4
•
Fund Family Shareholder Association
are minimal. Why the need for new
regulations in the first place?
Money funds aim to maintain a con-
stant net asset value (NAV) of $1.00.
While the NAV reported in the paper
and in your statement shows a stable
$1.00, there is actually some movement
below the surface. Money funds record
“shadow” NAVs daily, which estimate
the current market value of their secu-
rities. Those daily NAVs often dance
around $1.00 by a few thousandths of
a dollar as the prices of the short-term
securities held by the funds fluctuate
day-to-day. But we rarely see these
fluctuations, as the price for buying and
selling shares is rounded to two decimal
places. In a few rare instances, a money
market’s reported NAV (or “price”) has
dropped below $1.00. This is called
“breaking the buck.” When that hap-
pens, Wall Street shakes. Luckily, it’s a
rare occurrence. The last fund to break
the buck was the Reserve Fund during
2008’s credit-market lockup. Its fall
prompted the SEC to review the rules
applied to money market funds—in
particular, whether money funds should
begin reporting floating (or variable)
NAVs rather than $1.00 per share.
Fortunately, you and I can continue
to rely on our funds being priced at
$1.00 per share—no variable pricing
for us individual investors. Institutional
prime money funds, however, will shift
to floating NAVs (showing prices out
to four decimal places) by the end of
a two-year transition period. The SEC
also gave money funds (investor and
institutional) the ability to charge a fee
for redemptions or to suspend redemp-
tions entirely for up to 10 days if there’s
a run on assets during a crisis and
liquidity dries up.
None of the regulations—float-
ing NAVs or the emergency fees and
gates—apply to government money
market funds. So if you wanted to com-
pletely avoid the issue, you could con-
sider something like
Admiral Treasury
Money Market
—though as that fund is
closed to new investors, you’ll have to
look outside of Vanguard. But I’m not
losing any sleep over the changes. For
Vanguard investors like us, I think this
is a non-event. We keep the $1.00 NAV
price, and Vanguard’s money funds
continue to be safe and well-run.
That’s the good news. Unfortunately,
the yield or income we’re getting from
our money funds these days is a serious
problem.
The Federal Reserve, which, as we
discussed in last month’s issue, essen-
tially sets short-term interest rates,
last cut its fed funds rate to a range
of 0.00% to 0.25% on Dec. 16, 2008,
over five years ago. Money markets’
yields are generated by very short-
term bonds that peg their own rates to
what the Fed does. If the fed funds rate
is low, so are money market yields.
And money market yields are cur-
rently so low you almost have to look
up to see bottom.
I’ll bet you never thought much
of a money market fund yielding
1.00%. Big deal, right? Well, you and I
haven’t seen a yield of 1.00% on any of
Vanguard’s money market funds since
March 2009—and Vanguard’s the low-
cost leader, right? It has been nearly
five years since their money market
funds sported yields above 0.25%, and
over two years since I could find a
0.10% yield. It’s been almost a year
since there was a yield above 0.01%, or
one basis point.
The fact that Vanguard is going to
great lengths—subsidizing some of the
costs on a temporary basis to keep
yields above zero—shows the toll that
the Fed’s zero-interest-rate policy has
taken on yields. The ultra-short-term
bond market is fairly high quality, so
there’s not much more a great fund man-
ager can do than a mediocre manager to
select great securities for a money mar-
ket fund. In the end, it mainly comes
down to costs. The lower your operat-
ing expenses, presumably, the higher
your money fund’s yield. Yet Vanguard,
which has some of the lowest costs in
the industry, still can’t get the yields on
its money funds up over 0.01%.
Annuity investors face a special
case. See the box on page 6 for more
on
Money Market Annuity
,
but as the
table above shows, Vanguard can’t keep
investors’ yields in the black. It’s been
losing value since Dec. 1, 2009.
With core inflation running between
1.5% and 1.9%, money market assets
aren’t coming anywhere close to
keeping up with inflation—meaning
the value of cash is slowly eroding.
Consider the graph to the left, which
plots the return of
500 Index
,
Total
Bond Market
and
Prime Money
Market
as well as inflation over the
past 25 years. Cash does give you
a smooth ride, and at times like the
market crash in 2008 and early 2009,
simply holding cash at a then-bountiful
yield above 1% looked like a smart
move—but over an investment lifetime,
returns from cash have fallen well short
of those from stocks or bonds, and are
only narrowly ahead of inflation. Over
the last five years, inflation has sped
well ahead of cash, up more than 10%
cumulatively to Prime Money Market’s
0.2% gain. Given where we are today,
with yields at zero, it’s almost certain
that returns from money market funds
will continue to fall short of inflation.
ZERO
FROM PAGE 1
>
Cash Doesn’t Pay
Over a Lifetime
500 Index
Total Bond Market Index
Prime Money Market
Core CPI
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
8/88
8/90
8/92
8/94
8/96
8/98
8/00
8/02
8/04
8/06
8/08
8/10
8/12
8/14
Rock Bottom Yields
Current
Yield
First Date
Yield
Hit 0.01%
Admiral Treas. Money Mkt.
0.01% 12/7/2009
Federal Money Mkt.
0.01% 1/6/2010
Prime Money Mkt.
0.01% 2/18/2010
Tax-Exempt Money Mkt.
0.01% 6/20/2011
CA Tax-Exempt Money Mkt. 0.01% 6/14/2011
NJ Tax-Exempt Money Mkt. 0.01% 6/14/2011
NY Tax-Exempt Money Mkt. 0.01% 6/14/2011
OH Tax-Exempt Money Mkt. 0.01% 7/5/2011
PA Tax-Exempt Money Mkt. 0.01% 6/8/2011
Money Market Annuity
-0.21%
*
* Value began falling Dec. 1, 2009.
