The Wall Street Journal writes on money market mutual funds in "How This Year's Hottest Investment Could End Up Costing You." They say, "Cash has rarely been this hot on Wall Street. Financial advisers warn holding too much can burn a hole in your portfolio. With markets rocky and cash earning 5% or more, investors have boosted their holdings of money-market funds to a near-record $5.6 trillion, according to the Investment Company Institute. Both individuals and institutional investors are piling in -- asset managers now have roughly one-fifth of their portfolios in money-market funds, State Street data show."
The piece explains, "Cash was trash for years on Wall Street, where low interest rates left investors buying every dip, saying there was no alternative to stocks. The prospect of a prolonged period of higher rates has upended that thinking, buffeting both stocks and bonds while increasing the returns offered by some of the safest, shortest-term investments such as money markets. Yet many advisers caution that fees, taxes and inflation all undermine those returns. And one of the biggest costs is opportunity: By pouring money into cash, investors miss out on potential gains from holding a broad portfolio of stocks, bonds and other riskier investments."
They quote a Wylie Tollette, chief investment officer for Franklin Templeton Investment Solutions, "Money-market funds are a rational place to be for the next six months. But over the long term, taking risks pays you more. Keeping any more than a small allocation to cash in your portfolio, for any longer than the short-term, will ultimately cost you thousands or millions of dollars."
The Journal piece states, "Though often treated as akin to a bank account, the funds differ from normal savings accounts and other cash-like investments, such as CDs. They typically lend cash to banks overnight (backed by Treasurys), park it at the Fed or invest in Treasury bills maturing in a few months. Still, they are considered equivalent to cash because investors generally expect to get their money back whenever they ask. To that end, the funds try to maintain a net asset value of $1 a share."
It tells us, "Yields fluctuate with benchmark rates set by the Federal Reserve. Right now, the $265 billion Vanguard Federal Money Market Fund yields 5.3%, earnings that are distributed via dividends. The popular Fidelity Government Money Market Fund yields 4.99%, though requires no minimum amount to invest in the fund. Vanguard asks for at least $3,000."
The Journal warns, "Though considered to be among the safest of all investments, deposits in the funds aren't insured and they have occasionally gone haywire in times of stress. Shares of one fund fell below $1 a piece when Lehman Brothers failed in 2008, prompting a federal backstop. Regulators also stepped in to backstop the funds during the market turmoil of the pandemic's early days. That episode prompted a rewriting of the rules guiding money-market funds for the third time in 15 years."
They add, "Those considerations haven't driven away investors. The Fed's most aggressive interest-rate campaign in decades has lifted rates near the returns many investors would expect from their portfolio on an average year. With the central bank expected to hold rates near this level for some time, money-market funds are now considered a viable investment rather than just a place to stuff cash. The influx into money markets also accelerated this year after the failure of Silicon Valley Bank left depositors worried about how protected their money was in banks."
Finally, the article quotes Dreyfus CIO John Tobin, "The fed-funds rate is likely to be between 3% to 4% for the long run, stock valuations are lofty and bond volatility doesn't look like it's abating anytime soon.... If we are delivering 4% returns in a world of two-and-change percent inflation, I think cash becomes a real asset class and we hold on to a lot of the assets under management we've accumulated."
In other news Barron's also writes about "cash" in "Fidelity Takes a Page Out of Schwab's Playbook on Low-Paying Sweep Accounts. They state, "One of Fidelity Investments' advantages over rival Charles Schwab could be eroded soon for an important base of clients. Fidelity plans to end the ability of independent financial advisors to use high-yielding Fidelity money-market funds as the core sweep account for new nonretirement accounts that they manage."
The article explains, "Starting later this year, Fidelity's own core cash option known as FCash will be the only sweep account option for new nonretirement brokerage accounts opened for custody clients. Existing nonretirement accounts in the custody channel are grandfathered in and can keep the money-market fund option. The change also won't affect Fidelity's new or existing retail brokerage clients. The FCash rate is now 2.26%, higher than the Charles Schwab Corp. sweep rate of 0.45% but half the 5% rate on Fidelity money market funds like Fidelity Government Money Market fund (SPAXX) that now can be used as a sweep account."
They quote a statement from Fidelity, "We offer a competitive rate through FCash as the default option that many of our clients use today. Fidelity continues to offer an overall best in class experience for custody clients through the combination of our industry leading platform, dedicated client service teams, and comprehensive suite of investment products."
Barron's piece comments, "The new Fidelity setup will more closely resemble the situation at Schwab, where clients receive proceeds from trades or income from investments directly into the low-yielding bank sweep account and then need to make trades to move assets to other investments. This forces Schwab clients to shift money into money-market funds to earn a higher yield and then back to the sweep account to trade, a cumbersome process."
