Look, Ma, nearly no yield

The plug got pulled on money market mutual funds in 2009.

Total assets of money funds plummeted by nearly $500 billion, to about $3.26 trillion at the end of the year, a drop of 13% from the end of 2008, according to IMoneyNet Inc.

The cash poured out because the Federal Reserve’s policy of near-zero short-term interest rates also reduced money fund payouts to nearly zero. The average annualized yield on taxable money funds now stands at a barely detectable 0.03%. At that yield, a $10,000 balance in a money fund would earn $3 a year.

What’s more, investors know that money fund yields have little chance of moving higher until the Fed begins to lift its benchmark interest rate -- an event unlikely to happen until the second half of the year, barring a miraculous growth surge in the U.S. economy.

Where did the cash yanked from money funds go? A big chunk probably moved into bond funds in search of higher yields. People who wanted to take no risk at all with their money probably went to banks, where they can at least earn 0.54%, on average, on three-month CDs, according to Informa Research Services.

But the surprise may be how much cash has stayed in money funds.

About 70% of money fund assets belong to institutional investors, and for many of them there may be no decent alternative to the immediate liquidity that money funds provide, even if interest earnings are zilch, said Pete Crane, head of money fund research firm Crane Data.

Many risk-averse small investors, too, may be opting to wait out the rate drought in the funds, Crane figures, given paltry yields on other short-term accounts.

“My general rule is, if you’re not going to make $100 more [in interest] by switching, don’t bother,” he said.

And Vanguard bond funds get the dough

When many investors think of bonds they think of Newport Beach-based Pimco, perhaps the best-known name in the fixed-income business.

But in 2009 plenty of investors hunting for bond funds turned to Vanguard Group -- helping to entrench the Valley Forge, Pa., company’s position as the largest manager of stock and bond funds.

Vanguard had a total net cash inflow of $88.3 billion last year through November, the most of any fund firm, according to data from Morningstar. And most of that money went into the firm’s bond funds.

Pimco came in second, with a net inflow of $74 billion for the 11 months.

Vanguard’s inflows, and the rebound in stock and bond values, lifted its total long-term fund assets to $1.05 trillion. L.A.-based American Funds was No. 2, with $902 billion.

Not surprisingly, Pimco’s flagship Total Return Bond fund was the most popular bond fund -- the most popular mutual fund of any kind, in fact -- for the year, taking in a stunning $47 billion through November, according to fund tracker Financial Research Corp.

But Vanguard had four bond funds on the list of the 10 bestselling stock and bond portfolios for the year, FRC data show: Vanguard Total Bond Market II Index, Vanguard Short-Term Investment Grade, Vanguard Inflation-Protected Securities and Vanguard GNMA.

The perennial appeal of Vanguard’s funds is their rock-bottom management fees. Still, there’s no denying Pimco Total Return’s recent performance edge.

The Pimco fund’s 6.8% average annualized total return over the last five years beat all four of Vanguard’s top-selling bond funds. The closest was Vanguard GNMA, with a 5.4% average annual return in the period.

Performance test for U.S. stock funds

Most of the biggest U.S. stock mutual funds managed to beat the Standard & Poor’s 500 index’s return in 2009.

Then again, they needed an index-beating year to make up for 2008, when most of the titans performed worse than the S&P index in the market meltdown.

Case in point: Fidelity Growth Company fund, with $33 billion in assets, surged 41.2% last year, far exceeding the 26.5% gain of the S&P.

But in 2008 Fidelity Growth sank 40.9%, a larger drop than the 37% loss of the S&P.

The largest U.S. equity fund, Growth Fund of America, rallied 34.5% last year after losing 39.1% in 2008.

Here’s a simple performance test for shareholders of the biggest actively managed domestic funds: Did your manager beat or lag what you would have earned over the last three years had you just passively owned the S&P 500?

The S&P lost 5.6% a year, on average, the last three years. Of the biggest actively managed funds, Vanguard Primecap trounced the index by eking out a 0.4% average annualized gain in the period. (Unfortunately, Primecap is closed to new investors.)

Other giants that held up better than the S&P index: Fidelity Growth Company, which was flat for the three years; Fidelity Contrafund, which lost 0.9% a year; and Growth Fund of America, off 3.1% a year.

On the other side of the performance fence, the Davis New York Venture fund slid 6% a year in the period, Vanguard Windsor II slumped 6.3% a year and Dodge & Cox Stock lost an ugly 9.3% a year.

Ultra-short idea comes up short

In the 1990s, the fund industry came up with what it thought was a brilliant idea for investors who wanted to earn yields higher than money market rates while maintaining relative stability of their principal value: “ultra short-term” bond funds, which bought government and corporate debt maturing in less than one year, on average.

The ultra-short idea worked well -- until the credit crisis of 2008. Then, the seemingly safe short-term debt owned by many ultra-short funds turned out to be not so safe after all. To investors’ shock, some of the debt had subprime mortgages underlying it.

The result: The average ultra-short fund suffered a negative total return of 7.4% in 2008, according to Morningstar Inc. That was worse than the 4.8% average loss of funds in the short-term investment-grade bond category, which in theory are riskier because they own longer-term bonds (with maturities of one year to 3 1/2 years).

“Even [ultra-short] funds with good long-term records and pedigrees let their shareholders down when it mattered most,” said Miriam Sjoblom, an analyst at Morningstar.

In 2009, though, most ultra-short funds rebounded. Their average total return was 6.2% for the year, compared with 9.2% for short-term investment-grade funds.

Sjoblom thinks most ultra-short funds probably have purged their portfolios of suspect debt securities. And some investors either figured that the funds had learned their lesson or just don’t know what happened to the sector in 2008: Ultra-short funds took in nearly $13 billion in cash in the first 11 months of last year, boosting assets to $28 billion.

Sjoblom advises staying away. Rather than settle for the 1% to 3% yields of ultra-short funds, she said, investors should take their chances with short-term investment-grade funds that pay a little more, even though they also may pose greater principal risk if market interest rates rise.

Despite the promises of ultra-short funds, Sjoblom said, 2008 showed that “you can’t have it all.”

One of Morningstar’s favorites in the short-term category: T. Rowe Price Short-Term Bond.