A client recently asked if, given the turmoil in Europe and the
substantial stake that US Money Market funds have invested
one way or another with European banks, he should be reconsidering
money market funds, and particularly, whether perhaps he should
be parking cash in a savings account or other alternative.
He provided the link to an interesting article in Reuters about
My response was basically that the biggest risk in the money market
funds was not really that any investment within the fund would go
to zero in value, but rather that if it did break the buck because
more than a tiny slice of the fund did go to zero (when the Reserve
Primary Fund broke the buck in '08 due to Lehman bonds, it went to
97 cents on the dollar) - the real danger is everyone running for
the doors at once on the fund. If in fact the assets go under
a buck, they have to redeem at NAV anyway, even if that NAV is
less than a buck. Nobody got completely cleaned out by this, mostly
it just may take a little while to sort it out.
That said, it still makes sense to minimize risks. If you are
using a money market fund as a cash alternative, stick with a
large, well-run, *cheap* fund such as Vanguard's Prime MMF or
other similar funds.
One more point in favor of the cheap funds - they can afford
to keep the most conservative portfolios since they don't need
to take the risks which come with higher yielding securities
to make up high costs. Most of them have large allocations to
And regarding any concern that treasuries might default, the
alternatives are no better - a bank savings account backed
by FDIC is, ultimately, still backed by the same government
which is backing the treasuries.
On the way to all of this, though, I found an interesting
letter that an advisor was sending to his clients. He uses
Fidelity as a custodian and was moving all their (taxable)
money market funds from Fidelity's Cash Reserves (their
default money market fund) to Fidelity's US Treasury
MMF. His reasoning was this - neither of them was generating
enough internal income to pay the yield they are paying
out in the first place - both have equal non-existent
yields of 0.01% right now, and most of even that is
due to the fund company waiving fees to make it happen.
So long as you are ending up with the same thing in your
pocket either way, his logic was to take advantage of
Fidelity and put the money into the less (credit) risky
of the two funds.
Interesting logic, and sensible, however, it does require
that if the crisis passes and ultimately yields start to
go back up, you need to watch the two funds and, probably,
will want to move back to the one which is less subsidized
by the fund company. Those subsidies do eventually have to
go away and at that point, there will again be a real yield
difference between the two.
I'd love to hear other folks thoughs on the issue.
- posted 8 years ago