Cold hard cash is hot this summer.
With money market fund yields rising right along with the mercury, the long-neglected instruments are enjoying inflows unseen since 2000, according to data from iMoneyNet Inc.
"I don't think there's anything out there as attractive right now if yields and safety mean anything to you," said Connie Bugbee, the managing editor of the New York company's weekly newsletter Money Fund Report.
Last month the average seven-day yield hit 4.65%, with the highest-yielding funds topping 5%, according to iMoneyNet. The McMorgan Principal Preservation Fund's yield reached 5.03%, and the yield for Vanguard Group's Prime MMF/Retail Fund reached a 5%.
Those types of figures have drawn investors back to an asset class they walked away from in 2003, when yields were as low as 0.5% and outflows were fast and furious.
In the week that ended July 10, money market mutual funds took in a record $23 billion of assets, according to Money Fund Report. In the following week they had $136.1 million of net outflows, mainly because institutional investors, which typically use the funds as a short-term cash vehicle, pulled out $3.2 billion. Retail investors, who use the funds as a savings vehicle, added $3.11 billion of assets.
On June 30 money market funds had a total of $2.097 trillion of assets, according to iMoneyNet.
"These numbers might give us an inkling of, if you will, the fear factor that's out there," said Tom Roseen, a senior analyst with Lipper & Co. of New York. With equity markets slumping and international funds turning negative, investors are looking for a safe haven, he said.
Historically, June is an especially slow month for such funds, so this year has been an exception, Mr. Roseen said. "We believe that fear factor is building." He cited unrest in the Middle East, concerns about Iran and the war in Iraq, and the shifting performance of emerging markets.
Peter Crane of Crane Data LLC in Westborough, Mass., said he believes the shift started with the Sept. 11 attacks, which made businesses and individuals begin to think about cash as part of their disaster planning.
"First thing you do is stock up on canned goods, then stock up on cash," he said.
That trend was evident soon after the attacks in bank deposits and the subsequent sputtering of U.S. markets. But when the Federal Reserve Board cut rates to help economic recovery, money market fund yields suffered, and investors turned to other short-term tools.
"Consumers were fighting against the tide to build up cash with record-low rates," Mr. Crane said.
According to Mr. Roseen, the run-up in interest rates has changed that, and the security that money market funds offer, compared with instruments such as adjustable-rate mortgages or loan participation funds, has made them especially attractive.
Investors also like the flexibility money market funds offer, including the ability to write checks and make withdrawals without tax penalties, unlike bond funds, which are liquid but are taxed upon redemption. And unlike bank certificates of deposit, the funds do not lock up an investor's money.
Inflows are expected to remain strong as long as the rates these funds offer remain competitive.
"If that spread narrows, you'll see funds flowing out," said Chris Wloszczyna, a spokesman for the Investment Company Institute in Washington.
Mr. Crane does not expect that to happen anytime soon, even if interest rates freeze at their current level.
"Even if the Fed decreases rates, which I don't think will happen, there's still some of the previous rate hikes in the pipeline," he said. "Companies are well aware of the popularity of cash, and you're going to see competition for market-leading rates."
According to Ms. Bugbee, it takes five to seven weeks for an interest rate increase of 25 basis points to affect yields
She agreed that the popularity of money market funds is not likely to falter. "Sooner or later people are going to wake up and go, 'Gee, money market funds are doing darn well. Why am I sitting wherever?' "
Fund companies appear to be confident that promoting these products will pay off, Ms. Bugbee said. "We're seeing some of the fund companies advertising their [money market] funds again."
Scott Berry, a senior analyst with Morningstar Inc. of Chicago, said that money market funds serve as good cash reserves, but asset allocation remains the most important component of any strong portfolio.
"It's tempting to look at these and say, 'I can get 5% in money market funds, so I should stick all my money in there,' " he said.
The danger lies in whether the cash is still sitting there when the market recovers, Mr. Berry said. "These are more for short-term savings than shifting in and out of stocks or trying to time the market. Then the question is, 'When do I go back into stocks?' The answer is when the market goes up, but by that point it's too late."
Likewise, investors should avoid relying heavily on money market funds in their retirement accounts, such as 401(k) plans, which typically receive less attention from investors and are rebalanced too infrequently, he said.
"It goes back to the market-timing argument. You could be missing out on some good gains in the stock market if you're sitting in cash when the market rallied. By that time it's too late to switch back," Mr. Berry said.
Ms. Glover is a reporter for
