Courts force refund of some money market fees
Shareholders of the money market funds may have an extra bit of yield coming their way. Class-action lawsuits brought against about a dozen money market mutual funds have questioned the size of the fees the funds are nailing down for managing some $172.7 billion.
Already one suit, involving Oppenheimer Management Corporation, which runs the Oppenheimer Money Market Fund, has been settled with a $1.2 million return to the shareholders. Another suit involving the Dreyfus Corporation's Liquid Assets Fund has been resolved with the fund agreeing to a reduction in its management fee over a 10-year period. The reduction in the fee, based on the fund's $8 billion in assets, is currently worth an extra $3.1 million per year to the shareholders.
Still, more suits are pending. Potentially, the largest of the suits involves the giant broker Merrill Lynch and its Ready Assets Fund, which manages over $21 billion and its CMA Money Trust fund with assets of over $10.6 billion. A ruling by US District Judge Milton Pollack is expected shortly.
What the suits are charging is that the management fee, generally averaging 0 .3 percent, is too high considering the economies of scale enjoyed by the managers of the fund as their assets grow. One lawyer involved in the Oppenheimer case noted that as the funds grow, the per-unit expenses go down, but they are not passed along to the shareholders. ''There is a growing awareness that the fees paid are grossly disproportionate to the work going on, '' he states.
However, lawyers representing the funds disagree. Dan Maclean, general counsel for the Dreyfus Corporation, says the main reason the company settled its case, with the court's approval, was because it represented ''continual harassment and diversion of executive time.'' The management company, says Mr. Maclean, never thought the four-year suit had merit.
For example, Mr. Maclean points out that Liquid Assets was one of the first money market funds established, absorbing millions of dollars of advertising to educate the public. Furthermore, Dreyfus, by establishing the fund as a no-load fund at a time when the rest of its mutual funds were still load oriented, risked its existing broker-dealer ties. The shareholder pays for administrative costs in a load fund, while profit pays the costs in a no-load fund.
The fund also has administrative expenses which normal investment advisers don't have. For example, shareholder turnover is about 300 percent annually. In a normal stock fund, shareholders hold on to the funds over a long time period. Thus, Mr. Maclean argues, the economies of scale don't work for the fund as it would appear on the surface. Instead, he says, ''expenses grow geometrically.''
Still, the funds make a good profit. But, Mr. Maclean argues, ''There is no reason we shouldn't make a profit on the fund. It's not like a public utility.''
The whole question of profits is sort of nebulous. The total industry of 152 funds this year will charge over $350 million. Merrill Lynch will receive over $ 85 million this year on its two funds. Shareholders argue it can't cost that much to invest in short-term securities issued by the nation's top banks, major corporations, and the US government.
The brokers counter that their profit margins on the funds are thin. However, they steadfastly refuse to break out profit and loss statements, claiming that they are not relevant. Bache Halsey Stuart Shields, for one, claims it loses money on its money market fund. The broker mainly runs its fund so that its clients keep their funds invested at the brokerage house. Since the brokers don't make a commission on investments in the money market fund, there is often a general grumbling among the sales force. Many brokerage houses have started to charge for some of their ancillary services such as check writing privileges and withdrawal fees.
The funds also argue that their fees are small compared with their competition - the banks. ''A bank managing $8 billion in assets,'' says Mr. Maclean, ''probably would charge 200 basis points (about 2 percent) more.''
Mr. Maclean claims that investors shouldn't look at the management fee in their prospectuses, but should look at the total expense ratio. By sitting down with several different prospectuses, an investor can determine if his or her mutual fund is operating at about the industry level. Profitability, fund sponsers claim, may not be a good measurement since profits may only be a function of efficiency. Still, to protect shareholders, the Investment Company Act grants them the right to sue privately for ''excessive fees.''
When the class-action lawsuits are brought against the funds, they can sometimes be quite profitable for the lawyers bringing the suits. In the case of the Liquid Assets fund, the firm of Pomerantz, Levy, Haudek & Block, famous for their class-action suits, received an award of $350,000, over and above their expenses, when they settled the case. Often the same legal papers that are used in one case can be used in others. Thus, the economies of scale should operate when Pomerantz, Levy, which is involved in other money market fund class- action suits submits its expenses, quipped one fund manager.