Some money-market funds stand out from crowd by not charging a fee

MUTUAL FUNDS

July 16, 1995|By Knight-Ridder News Service

In the colorful world of mutual funds, money-market funds are comfortably beige. They invest in short-term, super-safe instruments, such as U.S. government securities and certificates deposit. Average yields rarely differ by more than a few tenths of a percentage point.

Nonetheless, a few funds have managed to stand out from the crowd.

During the second quarter, Strong Money Market Fund posted an average yield of 6.28 percent, well above the industry average of 5.53 percent.

Similarly, Olde Premium Plus Money Market Series posted an average yield of 6.18 percent, according the Money Fund Report, a newsletter published by IBC/Donoghue Inc. of Ashland, Mass.

What's their secret?

Both the Strong and Olde funds charge no fees for their services. Since fees eat into a fund's yield, no-fee and low-fee funds usually outperform other money-market funds.

Why would a fund give its services away?

For the same reason discount stores advertise buy-one, get-one-free promotions. They hope that once you're in the store -- or in this case, the fund group -- you'll buy their other products.

The Strong Money Market fund, a member of the Milwaukee-based Strong Income Funds, waived its fees last December in an effort to boost the fund's assets.

Previously, Strong's expense ratio was 0.7 percent, about average for a general purpose money fund.

Jay Mueller, portfolio manager for Strong Money Market, said Strong scrapped fees in an effort to attract new customers to the fund.

"The fund has been around for 10 years, but unless you're on the Top 10 list now, you don't get much attention," he explained.

The strategy has succeeded. Strong's fund earned the No. 1 spot on IBC/Donoghue's list of "general purpose" taxable money funds. The fund's assets jumped from $480 million last year to about $2.1 billion.

But like the loss-leaders at Wal-Mart, fee waivers are available only for a limited time.

Strong plans to start reinstating fees in August, and will gradually phase them in over a period of several months.

Mr. Mueller acknowledged that the fund risks losing business when it reinstates its fees, since its yield will almost certainly fall.

But he hopes that many of his new customers will stick around because they like the Strong group's service and the other funds the group offers.

Strong has also unveiled a new money-market fund called the Strong Heritage Money Fund, which will charge no fees until the end of the year. However, the fund isn't for everyone: Its minimum investment is $25,000.

The Olde Premium Plus Money Market Series, meanwhile, has no immediate plans to reinstate fees, said Tim Atkinson, one of the fund's managers.

"We've committed in writing to our investors to waive them [fees] through January of 1997," he said.

The experience of the Benham Prime Money Market Fund suggests that the no-fee strategy can work.

The fund was launched in November 1993. In an effort to attract assets, Benham waived all expenses and management fees. Benham Prime was last year's top-performing fund with assets swelling to $1.5 billion.

"Basically, we got our foot into the door in a lot of new households," said Amy O'Donnell, portfolio manager for the fund.

Benham Prime began phasing in fees in January and now charges 0.5 percent. Ms. O'Donnell said the fund has lost about $150 million in assets since it began charging fees. That still leaves the fund with $1.37 billion in assets.

"I've actually been pleasantly surprised with how much assets we've retained" since the fund started imposing fees, she said.

While only a handful of funds have waived all of their fees, nearly 60 percent of all money-market funds waived part of their fees last year, said Peter Crane, editor of the Money Fund Report.

"Last year, when the Fed started raising rates and the stock market had a correction, funds saw an opportunity," he said. "They got quite aggressive about cutting their fees because people were paying more attention to money funds."

Fund experts are divided on how the Fed's recent drop in interest rates will affect fund fees. Benham's Ms. O'Donnell, for example, believes lower interest rates will mean fewer breaks on fund fees.

"When rates go down, money-market funds become less attractive, so why bother fighting for the few assets that are left?" she said.

But Mr. Crane said the drop in interest rates could lead to an increase in fee waivers.

"Yields have been easing back down for the last couple months and they (top-performing funds) are battling to stay above 6 percent," he said. "This may cause some to cut fees even more."

Money fund experts said there's no harm in taking advantage of low-fee or no-fee funds, as long as you keep tabs on the fund's performance.

Unlike other types of investments, money-market funds are extremely liquid. Since all funds seek to maintain a $1-per-share price, you can withdraw your money at any time without taking a loss on your initial investment.

Most money-market funds have a toll-free number you can call to check on the fund's yield.

Funds are also required to disclose their expenses in their prospectus.

Baltimore Sun Articles
|
|
|
Please note the green-lined linked article text has been applied commercially without any involvement from our newsroom editors, reporters or any other editorial staff.