Outflows from money market funds are par for the course in April because of tax season, but rarely do they reach the kind of level seen last month.
The nearly $80 billion that were pulled from money market funds was the highest monthly total in 16 years. While some of that has already reversed itself in typical May fashion, the size of the outflow had some discussing whether a more fundamental change might soon be in store for the money market fund business.
Money market funds reported net cash outflows totaling $78.734 billion for April, according to AMG Data Services.
In March there were $114.45 billion of net inflows, bringing the asset total to a record $3.4 trillion.
For the last week of April, AMG reported a record $61.328 billion of outflows from money market funds. More funds reported net outflows than in any week since December 2003.
Money market executives agreed a decline resulting from tax payments is typical in April, but AMG said, there were $33.452 billion of inflows in April 2007.
In the first week of this month, things have already started to rebound for the industry; when according to AMG money market funds reported $47.853 billion of net cash inflows.
"Basically, we had $150 billion flow out of money market funds over a three-week period, and then we have about $50 billion flow back into funds last week," said Peter G. Crane, the president of Crane Data LLC, a Westboro, Mass., company that tracks the money market industry. "This is pretty normal for the weeks following April 15."
Mr. Crane said that what made this year different was that large tax-related outflows were "exacerbated by the market thinking that the Fed might be done" lowering interest rates, he said.
Goldman Sachs Group Inc. reported $14 billion of outflows, and Charles Schwab Corp. reported $8 billion, according to Informa PLC's iMoneyNet, a Web site that tracks the industry.
A spokesman at Fidelity Investments said the Boston company had $4.5 billion of outflows in its money market funds last month, after recording $89.5 billion of inflows for last year.
Bank of America Corp.'s Columbia Management had $2.4 billion of April outflows, decreasing its money market fund assets to $151.8 billion. "Columbia has recently seen a degree of net outflows from its money market funds," a spokesman for the unit said. "While we can't say definitively what the reason is, we believe the need for tax season liquidity and investor allocation rebalancing both played major roles."
Bruce Bent 2nd, the president and vice chairman of Reserve Management Corp., the New York company that created the first money market fund, said as a result of some of the outflows, his company is in discussions with three banks (which he would not name) that want to stop offering proprietary funds and use his company's products instead.
"We are doing more business with banks because of the heavy outflows we have seen in the industry," Mr. Bent said in an interview this week. "Banks that previously may have used their own funds are now giving those assets to us."
Reserve Management had $112 billion of assets under management April 12, he said; that figure "predictably" declined to $102 billion by April 16 and rose to $111 billion by May 12.
"Based on history, over the past 40 years we lose 10% of our assets in April, and we make them up by the beginning of June," Mr. Bent said. "But this year we made up those assets in two weeks instead of eight.
"Honestly, historically speaking, we have never seen that seasonal decline in assets stick," he said. "Every year should be as good as this year."
Mr. Crane said he has not heard of many companies interested in exiting the business. "The talk of consolidation has been going on for years in this industry, but you really haven't seen any substantial participants exit the business."
In the past year there has been only one major sale of a company's money market fund line, he said. In October, Alliance Capital Management Holding LP sold its cash management business, which had $29 billion in assets under management, to Federated Investors Inc. of Pittsburgh.
"Among the largest firms, we just have not seen, and don't expect to see, anyone significant exit from the money management business," he said.
Mr. Crane said the money market industry's 40% asset growth last year probably will not be repeated this year. "Certainly the party isn't over for money market funds, but it is definitely slowing down and throttling back."
Because of this, some consolidation is possible, he said."When assets were growing at a 40% clip, people would be crazy to leave the cash management business. If things slow, we could see consolidation, but I think it is still unclear that this boom is really over," he said. "The money market fund industry still looks spectacular, since so many competitors, including ultra-short bond funds and enhanced cash products, have just been laid to waste in recent months."
Mr. Bent said he has seen a lot of inflows into large money fund managers. Mr. Crane agreed that since August investors have favored large funds sold by large companies.
"The big have gotten bigger in the last nine months," he said. "But that is a rarity, and it is unclear if that will continue."
Mr. Bent said he does not think the outflows will persist.
"There just isn't a trend in terms of interest rates or yields that makes me think this will continue," he said. "I mean, if interest rates were going up, I would expect investors would abandon money market funds and go into direct investors, but I would find it surprising if investors went in that direction. The market just isn't boiling over."
Mr. Bent said Reserve is offering its products through more banks and Fortune 500 companies. "What we have seen is more and more direct cash managers are getting out and letting us manage their money" he said. "The truth is, cash management hasn't worked out too well for companies that don't specialize in it."
