MONEY FUNDS ARE HAVEN AMID MARKET TUMULT: TOO BAD SMALLER FIRMS DON’T OFFER INVESTORS THE SECURITY BLANKET

With the bulls and the bears brawling, ho-hum money market funds are suddenly starting to look pretty good.

That’s why fund groups that aren’t able to provide the calm waters of a money market fund run the risk of seeing assets swim away. Most susceptible are small money managers, many of which can’t afford to run a money market fund and have to rely on discount brokerage supermarkets for distribution.

During the week ended Tuesday, Aug. 4 — the day the Dow Jones industrial average suffered its third biggest point drop ever, 299.43 points — jittery investors poured $10.4 billion into money market funds, a 0.9% increase from the previous week.

The two biggest beneficiaries were funds that are plugged into supermarkets, where bouncing out of a high-risk stock fund and into a lower-risk money market fund is relatively easy. Fidelity Cash Reserves, for example, picked up $800 million in fresh assets, a 3.1% increase from a week earlier, and Schwab Money Market pulled in $510 million, a 2.1% increase. Both Fidelity and Schwab oversee wildly successful supermarkets.

By comparison, Vanguard Money Market Reserves, which isn’t sold through such supermarkets, gained 1.5%, or $439 million, during the same period, according to IBC Financial Data, an Ashland, Mass., firm that tracks money funds.

“There definitely were some signs that investors moved to the sidelines,” says Peter Crane, director of research. “You can bet that Fidelity and Schwab money includes (outflows from) some non-Fidelity and non-Schwab stock funds that were sold.”

Making matters worse, there seems to be little the smaller firms can do to prevent Fidelity or Schwab from stealing their hard-earned assets. That’s because neither company allows other fund firms to offer money market funds through their supermarkets.

SUpermarts call the shots

“It’s a situation where you have to take the good with the bad,” says John Yeager, managing partner of Loomis Sayles & Co. LP, which is based in Boston and has $2.4 billion in fund assets. “We all know the rules of the game when we join these supermarkets.”

One look at the numbers and it’s easy to see why many have ignored money market funds. On average, mutual fund firms charge $6.20 a year for every $1,000 invested in a money market fund. That’s far less than the average $153 for every $1,000 invested in a stock fund, according to Morningstar Inc., the fund tracker in Chicago.

Even if more small firms were to offer money market funds, chances are they wouldn’t be able to keep their costs low enough to offer the competitive yields of bigger funds.

About $1.17 trillion is invested in U.S. money market funds, including the $81.5 billion that flowed into them during the first six months of this year, according to the Investment Company Institute in Washington.

The list of money managers that don’t offer money market funds is long. Among them are such well-known firms as Dodge & Cox in San Francisco, First Pacific Advisors Inc. in Los Angeles, Longleaf Partners Funds in Memphis and Baron Capital Management in New York, according to IBC.

With $46.6 billion in money fund assets, Boston’s Fidelity Investments is the biggest player in the industry. It’s followed closely by Dreyfus with $43.5 billion and Vanguard with $37 billion.

“The big guys definitely have an advantage here,” says Mr. Crane. “For the majority of retail complexes, the money fund is either very low profit or it’s a loss leader.”

the 10% solution

Bruce Bent, the man who invented the money market fund 30 years ago, says most investors are likely to keep just 10% of their assets in money market funds, no matter if the market is a bull or a bear.

“Things might bounce up a bit in the beginning of a downturn,” says Mr. Bent, president of Manhattan-based Reserve Funds, which has $5 billion under management and 27 money market funds. “But it always dissipates and comes back to 10%.”

If small companies are worried about being caught in a bear market without a money fund, they aren’t admitting it.

“Not everybody is going to be shifting out of stocks or fixed-income,” says Eric F. Richter, a managing director at North Star Asset Management Inc., in Menasha, Wisc. “Some people are going to be looking for better managers — those that can outperform the market.”

in the money

Top five in money market funds

Fund group Number Assets

Fidelity Investments 5 $46.6 Billion

Dreyfus 63 $43.5 Billion

Vanguard 3 $37.0 Billion

Nations Fund 40 $21.6 Billion

Alliance Capital 7 $16.8 Billion

Industry total $1,170 Billion

Source: CDA/Wiesenberger