changes in the Fed’s target rate for overnight loans between banks. The 1.05% average seven-day money fund yield is the lowest in the 31 years that money funds have existed, said Peter Crane, managing editor of the Money Fund Report, an industry newsletter.
“Two months from now, the average yield will be 0.71% as funds pass through the entire effect of the rate cut,” Crane said.
The $2.3-trillion money fund industry is feeling the pinch. “The threat of sub-1% returns will probably hasten some existing industry trends such as consolidation, out-sourcing of fund management and lower fee structures,” said Lou Crandall, chief economist at Wrightson Associates, a research firm.
Money funds are considered among the safest investments because of the premise that for every $1 invested, $1 is returned. The portfolios are regulated by the Securities and Exchange Commission, which sets limits on fund exposure to any single corporate borrower. The funds also have to keep at least 95% of assets in investments with top credit ratings.
Funds with high expense ratios, the percentage of assets that go toward running the fund, may need to waive or lower fees to keep investors from losing money as yields fall. The average expense ratio for the industry is about 0.45% as of Oct. 31, according to the Money Fund Report.
“We have been reducing expenses ever since interest rates fell below 1.75%,” said Jesse Noel, who manages about $430 million at Potomac Funds. There will be expense reductions because “with rates as low as they are, we have to try to get as high a return as possible.”
Money funds have seen net cash outflows of $36.8 billion this year, with $31 billion pulled out by individuals and small companies, according to the Money Fund Report.
“There must be a hundred other banks and insurance firms that are now wondering why they’re in the money fund business,” Crane said.
