The money-market mutual funds, which have always been a place for big institutions to "park" cash and earn a little interest in a few days or weeks, found some of those investment pools leaving them this summer for even higher rates elsewhere.
But the funds are in no danger of going out of business. They still have nearly $80 billion to play around with. It's just that an increasing portion of that money is coming -- in much smaller amounts -- from individual investors who , in the last couple of years, have found the funds to be attractive alternative to bank passbook savings accounts.
"Right now the funds are kind of wavering," one industry observer said. "They've been hovering around the $79 billion mark. The institutional money, which is much more interest-rate-sensitive, has been flowing out."
Even with yields just over 8 percent -- the low point for many of them this summer -- the money funds were still earning nearly three percentage points more than some passbooks, easily enough to attract "small savers" who had at least $1 ,000, but did not have the $10,000 or more needed to invest directly in bank certificates and US Treasury notes.
But those yields, almost half the level reached before the Federal Reserve Board imposed credit controls March 14, are not high enough for the corporations and institutions, including pension funds, bank trust departments, insurance companies, trade associations, religious organizations, and labor unions that had found the money funds a convenient way to invest in short-term vehicles.
"The bigger institutions are going to the money market directly," said Reginald Green of the Investment Company Institute, the mutual fund trade group. They are doing their own investing in Treasury bills, bank certificates of deposit, and commercial paper, he explained.
As of Sept. 10, Mr. Green said, the money funds had $78.5 billion in assets. This was down $299 million from the week before, and approximately $280 million of his decline came from institutional withdrawals. The highest asset level for the funds came July 13, when they reached $81.5 billion, he said.
The money funds do see better times ahead in the next few months, however, as interest rates climb and they are able to offer investors better yields. Last week, many of the funds were reporting yields of around 9 percent, and some industry observers expected they would go as high as 12 and 13 percent in the next several months. "But I don't think we'll see the rates we had in March again very soon," one analyst said. Then, and through part of April, the funds were paying 14 to 16 percent. After that, the prime rate and other rates dropped as dramatically as they had risen, and the fund yields followed a few weeks later.
But the funds will not be able to take advantage of the present interest rate upswing right away. Because the maturity on money fund investments usually ranges from 20 to 60 days, their yields do not go up as fast as the rates of their investments. Six-month Treasury bills, for instance, are offering rates just under 10 1/2 percent -- a percentage point or two lower than the funds. "There is a rate lag," said Thomas S. Drumm, a vice-president of Keystone's American Liquid Trust. The funds are hurt on the upswing. But then they don't go down as fast when rates drop, either."
Even before July 28, when the Federal Reserve suspended its controls on the money funds, which required them to put 15 percent of all new assets in noninterest-bearing accounts, the funds had seen a steady growth in the number of individual investors. This has not made up for the loss of institutional money, however. Some funds that had especially wooed the individual have had their assets climb steadily.
One of these, Delaware Cash Reserve, part of Delaware Management Company Inc. , receives about 80 percent of its money from individual investors, said Richard J. Vesely, marketing vice-president.
"From the very beginning, we've tried to position ourselves as a fund for Mr. and Mrs. John Q. Public," he said. This was accomplished, he explained, partly by advertising outside of financial publications. "Our advertising went into all media -- radio, television, daily papers." As a result, Delaware has had "no effect" from declining interest rates on its assets, Mr. Vesely claims. The fund stands at about $642 million and growing, he added.