8/27/12 1:48 PM – Should You Worry About Your Money Market Fund?

Yields are so low right now that most money market funds are paying interest around 0.01% to very slightly higher, probably not enough interest over the course of a year to buy a decent meal.

With yields on very short term debt are getting very close to the interest the funds earn. It may be that some fund may break the buck if yields go lower.

The question then, becomes one of safety. Secondly, we should consider the push to “reform” money market funds.

Mary Shapiro, an activist appointed by Pres. Obama as head of the Securities and Exchange Commission has been pushing for four years to get money market funds to be quoted with a floating share price rather than a constant $1.00 per share. One of her motives has been to prevent a run on money funds if their share price were to drop below $1.00. She had a vote scheduled for this week on this proposal but cancelled it last week when it became apparent 3 of the 5 members of the SEC committee would vote against it.

In the roughly forty year history of money market funds, a quoted share price below $1 has been extremely rare. That doesn’t mean their true price is not something like say, $0.9956 at times. Unless the underlying price is significantly different, maybe a couple or three cents below $1.00 funds are allowed to keep the price at $1.00. And, in the very few instances where the quoted price did drop below $1.00, called “breaking the buck” sponsors of these funds have ponied up the money to make up the shortfall.

I can only think of three instances like this since I joined the industry in 1984. The SEC insists there were 300 such instances but no one I know can recall these and my guess is that they were very small funds.

I don’t know why Ms. Shapiro cannot see that changing to having all money market funds quoted at something other than a constant $1.00 would not in itself prompt a panicked run on these funds. She far overestimates the sophistication of many investors, especially small ones. In other words, installing her proposed regulation would immediately trigger the very effect it is intended to avoid!

So what should a prudent investor do?

I have switched all client money funds, including my own, of course, to the Schwab Bank Fund, the money market account of Schwab Bank. This is insured by FDIC up to $250,000. Check FDIC regulations for finer details.

With yields at nearly zero, why not be in the safest fund you can find? Charles Schwab as an institution is in my opinion, by far the strongest of all the major brokerage firms. Its bank should be run along the same financially conservative lines.

Since Ms. Shapiro’s proposal does not extend to banks, this also allows us to be exempt from a floating share price if Ms. Shapiro again brings this to a vote by her committee at some point and turns out to be successful.

I am not trying to strike fear in anyone’s heart. I don’t think that is warranted. I am just saying, “let’s have our cash be the safest it can be when the differences in interest are negligible.”

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