'They Forgot What a Money Fund Was'
When Bruce Bent created the first money market fund in 1970, the prevailing attitude was that any idiot could master cash management. But that was before some of the ultraconservative funds were caught with their hands in higher-yielding short-term securities that wound up part of the subprime mess. And with concerns about the impact of bond insurer downgrades on municipal money funds, investors are starting to concede that "only some idiots can run cash appropriately," Bent says. His company, The Reserve, manages some $90 billion. BusinessWeek's David Bogoslaw spoke with Bent about whether there are more surprises out there.
Is finding safe investments more of a challenge?There are securities out there with good collateral like certificates of deposit. We've got about $1.5 billion in tax-exempt muni funds. Ten percent of our assets were in Financial Guaranty Insurance and Mortgage Guaranty Insurance until October [the insurers were downgraded last November by Standard & Poor's Ratings Services]. We've run those down to about 5%.
How aggressive have money fund managers been in recent years?No question, they forgot what a money fund was and said: "Let's opt for an extra one-hundredth of a point." That probably goes back to 2002, when the effective rate of return was zero. It's also a question of investors saying: "I want that extra basis point" and not recognizing the risk involved. The [newfound discipline among money-fund managers in not chasing yields] may be short-lived if interest rates go low enough. But I think it will outlast the rate cuts because rates are going to start moving back up by the end of the second quarter, certainly by the third quarter.
Some muni money funds have dumped securities on fears of bond insurer downgrades. Is that a real worry?Some muni money funds have reduced their exposure to insured securities because of concerns that the bond insurers may be downgraded. This isn't a real worry because they're not going to be downgraded to the point where it will be a problem.
With safety such a concern, why offer The Reserve Yield Plus fund, an enhanced cash fund that can invest in securities that have a longer maturity?We're saying to people who are sophisticated: "This is not a money fund, and if you want to take a different level of risk, this is available to you." Is it appropriate as an alternative to the vast majority of assets that are in money funds? No. It's a complement. We restrict ourselves to prime credit paper, and maintain an average life of 90 days. Instead of having a maximum maturity of 13 months, we can go out two years and get a higher yield.
Are there any warning signs to look out for in money funds in general?If someone is consistently the highest-yielding fund, that raises questions, because it's taking too much risk. We shoot for the top quartile, definitely the top half. Also, ask for a copy of the portfolio. If someone says they can't give you that, that's a real red flag.