Money funds caught between staying safe and staying around

These days, money market funds are investing only the safest securities.
NOV 25, 2009
These days, money market funds are investing only the safest securities. But rather than trust the industry to continue doing right by investors on its own, regulators are considering new policing guidelines that may result in safer money funds and fewer fund managers. “There's no doubt in my mind we will continue to see some players leave,” said Connie Bugbee, managing editor at research firm iMoneyNet. In the current low-yield environment — which is expected to last for some time — some money fund managers just can't afford to have their hands tied by regulations that would limit their securities options. For example, the Securities and Exchange Commission is considering a move to shorten the maximum average portfolio maturity for money market funds to 60 days, from 90. The idea is that shorter-term securities generally exhibit a low level of volatility, providing greater assurance that the money market fund holding the securities will be able to maintain a stable share price. But shortening the average portfolio maturity restricts the flexibility of money fund managers, potentially reducing their ability to reach for yield, Ms. Bugbee said.
Evidence of the squeeze on money funds can be seen in the number of fund consolidations that have occurred recently. In July, Aston Asset Management LLC, formerly ABN Amro Asset Management Holdings Inc., liquidated its funds, becoming the sixth firm in two years to leave the money fund business according to consulting firm Crane Data LLC. Also closing their funds were Calamos Advisors LLC, Credit Suisse Asset Management LLC, Munder Capital Management, Utendahl Capital Management LP and Monarch Investment Advisors LLC. Financial advisers applaud efforts to make money funds as safe as possible. After the Reserve Primary Fund, advised by Reserve Management Co. Inc., saw its net asset value fall below $1 in September — making it the second money fund in history to “break the buck” — advisers were forced to re-evaluate their money fund ties. “We are now more careful in looking at what the money fund does,” said Richard Schroeder, executive vice president of Schroeder Braxton & Vogt Inc., a financial advisory firm with $170 million in assets. Adam Bold, chief executive of The Mutual Fund Store LLC, agrees. “At this point, we're doing an extra level of due diligence on the money funds that we use,” said Mr. Bold, whose registered-investment-advisory firm manages $4.3 billion of assets. E-mail David Hoffman at [email protected].

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