Good article in bear-uns about money market risk and how they've suffered mission drift (though the end of the article reverts to recos on specific, flawed mmf's):
interactive.wsj.com
Distressed Dad
The father of the money-market fund isn't happy with his
progeny
By Jennifer Ablan
Bruce Bent has a thing about a buck. As co-inventor of the money-market
mutual fund back in 1971, he designed his creation to maintain a constant
net-asset value of $1 per share. Now he's also seeking the Republican
nomination for county executive of Nassau County in suburban Long Island,
New York. If elected, he'd serve for $1 a year.
Bent won't comment about his political ambitions, but he minces no words
about what's happened to money funds since he and his colleague Henry
Brown brought the first one into the investment world three decades ago. But
his fiscal probity would be welcomed in the public sector, especially in
Nassau County, whose Gold Coast provided the setting for The Great
Gatsby eight decades ago and which still is one of the nation's richest
counties. Nassau's finances have been decimated, with its once-rich bond
rating downgraded to a notch above junk and its affairs overseen by a state
watchdog after years of tax-and-spend misrule by a GOP machine.
But when asked if he's pleased
about how his baby has developed
into a $2 trillion monolith, the
63-year-old Bent, who runs the
Primary Fund, responds with an
unflinching "no."
Designed as a liquid savings
account unencumbered by the
legal ceilings then imposed on
bank-deposit interest rates, money
funds really have been
"compromised," Bent contends.
"Money-market funds weren't
intended to include inappropriate
risk." And there's lots of it these
days with bankruptcies, defaults
and downgrades piling up in the credit markets, which, he predicts, are sure
to hit money funds.
The Reserve Funds, home to the Primary Fund (originally called the Reserve
Fund when pioneered by Bent and Brown), are among just a few that invest
only in Treasuries, federal agency securities, repurchase agreements and bank
instruments. But Bent eschews commercial paper -- short-term unsecured
corporate obligations that are the bread and butter of most money funds.
Commercial paper is now also creating a lot of angst for many money-fund
managers. "We've been in a very positive credit environment for quite a while,
but it recently has become challenging," says Jay Mueller, portfolio manager
of taxable money-market funds at $45 billion Strong Capital Management in
Milwaukee. Headline-grabbing downgrades of formerly top-quality issuers
such as Xerox, AT&T and Lucent Technologies and defaults by California
utilities have led to a substantial tightening in the commercial-paper market.
Only the most creditworthy corporations need apply these days to that
market. Any issuer with a rating below the top A1 by Standard & Poor's and
the equivalent Prime-1 by Moody's Investors Service simply can't find buyers.
But Bent doesn't want even top-quality commercial paper, preferring bank
instruments. He notes that banks' assets are diversified pools of loans, unlike
CP, which is the debt of a single company. "You are concentrated in that
business. If you take a look at the yield differentials, you don't get paid for the
risk."
But some experts say the tightening in CP really
has not been too problematic. Marty Duffy, vice
president in the managed fund group at Moody's, avers that the CP woes
really "have not materially affected" money funds. While there has been a huge
decline in outstanding commercial-paper volume -- the most pronounced
contraction in a decade -- its place has been taken by asset-backed
commercial paper, Duffy emphasizes.
Money funds have been increasing their exposure to asset-backed
commercial paper, once considered too esoteric for the market.
Asset-backed CP is issued by banks that want to provide liquidity to their
customers without putting loans on their own balance sheets. For instance,
trade receivables might be repackaged as asset-backed commercial paper.
Buyers get an instrument with a more diversified credit base plus a slightly
higher yield than traditional CP.
But, says Strong's Mueller, "You should always do credit analysis in
fixed-income, but the importance of good credit work doesn't come to more
light until these [bad] things happen." Indeed, fund managers face "one of the
worst credit- and event-stress environments in years," adds Peter Crane, vice
president of iMoneyNet, a Westborough, Massachusetts, firm that provides
money-market mutual-fund data.
While the credit quality of some issuers of money-market instruments is
sliding, the supply of risk-free Treasury bills is declining for money funds,
notes Henry Shilling in Moody's managed-funds group. Moreover, he adds,
interest-rate-spread volatility between Prime-1 paper and Prime-2 has
jumped as a result of defaults by Southern California Edison and Pacific Gas
& Electric.
Also, some consolidation in the brokerage industry reduces the number of
dealers with whom funds can transact, a significant factor in light of other
diversification requirements, he says. As if that weren't enough, competing
products are entering the fray from large fund sponsors such as Merrill Lynch,
which now offers its customers FDIC-insured accounts through a bank it
owns in Utah. Citigroup also offers a money-market- fund alternative where
money-fund assets can be moved to an FDIC-insured account.
But even as money-fund assets have exploded in recent months as investors
have sought refuge from the volatile stock market, Bent is not impressed with
the industry that he says has become infested with "greed- and yield-driven
managers."
The market definitely has become specialized, but there are money funds that
offer what they promise, says iMoneyNet's Crane. Money funds invest in
short-term instruments with maturities of 13 months or less (most have
average maturities of 90 days or less) and aim to maintain a net asset value of
$1 a share. Securities and Exchange Commission rules require that 95% of
the issues used in such funds have the highest possible ratings. These taxable
funds buy the best-yielding short-term corporate or government issues
available, such as CP and asset-backed CP.
Tax-exempt money funds are limited to municipal debt. Because of the
persistent paucity of short-term tax-free paper, their yields are relatively low,
generally in the 3% range, making tax-exempt money funds worthwhile only
to investors in the highest tax brackets.
Taxable funds paying 4.5%-5% are preferable to the average bank money
account or CD, which may yield half that. But the highest-yielding bank
instruments do better.
For one of the best funds in terms of consolidating checking within an
investment, Crane says consider the Merrill Lynch CMA Money fund.
Among the low-cost leaders in the money-market universe are TIAA-CREF
Money Market and Vanguard Prime Retail, Crane says. He also likes
Schwab's and Fidelity's offerings because of the extra layer of safety in having
large companies standing behind them.
Although they have no legal requirement to do so, big fund families have
bailed out their funds when they've been hit with the rare default rather than
suffer the public-relations black eye of having a money fund with their name
on it "break the buck" -- fall below $1 net asset value.
If that doesn't satisfy your concern about safety, consider the funds from these
families that restrict themselves to Treasuries or other U.S. government issues.
For many, the sacrifice in yield is negligible. In fact, Vanguard Federal Money
Market's seven-day yield was 4.82%, versus 4.81% for its Prime Retail fund.
But Bent says that "outside of government and Treasury funds, there's only
one other fund to consider" -- his own. Spoken like someone who knows the
value of a buck.
Got gold? |
