Safety and Money Market Funds
August 15, 2007
Money Market Funds have a long and distinguished history of maintaining a price or NAV (Net Asset Values) of $1 comforting investors that their funds, while not federally insured, are extremely safe. The recent panic in the mortgage-backed securities industry has caused some scrutiny of money market funds and their ability to meet liquidations and maintain the magical $1 NAV.
According to Federal rules the securities which are held by a money market fund should have an average duration or maturity of less than 90 days. However, money market funds can step outside the general guidelines of purchasing Treasuries, overnight repos, bank CDs, and commercial paper to buy mortgage-related securities rated very high (at least as high as AA). Trading in these mortgage-related securities has become tricky even for those securities rated highly. The New York Times recently reported that Standard and Poor's has highlighted four companies for possible downgrading of commercial paper related to the mortgage industry. The article went on to identify four money market funds which held commercial paper targeted for downgrades:
Among the money market funds that held commercial paper issued by the companies singled out for possible downgrading were two offered by Evergreen Investments. As of May, the $16.6 billion Evergreen Institutional Money Market Fund held $385 million in Broadhollow Funding and $72 million in Ottimo Funding. The $4.5 billion Evergreen Prime Cash Management Money Market Fund held $50 million in Ottimo Funding as well.
In a worst case scenario, liquidations and/or illiquid securities could force a money market fund with exposure to mortgage-related securities to drop their Net Asset Value below $1, which would represent a loss of principal to investors.
The typical money market fund does not have a dangerous level of exposure to the type of illiquid mortgage-related securities discussed above, but investors are advised to check the portfolio holdings of their money market fund which is readily available on the websites of each mutual fund company. The money market funds listed below offer attractive 7-day effective yields and based on their most recent disclosure of holdings do not hold a large percentage of mortgage-related securities.
Vanguard Prime MMF 5.23%, minimum $3,000
Fidelity Money Market Fund 5.23%, minimum $25,000
Harbor Money Market Fund 5.23%, minimum $1,000
McMorgan Principal Preservation Fund 5.20%, minimum $3,000
TIAA-CREF Money Market Fund 5.15%, minimum $2,500
PayPal Money Market Fund 5.14%, minimum $1
GE Money Market Fund 5.12%, minimum $500
Transamerica Premier Cash Reserve Fund, 5.11%, $1,000
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