The following is excerpted from the July issue of Money Fund Intelligence. Los Angeles-based TCW Group celebrates its 20th anniversary running TCW Money Market Fund this year. This month we interviewed Portfolio Manager Barr Segal, who has been involved with the Trust Company of the West's money fund since its inception in 1988 and has been running the fund since 1999.

Segal says, "I think that the biggest challenge in managing a money market fund is always providing protection of principal and liquidity while resisting the temptation to take too much risk. The trick is providing a decent yield while you're still meeting the two major reasons investors want a money market fund -- they want their money back in full and they want it available every single day. You can't violate either of those two requirements."

He continues, "The other big challenge, particularly since the SEC put Rule 2a-7 into effect, is differentiation, because a lot of money funds over time have started to look more and more like each other. There's a desire to, of course, raise assets. How do you do that? Well you have to differentiate yourself somehow."

"These two challenges are like high tide and low tide. When the credit cycle is in good shape, there's a tendency to differentiate. Of course that's exactly what happened the last several years. Many funds decided to go get extra yield by investing in things like SIVs and asset-backed commercial paper backing CDO's, etc. That then leads to the next challenge which is still protecting principle and providing liquidity when you have a credit crisis, which of course happens after a credit bubble," says Segal.

Segal adds, "We resisted that temptation and did not get involved in any of these structures which became quite illiquid and quite a problem. So our investors have slept very well at night. The nature of the business is that many funds will try to drive the yield higher by taking what will turn out to be excessive risk. It goes in market cycles."

E-mail for a full copy of the interview.

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