Content provided by Marc Pfeffer, CLS Senior Portfolio Manager
As someone who has managed money market funds over four different decades, I probably have a much more biased opinion as to the benefits they provide to all investors. And, I think some of the stories in the press of late have been a bit sensational in discussing the impact of money market reform. In short, I think money markets belong in most investors’ portfolios, and the recent reforms have only made the money market industry stronger.
First and foremost, despite some of the headlines of late that are shaping some investor perceptions of what money markets are and what they do, it should be stressed that they remain regulated by the U.S. Securities and Exchange Commission (SEC), just as they always have been. The SEC ensures that risks are limited and investors’ interests are protected. Yes, there have been some scares: Orange County in the 90s, Y2K, and then of course Lehman Brothers and Bear Stearns in 2008 which led to the demise of a well-known money market Reserve Fund.
Why the big fuss over money markets now? Heck, with short-term interest rates this low, it’s absolutely astonishing to me there are still over $2.5 trillion in assets in these funds. What that does mean, however — and it’s very loud and clear – is that there is a NEED for this product, even if they have only been earning nearly 0% for the past five years.
So, why has there been so much pushback for money market reform? It wasn’t just the small dollar price movements that most investors were concerned with: it was the fact they could NOT get to any of their money at any price. Liquidity is key for the functioning of this often misunderstood sector of the fixed income markets. Without it, NOT A SINGLE asset class sector can function properly.
Most investors understand losses can occur on investments. However, no one expects it on investments they put into money market funds. Additionally, they most certainly expect to have access to their money on demand that day. If not, they might as well put it under a mattress.
I applaud the changes made for institutional prime funds as they can be construed as a short-term bond fund. They gather “hot money” from time-to-time, and there is an amount of credit risk in these funds that merits the proposed changes. Treasury and government funds have a perceived level of safety and credit to them and fortunately, and rightly so in my opinion, the recent money market reform left retail and government money markets funds alone.
Bottom line, I believe these reforms are good for the long-term health of the money market industry, but more importantly they are good for investors. In my opinion, a stable, liquid money market fund belongs in most investors’ portfolios.
Investing involves risk. This material does not constitute any representation as to the suitability or appropriateness of any security, financial product or instrument. There is no guarantee that investment in any program or strategy discussed herein will be profitable or will not incur loss. Investors should seek financial advice regarding the appropriateness of investing in any security or investment strategy discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that security values may fluctuate and that each security’s price or value may rise or fall. Accordingly, investors may receive back less than originally invested. Past performance is not a guide to future performance. Individual client accounts may vary. Investing in any security involves certain non-diversifiable risks including, but not limited to, market risk, interest-rate risk, inflation risk, and event risk. These risks are in addition to any specific, or diversifiable, risks associated with particular investment styles or strategies. 1631-CLS8/18/2014