Money market funds are often where the buck stops, and starts, for mutual fund companies.

Retail and institutional investors alike frequently use these plain-vanilla types of investments like checking accounts, or park their money in them before they move into or out of other types of funds. Thus, they've been very successful in retaining assets at fund complexes during periods of market uncertainty, but with the markets as bad as they are, the love of money market funds may be waning.

With money market fund yields at an all-time low of 1.24%, some investors have been moving into other products outside of fund complexes, including bank sweep accounts, certificates of deposit and fixed annuities. Down the road, even when yields improve and the market turns around, analysts warn, some of this cash might not return to fund firms and could very well stay put, tidily stashed in the bank.

Investors have been fleeing out of equity funds - as evidenced by July's record $53 billion surge out of stock funds - into other, safer products, such as money market and bond funds, even risky propositions such as gold, bear and hedge funds. Cautious retail and big institutional money market fund investors, however, have been pulling their money out of money funds and socking it into higher-yielding products at banks - primarily due to a widening spread between declining money market fund yields and increasing interest rates on money market deposit accounts.

"Some investors have become disgusted with the stock market and are closing their brokerage and mutual fund accounts, and banks are getting the money," said Donald Cassidy, a senior analyst at Lipper of New York. "The relative yield advantage is notable."

"Banks are just cleaning up," agreed Peter Crane, vice president at iMoneyNet, a publisher of money fund data in Westborough, Mass.

"The rate of 1.24% is beginning to take its toll on money fund investors. Even for five basis points, they're moving out. Since the end of 2001 through the end of August, money fund assets are down $33 billion," Crane said. In past market downturns, data from the Investment Company Institute shows, flows into money funds have gone up by about $22 billion for each 10% decline in the market in any given month. In fact, as the markets got pummeled last year, money fund assets hit a record net new cash flow of $375 billion to reach $2.3 trillion, according to the ICI.

But the average money market fund is yielding less than 1.25%, according to iMoneyNet, and even an IRA money market account provides only 1.93%, according to With CDs now yielding 2.38%, investors are taking another look.

Investors have even been "locking up their money a little longer in bank-sold fixed annuities yielding 3.9% with a 1% first-year bonus," said Kenneth Kehrer, president of Kenneth Kehrer Associates of Princeton, N.J. "With the yield curve so steep, an awful lot of money is going into fixed annuities," he said.

"We think 2002 could be the first time in their 31-year history that money market mutual fund assets will decline," Crane said. "When you consider that money funds generally have gained $100 billion a year over the past seven years straight," that's a significant drop, he said.

The loss of money market fund assets to banks is not a battle that fund companies would like to fight, Cassidy said. "Basically, they thought they'd won that war in the 1973-74 disintermediation" with the invention of money market mutual funds, Cassidy said. "Now the fund business is going to have to win that battle back."

First Financial Bancorp of Hamilton, Ohio, which launched its first mutual funds under the Legacy Funds umbrella in June [see MFMN, 6/10/02], has seen some movement out of its mutual funds into short-term Treasuries and CDs, said Rick Titus, first vice president with First Financial Capital Advisors.

Money market mutual funds, which have averaged a 5% return over the past 10 years, typically invest in short-term, 60-day securities, Treasury bills or commercial paper highly unlikely to waver from the fund's net asset value, or as the industry terms it, to "break the buck."

Although the Fed Funds overnight rate, on which their return hinges, has been at 1.75% since Dec. 11, their yield has only dropped recently because their yields, which are based on earlier-acquired securities, tend to lag behind market interest rates, according to the ICI. The market's anticipation that the Federal Reserve would cut the rates further is what caused their recent fall below 1.25%, Crane said.

Even if the spread between money market funds and bank products should narrow, it's likely that money fund investors, 48% of whom are individuals and 52% of which are institutions, would move to gain even a few basis points.

"A lot of this is hot money looking for the better yield," Kehrer said.

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