Syndicated columnist Chuck Jaffe says that a number of fund families have closed off their Treasury-oriented funds to new investors.

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People buy mutual funds to try to make money.

If a fund has virtually no chance of actually achieving that goal, there’s a real question as to whether it should stay in business.

While battle-scarred investors may be wondering if their stock funds should stick around, the real question about funds staying open and operational revolves around Treasury-oriented funds, both short-term bond funds and money-market funds.

Since December, a number of fund families have closed off their Treasury-oriented funds to new investors, because low yields on government securities have made it nearly impossible for the funds to post a potential profit.

Fleeing to Treasurys

With the stock market’s volatility and fears over credit quality sending investors flocking to Treasurys, yields on government debt have dropped to their lowest level in a half-century, which in turn put pressure on fund managers to deliver yields in a reasonable range.

Some have cut costs or waived fees, particularly money-market funds that might otherwise have “broken the buck,” shrinking net asset values below the steady $1 level because expenses are greater than the interest the invested assets can earn.

Others have closed the door to new investors; turning away new customers protects returns for current shareholders because managers don’t have to buy as many new Treasurys with yields lower than current holdings.

“A lot of people right now have gotten to where they are so risk-averse that they are willing to buy funds where they have no reason to believe there will be any real return,” says fund manager Eric Kobren of Kobren Insight Management in Wellesley Hills, Mass.

“A year and a half ago — when people were getting paid absolutely nothing to take risk — everyone wanted to jump into high-yield stuff.

“Today, when the spreads are huge and you could make money in many different types of bonds, nobody wants to look at anything but Treasurys. … That picture will not straighten out for a while, and Treasury funds won’t be too attractive again until it does,” Kobren said.

Different animal

Treasury-oriented funds are a bit different from most other types of stock and bond funds. While they do not come with a guarantee that they will make money, the basic investment premise is pretty simple: Shareholders pool their resources, buy the most straightforward of securities, take the yield they can get, pay the freight on management fees and keep what’s left as a profit.

The value of the bonds may fluctuate — which can push net asset values down — but the long-term investment proposition is still as simple as “keep what’s left after expenses.”

If yields drop so low that there is nothing left after costs, however, then Treasury funds have lost their raison d’être.

At that point, an individual investor interested in Treasurys would be better off buying the bonds directly (, avoiding the management fee, locking in the yield and protecting their principal.

Copyright 2009, MarketWatch

Chuck Jaffe is a senior columnist at MarketWatch. He can be reached at or Box 70, Cohasset, MA 02025-0070.