By John Wasik
CHICAGO Jan 22 The $2.7 trillion money market
funds market is in line for new regulations as the Securities
and Exchange Commission ponders new rule changes that would give
investors a better idea of how much risk they're taking.
But no matter what happens, the funds will still be
relatively safe baskets for short-term cash, though afflicted by
paltry yields for the near term.
The biggest change that might come about is increased
transparency. The SEC tabled a proposal late last year on a set
of rules and now the matter is being reconsidered, although it
may not be acted upon until a new, permanent chairman is
appointed and one of the empty commissioner's seats is filled.
Another proposal before the Financial Stability Oversight
Council may require that managers set aside capital against
losses or price funds at the actual net asset value.
Already, in advance of possible regulations, some of the
biggest fund groups are taking their own steps in that
direction. On Jan. 11, a group of them, led by BlackRock Inc
, Fidelity, Federated Investors Inc, Goldman
Sachs Group Inc and Charles Schwab Corp, said
they would agree to post "shadow" daily fund asset values. The
companies are hoping to head off the rules being considered by
the SEC because they would be more costly to implement.
The concern of regulators and investors is that a money
fund's net asset value - perceived to be locked at $1 per share
-- actually may vary a few hundredths of a percent every day.
The fear is that investors will perceive money funds as unstable
if the NAV doesn't always equal the cash value of $1.
Only one fund has "broke the buck" in recent memory -- when
the Reserve fund dipped below the $1 NAV in September, 2008,
after the failure of Lehman Brothers. When that happened, it
triggered a run on money funds, which was only halted by
While most variations will mean little or nothing to most
investors, no one in the industry wants to fuel that fear again.
In fact, many fund companies seem like they'd rather just
run away from money market funds altogether. As a result of a
combination of tougher rules, which the SEC imposed in 2010, and
a low-yield environment, 14 fund companies have either shuttered
or merged them into other funds. The overall number of funds
sank from 1,569 in December 2011 to 1,470 as of Dec. 31, the
lowest total since December 2000, according to Mike Krasner,
managing editor for iMoneyNet, a financial information service.
LOOKING FOR YIELD
If you are also concerned about low fund yields -- and who
isn't? -- there are some alternatives, although few will impress
At around a 0.02 percent average seven-day yield, taxable
money funds, which pool short-term corporate and government debt
securities, are still relatively safe buckets to keep cash in,
yet they're also a little leaky. They are losers on net return
when you subtract taxes and inflation.
If you wanted to lock your money into a one-year, federally
insured certificate of deposit, you could find a CD around 1
percent in yield, compounded daily, according to BankRate.com.
The national average for that maturity of certificate is 0.27
percent. You could nearly double the yield if you wanted to lock
up your money for five years.
Outside of CDs, you'd have to consider taking some
credit-market risk and enter the uninsured world of short-term
The Vanguard Short-Term Investment Grade fund
offers slightly more than a 2 percent yield and has more than
half of its holdings in corporate bonds, most of which mature in
under three years. The USAA Short-term bond fund
offers a somewhat higher yield, but takes roughly the same
approach, but with about one-third of its portfolio in corporate
Unlike money funds or CDs, you need to be concerned with a
measure of risk called duration in short-term bond funds. This
is a measure of how much the fund would lose value if interest
rates rise 1 percentage point. The Vanguard fund's average
effective duration is 2.3 years; it's 1.26 years for the USAA
How much risk you take depends upon how you plan to use the
cash in question. Short-term bond funds may be suitable for
funds you won't need for a few years, while CDs or money funds
are fine for cash you'll need within the year. It all depends on
how much risk you want to take over time.