Leaner days could be ahead for money market mutual funds after a year of explosive growth.
Taxable and tax-free money market fund assets grew 26% in 1995 - the highest jump in more than six years. That brought money fund assets to $775.2 billion as of Dec. 27, according to IBC/Donoghue, an Ashland, Mass., mutual fund tracking firm.
But lower yields on these portfolios, combined with consolidation in the banking industry, are expected to put a crimp in the number of money funds on the market, and the amount of assets flowing into them, experts say.
"Assets will continue to grow this year but at a slower pace, and the number of funds will remain steady if not shrink in the next year or two," said Ralph Norton, managing editor of IBC's Moneyletter.
The number of money funds, both retail and institutional, grew last year to 1,167, a 9.2% boost from 1994.
However, banks' share of the money market fund business grew almost imperceptibly during the year, from 29.2% in 1994 to 29.4% at the end of November, according to Lipper Analytical Services Inc., Summit, N.J.
"A lot of financial institutions concentrated on merging or acquiring one another instead of adding on to their fund" families, said Mr. Norton. "We are going to see more consolidation in the future."
The record growth of assets in 1995 was somewhat surprising, given that money funds normally experience slow growth when the competing stock and bond markets are strong. Generally, they benefit when the markets for longer-term investments are suffering.
"Money funds made sense for investors last year, because yields were well above the six-month and one-year CD," Mr. Norton said.
Indeed, taxable money funds had an average 12-month return of 5.49% in 1995, the highest since 1991. But those same funds ended the year with an average weekly yield of 5.16%, according to IBC.
Mr. Norton predicts that the yield will fall below 5% early in the year if, as expected, the Federal Reserve Board orders another cut in short-term interest rates.
Though falling interest rates will translate into a slowdown in money fund growth, few expect that assets in these funds will actually decline during 1996.
"There won't be any rampant pulling out of money funds because of the rate fall," said David Kundert, chief executive of Banc One Corp.'s Investment Management and Trust Group.
The banking company had $5.8 billion in money funds at yearend, a 23% gain over 1994. Mr. Kundert said Banc One's money funds will grow only slightly in the first half of 1996 as people "wait to see what happens with the stock markets."
But if the stock market were to experience a downturn in 1996, "all bets are off" and money funds could experience an enormous inflow in assets, said Stephen C. Scott, president of Great Western Financial Corp.'s Sierra Investment Advisors.
Mr. Scott said he expects money will continue to pour into the stock and bond markets at least in the short term. Great Western's $256 million in money market assets, which grew 40% in 1995, should grow modestly in the single digits this year, he said.
Many bankers and mutual fund experts argued that one trend helping money markets is their increasing importance as cash management tools for both retail and corporate customers.
Part of the attraction is that money market mutual funds are relatively stable investments, and are managed to maintain a value of $1 per share.