CNBC Writes "Big Risk" in MMFs
CNBC.com posted an article, entitled, "The big risk looming in your money market fund," which says, "With more countries either introducing or talking about instating negative interest rates -- Japan was the latest to go minus, on Jan. 29 -- many Americans are concerned about what might happen here if the Federal Reserve has to reverse course and go the sub-zero route, too. One particular part of the investment industry is likely more nervous than most: the money market sector. These investments are generally thought of as safe haven investments. The goal of these funds is to never lose money and maintain a net asset value (NAV), or per share value at $1. But if rates go negative the fear is they may be in danger of "breaking the buck".... Over the last eight years, interest on money market funds has declined significantly. In 2007, rates were around 4.5 percent. Today they're at about 0.1 percent. If rates fall further, Americans will be lucky to even get a single basis point on their investment. "At this rate, your money will double in 6,000 years," said `Mike Geri, a Seattle-based financial advisor with RBC Wealth Management. "You're essentially earning zero. It's horrible." It continues, "While this is bad news for investors, it's even worse for the industry. Because rates are so low, money market providers have stopped charging fees, which means they make no money on these products. According to the Investment Company Institute, last year funds waived $5.5 billion in fees.... "If we saw 30-day, 60-day and 90-day paper at negative rates, then that would severely harm money market funds," said Jeff Tjornehoj, head of Americas research at fund data company Lipper. Fund flows have remained steady over the last couple of years, though the industry has seen a fairly significant contraction since those days of heady rates. At the end of 2008, there were $3.8 trillion in U.S. money market funds; today there's about $2.7 trillion in assets under management, according to Lipper.... If rates do go negative and investors actually have to pay to keep money stored in a fund, then you can bet that more firms will stop offering these products. In Europe, a number of companies are employing the "reverse distribution mechanism" in order to keep the fund's net asset value at $1 a share. This involves canceling shares in the fund in order keep the net asset value stable." It concludes, "As bad as things may get, some investors and institutions may still use money market funds, even though they may lose money, said `[Laurence] Booth, Chair of Structured finance at Toronto's Rotman School of Management. Why? Because, as the saying goes, the devil you know is better than the devil you don't. "What's the alternative?" he asked. "Is it better to put your money in an account and lose 0.5 percent year-over-year or invest in some other security and lose even more"?
