There has been some talk of a whopping $5 trillion sitting on the sidelines, but little if any of it is actually in a position to be the white knight the market may have been hoping would save the day and lead the way back to bullish times.
That lofty figure is a combination of the $2.16 trillion stored in money market mutual funds and $2.8 trillion in bank money market deposit accounts, according to Peter Crane, vice president at iMoneyNet, a publisher of money fund data in Westborough, Mass.
"The line that there's been this large buildup of cash has to be taken with a grain of salt," he said. "There has not been a build up of money funds."
It is true that assets in money market funds, including both taxable and non-taxable, are up 32% over the life of the bear market jumping to $2.23 trillion as of the end of February, according to the Investment Company Institute. However, this doesn't tell the whole story.
Crane said that while there has been an increase in the total number of cash on the sidelines, most of it has moved into bank money market deposit accounts, not money market mutual funds. Money market deposit accounts grew by $400 billion in 2002, while money market mutual funds shrank last year, the first time the area has gone in that direction since 1983. Year-to-date money market mutual fund assets are down about $70 billion, Crane said.
On the money market mutual fund side, $2 trillion out of the $2.2 trillion "is not going anywhere," Crane said, adding that the nature of money market funds have changed over the past 10 years. Traditionally, retail and institutional investors both used these ordinary no-frills-type of accounts as parking places for their money before a move into or out of other types of funds. They have been a sort of safe haven for investors during periods of market uncertainty and at the same time have allowed fund complexes to retain assets in troubled times.
Not so anymore, according to Crane, who says money market mutual funds are now "transactional in nature. That money is really oil that lubricates the economy.
"This gigantic pile of cash has been there for the last three years in a row and it hasn't done the market any good," Crane said. "What makes strategists think it will come back into the market now?"
Reinforcing the notion, Chris Wloszczyna, a spokesman for the ICI, said he has not heard of any companies in the industry taking specific initiatives to garner these assets "on the sidelines." In fact, he said if any of that wad does comes back, it is expected to be minimal in comparison with the overall sum.
Money market account returns were at 0.70% and CDs at 1.29% as of last week, according to bankrate.com. Money market mutual fund averages have steadily declined since December 2000, when they stood at 0.51%. As of March 2003, that number sank to a lowly .06%.
"You're seeing a buildup in savings accounts, which is not good news for mutual funds," Crane said. "Bank deposit rates for the first time in history have an advantage over money market mutual funds."
The one-month CD rate is 0.91%, with a 1.4% rate over the last six months and 1.73% in the last year.
"If it's been put in a CD, the returns are quite a bit higher," said Lipper's Don Cassidy. "That money theoretically is waiting to come back, but [it's tied up] at least three years if its in a CD," he said, adding that it is highly unlikely investors would be willing to give up some portion of the interest they earned in an early withdrawal penalty.
"We've been saying since last summer, the money is locked up for two to four years in CDs, but represents money the fund industry has to fight to get back," Cassidy said. "There's been a net flow of money from banks to money market funds for the last 30 years, now you are starting to see a trickle the other way."
Fed Fund Pressure
There has been some speculation that the Federal Reserve might cut U.S. interest rates further below 1.25% in an attempt to jump-start the sputtering economy that has seen 465,000 jobs disappear in just the last two months. If this happened, this could decimate money market mutual fund returns, as low as they already are.
The current rate, which was dropped to 1.25% in November, its lowest in 41 years, is the product of an easing cycle that has seen the central bank cut rates 12 times since January of 2001.
The concerns over the ill affects of such a move upon money market funds are greatly overstated, according to a recent Lehman Brothers report. Lehman said it expects the Fed to cut rates to 50 basis points by June.
Lowering interest rates is an attempt to penalize those in safe savings. Likewise, lowering the rate will make keeping money in super-safe assets less attractive and give investors an incentive to put their cash into riskier investments, Lehman said.
Out of the 144 money market funds that have yields below 0.25%, the majority of them have already waived fees to stay in positive territory, according to iMoneyNet. Rough estimates, based on the assumption of fee waivers, predict that a cut of 50 basis points would result in a loss of revenue of $458 million, according to the company. A cut of 75 basis points would cost the industry $1.54 billion, while chopping 100 basis points from the rate would cost the industry $3.38 billion in revenue. These estimates are based on figures as of the beginning of last month.
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