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Not entirely clear to me if the redemption fee provision is intended to be only an "alternative" to the floating NAV plan should that idea be nixed. But believe that's what Gretchen Morgenson's trying to say - and suspect her editors had a less than helping hand here. At any rate, it appears the proposal(s) would apply only to institutional funds - initially anyway.
Don't care if they float or not. What I would like is a return somewhat higher than today's .01%. I understand the SEC's intent is to prevent runs on money funds which could do great damage to investors and the economy. And, perhaps they feel this period of effectively "0" rates of return is the best time to broach the issue. Thanks for the link Skeet.
In my portfolio, I have a cash area that consist of both a demand cash sleeve and an investment cash sleeve. In the investment sleeve I use to hold cds ... but, with the low interest rates now being paid on cds I figured ... Why lock up the money with a time deposit? With this, it is now void of any assets and all my cash, within my portfolio, is held in the demand sleeve. I too, look for interst rates to rise and hope they normalize at a measured pace mind you. When this happens, I'll restore my investment cash sleeve.
I did have some money parked in some bond funds over and above what I normally would keep in bonds. With the potential loss of principal in fixed income within a rising interest rate environemnt ... Well, I have been trimming my fixed income sleeve back and have now overloaded my hybrid income sleeve. The hybrid income sleeve consist of mostly conservative allocation funds that can hold a wide range of assets and those that pay out a good dividend. Anway, this is where I am heading with some of my idle cash at the moment ... hybrid income. We shall see if this is prudent.
Currently, my hybrid income sleeve makes up about 75% of my income area and consist of CAPAX, FKINX, ISFAX, PASAX, PGBAX, NWQAX, and AZNAX and provides a yield of about 5.0% on valuation. My income sleeve consist of LALDX, THIFX, ITAAX, LBNDX and NEFZX and makes up about 25% of my income area and provides a yield of 3.25% on valuation. Back in the day my CD Ladder provided a yield close to 5%. So one can see the amount of risk one must now take to earn yield.
I have not given much thought to parking some of my cash in a money market fund. Heck, it has been about four years since this became a pending issue ... and, to date, what has been done other than talk? Not much.
The three choices are: floating NAV for institutional funds (nothing for other funds), tools to slow redemptions for all, or a mix - floating NAV for institutional funds and redemption tools for everyone else.
A problem I see with the tools is that their use is semi-voluntary. If the fund's board of directors (that's the group of people who rarely do much and let the fund management company dictate policy and expenses) decide that it is in the best interest of the fund not to impose a redemption fee, well, there you go. And what fund is going to think it is in its best interest to impose a redemption fee when other funds aren't?
Another problem is that since funds will have to disclose asset levels on a daily basis, people will see when the fund is approaching the magical 15% (weekly liquid asset threshold), and start a run at 15.01%, before the fund imposes its redemption fee (or shuts down redemptions altogether).
Altogether, this looks like a feel good proposal. Maybe that's all that's needed - runs are mostly psychological. If people think that a problem will be avoided, they won't act to aggravate the situation (even if it is already dire) by starting a run on the fund. On the other hand, if people act rationally in their own self-interest, the risk of a redemption fee will motivate them to stampede for the doors. This is the Prisoner's Dilemma. Everybody wins if they withdraw only what they need (see, e.g. It's a Wonderful Life - that's fiction, not real life, and that's the problem)
Reply to @msf: I thought the (second part of) the SEC press release made for interesting reading. As I think you hint at, there's enough holes in the proposal(s) to drive a truck through. Most interesting that SEC feels government securities funds represent substantially greater safety (and are exempted from the more stringent measures). Prior to 2008, the most notable problem among money funds seems to have been not with traditional funds, but with the Community Bankers U.S. Government Money Market Fund (Institutional) which liquidated at 96 cents on the Dollar in 1994. While credit quality may have been high, they most likely ran into issues with duration and perhaps rate risk. Than again - A percept is a product - and the SEC is banking on a popular perception in exempting these funds.
*(Another fund liquidated at 94 cents in 1978. While marketed as a traditional money market fund, the managers had extended the average maturity out to 2-years, so the classification as money market fund is suspect.)
Reply to @hank: I've started reading through the 698 page proposal. Interesting, and moderately light reading (at least it's not like reading regulations - much more direct, narrative style).
A couple of interesting items in the first 50 pages (as far as I've gotten):
- the number of times that fund families had to step in (or request "no action" assurance from the SEC) was far from zero. See Table 1 on pp. 23-24 in the proposal. Four funds in 1989, 21 in 1990, 10 in 1991, 83 in 1994 (half due to Orange County's bankruptcy), 3 in 1997, 25 in 1999, 6 in 2001, 51 in 2007, 109 in 2008 (no surprise there), and 3 in each of 2010 and 2011.
This table reflects only the number of funds reacting to a few specific events (such as Orange County's bankruptcy); it's not the total for each year. That's clear because the BusinessWeek article you cited says there were 30 funds needing help in 1997, but the SEC table shows only 3 (due to Mercury Finance defaulting). I take all these figures as showing how shaky the whole industry was and is.
- when the NAV of a fund drops below $1 (e.g. to $0.9975, which is still reported as $1), there's very little the fund itself can do to bring the NAV back up. For example, it cannot use received interest to rebuild capital, since the fund must distribute substantially all its earnings. My inference is that any permanent loss of value (e.g. due to a default) most likely has to be made up by the fund family. The problem Reserve Fund had was that the family didn't have the resources to prop up its Primary Fund (and also that 1.2% of the fund was invested in Lehman Bros).
Reply to @msf: Your analysis (last paragraph) is on-target. The shakiness you reference finally caught up with us in '08. The first publicly acknowledged company bailout of a sick MM fund I recall was Strong's in '97. The Merc Capital mess made front pages and there was no way Strong could keep their involvement quiet. However, over the years, several other investment companies similarly afflicted apparently succeeded in keeping their interventions largely out of the public eye.
Comments
Don't care if they float or not. What I would like is a return somewhat higher than today's .01%. I understand the SEC's intent is to prevent runs on money funds which could do great damage to investors and the economy. And, perhaps they feel this period of effectively "0" rates of return is the best time to broach the issue. Thanks for the link Skeet.
In my portfolio, I have a cash area that consist of both a demand cash sleeve and an investment cash sleeve. In the investment sleeve I use to hold cds ... but, with the low interest rates now being paid on cds I figured ... Why lock up the money with a time deposit? With this, it is now void of any assets and all my cash, within my portfolio, is held in the demand sleeve. I too, look for interst rates to rise and hope they normalize at a measured pace mind you. When this happens, I'll restore my investment cash sleeve.
I did have some money parked in some bond funds over and above what I normally would keep in bonds. With the potential loss of principal in fixed income within a rising interest rate environemnt ... Well, I have been trimming my fixed income sleeve back and have now overloaded my hybrid income sleeve. The hybrid income sleeve consist of mostly conservative allocation funds that can hold a wide range of assets and those that pay out a good dividend. Anway, this is where I am heading with some of my idle cash at the moment ... hybrid income. We shall see if this is prudent.
Currently, my hybrid income sleeve makes up about 75% of my income area and consist of CAPAX, FKINX, ISFAX, PASAX, PGBAX, NWQAX, and AZNAX and provides a yield of about 5.0% on valuation. My income sleeve consist of LALDX, THIFX, ITAAX, LBNDX and NEFZX and makes up about 25% of my income area and provides a yield of 3.25% on valuation. Back in the day my CD Ladder provided a yield close to 5%. So one can see the amount of risk one must now take to earn yield.
I have not given much thought to parking some of my cash in a money market fund. Heck, it has been about four years since this became a pending issue ... and, to date, what has been done other than talk? Not much.
Take care and thanks for stopping by.
Skeeter
Here's the actual proposal (File No. S7-03-13, 698 pages!), comments received by the SEC to date, and how to submit your own comments.
The three choices are: floating NAV for institutional funds (nothing for other funds), tools to slow redemptions for all, or a mix - floating NAV for institutional funds and redemption tools for everyone else.
A problem I see with the tools is that their use is semi-voluntary. If the fund's board of directors (that's the group of people who rarely do much and let the fund management company dictate policy and expenses) decide that it is in the best interest of the fund not to impose a redemption fee, well, there you go. And what fund is going to think it is in its best interest to impose a redemption fee when other funds aren't?
Another problem is that since funds will have to disclose asset levels on a daily basis, people will see when the fund is approaching the magical 15% (weekly liquid asset threshold), and start a run at 15.01%, before the fund imposes its redemption fee (or shuts down redemptions altogether).
Altogether, this looks like a feel good proposal. Maybe that's all that's needed - runs are mostly psychological. If people think that a problem will be avoided, they won't act to aggravate the situation (even if it is already dire) by starting a run on the fund. On the other hand, if people act rationally in their own self-interest, the risk of a redemption fee will motivate them to stampede for the doors. This is the Prisoner's Dilemma. Everybody wins if they withdraw only what they need (see, e.g. It's a Wonderful Life - that's fiction, not real life, and that's the problem
2007 article referencing the Community Bankers fund cited above.
http://www.businessweek.com/stories/2007-11-25/money-market-funds-a-safety-check
*(Another fund liquidated at 94 cents in 1978. While marketed as a traditional money market fund, the managers had extended the average maturity out to 2-years, so the classification as money market fund is suspect.)
I've started reading through the 698 page proposal. Interesting, and moderately light reading (at least it's not like reading regulations - much more direct, narrative style).
A couple of interesting items in the first 50 pages (as far as I've gotten):
- the number of times that fund families had to step in (or request "no action" assurance from the SEC) was far from zero. See Table 1 on pp. 23-24 in the proposal. Four funds in 1989, 21 in 1990, 10 in 1991, 83 in 1994 (half due to Orange County's bankruptcy), 3 in 1997, 25 in 1999, 6 in 2001, 51 in 2007, 109 in 2008 (no surprise there), and 3 in each of 2010 and 2011.
This table reflects only the number of funds reacting to a few specific events (such as Orange County's bankruptcy); it's not the total for each year. That's clear because the BusinessWeek article you cited says there were 30 funds needing help in 1997, but the SEC table shows only 3 (due to Mercury Finance defaulting). I take all these figures as showing how shaky the whole industry was and is.
- when the NAV of a fund drops below $1 (e.g. to $0.9975, which is still reported as $1), there's very little the fund itself can do to bring the NAV back up. For example, it cannot use received interest to rebuild capital, since the fund must distribute substantially all its earnings. My inference is that any permanent loss of value (e.g. due to a default) most likely has to be made up by the fund family. The problem Reserve Fund had was that the family didn't have the resources to prop up its Primary Fund (and also that 1.2% of the fund was invested in Lehman Bros).
'97 article on Strong's intervention: http://articles.chicagotribune.com/1997-02-26/business/9702260088_1_money-funds-strong-capital-management-fund-s-portfolio