Money Market Mutual Fund Safety from AARP, Vanguard, Fidelity, and TIAA-CREF
March 02, 2008
Wells Fargo & Company announced that it has taken a $39 million loss on Structured Investment Vehicles (SIVs) which were used in the portfolios of a number of their money funds. The $39 million is not devastating to company who holds over $106 billion in money market mutual funds, but is another example of money fund managers extending their risk tolerance to grab extra yield in an investment that most investors consider completely safe.
Investors have relied on the historically-stable $1 net asset value that all money market mutual funds quote without much thought of their mutual fund company "breaking the buck". However, when companies like Well Fargo, Bank of America, and State Street Boston are forced to infuse cash into their money funds to stablize the returns then investors need to consider just who is standing behind the $1 price on their money fund as the higher yielding money funds may hold riskier more volatile holdings than those funds yielding less. Fund managers have a lot more discretion than investors may expect in a conservative money fund and have been tempted by the lure of higher yields into mortgage securities and complex investments like the SIVs that have lost value and liquidity. With interest rates falling and competition for cash always intense, fund managers may continue this trend despite the negative publicity generated by companies who have propped up their money funds. Investors with a money fund backed by a large financially strong company may be in a better position to expect their mutual fund to hold a $1 net asset value through any financial catastrophe. The four funds listed below are from large respected companies:
AARP Money Market Fund (3.43% effective yield)
Fidelity Money Market Fund (3.47% effective yield)
TIAA-CREF Money Market Fund (3.65% effective yield)
Vanguard Money Market Fund (3.77% effective yield)
These four companies are not at the top of a list of the highest yielding money funds, but AARP, Fidelity, TIAA-CREF, and Vanguard are four blue-chip companies very likely to stand behind their money funds in the event of financial turmoil.