U.S. cash funds primed to recover waived fees

Mon Nov 28, 2011 1:29pm EST
 
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By Tim McLaughlin

(Reuters) - Several companies in the money market fund industry, which has waived several billion dollars of fees over the past two years, are primed to recapture lost revenue from investors at a future date.

In a recent disclosure, for example, discount brokerage Charles Schwab Corp (SCHW.N: Quote) said it could potentially recover $878.2 million in previously waived fees from investors in a number of its money market funds. The fee recapture, as disclosed in an updated filing with the Securities and Exchange Commission, could take place over a three-year period that ends in 2014.

Peter Crane, president of Crane Data LLC, a company that tracks the money market industry, said he has noticed that several funds have mentioned the ability to recapture waived fees in recent prospectus updates and supplements. He also said these funds have warned investors of this "recoupment risk."

In a near-zero interest rate environment, the funds are not in position to recapture previously waived fees just yet. But as one industry executive put it, funds are drawing a line in the sand to let investors know that fee recapture is coming.

"This recapture could negatively affect the funds' future yield," Schwab said in the recent SEC filing. A Schwab spokeswoman declined to provide further comment. Schwab's U.S. Treasury Money Fund, for example, reported nearly $168 million in "recoupable expenses" over a three-year period.

Updated disclosures by Bank of America Corp (BAC.N: Quote) also showed the amount for potential recovery from investors over a three-year period. The recovery could total about $113 million across several money market funds. The bank said in a recent SEC filing that no amounts were recovered during the 12 months that ended August 31.

Retail investors, in particular, already have weathered paltry yields because of historically low interest rates. But without the current benefit of fee waivers from the money market fund industry, many investors would have experienced negative yields.

Crane said fee recapture won't be an issue until the U.S. Federal Reserve raises its Fed Funds rate to 0.50 percent, which could be anywhere from mid-2013 to early in 2014, or even beyond. Even then, he said a Fed Funds rate of 25 basis points to 50 basis points would only unwind fee waivers. He said money funds are waiving about half of their fees currently, charging 0.18 percent of average assets, compared with 0.36 percent a couple of years ago.   Continued...