My take on his commentary:
SEQUX: Just another reason in the long line of reasons for the need to index. Not a popular opinion for stockbrokers or financial advisors or anybody who makes their living advising people. But these are the same people charging 4% commission for a Certificate of Deposit annuity paying 2.5%. I have previously discussed the value of VBINX or similar.
FPACX: I sold it a month ago. Held it for many many years. My reason is different from Mr. Snowball. IMHO, I believe human nature is such that it is difficult to be the best at a profession that requires so much. Eventually your motivation and drive begins to weaken. Asset size doesn't help matters. The funds commentary alerted me to that possibility.
Money Market: Are we saying that Treasury only Money Markets will not break $1.00 NAV? Is there no option left come October that will not break the buck for a brokerage sweep account?
Comments
No MMF, not even one containing only Treasuries, is guaranteed not to break a buck. That's true now and will always be true (unless the Treasury does something extraordinary as it did in 2008 and step in to guarantee MMFs).
One of the rules going into effect later this year says that prime and muni MMFs must have floating NAVs if they are offered to institutional investors. So there are (at least) two types of non-Treasury MMFs that are not required to have a floating NAV:
- Federal-government security MMFs (these are allowed to hold federally backed paper aside from Treasuries), e.g. SPAXX, whose holdings you can find here.
- Retail MMFs, regardless of what they hold.
Many brokerages have for years offered sweep accounts into FDIC-insured bank accounts. So there are, and will be, options for sweeps that will not break a buck.Fidelity (since the commentary spoke directly about this brokerage) has converted some of its prime MMFs (e.g. FDRXX) into government securities MMFs. Fidelity requires new accounts to use a government MMF or FDIC-insured sweep account as your core (transaction) account (old accounts are grandfathered), it continues to offer a full suite of "position" MMFs that you can own and trade explictly.
Here's Fidelity's page on the rules along with links to all its MMFs.
Further, as a courtesy, Fidelity will allow you to purchase securities in your brokerage account automatically using cash directly from your "position" MMFs. So to a certain extent any MMF can function as your core account. While there's this sweep out of the position account, there's no automatic sweep in. You have to explicitly move cash into the position MMFs.
The inference is that if you have an older MM (grandfathered account) you might get a higher yield than new accounts set up today?
Does Fidelity offer sweep accounts into FDIC insured MM's? Ticker?
- Retail MMFs (whether at a brokerage or elsewhere) will not be required to float.
- Fidelity has converted some of its funds (notably FDRXX) to government (not Treasury) MMFs so that they may be offered to institutions as well as retail customers without floating NAV.
- Aside from changing the charters of some MMFs to be government funds, Fidelity is making no changes to its MMFs.
- Fidelity will not force you to change whatever MMF (if any) you're currently using as your core account (though your fund's portfolio may change from corporate to government paper, e.g. if FDRXX is your core account).
What I didn't say above was anything about liquidity restrictions (liquidity fees and redemption gates) - for that see the thread I started on MMFs.For more info on Fidelity-specific funds, I refer you to the Fidelity page I linked to above.
From time to time, Fidelity has changed the MMFs that it allows to be used as core accounts. To my knowledge, it has never forced someone to change an existing core account. For example, for IRAs it used to allow FDRXX. If that's your core account, you can keep it, even though it doesn't offer this as a core account for new accounts.
The current core account choices if you are opening a new IRA account are FDIC-Insured Deposit Sweep Program (default), SPAXX, and FZFXX. But you're always free to open FDRXX as a position account, so you can still get the same pathetic yield as grandfathered accounts. If you're looking for yield (small though it may be) you need to look outside of funds that brokerages allow as core accounts. That's always been the case.
Here's some of Fidelity's info on its FDIC-Insured Deposit Sweep Program. No ticker since this is a sweep into FDIC insured bank accounts, not mutual funds or other investments investments (which as we all know, are not FDIC-insured and may lose value).
For completeness, since you asked about Vanguard:
https://investor.vanguard.com/mutual-funds/money-market-reform/investor-impact
(It still offers its full lineup of MMFs as position funds, but puts you into a government MMF for your core (settlement) fund.)
http://mutualfundobserver.com/discuss/discussion/26328/money-market-funds
The relevant section (emphasis added):
These are all "prime" funds, meaning that come October they will have to impose liquidity constraints. In times of stress they may impose a redemption fee, hold your money up to 10 business days, or some combination of those.
Fidelity's old prime fund, Cash Reserves (FDRXX) has been promoted (or downgraded, depending on your point of view) to a government fund. No liquidity constraints, but no yield either (0.03%).
1. Which Money Market would you recommend if I choose to have a fund a)with no liquidity constraints and b)that is not required to float for both Fidelity and Vanguard?
I assume FDRXX for Fidelity ? For example, does Vanguard Fed MM yielding 0.30% meet both of those requirements? It is not classified as prime in the link you provided.
2. My thoughts are that if these two requirements are NOT met, that during market melt downs it is probable (for anyone selling stocks) the proceeds from the stock sale in a retail brokerage account will be placed into a MMF whereby a dollar put into that MMF might only give you back .96c. IOW's stock market distress would equal MMF distress and possibly too late to convert without taking a loss in the MMF (the investor knows at the point of sale of the stock that his MMF is in trouble too). Double whammy.
3. What is difference between a core account and a sweep account?
4. Usually these type changes are profitable for some unknown party with strong lobbying support. How could there be no MMF available that meets the two requirements in my #1 above that would not yield closer to the current 3 month Treasury at .29% if that treasury is supposedly the safest investment known to mankind?
This assumes your answer to #1 provides no other option other than FDRXX at 0.03%.
5. I would assume all 401k accounts with an Income Fund MMF option will need to add those two requirements as an option for ultra conservative investors? Some 401k's held Reserve Fund in 2008-09 as their supposedly safe Income Fund option when they broke the buck. Reserve ended up eating the loss but for some time it was undecided which party was going to take the loss. Bad business.
https://personal.vanguard.com/pdf/VGMMR.pdf
1. Here's a three part answer:
a) Core funds (see also answer #3 below for explanation of core accounts):
- Vanguard gives no choice, there's only Vanguard Fed MMF (VMFXX)
- Fidelity. Pick the highest yielding one. They're all government paper, so I don't see a great virtue in getting a pure-treasury one (unless state taxes come into play).
- Grandfathered core funds: FDRXX was converted to a government fund[video link]; not available as a core fund for new accounts. 6x the yield of Fidelity's other options (0.06% vs. 0.01%).
- Non-grandfathered core funds: Pick SPAAX (non-Treasury) over FZFXX (Treasury). Both yield 0.01%, but there's still a microscopic difference; last divs were $0.000008592 vs. $0.000008494.
b) Non-core funds:- Vanguard: You've got a choice of two: Fed MMF (see above), and Treasury MMFVUSXX. As explained above, I'd go with non-Treasury (slightly higher yield, virtually no risk).
- Fidelity: Cash Reserves FDRXX; as above, 6x the yield of other options.
c) Link to outside banks:Internet banks yield around 1% with no redemption fees, and my experience with EFT transfers to Fidelity (at least with some banks) is that I have access in 24-48 hours, which may or may not be sufficient. Note that bank savings (and MM) accounts come with a legal requirement (Fed Regulation D) that they can hold your money for up to seven days. This rule has been around for decades.
2. Money in a brokerage account (from sale of securities or anything else) first goes to your core account (see #3), so in this sense, the possibility of the cash "automatically" going into a non-government fund or similar is nonexistent.
That aside, I think you're too concerned about what will happen with prime funds. Stock prices (crashing or otherwise) don't directly affect a company's ability to service its debt. If the company is sound, cash flow positive, it will be servicing its bonds regardless of what the company is worth.
What happened with Reserve Primary Fund (breaking a buck) was a confluence of several factors, plus mass panic (bank run):
- The fund was aggressively managed for yield and loaded up on Lehman Bros. paper, creating a single point of failure. Fidelity and especially Vanguard funds are conservatively managed.
- The Reserve (the fund company behind Reserve Primary) did not have assets to prop up its MMFs (since these were its whole business).
Many fund families have provided financial support to prevent their funds from breaking a buck. (NYTimes: "[In 2008 alone] big banks and fund management companies have pledged more than $10 billion to rescue affiliated money funds that were caught holding mortgage market securities that were deteriorating rapidly in value.")
Fidelity and Vanguard certainly have the resources and motivation to do so if it comes to that.
- Institutions started pulling money out of Reserve Primary as soon as they got a whiff of trouble, and others followed. This exacerbated the situation. The Treasury stepped in an guaranteed existing cash in MMFs (but not new cash) to stanch flows at other funds,; in 1929 FDR imposed a four day bank holiday.
Liquidity constraints (redemption fees and redemption gating) are now in place to serve the same purpose of preserving order and liquidity. Fidelity's video on fees and gates.
3. A core/settlement/transaction account is the place through which all your money flows. Think of it as your checking account at a brokerage. That core account may have a sweep feature, where spare cash is "swept" nightly into one or more other accounts. That could be simply for greater protection (e.g. Fidelity's sweeps into banks yield just 0.01%, even less than some of their core MMFs), or it could be for yield. The receiving account could be one or more banks, or a different MMF.
For example, Schwab has a sweep option to move cash into MMFs. It is eliminating this option as of June 1. Your cash (i.e. your core account) will now remain as a general liability of the brokerage (Schwab One Interest, SIPC coverage), or get swept into banks. Fidelity's equivalent to Schwab One Interest is called Fidelity Cash FCASH.
Fidelity's CMA brokerage account (here's the account agreement) will not sweep money into bank accounts if you reside outside the country. For these accounts, the cash remains a general liability of Fidelity. Similarly, some other types of accounts such as inherited IRAs cannot sweep into banks (but do provide core MMF options).
Lots of possibilities and combinations. The basic distinction remains - core is "checking", sweep is "automatic shadow account'.
I'd also mentioned a sweep-like feature that Fidelity provides. It will use your "position" (non-core) MMFs as sources of money for expenses (check writing, purchasing securities, etc.). Same idea as banks using savings accounts as a "checking plus" feature. So there's a sweep, but it's only one way. Here's Fidelity's video on how this works.
4) No conspiracy theories allowed
If anything, the fund companies have been fighting the new regulations (as they typically fight any regulation, not appreciating that sometimes eating your vegetables is good for you). There was strong lobbying against these changes.
5) Interesting question. I haven't looked into it.
https://www.depositaccounts.com/blog/
Personally, I prefer I-bonds to 1 year CDs. What I give up in short term liquidity (no redemptions in the first year) I gain in a better rate, inflation protection, state tax exemption, potential to defer taxes for years (until redeemed), and greater safety (theoretical only) than an FDIC-insured CD.
- I bonds have no redemption fee once held for 5 years, so if one is expecting to roll over CDs, holding the I bond is slightly easier and more liquid over the long term.
- The FDIC is not officially backed by the full faith and credit of the US government; savings bonds are treasury securities that have this backing.
One can purchase $15K of I bonds/year per SSN. Current yield is 1.64%.
My take: no passive or actively managed fund should become an "old friend." Such attachment may result in holding on to an underperforming fund for too long. Hope is not a strategy in politics or investing. Hanging on to poor performing funds with relatively high expenses is all too common among common investors, and that is why such investors routinely underperform passive funds over long periods.
As I see it, ARIVX continues to be the poster child for indexing, and any attractive risk metric it has is largely due to its crazy-high cash position, which is currently 82%. This fund cannot objectively be compared with true SCV equity funds due to its historically high cash position. Currently, this is a MMF which is dabbling in SCV stocks, and primarily provides the diversification of MMF but not SCV equities.
And when fund managers say that cash positions have increased due to decreased investment opportunities, they are in fact engaging in market timing and nothing more sophisticated. And as we all know, market timing has never worked over long periods. I hate to be so down on this fund, but I firmly believe such funds are not in the best interest of long-term investors, and I would never own such a fund or recommend such a fund to friends or family. And as much as I respect Dr. Snowball for all of his wonderful contributions at FA and MFO, I continue to be bewildered by his support for ARIVX.
As for MACSX, this is a rock-solid fund which remains true to its investment objective, and does not try to time the market with high cash positions.
Kevin
Ummm ... you might reflect on that conclusion in light of the positioning of my portfolio, which I publish annually. In the non-retirement portfolio, about 50% of my money is in equities and 50% in income-producing securities. Within the equity sleeve, 50% is international and within international more than 50% is a combination of small, emerging and frontier. Domestic is overweight small- to micro-cap which a distinct value pitch. I have no savings account (0.01% APR does nothing for me) but instead balance very conservative income-oriented investments (the aforementioned RPHYX) with quite aggressive ones.
It might be a bit misleading to point to one fund and generalize from it. I mean, really, why is substituting RPHYX and RPSIX for CDs and a savings account "risk averse"?
My self-description would be closer to this: "I will accept no risk unless I perceive a serious assymetry, in which the probable upside is substantially greater than the probable downside." One measure of the ability of a manager to achieve that goal is to look at a risk-return ratio over a meaningful period of time. My default is Sharpe over a full market cycle. The FMC orientation simply reflects the fact that I have better things to do than try to time my portfolio; I have neither the interest nor the discipline to pull that off. Some folks do, although the evidence suggests a far larger number simply thinks they do.
So, if you start with my premise - high risk-return ratio over meaningful periods - which small caps should I be looking at? When I screen for open, retail small cap funds - domestic, global, international - no-load or load-waived at Scottrade and sort by descending Sharpe, the top ones are:
1. Intrepid Endeavor, first by a lot. ARIVX is a near-clone in terms of risk-return but it doesn't have a full cycle record.
2. Westwood Mighty Mites
3. Homestead Small Cap
4. Pinnacle Value
5. Tributary Small Cap.
If you play with the risk-reward measure (Sortino, Martin, Ulcer Index) you get a slight shuffle of the top ten with the addition of Queens Road SCV and Royce Special.
I'm not enamored with the Royce or Gabelli organizations. Love Homestead's low minimum initial investment ($500), don't love the $1.2 billion size as much. Queens Road is very much worth a look. Tributary really would qualify as "in the shadows." And still the numbers point most consistently to ICMAX and the much-derided ARIVX.
I bet you're wondering why I buy and sell funds so rarely. Briefly, I go through this sort of pondering with every single one.
David
Thanks!
David