Money Funds Feel the Squeeze: Lower rates and reduced fees are hurting industry profits

Businessweek reports:

Money-market mutual funds, with $2.64 trillion in assets, are confronting their biggest challenges since they first appeared in 1971. Having survived withdrawals by investors following the September 2008 collapse of the $63 billion Reserve Primary Fund, they now must contend with Treasury yields near record lows, a shrinking supply of debt to invest in, and declining assets. “I haven’t seen an environment like this in my lifetime,” says Kevin Kennedy, who helps manage $114 billion in cash funds for the Western Asset Management unit of Baltimore-based Legg Mason (LM) and has been in the business for three decades.

As yields have come down, fund companies have had to cut their management fees to keep customers’ returns above zero. The average annual fee charged by money funds tracked by Crane Data fell to 0.18 percent in August from 0.37 percent three years earlier. Over the same period, assets have shrunk 23 percent. As a result, the industry’s annual revenue has fallen 62 percent since 2008, to $4.5 billion, according to Crane Data. Tough conditions have led some companies to sell or shutter funds. SunTrust Banks sold assets run by its RidgeWorth Capital Management unit to Federated Investors last year. EBay’s (EBAY) PayPal closed its money fund in July, returning money to investors. The number of U.S. money fund companies reporting data to research firm iMoneyNet, has fallen by 25 percent, to 104, since Sept. 30, 2008, although that is partly the result of mergers and acquisitions such as Well Fargo’s (WFC) 2009 takeover of Wachovia.

The fallout from artificially low interest rates manipulated by the Fed.