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Dale Jackson

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Hibernating never looked so good

Dale Jackson


Bears invest wherever bears invest but when it's time to sleep off the winter they keep their cash in money market funds. For most of us money market funds provide a nearly risk-free way to hold money that can be accessed quickly. It's our haven in troubled equity markets that can at the very least grow enough to outpace inflation.

But lately money market funds have been providing much more: real returns. After over five years of annual returns averaging below two per cent many Canadian money market funds are yielding over four per cent. Over the past year the benchmark 91 Day Treasury Index rose 4.3 per cent. It may not seem like much but over the same period inflation held steady at under 2 per cent. Short term rates haven't been this high since the late 1980s - and even back then a bigger slice of the returns were eaten up by inflation.

There's another factor pushing up yields on money market funds - the flat yield curve. With interest rates at historic lows, and little sign they will increase any time soon, the difference between long-term and short-term rates (or spread) is small. Yields at the long end are usually higher than rates at the short end to reward investors for committing their money for a longer period of time. Currently, money market funds provide a combination of relatively high yields, liquidity and little or no management fees.

When you crack it open a money market fund is a mutual fund that holds short-term debt such as guaranteed investment certificates, treasury bills and other government securities maturing in a short period of time - usually three years or less. Returns are historically low but money market funds are arguably the safest way to protect your principal short of a regular bank savings account. Even a savings account or shoving your cash in a mattress won't alleviate the risk of having it nibbled away by the rising cost of living.

There are hundreds of money market funds available on the market. Most are in Canadian dollar denominations but U.S. money market funds are available to hedge against currency fluctuations - one of the other small risks that come with money market funds. U.S. money market funds are ideal for investors who plan on spending the cash in the United States.

Most major fund companies offer money market funds but returns and fees differ so it's important to shop around. The best performing money market fund so far this year is the CI Short-term Corporate Class (U.S.) fund with a year-to-date return of over nine per cent. The fund is not a typical money market fund because it holds some longer term corporate bonds such as Merrill Lynch and General Electric.

The CI Short-term Corporate Class (U.S.) fund is considered open-ended but is closed to new investors for the time being.

Another strong performing money market fund is the AIM Short-Term Income (U.S.) fund, which has returned 8.7 per cent since the beginning of the year. The fund invests in money market and fixed income securities that mature in two years or less.

However, not all money market funds are created equal. At the other end of the spectrum the Acuity Money Market fund has returned less than 1 per cent since January first. The fund invests Canadian dollars in mostly foreign securities. The strengthening loonie has had a devaluing effect on the overall portfolio.

Returns from most money market funds fall somewhere in the middle but there is one other big difference that separates good money market funds from bad ones - fees. Money market funds are fairly simple to manage and the average management expense ratio (MER) is about 1 per cent. Most do not charge front or back end fees.

Some fund companies, however, charge higher fees for money market funds that offer the same basic product. They manage to snare investors by including their money market funds in families or classes of other mutual funds. In some cases investors wanting to sell an equity fund and get into a money market fund can only avoid fees on the fund sold by getting into that company's high-priced money market fund.

Many insurance companies take the fleecing one step further through segregated money market funds. Segregated mutual funds insure most, or all, of the principal and charge high fees for that guarantee. Since the principal on money market funds is nearly guaranteed to begin with, extra insurance is not necessary.

Dale Jackson has been a producer at Report on Business Television since its launch in September 1999.

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