Dollar, Not Euro That Investors Should Be Worried About: Analyst

[fundinvestguru]

When money fund returns are down to a few basis points it is prudent to remember that money fund managers make their money from both money fund management fees (a significant amount of which is being absorbed to keep the funds returns positive) and the much more lucrative management fees on other funds in the family.

As millions of investors have gotten comfortable with money funds and their excellent track record of safety, it has become popular to speculate that money funds must be taking extra risk to get higher returns. It has always been easier and more prudent to lower fees than to take extra risk. In this case (above) we have speculation based on a survey of two funds. Hmmmm

Money fund managers are wise enough to understand that as soon as interest rates start their inevitable rise, money funds with very short average maturities (as little as overnight) will be the funds which enjoy the heaviest inflows as the reflect the new higher returns sooner.

Banks always lag during this period as serving their customers is not a high priority. Why not keep the money market deposit interest rates low and enjoy the higher spread themselves.

Money funds make money by being safe harbors for investor without the ability to negotiate higher returns on their cash. If they wait patiently, the money funds will scoop up the new profits for their customers for their investors and the management fees on the money they attract for themselves. Taking higher unnecessary risks will accrue no long-term profits for money funds, waiting for higher money market opportunities will.

Bill Donoghue, Editor, The Proactive Fund Investor (www.marketwatch.com)