By CHET CURRIER
LA Times, 11-28-99
Fed Raises Interest Rates
For the 21 million-plus U.S. investors who own money-fund shares, interest rate increases that take place now mean higher yields soon on their investments. The funds buy short-term interest-bearing securities such as Treasury bills and commercial paper issued by corporations.
Since the start of 1999, the average seven-day compound yield on money funds has risen to 5% from 4.6%, according to IBC Financial Data Inc. in Ashland, Mass.
With the Fed's announcement Nov. 16 of the third quarter-point increase since June in the overnight bank-lending rate, yields could well keep moving up. They usually follow trends in open-market interest rates with a lag of several weeks, as money-fund managers replace maturing securities with new ones carrying current market rates.
"Money-market funds are looking sweet," said Dan Wiener, who edits the newsletter Independent Adviser for Vanguard Investors.
In the last two years, assets of money funds have soared almost 50%, to more than $1.5 trillion, as tallied by the Investment Company Institute, the fund industry's biggest trade group. They account for $1 of every $4 invested in funds of all types.
Money funds, sometimes known as "cash" in financial shorthand, have achieved that growth even though their yields can't begin to keep up with double-digit gains year after year in the stock market. New wealth spilling over from stocks and the economy, as well as cash moved from banks and bonds, account for most of that growth.
With net-asset values that don't fluctuate, money funds have become a favorite means of diversification for investors who want to keep riding the bull market in stocks as long as it lasts, but with stabilizers in place.
"I think of my cash holdings as a shock absorber for the rest of my portfolio," Wiener said. Although they are not covered by federal deposit insurance, money
they did in 1994 and again this year.
"Since 1994 money funds have been taking market share away from bond funds," said Peter Crane, managing editor of JBC's Money Fund Report. As recently as the end of 1993, bond funds held more assets than money funds. Now money funds are more than 75% bigger than the bond funds, which have about $830 billion.
Analysts often protest that bond funds earn better long-term returns than money funds. But even investors who do like bond funds can use money funds as a counterweight, because the two types of funds tend to move in opposite directions as interest rates fluctuate.
The Feds interest rate increases this year came just as short-term rates and money-fimd yields had begun a decline. The $38-billion Fidelity Cash Reserves Fund, the biggest of several money funds offered by the largest of all fund managers, Fidelity Investments, produced average annual yields in the 5. 1 % to 5.3% range through 1996, 1997 and 1998. For the last 12 months, its annual yield tailed off to 4.9%.
Now, though, it's climbing again, moving above 5.25% this month,
"There are plenty of good reasons for owning a money-market fund regardless of its yield," Wiener said. "The check-writing privileges make them incredibly convenient, and cash is a good rainy-day asset."
If the yield on money funds does rise, though, so much the better for the people who own them. This year's increase of about two-fifths of a percentage point in yields, on a base of $1.5 trillion, puts an extra $6 billion a year in money fund shareholders' pockets. Thanks, Mr. Greenspan.
Chet Currier Is Bloomberg News Mutual Fund Columnist. the "Funds and 40 1 (k)s" Column by Times
Staff Writer Paul J. Lim Returns Next Week