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New Regulations Spell the End of Money Market Funds
I continue to be puzzled by suggestions to use ultrashort bond funds in place of cash. Their SEC yields are typically under 50 basis points (vs. 1% for insured bank savings accounts), unless they are diving well into junk.
On top of that, here we have a column suggesting one use ETFs rather than funds - with their extra costs that impede use as cash accounts. If they are offered NTF, they have heavy short term trading penalties. If ETFs are sold with commission, well, that also impedes their use as cash. Not to mention the omnipresent bid/ask spread, and the risk of tracking error (price vs. NAV).
Here's a rarity - a well reported, detailed (dare I say dense) article about Fidelity's MM changes (four phases), with links to Fidelity articles and SEC filings, as well as actual numbers about what customers expect to do (rather than just "many customers have said"). Crain Data: Fidelity Announces Major Changes to MMFs; Staying Stable, Going Govt
Also I have heard that one of the new rules is that redemptions out of MM funds would be stopped during market stress periods. If true, that is not good.
Edit: Here is a Forbes article with info on the new regs.
(1) Halting Redemptions: Here's an article which quotes existing SEC language giving fund directors permission to halt temporarily redemptions from money market funds in times of crisis. It was supposed to take effect a year ago:http://www.economicpolicyjournal.com/2015/02/warning-sec-has-given-money-market.html On broader scale, ... Never put all your eggs in one basket. Folks here are creative enough to figure out how best to preserve some degree of liquidity in event of a financial crisis. Umm ... Using different cash-equivalency funds, different banks, perhaps some govt. bonds, different lines of credit, a store of food or cash, perhaps a pocket full of gold or silver coins. -
(2) Floating NAV: John's original article addresses the floating NAV soon to take effect (although fudiciaries can get around the requirement by designating a fund "retail" only). I view the change as equivalent of cod-liver oil. Won't taste very good - but healthier long run. Money market funds were not designed to insure the same level of safety or stability as banks or government bonds. The floating NAV brings investor expectations more in to line with reality. Consternation surrounding the floating NAV appears largely "Much Ado About Nothing". We have operated our family budget out of both good quality ultra-shorts and money market funds for decades. Fluctuations in value on the ultra-shorts are normally slight and not enough to upset anyone's budget. We've owned Price's TRBUX since inception. It aims for $5.00 NAV and typically remains at that value. On rare occasions has it fallen to $4.99 or risen to $5.01, hardly enough to be noticed. A conservative house, Price has probably done a better job running this type of fund than some others will. And, I'd expect greater fluctuations during a severe crisis. (Under such circumstances you'll probably have more to worry about than whether the cable bill gets paid on time.) -
(3) Re Ol' Skeeter's Related Question http://www.mutualfundobserver.com/discuss/discussion/19156/money-market-reforms-force-advisers-to-rethink-risk#latest Can't remember the last time I looked to my cash portion for income. The small amount of cash we hold is for immediate liquidity and to allow us to take advantage of opportunities that arise. Since most houses exempt money market funds and ultra-shorts from frequent trading restrictions, we're willing to sacrifice yield in return for that increased liquidity. We also keep balances in no-fee checking accounts at local banks and credit unions. While the income earned is negligible, we receive many services from these institutions. Things like being able to transfer funds in and out of our mutual funds, automatic bill paying, gift-cards during the Holidays, checking (even a supply of checks), all without fees.
Comments
On top of that, here we have a column suggesting one use ETFs rather than funds - with their extra costs that impede use as cash accounts. If they are offered NTF, they have heavy short term trading penalties. If ETFs are sold with commission, well, that also impedes their use as cash. Not to mention the omnipresent bid/ask spread, and the risk of tracking error (price vs. NAV).
Here's a rarity - a well reported, detailed (dare I say dense) article about Fidelity's MM changes (four phases), with links to Fidelity articles and SEC filings, as well as actual numbers about what customers expect to do (rather than just "many customers have said"). Crain Data: Fidelity Announces Major Changes to MMFs; Staying Stable, Going Govt
Edit: Here is a Forbes article with info on the new regs.
http://www.forbes.com/sites/keithweiner/2014/07/26/will-new-money-market-rules-break-money-markets/
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(2) Floating NAV: John's original article addresses the floating NAV soon to take effect (although fudiciaries can get around the requirement by designating a fund "retail" only). I view the change as equivalent of cod-liver oil. Won't taste very good - but healthier long run. Money market funds were not designed to insure the same level of safety or stability as banks or government bonds. The floating NAV brings investor expectations more in to line with reality. Consternation surrounding the floating NAV appears largely "Much Ado About Nothing". We have operated our family budget out of both good quality ultra-shorts and money market funds for decades. Fluctuations in value on the ultra-shorts are normally slight and not enough to upset anyone's budget. We've owned Price's TRBUX since inception. It aims for $5.00 NAV and typically remains at that value. On rare occasions has it fallen to $4.99 or risen to $5.01, hardly enough to be noticed. A conservative house, Price has probably done a better job running this type of fund than some others will. And, I'd expect greater fluctuations during a severe crisis. (Under such circumstances you'll probably have more to worry about than whether the cable bill gets paid on time.)
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(3) Re Ol' Skeeter's Related Question http://www.mutualfundobserver.com/discuss/discussion/19156/money-market-reforms-force-advisers-to-rethink-risk#latest
Can't remember the last time I looked to my cash portion for income. The small amount of cash we hold is for immediate liquidity and to allow us to take advantage of opportunities that arise. Since most houses exempt money market funds and ultra-shorts from frequent trading restrictions, we're willing to sacrifice yield in return for that increased liquidity. We also keep balances in no-fee checking accounts at local banks and credit unions. While the income earned is negligible, we receive many services from these institutions. Things like being able to transfer funds in and out of our mutual funds, automatic bill paying, gift-cards during the Holidays, checking (even a supply of checks), all without fees.