by Dan Wiener | April 3, 2012 11:00 am
Money market funds have been under increasing scrutiny and regulation since the Reserve Fund broke the buck in the credit lock-up in 2008. In May 2010, the SEC introduced Rule 2a-7. This rule was designed to make money market funds safer by reducing the maximum weighted maturity of portfolio holdings (from 90 to 60 days), limiting the amount of lower-quality securities permissible in a portfolio and allowing funds to restrict redemptions in stressful times.
More changes could be on the way. The most important, and one which fund companies like Vanguard are fighting tooth and nail, is a requirement that money market fund prices, or NAVs (Net Asset Values) “float.”
In other words, money market funds wouldn’t always report a $1.00 NAV, and you might redeem shares at less than “a dollar in, a dollar out.”
First, let me reiterate that Vanguard’s money funds are safe. The funds are all high quality and managed by top-notch teams. Vanguard’s expense advantage allows them to build a conservative portfolio and still deliver competitive returns. I have not lost any sleep over the prospect of a Vanguard money market breaking the buck. And it doesn’t bother me to know that the $1.00 price on my money market might actually be a slight exaggeration of the true underlying value of the fund’s portfolio.
That said, I’m not entirely comfortable with the notion of allowing the NAV to float. Money market providers have big incentives to maintain that $1.00 NAV, but it is only an “implicit” guarantee, even though many investors perceive it as more than that.
Allowing the price of a money funds’ shares to float would make the lack of a guarantee more explicit, but it might also cause damage to the entire money market industry, as savers would, no doubt, pull money to put it into bank or other FDIC-guaranteed accounts. And this would make investing in mutual funds tougher, since moving cash into or out of your funds would become more difficult.
While I don’t believe a floating NAV is a death knell for money funds, I do think it would reduce their usefulness as a money management tool. With the mutual fund industry adamantly opposed, we’ll have to see what the regulators come up with.
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