Money market funds expected to continue rise

Money market mutual funds -- which last week reached a record high of $78.1 billion in assets -- are expected to show a continuing growth despite the current economic slump.

* Despite a closing of the interest rate "differential" between yields on money funds and short-term Treasury issues during the past several months, industry analysts do not expect any major movement by investors out of money funds.

* While growth in money funds is expected to slow considerably during upcoming months, some industry officials are projecting inflows into money funds of at least $1 billion monthly.

The money market funds currently face a number of difficult problems, including falling interest rates, the sheer size of many of the funds (which makes quick investment decisions more difficult than ever), as well as the knotty problem of integrating the newer clone funds back into the parent money market funds.

There are now 35 "clone" funds with assets of $3.2 billion. The clone funds were established in response to credit curbs imposed by the Carter administration and the Federal Reserve Board in mid-March of this year. Under the administration's credit curbs, money market mutual funds were required to set aside 15 percent of their new assets in non-interest bearing accounts with the fed.

In May the Federal Reserve Board lowered the set-aside requirement to 7.5 percent.

Earlier this month the fed removed the credit curbs, and thus, the reserve requirements on the clone funds.

The Securities and Exchange Commission (SEC) and the mutual fund industry [ operating through its trade arm, the Investment Company Institute, ICI] are expected to eventually work out a process whereby the various parent funds will "absorb the clones," says Jennifer Brown, an editor of William E. Donoghue's Money Fund Report.

What is likely to happen, she argues, is "each fund will eventually formulate" its own policy within SEC guidelines about exactly how to integrate shareholders in the clone funds.

Because of the 7.5 percent set-aside, yields on the clone funds are running behind that of the parent fund.

The T. Rowe Price Prime Reserve Fund, or example, with assets of $1.137 billion, is yielding 8.89 percent as of this writing, the clone fund, however, Prime Reserve Fund II, is yielding 8.46 percent.

Although there are expected to be numerous technical problems involved in working out the procedure for merging the two funds, it is now assumed that the SEC and the industry will work out a merger arrangement, says a spokesman for T. Rowe Price Associates.

The longer range question, the spokesman points out, is what happens to money market funds in general, with interest rates having fallen downward during recent months.

According to the T. Rowe Price spokesman, company officials anticipate that money funds will post a growth of at least $1 billion monthly during the rest of the year.

Officials of the ICI also expected continue growth in money funds, despite falling interest rates.

Assets in money funds shot up by 1.38 billion dollars for the week ending July 9. Since mid-April, total money funds assets grew by approximately 30 percent, despite the drop in interest rates.

ICI officials argue that the experience of money funds in the 1974-75 downturn -- the worst recession in the US since the depression of the 1930's -- suggests that money funds will likely not show any large loss of investment dollars.

In 1975, money funds had some $3.9 billion in assets.

By 1976, when interest rates had reached a very low level, money funds dropped to $3 billion. But that was slightly less than a 25 percent decline in total assets.

Today, ICI officials note, there is greater acceptance of money funds by smaller depositors, who tend to prefer the fund for their liquidity. Money put into treasury issues, by contrast, is "locked up." For that reason, ICI officials do not anticipate any large scale defection from money funds in the months ahead.

According to Donoghue's Jennifer Brown, more families of funds are also seeking to introduce "fund transfer" from one fund to another -- so that money funds can be shifted into equity or other funds (and back again) as economic conditions warrant.