Shakeout from money fund’s collapse is just starting
BOSTON — It’s not the sexiest investment, but the money-market mutual fund has become a high-demand haven for those who can no longer stomach the stock market.
Think again, however, if you believe you’ve found quiet refuge among the growing ranks of play-it-safe types who have nearly $3.9 trillion stashed in these investments.
Money funds are generally safe places to park cash because they invest in the safest types of debt. Many buy government bonds such as Treasury bills, while so-called prime funds seek slightly higher yields but accept marginal risk by venturing into short-term corporate bonds.
The downside of such risk hit home last fall when a soured investment in Lehman Brothers debt spooked investors who suddenly pulled cash out of the Reserve Primary Fund. Although that run was triggered by the fund’s institutional clients, individual investors could end up losing about 8 cents on each dollar invested.
To prevent another such debacle, industry and government regulators are weighing changes in how money funds operate. Their moves could make money funds even safer, but trim their already tiny yields.
A program to temporarily provide money funds with government guarantees similar to FDIC bank deposit insurance is due to expire April 30, although it’s expected to be extended. And some observers expect fund companies to eventually replace the government backing with their own industry insurance program.
Meanwhile, yields on taxable money funds — a category that includes Treasury funds and prime funds — fell to an all-time low average of 0.29 percent this week, according to the Money Fund Report, published by
iMoneyNet.
The extended period of low yields has triggered a competitive shakeup. When it’s over, the number of companies offering the more than 1,700 funds is expected to shrink, reducing consumers’ money fund options.
The changes are swirling around an investment that’s usually so low-profile it’s typically compared with bank certificates of deposit.
"Everybody will look forward to a time when money funds are boring again," said Peter Crane, publisher of the newsletter Money Fund Intelligence.
Experts say there are no indications that investors will suffer losses anytime soon in any other money funds. But the Reserve mess spurred proposals for changes that are just beginning to ripple across the money fund industry, which now holds about 40 percent of the total $9 no fax needed payday loans.4 trillion in all U.S. mutual fund assets. Some of the changes:
— Guarantees can be fleeting: With money fund assets at a record high, the guarantee program prompted by the Primary Fund’s troubles is expected to be extended, perhaps to Sept. 18 — a year after the guarantees started.
Fund companies have paid more than $800 million in fees to extend government backing to their funds and bolster investor confidence. No claims have been paid out — the Reserve Primary Fund didn’t meet the coverage criteria.
— Dollar-for-dollar rule challenged: Money funds are supposed to hold at least $1 in assets for each investor dollar put in. That’s the safety benchmark that the Primary Fund violated when it "broke the buck" after a rush of investor redemptions forced it to quickly unload assets.
Some critics argue the dollar-for-dollar target is too strict, and should allow fluctuations. That way, the thinking goes, investors afraid of seeing a fund break the buck would be less inclined to suddenly pull out.
Federal Reserve Chairman Ben Bernanke touched on the issue on Tuesday, saying that policymakers "should consider how to increase the resiliency of those funds that are susceptible to runs." Bernanke said possible approaches include tighter restrictions on the type of investments funds can make, and an insurance system to prevent instances of breaking the buck.
— Yield shakeup: With money fund yields near zero, some companies’ returns are barely enough to offset expenses to run their lowest-yielding funds. That’s led to several recent cases of providers closing Treasury-only funds to new investors, or limiting new investments by current clients. Others are trimming or waiving management fees to ensure clients see modest returns. But eventually, providers may pass on higher fees to investors.
Crane, of Crane Data, said the competitive balance will increasingly tip in favor of bigger providers.