The views expressed in this column are solely those of the author and do not reflect the views of SVB Financial Group, or Silicon Valley Bank, or any of its affiliates.
To the beat of the rhythm of the night
Dance until the morning light
Forget about the worries on your mind
You can leave them all behind
- DeBarge
The era of "bubblegum" music was so pervasive, it even hit Motown. And the above DeBarge song was probably the peak.
The era of "bubblegum" finance — as we have seen recently — has popped and with a loud bang at that.
Many highfalutin Wall Street types are dazed and confused, wandering the streets with more than a little gum residue on their faces. Those of us left behind are challenged with cleaning up the mess.
One of these is the money market fund industry where investors experienced only their second loss since the industry was founded in 1972.
This nearly $3 trillion industry has provided daily liquidity and money market returns like clockwork for nearly 40 years. Then, in 2008, a fund manager loaded up on Lehman paper garnering some extra yield in hopes the Fed would provide a rescue.
When that bet didn't turn out, investors ran for the hills leaving many with actual principal losses on what was supposed to be "cash" investments. Well, not all "cash" carries the same risk.
In the interest of full disclosure, we at SVB Asset Management took a look at this high yielding fund some time before it met its doom and determined in a 20 minute phone call that it would have significant challenges. Looking back, I don't think any investor asking appropriate questions would have ended up in that particular fund.
But there's the rub: We want to believe "cash" equals "safe" so that we can take a pass on due diligence.
It surely does not.
Last week, the SEC took comments on the options presented to the President's Working Group Report on Money Market Reform (whenever I find myself typing so many capitalized words, lawyer jokes come to mind for some reason).
Altogether, 53 comment letters were submitted with nearly as many opinions on how the money fund industry should be structured going forward. All the heavy-hitters in the industry are there, but there are some surprises as well. At least three individuals voiced their opinions, representing no corporation whatsoever. (The job market must be tough!)
Significantly, there seems to be near-consensus agreement in one area: that the $1 NAV should remain. Recall this is the requirement that money market funds allow investors to buy and sell funds at a share price of $1, as long as the true market value of the underlying securities remains in a tight range.
Since these funds are used for frequent — often daily — transactions, this simplifies accounting for investors, preventing them from realizing gains and losses on each transaction.
Unfortunately, this masking of the true underlying value has encouraged greater risk-taking on the part of fund managers. Realizing investors believe all money market funds are safe, they are only left with yield as a differentiator.
The dirty secret here is that funds are encouraged to push for high yields (which can only be obtained by taking on risk) in order to grow assets.
Only investors focusing on the cash sector have the resources to commit to money market fund analysis needed to differentiate from high risk funds and low risk funds. (The example given above regarding our 20 minute call was certainly an outlier of the riskiest funds in the market)
Does this mean $1 NAV is bad?
No.
Instead, consider no amount of regulation or disclosure will make any investment 100 percent safe. It is critical to have an experienced investment professional team overseeing your investment choices.
For those of you having trouble sleeping, have a look at our response letter to the SEC.
Key Developments
Wholesale costs in the U.S. increased more than projected, led by higher prices for commodities such as fuel and food. The Producer Price Index rose 1.1 percent in December over the previous month, and 4.0 percent from a year ago. Core PPI increased 0.2 percent and 1.3 percent respectively.
The Consumer Price Index rose 0.5 percent in December over the prior month, and 1.5 percent over last year. Core CPI increased 0.1 percent and 0.8 percent respectively. The increase was led by higher fuel and food prices, while most other goods and services were little changed.
Advance retail sales climbed 0.6 percent for December, the sixth consecutive positive month. Eight of the 13 major retail categories showed increases last month, led by a 2.6 percent jump at non-store retailers like Internet vendors. Also, demand at auto dealers increased 1.1 percent.
The views expressed in this column are solely those of
the author and do not reflect the views of SVB Financial Group, or SVB Asset
Management, or any of its affiliates. This material, including without
limitation the statistical information herein, is provided for informational
purposes only. The material is based in part upon information from third-party
sources that we believe to be reliable, but which has not been independently
verified by us and, as such, we do not represent that the information is
accurate or complete. The information should not be viewed as tax, investment,
legal or other advice nor is it to be relied on in making an investment or other
decisions. You should obtain relevant and specific professional advice before
making any investment decision. Nothing relating to the material should be
construed as a solicitation or offer, or recommendation, to acquire or dispose
of any investment or to engage in any other transaction.
SVB Asset
Management, a registered investment advisor, is a non-bank affiliate of Silicon
Valley Bank and member of SVB Financial Group. Products offered by SVB Asset
Management are not FDIC insured, are not deposits or other obligations of
Silicon Valley Bank, and may lose value.