Floating NAV Would Drive 80% Of Corporate Investors Out Of The MMF Market

Wednesday, January 12, 2011 00:29
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Floating NAV Would Drive 80% Of Corporate Investors Out Of The MMF Market

A proposal currently on the table to force money market funds to abandon their famous $1-a-share structure would effectively destroy the MMF market, if new numbers collected by the Association for Financial Professionals are any indication.

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A presidential working group has suggested that in order to prevent the possibility of future disasters like the 2008 implosion of the $62 billion Reserve Primary fund, the oldest and one of the biggest money market funds out there, these funds should switch to a floating NAV structure like most other types of mutual fund portfolio.

 

Under the proposal, MMFs would no longer need to guarantee investors that each share is immediately redeemable for $1, regardless of the health of the securities in a fund's portfolio. Thus, for example, a given MMF could see its share price rise to $1.07, fall to $0.98, and then rise again in an especially volatile period.

 

The concept offends many MMF sponsors, including giants like BlackRock and Vanguard, and according to the AFP, would backfire by immediately driving 80% of all corporate investors in the money markets -- representing about $2.8 trillion in assets -- out of the asset class.

 

These institutions are not "institutional investors" but are simply large corporations and other entities who keep their short-term cash in money markets in order to get a somewhat better return on an almost absolutely liquid instrument. 

 

Those that pull out of floating MMFs would instead go to bank deposits, stable value funds or short-term bond funds, the AFP says.

 

This kind of unintended consequence probably caught a lot of people who simply think of these funds as a component of a retail or institutional investment portfolio -- but is exactly the reason why participation in the comment cycle in most regulatory rulemaking is so important. 

 

MMF sponsors flooded the SEC with comments on the floating NAV proposal, and now there's a chance that it will not actually happen. Likewise, with any issue that impacts advisors or their clients, participation in the process is crucial.

 

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