Money market funds: billions richer weekly

Call this the Year of the Money Market Fund. Every week they grow by $2.9 billion, or $600 million a day. At the end of February some 5 million Americans, or 2 1/2 percent of the total population, had a money market account. And the assets of the funds have mushroomed since Jan. 1 by 50 percent to $112.3 billion. To the banking industry's chagrin, they are fast becoming a major fact of life on the US financial scene, much like savings or checking accounts, which they have replaced in some cases.

The funds have gotten so big that:

* They are having an adverse impact on the thrift industry by siphoning off savings into higher interest rate instruments. George Hanc, first vice-president of the National Association of Mutual Savings Banks, comments, "It's clear that what the money market funds have done is to divert money away from the thrifts and smaller commercial banks . . . into the giant money center banks and the customers they serve. They are diverting money away from housing and small business."

* The American Bankers Association, one of the most powerful lobbying groups in Washington, has positioned the money market funds as its chief target during the current legislative session.

* They are making it difficult for the Federal Reserve Board to accurately keep track of the nation's money supply. Economist Richard Hoey of Bache Halsey Stuart Shields Inc., a brokerage house, notes, "They are giving the Fed and the financial community problems interpreting the money supply numbers."

* The funds are now twice as large as the rest of the mutual fund industry. The value of stock and bond mutual funds is $56 billion. "It's the tail wagging the dog," chuckles a spokesman for the Investment Company Institute.

* Almost every financial institution in the country has tried to figure out a way to cash in on the funds. Banks are prohibited from forming mutual funds, but as Tom Labrecque, the vice-chairman of Chase Manhattan Bank, noted recently, "We are still looking at ways to do it." Insurance companies are interested -- and recently when the Prudential Insurance Company, the nation's largest insurance company, announced it would acquire Bache Halsey Stuart Shields, its vice-chairman said it is devising a strategy so it can offer the brokerage house's money market fund, as well as other services, to its 50 million policyholders as soon as possible.

The money market funds have gotten so popular that a book about them, "William E. Donoghue's Complete Money Market Guide," is now on the New York Times bestseller list.And, if California is any indication of the future direction of the country, money market funds have now replaced real estate as topic No. 1 with the hot-tub circuit. Recently, at Snowbird Ski resort in Utah, a young California woman told her apres ski companions, "I'm really a little disenchanted with real estate. I'm thinking of getting into money market funds."

The fact that so many people are getting "into" the funds bothers some people. Paul Volcker, the chairman of the Federal Reserve Board, for example, at a recent Economics Club of New York dinnr, said, "My concern is that we have a potential banking system growing with checking accounts and other banking services without the normal burdens and privileges normally associated with being a bank." However, he adds, that even with some form of restraint, "I personally believe it wouldn't affect the growth of the money market funds."

Why are the funds so popular?

According to Mr. Hoey of Bache, they are popular because they are a "saver's revenge." Savers, with as little as $500 to $1,000 can receive approximately the "wholesale" interest rate that large banks are willing to pay to borrow their money. Because the mutual funds pool this money into one lump to lend it over a short-term period to the banks, individuals get the same high interest rates that institutions receive. Thus, instead of getting 5 1/2 percent -- the passbook rate -- on their savings, they currently are getting between 14 and 15 percent. At the moment, money market funds are offering savers with larger sums to invest between 2-to-3 percent more than the savings banks. At the same time, the money market funds offer them check writing privileges, which the Investment Company Institute claims is used on avarage twice a year.

For the most part, the funds are used by individuals. Only $21 billion of the money market's $112 billion in assets is purely institutional money. The rest is mostly individuals' funds, with the largest amount originating from brokerage houses.

Whether the money invested in the money market funds is just temporarily "parked" there, or is more permanent is open to some speculation. Delayne Gold, senior vice-president of Bache, says the money is only invested in the funds temporarily. "It will go into another investment vehicle if it's more attractive," she states. However, a spokesman for the Fidelity Group of funds in Boston says most of the $1.65 billion invested in its Cash Reserves fund, which has a minimum investment of $1,000, "usually ends up staying with us."

Money market fund managers are fairly confident that they will keep a substantial portion of the money even when interest rates start to fall. Only the deregulation of the savings industry -- allowing thrifts to compete for funds -- can make an impact, says one New York manager.

The funds have come a long way since Bruce Bent began the Reserve Fund in October 1972. Mr. Bent recalls going around to E. F. Hutton, Merrill Lynch, and other brokers trying to enlist some help in getting his fund started. "All I got," he recalls, "was a comment, 'It's just another mutual fund.'" Thus, he began the fund on $100,000 of his own funds and by January 1973, the fund had grown to $400,000 and by January 1974 it was $100 million. Today, it's $3 billion.

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