Details that emerged Monday in the government's plan to guarantee money-market mutual funds are expected to further ease fears about a type...
BOSTON — Details that emerged Monday in the government’s plan to guarantee money-market mutual funds are expected to further ease fears about a type of investment that had — until just a couple weeks ago — been considered practically as safe as cash.
But risks aren’t entirely out of the picture. And the guarantee program means there are new questions to consider before parking any more cash in money funds, or pulling out.
Still, details about fees that fund companies will pay under the plan announced Sept. 19 are expected to further strengthen the guarantee program from the consumer standpoint.
The key? The government announced the fees that firms must pay if they wish to secure guarantees to protect investors in case a fund’s underlying assets fall below $1 for each investor dollar put in — called “breaking the buck.”
Most Read Business Stories
- 55,000 in Washington state may have to pay back thousands in jobless benefits
- 1 house, 45 offers: Homebuyers in Western Washington hard-pressed as supply remains scarce
- Boeing CEO gave up millions in pay; here's what he and other top execs earned
- Jeff Bezos gets fraction of legal fees from girlfriend’s brother
- Highlights of the $1.9T COVID bill nearing final passage
The Treasury Department said Monday that funds wishing to participate must pay an upfront fee of one-hundredth of a percentage point of the fund’s total assets — an amount known in industry parlance as one “basis point.” That’s provided the fund maintained an asset value of at least 99 and three-quarters cents for each investor dollar put in, as of the close of business Sept. 19.
Firms, which manage a total $3.4 trillion in money funds assets, must apply by Oct. 8 to participate.
Amid market turmoil, the fees appear small enough that most if not all fund firms will likely decide the expense is a modest price to pay for the ability to pitch customers with the pledge of government backing, said Peter Crane, president of Crane Data, which publishes the money-market fund newsletter, Money Fund Intelligence.
“This question of whether a fund has a guarantee just went to the top of the list,” said Crane. “It used to be, ‘Does a fund have exposure to Lehman Brothers, or A.I.G, or Washington Mutual?”‘
While the Treasury Department initially envisioned the guarantee program would last a year, the agency on Monday only committed to a three-month program, at least at the current fee levels.
Agency spokeswoman Jennifer Zuccarelli said the government will consider market conditions before deciding whether to end or renew the program beyond the initial three months.
Paul Schott Stevens, president and chief executive of the Investment Company Institute, said, “It’s everyone’s hope the market will return to normal, and there will be no need to extend this program.”
Money-market mutual funds invest in short-term corporate and government debt that typically carries lower risks than the stocks and bonds that make up the bulk of other mutual funds’ holdings. Money funds are popular places to park cash because it’s still accessible when needed, and typically earns higher interest than money-market accounts and savings deposits at banks, which are FDIC-insured.
Treasury’s move to offer guarantees via its $50 billion Exchange Stabilization Fund now gives money funds temporary guarantees similar to FDIC insurance. Tax-exempt funds that invest in government debt are eligible to participate in the program along with taxable funds.
Besides tackling the usual questions about a fund’s potential returns and investment style, investors have new considerations:
• FUND PARTICIPATION: Investors can’t sign up to participate individually. Because not every fund will choose to pay fees to secure a guarantee, check with a fund’s manager to see if the fund participates. A guarantee could lead a fund firm to pass on the cost to investors in the form of higher fees, but it’s likely a worthy expense.
• NEW MONEY VS. OLD: The government’s temporary guarantees only apply to shares held in funds at the close of business Sept. 19. It’s an important date because the coverage doesn’t extend to the Reserve Primary Fund, which announced it had broken the buck on Sept. 16, triggering fears that led the government to intervene. The cutoff also means money invested since Sept. 19 and future share purchases aren’t guaranteed. However, because the bulk of assets in funds predates the cutoff, the government backing is expected to prevent investors from quickly pulling out cash, forcing managers to quickly sell assets at a loss and sinking a fund below a dollar-for-dollar asset level. The guarantees “in effect put a floor under the asset base of a fund, and stops the run,” Crane said.
• FUND FIRM REPUTATION: The reputation of the firm managing a fund has always been a key consideration for investors, but that question becomes even more important in the current market. Firms that are small and rely on their fund management fees for the bulk of their overall revenue are more likely than diversified firms to find themselves unable to pour in cash to prop up a fund should trouble hit.
• DISCLOSURE: Finally, fund investors can assess risk and the quality of a fund’s underlying assets by reviewing investment criteria and asking managers about the types of investments the fund makes. But because assets in money-market funds are short-term and trade hands frequently, information available to shareholders is often out of date.
Instead, focus on funds likely to yield a decent return compared with rivals in the same investment category, and be cautious about funds with the highest yields. Such returns could indicate a fund is placing riskier bets than appropriate for a type of investment typically valued because of its safety.
— — — —