Falling U.S. Rates Increase Cost Pressure on Fund Firms --- Japan May Provide Some Lessons On Keeping Stable-Value Levels As Bank Returns Drop Below Zero
Tokyo -- NOW THAT FALLING interest rates make it harder for U.S. fund managers to keep the coveted $1 share price on money-market funds, a look at Japan, where base rates have been zero for four years, provides some important lessons.</br></br>Some U.S. money funds have had to waive at least part of their management fees to ensure a constant $1 price on money funds as returns from short-term investments drop, a situation exacerbated last week after the Federal Reserve's latest rate cut. Each drop in rates puts further cost pressure on fund-management companies, sparking the question of how low can rates go before U.S. fund firms decide they are unwilling or unable to keep propping up the $1 share value of their money funds.</br></br>Japan's experience shows that the despite the expense of operating in a low-rate environment, fund companies are likely to exhaust all other possibilities before allowing fund share prices to fall below their stable-value levels. As the Japan industry has learned first hand -- and as many analysts predict would happen in the U.S. -- failure to maintain a stable share price can spark massive withdrawals by both individuals and institutions, who treat money funds like bank accounts that aren't supposed to drop in value.</br></br>The Japanese industry is divided into two segments; one ran into serious problems in 2001, and the other is facing a potential crisis. So-called money-reserve funds, which are tightly regulated and are similar to U.S. money funds, have never declined from their steady 10,000-yen ($83.50) share price since they were introduced in 1997, even as Japanese interest rates have dwindled to zero.</br></br>Almost all companies that operate money funds in Japan pay a price in doing so, executives say, because fees, which are linked to fund yields, have shrunk to almost nothing. A $1 billion fund can bring in as little as $1,000 in annual fees.