NEW YORK (
) -- Money market fund leaders like
( RPFXX) and Fidelity have survived one economic crisis only to be faced by another.
These money market giants, along with other industry leaders like Vanguard, face new challenges as they battle SEC proposals that would result in "floating NAVs."
Both Vanguard and Fidelity have come out strongly against these proposals in public comment letters denouncing the changes to Rule 2a-7. Vanguard has proclaimed that, "a floating NAV would eviscerate a successful and important product for investors."
Fidelity noted that floating NAVs would cause "significant shareholder outflows, destabilizing money market mutual funds and overall money markets." In its letter, Fidelity cites research that suggests that 69% of institutional investors would stop using money market funds if the NAV rules are changed.
Despite challenges from the SEC and administration advisers like Paul Volcker, the money market industry is flourishing. Launched in 1971, money market funds have accumulated $3.5 trillion in assets. These funds, which are not included in the regulated banking industry, provide short-term funding to firms at rates that are lower than traditional loans.
Historically, money market mutual funds have maintained a stable price of $1 and offered investors returns that are generally higher than a typical savings account. These "ultra-safe" mutual funds track highly liquid securities like commercial paper and government debt. Many investors have turned to money market mutual funds for the "cash" portions of their portfolios, using the traditionally stable instruments to anchor their portfolios.
Money market funds have become so popular that the collapse of a single fund last fall threatened the entire financial system. When the $62.4 billion
Reserve Primary Fund
( RPFXX) "broke the buck" in September 2008, it sent shock waves that seized up the commercial paper market and put borrowers like
Fidelity Investments, the largest manager of money-market mutual funds, had $506.3 billion under management as of July 31. Together, asset managers like Fidelity,
, Vanguard and Federated, manage about half of money market fund assets. The other half is managed by bank-owned fund companies. The largest of these bank-owned funds belongs to
J.P Morgan Chase
While Fidelity's money market business may not be its most glamorous enterprise, it has quietly become an enormous success, amassing more than $500 billion in assets. Data helps to put the importance of these funds into perspective. Approximately 40% of Fidelity's $1.358 trillion in assets under management is allocated to money market mutual funds. The largest of these funds,
Fidelity's Cash Reserves
( RPFXX), is more than double the size of its largest stock-based fund, the
The crisis that hammered money market fund providers like Putnam seems to have strengthened Fidelity. When the Reserve Primary Fund broke below the dollar mark, retail investors fled many popular money market funds, flattening some while forcing others out of business. Fidelity, however, had little or no exposure to the events that precipitated the crisis.
Still reeling from the economic crisis, money market mutual funds have been hit by a series of economic initiatives. In addition to the question of NAV, the reality of low interest rates has made the money fund business unprofitable for smaller managers.
Managers like Federated, however, are benefiting from the resulting consolidation. Federated, the third largest money market fund manager, stepped in after the Putnam blowup and continues to amass assets. Fifth Third Asset Management Inc. of Cincinnati, a unit of Fifth Third Bancorp, and Nationwide Asset Management LLC of Columbus, Ohio, a unit of Nationwide Mutual Insurance Co., have both outsourced money fund management to Federated in recent months.
Money market funds have come to play a pivotal role in asset management. As rumors and reform hit the industry, large firms like Fidelity and Federated are positioned to weather the storm. Investors should stick with large firms like Federated and Fidelity in the upcoming months as the money market fund business is tested and consolidated. These firms will continue to find ways to survive, and thrive, in the face of adversity.
-- Written by Don Dion in Williamstown, Mass.
At the time of publication, Dion owns Fidelity's Cash Reserve.
Don Dion is president and founder of
, a fee-based investment advisory firm to affluent individuals, families and nonprofit organizations, where he is responsible for setting investment policy, creating custom portfolios and overseeing the performance of client accounts. Founded in 1996 and based in Williamstown, Mass., Dion Money Management manages assets for clients in 49 states and 11 countries. Dion is a licensed attorney in Massachusetts and Maine and has more than 25 years' experience working in the financial markets, having founded and run two publicly traded companies before establishing Dion Money Management.
Dion also is publisher of the Fidelity Independent Adviser family of newsletters, which provides to a broad range of investors his commentary on the financial markets, with a specific emphasis on mutual funds and exchange-traded funds. With more than 100,000 subscribers in the U.S. and 29 other countries, Fidelity Independent Adviser publishes six monthly newsletters and three weekly newsletters. Its flagship publication, Fidelity Independent Adviser, has been published monthly for 11 years and reaches 40,000 subscribers.