Common Sense Blog Says Yield Sells
The blog A Wealth of Common Sense writes that "Yield Sells. The update from Ritholtz Wealth Management LLC's Ben Carlson tells us, "Boring old money market funds are the hottest thing in fund flows this year. Just look at the massive amount of money that has poured into these things.... There's a good reason these funds saw stagnating asset growth in the 2010s -- there was no yield. Now there is. Bloomberg's Eric Balchunas and Jeff Seyffart show vhow banks and fund companies across the board are vacuuming up money now that money market funds are yielding north of 5% <b:>`_." It continues, "Investors have a history of chasing the best-performing funds but they also have a history of chasing yield in money market funds.... Money market funds are still a relatively new development in the fund world. Back in the Great Depression the government imposed a limit on the amount of interest a bank could pay to depositors because so many banks failed in the 1930s. The ceiling was a little more than 5% which didn't matter for many decades because rates never got that high. Then the 1970s happened. Inflation caused higher interest rates and banking customers couldn't earn the much higher yields now available in short-term credit instruments. A guy by the name of Bruce Bent recognized what was going on here and didn't like it. So in the early-1970s Bent created the first money market fund, which wasn't technically a savings account so it could offer market interest rates and charge fees to get around the regulations. Bent had a powerfully simple idea that made sense and had wonderful timing -- the perfect combination for fund flows." The blog tells us, "The money market fund quite changed the course of the fund industry forever. John Bogle described how this new fund kept Vanguard afloat during the late-1970s and early-1980s in his book Stay the Course: 'Throughout the decade of the 1980s, I often bragged to our crew about Vanguard's spectacular asset growth, in part to maintain and build on the solid morale we had established. But in reality, our growth largely reflected the growth of the burgeoning fund industry. During that decade, mutual fund assets leaped from $241 billion to $1.45 trillion. The charge was led by money market funds, which soared from $2 billion to $570 billion, accounting for almost half of the increase." Finally, it adds, "If yields stay high, the money will likely keep flowing into fixed income funds like money markets. If yields go back down, it will be interesting to see how investors will react now that we have so many retired baby boomers and more on the way in the coming years. If history has taught us anything, something else will come along to grab investor attention and fund flows."
