Is Your Money Market Fund Really Safe?
Last week, something very significant happened when a $5 billion money market fund run by the General Electric Company (The GEAM Cash Trust Enhanced Trust) offered a new price of 96 cents on the dollar - to its non-GE investors - and also encouraged them to cash out.
Now with this news, any astute investor should be asking him/herself this question: If a top money market fund can no longer be relied upon for complete protection of your invested principal, is there anything that's still safe anymore?
Money market funds originally came into existence in the early 1970s, and were meant to serve as an alternative to bank savings accounts. And as interest rates soared during the terrible Carter-stagflation of the 1970s, investors came to think that money market funds were the best game in town and so the money market business soared with some funds paying returns of more than 10% per annum.
Unlike bank deposits, money market funds are not guaranteed by the Federal Deposit Insurance Corporation (FDIC), thus fund managers knew they needed to offer investors as much security of principal as possible. But this began to change in 2001 as short-term interest rates dropped down to the 1% level, and returns on money market funds(after expenses) were only slighly above zero.
Wall Street responded to this by offering investors more risk by putting the money funds into asset-backed commercial paper which offered a higher return - which was the wrong move to take - because while these riskier funds paid better returns, the average investor had been lulled into believing that the fund manager would never allow their price to fall below $1.00.
And thus, the perception of decent returns and security of principal by having your money invested in a money market fund has now been shattered. GE is one of the biggest names in money market funds so if you can't rely on a fund backed by GE, then no fund management group can really be trusted to keep your fund share price at $1.00.
There are several possible ways to solve this problem, however, and we will talk about this at our next meeting on Thursday, December 6, 2007.
* * * * *
Now with this news, any astute investor should be asking him/herself this question: If a top money market fund can no longer be relied upon for complete protection of your invested principal, is there anything that's still safe anymore?
Money market funds originally came into existence in the early 1970s, and were meant to serve as an alternative to bank savings accounts. And as interest rates soared during the terrible Carter-stagflation of the 1970s, investors came to think that money market funds were the best game in town and so the money market business soared with some funds paying returns of more than 10% per annum.
Unlike bank deposits, money market funds are not guaranteed by the Federal Deposit Insurance Corporation (FDIC), thus fund managers knew they needed to offer investors as much security of principal as possible. But this began to change in 2001 as short-term interest rates dropped down to the 1% level, and returns on money market funds(after expenses) were only slighly above zero.
Wall Street responded to this by offering investors more risk by putting the money funds into asset-backed commercial paper which offered a higher return - which was the wrong move to take - because while these riskier funds paid better returns, the average investor had been lulled into believing that the fund manager would never allow their price to fall below $1.00.
And thus, the perception of decent returns and security of principal by having your money invested in a money market fund has now been shattered. GE is one of the biggest names in money market funds so if you can't rely on a fund backed by GE, then no fund management group can really be trusted to keep your fund share price at $1.00.
There are several possible ways to solve this problem, however, and we will talk about this at our next meeting on Thursday, December 6, 2007.
* * * * *
posted by Bob Moser at
8:12 PM
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