Vanguard money markets still a buck, but with potential for gates, fees

Vanguard's retail money market funds will continue to quote a consistent share price of $1, but the largest mutual fund manager will leave open the possibility of imposing liquidity restrictions on investors during market stress, a spokesman said Tuesday. The Vanguard Group Inc.'s announcement comes as its reaction to new rules facing money market funds next year that are intended to prevent a run on the products used by investors to keep cash safely while generating a return. The manager said it would make seven of its existing funds, including its $133.4 billion Prime Money Market Fund (VMMXX) and six tax-exempt funds, “retail” under the new requirements. That allows them to consistently quote $1 a share for the fund, rather than letting that price float. But the designation would allow the fund's boards to impose a fee on redemptions or to suspend them altogether in certain cases of extreme market stress. Vanguard spokesman David Hoffman assured advisers that it is very unlikely that Vanguard will impose liquidity restrictions even in the wake of another market crisis. “We do not expect to have to impose a fee or gate on a Vanguard [money market fund],” Mr. Hoffman wrote in an email. “Our [money market funds] are conservatively managed and have been since their inception.” Vanguard is the latest in a series to announce their response to reforms passed by the Securities and Exchange Commission last year. Those money managers — including Vanguard competitor Fidelity Investments — have fought to preserve their ability to quote $1 a share by designating their funds as “retail” or by restricting their underlying investments to a low-yielding, less-risky set of investments. The firm will also make an option available for investors who want both a stable share price that does not have liquidity restrictions. Vanguard said it is reopening its $2.8 billion Federal Money Market Fund. That fund is exempt from the reform requirements because it invests almost entirely in cash and short-term U.S. government debt, which is considered virtually risk-free. Those securities are expected to be in increasing demand because of the new reforms, pushing their razor-thin yields even lower. Investors fled money funds in 2008 after the $62.5 billion Reserve Primary Fund, which was invested in Lehman Brothers debt, "broke the buck," falling below $1 a share when that investment bank collapsed.