(PUB) Investing 2016

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The Independent Adviser for Vanguard Investors • September 2016 • 3 FOR CUSTOMER SERVICE, PLEASE CALL 800-211-7641
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WAKE FROM PAGE 1 >
BILLIONS OF DOLLARS are sloshing
into and out of Vanguard’s money mar-
ket funds as investors and fund firms
wrestle with new SEC rules taking
effect in October.
Billions per month are being sucked
out of money market funds that invest
mainly in short-term debt issued by
companies, and poured into funds
focused on government debt.
The SEC’s rules are meant to make
money market funds safer, but have set
off a slew of unintended consequences.
As a quick reminder, the SEC rules
will mainly impact institutional inves-
tors, as the money market funds you
and I can use will continue to be priced
at $1.00 per share day in and day out—
no variable pricing for us individuals.
If money market funds for individuals
will have stable NAVs, why are we see-
ing the shift toward government money
markets? Well, in times of stress, prime
money funds may suspend redemptions
or levy a fee against investors taking
money out of the fund. Government
money funds aren’t subject to those
regulations—so despite lower yields,
money is moving to where the fewest
changes are expected.
Driving these huge cash disloca-
tions has been Vanguard’s decision, in
response to the SEC rules, to consolidate
all its brokerage sweep accounts into
Federal Money Market, a process that
has bedeviled many Vanguard clients
as checks have bounced and balances
have mysteriously disappeared and reap-
peared.
$13.5 billion has drained out of
Prime Money Market over the past
four months, while more than $19 bil-
lion has sluiced into Federal Money
Market. The table above shows net
flows for Vanguard’s money market
funds this year. (Note that I have
combined the Investor and Admiral
share classes of Prime Money Market.)
You can see there have been net out-
flows for all of Vanguard’s prime and
municipal money market funds, while
the government funds have raked in
billions.
Despite the material outflow this
year, Prime Money Market, with over
$125 billion in assets, is still the firm’s
largest money market fund by a long
shot. Federal Money Market comes in
second with $27.5 billion—though its
assets have increased nearly six times
since the start of the year.
Frankly, I’m not worried about a
Vanguard money market fund break-
ing the buck. (I also wasn’t concerned
about that in the past.) But the new
rules are impacting the markets in ways
that I doubt the SEC intended. n
MONEY MARKETS
Billions In, Billions Out at Vanguard
Vanguard Money Market Funds Net Cash Flows
Jan-16 Feb-16 Mar-16 Apr-16 May-16 Jun-16 Jul-16
2016 Net
Flow
Treasury Money Mkt. $272 $326 $210 $160 $163 $359 $1,111 $2,601
Federal Money Mkt. $464 $848 $2,024 $3,758 $2,316 $5,884 $7,406 $22,700
Prime Money Mkt. $1,080 ($575) $160 ($3,050) ($1,656) ($4,563) ($4,216) ($12,820)
Tax Ex. Money Mkt. ($781) ($187) ($228) ($273) ($4) ($249) ($276) ($1,998)
California Tax-Ex. Money Mkt. ($65) ($20) ($43) ($88) $2 $19 $36 ($159)
New Jersey Tax-Ex. Money Mkt. ($17) ($16) ($5) ($31) ($13) ($25) ($24) ($130)
New York Tax-Ex. Money Mkt. ($40) ($21) ($66) ($36) ($14) ($32) $2 ($207)
Ohio Tax-Ex. Money Mkt. ($14) ($11) ($16) ($15) ($3) ($11) ($3) ($73)
Pennsylvania Tax-Ex. Money Mkt. ($45) ($28) ($10) ($37) ($10) ($49) ($17) ($196)
Note: Amounts listed are millions of dollars.
the tooth and is “due” to end—soon,
of course. The current bull market is
7.5 years old, so it has lasted longer
than the “average” bull market. However,
to claim the title of longest U.S. bull
market, it will have to go another two
years, until September 5, 2018, without a
20% decline, the mark of a bear market.
Yes, another bear is coming—but as the
saying goes, bull markets don’t die of
old age. They end when investors are
euphoric and worried about missing out
on gains—which doesn’t sound much
like the sentiment I’m hearing these days.
Meantime, the action has been in
the bond market. So far, there have >