Money Market Fund Flows Climb, for Now
March 5, 2001
Money market funds had net new cash flows of $102.78 billion in January, and all-time record, according to the Investment Company Institute of Washington, D.C. That represents 75 percent of the total net cash flow into U.S. mutual funds in January and follows flows of only $16.42 billion into money market funds in December, according to the ICI.
Eighty percent of the flows into money market funds last month were from corporations reacting to the falling interest rates of alternative investments, according to the ICI. Specifically, when interest rates of direct money market investments fall, it can be advantageous for corporations to move money into money market funds since the decline will affect the funds more slowly, according to John Collins, a spokesperson for the ICI.
"With interest rates in the direct money market investments falling, it is common for the money to flow into the money market funds," said Collins. "If you're a corporate cash manager and you're putting your money directly into money markets, and interest rates fall, your yields are going to fall immediately. But if you move your money over into money market funds, they have a 45-day average maturity of their portfolios and the rates don't fall so the yields that the institutional shareholders get don't fall as rapidly."
If that is the case, the increase in money market assets will be short-lived and those funds will soon see outflows as the investments in the funds' portfolios reach maturity and the yields of the funds decline, according to Collins and Scott Cooley, senior analyst with Morningstar of Chicago.
"In the past, when rates are cut, institutions will pile into money market funds just for a month or two," said Cooley.
There has been an increase in the number of corporations which use money market funds as cash management tools, said Collins.
"[That trend] is continuing to grow," he said. "It's a pretty good cash management tool for them. They can move money in at night to money market funds and leave it there for whatever time, and then, when the opportunities arise, write a check and go back into the direct money market investments."
Flows into money market funds are very sensitive to interest rates, according to Collins. In fact, while the increase in money market assets has been attributed to the decline in interest rates, specifically of money market investments, a similar rise in assets last January was attributed to rising interest rates. [MFMN 1/28/00]
"Because interest rates are on the rise, these funds are very competitive," said Collins last year. Money market funds again have a competitive advantage fueling their flows, although now it is against direct money market investments rather than other types of investments, according to Collins.
Not all of the flows were from corporations. Individual investors put $20.3 billion into money market funds, according to the ICI. That may be attributed to a volatile market in January, according to Jim Folwell, an analyst with Cerulli Associates of Boston.