The poor performance of money market funds (MMFs) is robbing investors of between $300 million and $500 million, says a report by the Canadian Foundation for Advancement of Investor Rights (FAIR Canada).
The report, titled Canadian Money Market Funds—Zero Returns says Canadians hold $56 billion worth of money market funds, most of which are not making any money. A quarter of them, in fact, lost money in the three or six months leading up to Dec. 31, 2009, and continue to do so.
“Few individual investors are aware that MMFs are now producing zero or even negative returns or that many bank savings accounts can produce better returns,” says Ermanno Pascutto, executive director with FAIR Canada, a non-profit organization dedicated to representing the interests of Canadian investors in securities regulations.
As a result, Canadians are being denied potential interest income of $300 million to $500 million. It comes as little surprise that Pascutto is recommending investors to consider “shifting their funds into higher-yielding premium savings accounts.”
Fund economics fails, the report says, when interest rates decline to almost zero, as was the case in March 2009. It says if it wasn’t for reduced MMF fees, most funds would be losing money.
“The average fee (management expense ratio or MER) for all Canadian money market funds is 0.99%. The largest funds charge an average MER of 0.62%. Yet, the current wholesale rate available to the MMFs on government treasury bills is only 0.57%. The result for individual investors is zero returns even with reduced MERs,” says the report.
It underlines the need for improved disclosure when returns on an investment drop to zero or turns negative. Pascutto urges advisors to consider recommending clients switch from money market funds to more profitable options, such as CDIC-insured premium savings accounts.
“Financial firms and advisors should be informing clients of current returns on MMFs and alternatives to the current zero returns. Monthly statements should disclose the current interest paid on MMFs,” says Pascutto. He suggests investors who solely rely on their advisors to stay current and well informed about their accounts and financial alternatives.
(03/12/10)