Here’s a novel solution to the problem of money market funds `breaking the buck’ in periods of financial stress and low interest rates — get rid of the `buck.’
From the Wall Street Journal:
A year after a money-market fund spooked investors by “breaking the buck,” Deutsche Bank AG’s DWS Investments plans to launch a money fund with a floating share price.
Unlike conventional money-market funds, the proposed DWS Variable NAV Money Fund will allow its net asset value, or NAV, to fluctuate rather than trying to maintain a stable $1 share price. The fund will require a $1 million minimum investment, a regulatory filing said.
The idea of floating money-market NAVs has been hotly debated. In the wake of the Reserve Management Co.’s Reserve Primary Fund falling below $1 last fall, regulators have searched for ways to make the $3.6 trillion money-fund industry more stable.
This is interesting since a defining characteristic of a money market fund, or MMF, has to date been the funds’ pursuit of a stable $1 net asset value through investment in short-term money market instruments like commercial paper. Dipping below $1 is called `breaking the buck’ — and has happened just twice — once by The Community Bankers Government Fund in 1994 and once by the Reserve Primary Fund in the aftermath of Lehman Brothers’ collapse.
Now, this isn’t the first time a floating NAV’s been mentioned.
Vanguard and Aviva have both introduced variable pricing into their European MMFs, after the Lehman bankruptcy. The argument for the approach is that it helps improve transparency about the real underlying value of the fund, thus soothing investors who may have been spooked by Reserve Primary events. Since MMFs have to date been allowed to smooth day-to-day fluctuations via some clever accounting finesse, thus somewhat obscuring the actual market value of their investments, you can see the appeal.
A floating NAV is, however, really a transformational change for MMFs — making them resemble a short-term bond fund more than a traditional money market instrument.
What will be interesting to see now, then, is the regulatory response. The SEC, as well as Obama’s economic adviser, Paul Volcker, are already looking into the MMF industry. A government report into the floating NAV idea is due on Sept. 15.
Related links:
Sympathy for the money market funds – FT Alphaville