The future of so-called "clone" money market mutual funds may be decided at a meeting tomorrow of Securities and Exchange Commission staff members and representatives of the money market mutual fund industry.
Questions about the funds were raised after the Federal Reserve Board's announcement last week of the removal of credit controls.
The funds were set up in response to the Fed's imposition of controls in March. These include a requirement for money market mutual funds to place 15 percent of ther new assets in non-interest-bearing deposits. Many fund managers set up new , lower-yielding funds for new accounts so that they could preserve the yields on the old funds which earned money on 100 percent of their assets.
The new, second generation funds typically had the same managers and the same investment policies as the original mutual funds -- hence the name "clone" funds. Despite the lower yields after the introduction of the special deposits the funds have continued to grow rapidly in recent weeks, preserving their reputation as one of the fastest-growing investment vehicles.
In the year ended in June, deposits in mutual money market funds rose from $26 billion to $76.7 billion. They are attractive to small investors because initial deposits need only be $500 or $1,000 rather than the $10,000 typically required for direct money market deposits.
In addition the funds are liquid, like passbook accounts, while yielding interest rates in line with Treasury bills or money market certificates rather than the much lower rates on passbook accounts. While interest rates are falling, as a present, the yield on mutual funds is greater than those on Treasury bills or money market certificates as the funds include some earlier-dated, higher-earning assets.
In May the Fed halved the special deposit requirement on money market funds to 7 1/2 percent. This enabled the yields on clone funds to rise. But now that controls are to be ended altogether "logic dictates that there should be only one fund" according to Steve Paggioli of the Investment Company Institute, a trade association for mutual funds. However, there are various technical obstacles to merging the clones with their original funds. The industry and the SEC are currently "studying how best to go about consolidating and reintegrating the assets" of the clones, said Paggioli.
Such a merger would benefit shareholders in the clone funds in two ways. They would receive higher yields on their deposits and would have lower management and administrative costs. Roger Serbvison, a vice president for Fidelity Management Research in Boston which advises several mutual funds, said yesterday that whereas the clone fund Fidelity Cash Reserve II now Yields 8.38 percent, the underlying fund Fidelity Cash Reserve is yielding over 11 1/4 percent. The Fed's controls will be removed on new deposits from July 28 and Serbvison commented "I guess that the underlying funds will still be yielding well over 10 percent by then."
At Wednesday's meeting the industry and the SEC will try to find the "most efficient and least costly way of transferring the clone funds to the original funds," said Steve Norwitz of Baltimore mutual fund sponsors T. Rowe Price Associates. He said that the industry would like to avoid the unusal formal procedure necessary for a corporate merger.
The SEC expedited the setting-up of the clone funds so that they could be registered in a week or ten days rather than six weeks. It is possible that the merging of clone and orginial funds will also be expedited.
Another complication with merging is that at present mutual funds are not permitted to buy the securities of another mutual fund.
Norwitz and Reg Green of the ICI both agreed that some managers may decide to keep the clone funds as shells, which could later be used if controls were ever put on again or as separate funds with slightly different investment policies from their originals. One suggestion is that the clone funds could be used to invest in short-term municipal funds.