Crunch time

The $1.02 billion Aon Money Market Fund had been a top performer since its inception in 1992. But in December, Michael Conway, head of money management at Chicago-based insurer Aon Corp., decided to close up shop anyway.

The $1.02 billion Aon Money Market Fund had been a top performer since its inception in 1992. But in December, Michael Conway, head of money management at Chicago-based insurer Aon Corp., decided to close up shop anyway.

“At the end of the day, we looked at the cost of managing the assets,” he advises. “Then I just finally said, ‘Okay, let’s pull the plug on this thing.’”

Conway won’t reveal his margins, but they had no doubt fallen during the previous year as declining yields prompted one third of the fund’s assets to seek higher returns elsewhere. For relatively small funds like his, it is increasingly difficult to cover fixed costs while trying to offer skittish investors a positive return. Average taxable money market yields recently hit a new record low of 0.71 percent, meaning that investors can sometimes pay more in fees than they receive in yield. That has left these funds in a no-win situation: Either they provide some sort of subsidy to investors through reduced fees, or they face the prospect that their clients will depart.

It’s odd that the funds, which buy very short-term debt instruments, find themselves in this bind. Offering safety, liquidity and a return -- however tiny -- in the current market environment would seem a surefire winner for an asset manager. The funds’ popularity is not in dispute: Total money market assets remain near peak levels, at $2.16 trillion. And megafunds such as the $50 billion Vanguard Prime Money Market Fund, yielding 0.95 percent, and Charles Schwab Corp.'s $38 billion Value Advantage Money Market Fund, yielding 0.87 percent, are said to still be ringing up sizable profits because overhead costs are spread over a huge base of investors.

But the decline in average yields, from 4.69 percent in March 2001 to 1.36 percent a year ago to 0.71 percent, has put smaller funds such as the $166 million John Hancock Money Market Fund in a tough spot. The fund is temporarily giving up most of its management fees to subsidize 65 basis points of the 100 basis points it charges investors on its class-B shares, the 12b-1 marketing fee. That price cut has allowed Hancock to slice investors’ total expense ratio to 110 basis points from 175; and even so, customers are left with a net yield (with fees subtracted) of just 10 basis points.

“At today’s federal funds level [1.25 percent], there’s not a lot of room to mess around and not a lot to brag about to your clients,” says Bruce Bent II, president of Reserve Funds, which manages some $25 billion in money market funds.

That’s why many managers of the nation’s 1,759 money market funds would like to follow Aon’s lead. In the past few years, only a handful have done so. Unlike Aon, whose funds were managed for its own insurance affiliates, other asset managers use their money funds as a convenient place for stock and bond fund shareholders to park their cash.

But the yield squeeze has made these funds increasingly difficult to justify. At recent rate levels only those with more than $1 billion in assets can operate profitably, analysts say. Yet according to Peter Crane, editor of iMoneyNet’s Money Fund Report, nearly half of the nation’s 189 fund families have money market funds with assets below that level.

“I’ve predicted consolidation for the past five years in a row,” says Crane. “But this is certainly the year.”

Unless rates rise, more money funds will be forced to merge, outsource their operations or liquidate. An industry shakeout would likely funnel more capital into money market funds run by industry giants such as Bank of America’s Nations Funds, Dreyfus Funds and Federated Investors. Already, well-known financial institutions such as American Express Financial Advisors and H&R Block outsource their money market funds to Reserve Funds. And Bear, Stearns & Co. sells a private-label money market fund run by BlackRock.

Although money fund assets remain at near-record levels, there are signs that investors are growing frustrated with the anemic yields. Last year total assets fell 0.46 percent, the first decline since 1983. Meanwhile, higher yielding (and federally insured) money market deposit accounts offered by banks and broker-banks such as Merrill Lynch & Co., Schwab and others rose by $400 billion, to some $2.8 trillion, a 17 percent increase.

“Many consumers already have shown that they’re not willing to bother putting money into a mutual fund for 1 percent or less,” says Crane. “Monster funds like Vanguard Prime and Schwab are yielding about 1 percent,” says Crane. “That’s an important psychological level. Once they get below 1 percent, there will be a drive among consumers to take all their marbles and go home.” And that’s something the funds dearly want to avoid.



Ad traffic If television shows and cosmetic companies can advertise on the sides of London taxis, why not money managers?

Axa Investment Managers, Colonial First State Investments, DWS Investments (Deutsche Asset Management’s new pan-European retail brand) and Investec, among other London-based asset managers, are taking their marketing campaigns to the streets of London and other U.K. cities. Overall media spending may be off, but to more and more money managers, taxi ads seem like a good deal.

In 2000, Schroders took out the industry’s first taxi ad. These days a media planning agency affiliated with a financial services company typically signs a deal with Taxi Media, an ad agency owned by U.S. media company Clear Channel Communications; Taxi Media controls more than 85 percent of cab advertising in the U.K. Lloyd Keisner, sales director for Taxi Media, estimates that financial advertising on taxis is growing about 10 percent a year.

“For us taxis capture the right type of consumer,” says Scott Stevens, marketing director of DWS. “People who take cabs are generally older and wealthier than the general population. They’re potential fund shareholders.” The key target for DWS, however, is the independent financial adviser. “We are getting the brand into the communities where the IFAs are living and working,” says Stevens. The firm is advertising on about 150 London cabs and a smaller number in Birmingham, Edinburgh, Liverpool and Manchester.

Taxi owners offer two types of advertising deals, explains Nick Jarman, head of International Poster Management, one of the leading agencies specializing in outdoor media. Money managers can advertise only on the sides of the cabs, or they can sign a full livery deal, which provides advertisements on the taxi receipts and the tip-up seats in the back as well. Typically, the money manager ads feature the fund family logo and a short tag line. The DWS pitch: “Get in. Sit back. See your future.”

Compared with outdoor posters, taxi ads are relatively cheap. DWS’s Stevens reports that a London taxi deal costs E650 ($702) for a three-month arrangement.

Meanwhile, poster sites at high-profile locations like train stations can cost between £10,000 ($15,700) and £15,000 for just two weeks. Stevens reports that a site over the London Bridge Station, which faces commuters as they cross the bridge, was sold for £52,000 for a two-week period. This was during the run-up to the end of the tax year on April 1, when investment advertising reaches it peak.

Britons are not jaded about taxi ads. Notes Katharine Weijsman, advertising manager at Investec: “People are pretty immune to poster advertising. In taxis you have a captive audience.”

Taxi owners appreciate the newfound revenue. Ian Collins, whose London taxi bears the blue-and-red logo of Colonial First State, offers a view from the street. Collins has been driving his own cab for 30 years and until April had never carried advertising. Recently, he signed a two-year, £2,000 deal with Taxi Media to offer advertising on his cab.

“It’s fine; it doesn’t bother me,” says Collins. “The thing is, times are so bad at the moment, every little bit helps.” No fund manager would argue with that. -- Andrew Capon

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