Not the time to meddle with money market funds
By Mark Fetting
Published: February 15 2011 15:01
During their 40-year history in the United States, money market funds have become a staple of the financial marketplace and a key component of the American economy. More than 750 US money market funds manage nearly $3,000bn on behalf of a wide range of investors – state and local governments, colleges, non-profit institutions, businesses, and, of course, other individual investors.America’s businesses and municipal governments depend on money market funds – and the critical short-term financing they provide – to fund daily operations and important projects, from meeting payroll, building inventory to smoothing out revenue streams.
But for millions of individual investors, the value of money market funds is much simpler. For them, these funds mean stability, convenience, easy access to cash, and yields that historically have matched or exceeded those of competing cash products. Whether they’re saving for a home purchase, planning for college costs, moving funds among other investments, or enjoying retirement, families have benefited from the convenient cash-management services that money market funds offer – cheque writing, sweeping up spare cash from brokerage accounts, ATM access, and easy transfer to other fund accounts.
Think back 40 years to when the first money market funds appeared. Consumers had few options for investing their cash, and the returns on those options were low (passbook savings) to zero (cash under a mattress). At a time of high inflation, saving money meant losing money, because interest rates failed to cover the rapidly escalating cost of living. Money market funds gave individual investors access to the money market rates that had been available only to major institutions. And that access has paid off. While today’s yields are at record lows, the market-based returns on money market funds have paid investors $225bn more than they would have received from bank accounts over the last 25 years.
Money market funds’ stability and convenience are grounded in a core principle – dollar-in, dollar-out. Unlike other mutual funds, money market funds seek to maintain a stable per-share price, usually $1. These funds can maintain a stable value because they invest in high-quality, liquid, short-term securities and manage portfolios to minimise swings in market value and credit risks. For investors, the result is a predictable, stable value in a fund that can be used for daily transactions without tax and record-keeping headaches.
Little wonder that some $330,000bn has flowed in and out of money market funds since 1982, according to Investment Company Institute (ICI) calculations.
Despite this record, some policymakers are floating the idea that funds should be forced to abandon the dollar-in, dollar-out principle. They argue that the stable $1 value creates a misperception about money market funds that should be addressed. Right now, the Securities and Exchange Commission is considering a range of reforms for money market funds, including ideas that would end the funds’ stable $1 price.
But money market investors have come out to tell the SEC why maintaining the stable net asset value is critical to the central role money market funds play, for their finances and for the economy. Groups representing users of money market funds – from the National Association of Corporate Treasurers to the Consumer Federation of America – have registered their opposition to floating these funds’ price. College business officers and state and local governments have warned that they’ll be forced to shift to other, less-secure cash products if money market funds are barred from offering a stable value. And businesses and governments have sounded the alarm: forcing money market funds to float will drive away so many investors that the current efficient channel they depend on for critical financing could be cut off.
We in the mutual fund industry believe that we can make money market funds even stronger while maintaining the features that are important to investors. We led the way with a round of proposals for tighter credit, maturity, and liquidity standards for these funds – proposals that were echoed in new rules adopted last year by the SEC. Another safeguard – ICI’s proposal for a private emergency facility to provide liquidity to money market funds when markets are frozen – enjoys widespread industry support. But we agree with our investors that forcing funds off the dollar-in, dollar-out principle could destroy money market funds while actually increasing risk to the financial system as a whole.
For 40 years, investors of all stripes and sizes have relied upon the stability, convenience, and market-based returns of money market funds. Given the economic uncertainties that many American families already face, now is not the time to undermine a product so central to their financial fortunes.
Mark Fetting is chief executive officer of Legg Mason
Copyright The Financial Times Limited 2011.
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