Friday, November 4, 2011

Money Market Funds, An Investment Whose Time Has Passed? [commentary]

[edited 11/07/11] Onebornfree's commentary: The original article title, by the highly esteemed [by myself, at least] Mr Terry Coxon, had no question mark in it.[It was added by me, as a subtle part of my own commentary.]

Terry gives a short very interesting history [well worth reading]of money market funds, and how they came about as a way to circumvent government regulation and still make a profit for the funds themselves and for the individuals who chose to put money into them.

He then speculates that because these funds generally did well during the generally inflationary period that somewhat fortuitously followed their creation [1970- 82], and because the [post 2008] economic environment is entirely different from what had mostly prevailed up until the "collapse", that these types of fund might no longer be useful for the average saver/investor.

He speculates for a number of related reasons:

"Today there is little good reason to use a money market fund for substantial amounts of cash.

1. There is no material yield advantage because there is no material yield on cash anywhere – unless you are willing to take risks that mock the idea of cash. The highest yield on a money market fund I've seen since the Federal Reserve hammered rates into the floor at the end of 2008 was an offshore operation called Bank of Ireland USD Liquidity Fund, with a yield of 0.54%. How the fund earned that much (after expenses) in a world where 30-day jumbo CDs return 0.20% and one-month T-bills yield 0.04%, I don't know. But if the fund's risk disclosure was adequate, it would have included language that amounted to "Baby needs shoes!"

2. With most money market funds, there is a material safety disadvantage vs. FDIC-insured CDs since, of course, commercial paper and jumbo CDs carry a risk of default.

3. With a T-bill-only fund, the best you can say in favor of the fund vs. FDIC-insured CDs is that it's a tossup. Both are very secure."


So what do I think?

Well basically, what I think about Mr Coxon's conclusion [i.e. that Money Market Funds ARE An Investment Whose Time Has Passed] , is represented by my addition of a question mark to his title. In other words, despite the fact that I agree with just about everything in the article, I disagree with his level of certainty.He appears to be sure, I am not.

The economic future [inflation, deflation, or whatever] as always, remains unknown, so while it is not prudent to keep all of one's life savings in any money market fund [regardless of type], no more than it is prudent to keep them all in any one investment class such as: gold and other precious metals, or in real estate, or in stocks, or in US Treasury or corporate bonds, art, or even in cash under the mattress, money market funds of a particular type [e.g. those investing purely in U.s. T-Bills], might, to a degree, still serve some particular advantage for the individual saver [for example, as a convenient,liquid way to hold cash and still earn a small return in a deflationary environment. ]

Other types of money market funds [e.g. those investing in jumbo bank CD's mentioned in Mr Coxon's article] , might still also be useful, if and when inflation returns.

So maybe, don't write them off completely just yet, Mr. Coxon?. Regards, onebornfree.

DISCLAIMER : I have no financial interest in any money market fund, of any description, anywhere in the world.


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