Reforms to money funds don't go far enough, Neuberger executive says

Jun 8, 2010 @ 3:46 pm

By Jessica Toonkel Marquez

The reforms to money market funds that took effect last month aren't enough to address the problems associated with these investments, a Neuberger Berman executive said today.

Although the new rules “are a step in the right direction, they fail to address the unrealistic expectations that one should have unlimited liquidity and some kind of return,” said Bradley C. Tank, managing director, chief investment officer of fixed income at Neuberger Berman. He made his comments during a panel discussion at a media event for the firm in New York.

Money market funds made headlines in 2008 in the wake of the collapse of Lehman Brothers Holding Inc. when The Reserve Primary Fund “broke the buck,” meaning that its net asset value fell below $1 a share.

To address concerns that more money market funds may have liquidity issues, the Securities and Exchange Commission passed rules mandating that money funds hold more liquid assets, limit their investments to only the highest-quality securities, and reduce the average maturity of the securities in their portfolios. The rules also mandate that the taxable money market funds hold 10% of asset in cash or other highly liquid securities.

“We should take further steps,” to address investors' unrealistic expectations, Mr. Tank said.

However, requiring the funds to be insured, as some fund companies have suggested, isn't the answer, Mr. Tank said.

“You can effectively lower yields and raise expenses by requiring insurance,” he said. Or, Mr. Tank added, firms can restructure their money funds to better offer liquidity. “I prefer that.”

In other comments, Neuberger Berman executives expressed concerns about the amount of money going into fixed-income assets.

Sandy M. Pomeroy, managing director, portfolio manager at the firm, said that “the notion that bonds are safe,” is the biggest fallacy she sees today.

“People are not taking into account interest rate risk or purchasing power risk,” she said.

Mr. Tank noted that bonds are at a very high risk of losing money.

“From the standpoint of defining risk as the probability of losing money in a given calendar year, bond funds have never been more risky than they are today,” he said.

The yields for three-year bond funds are under 1%, Ms. Pomeroy said.

“There isn't a lot of value,” she said.

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