One of the largest and first money market mutual funds ever has broken the buck yesterday. The Primary Fund, run by The Reserve, with $65 Billion in assets, saw it’s per-share price drop from the standard $1 to 97 cents, due to it’s holdings of Lehman Bros. debt. They are also restricting withdrawals for up to 7 days. According to the NY Times, this is only the second time in history this has ever happened.
In the aptly titled Pride Goeth Before a Fall, NY Times blogger Floyd Norris points out how The Reserve actually made fun of other money market funds for being careless. This is from a letter from The Reserve to shareholders from earlier this year:
When we created the world’s first money fund in 1970, we clearly stipulated the tenets that define a money fund: sanctity of principal, immediate liquidity, a reasonable rate of return — all while living under the overarching rubric of boring investors into a sound sleep. Unfortunately, a number of firms that sponsor money funds, and a number of investors that selected them, have lost sight of the purpose of a money fund and the simple rules that guide them in their foolhardy quest for a few extra basis points. [...] Thank you for your confidence in our Reserve. We never forget you have entrusted us with your reserve(s).
Yeah, you’re welcome. Can I have my money back now? If you trade with TD Ameritrade and have a money market sweep set up with them, I believe they use The Reserve.
Where Should I Put My Cash?
Consider sticking with an FDIC-insured bank account. Money market funds are not insured. If you want that, you should stick with an FDIC-insured bank and mind the FDIC insurance limits carefully.
Besides, it’s more profitable right now. You can get a savings account today with no fees or minimums that earns up to 3.75% APY. The fund that failed above was only yielding 1.19%, and I don’t know of any money market fund that yields higher than 3%. (Even if it does, be suspicious!). Why settle for less interest and more risk?
Invest in a Treasury money market fund. But many of us have brokerage accounts with an automatic sweep or “core” option. We have to pick some sort of money market fund. In this case, to get the most safety you should choose the “Treasury” money market option, because these only invest in Treasury securities which are backed by the U.S. Government. You often end up with a lower yield, but some of it is recovered if you live in a state with income taxes. Treasury interest is exempt from state income taxes.
For example, with Zecco Trading their taxable money market (CSAXX) is yielding 1.81% while their Treasury MM (ITRXX) is only at 1.16%.
Invest in big fund companies with lots of assets. You might be surprised to know that many other money market funds would have broken the buck this year, except that the fund companies stepped in with their own money to prop things up. The Wall Street Journal reports that “20 money-fund advisers have moved to support their funds within the past 13 months”. One recent example is the influx of money by Wachovia Corp. into the money market funds from Evergreen Investments, which they own.
Why do they do this? Not out of the goodness of their hearts. It is to protect the trust of their brand and to prevent a huge onslaught of withdrawals. I would certainly never invest in a company that I can’t even trust with my cash. Therefore, if you are going to invest in a money market fund, buy one in a company which would spend every last penny to protect it’s name brand. From Marketwatch:
Phillips speculated that because The Reserve is solely a money market shop, it didn’t have the resources to bail out Primary Fund in the way a diversified mutual-fund giant such as Fidelity Investments, Vanguard Group or Evergreen Investments, which is owned by Wachovia Corp , would be able.
FYI for those who invest in Vanguard money market funds:
Vanguard Group’s money-market funds have no exposure to commercial paper from Lehman, Merrill Lynch & Co., Morgan Stanley, Goldman Sachs Group Inc., Washington Mutual or AIG, according to a spokesman for the Valley Forge, Pa., asset manager.
As for Fidelity:
Fidelity’s taxable, general purpose money market funds have no exposure to any Lehman Brothers entity, Crowley said. The taxable money market funds do have “modest” exposure to two issuers that are subsidiaries of troubled American International Group.
Although most of my cash is in FDIC banks right now for the higher yield, I would personally still sleep well with money kept in a money market fund from Fidelity or Vanguard.