Deutsche breaks the buck
A week ago, I wrote about Paul Volcker’s call for money market funds to stop using the $1 NAV. In conditioning investors to believe their principal isn’t at risk, money funds can be very dangerous, systemically-speaking. When the buck gets broken …
- Investors panic: Their money was supposed to be safe.
- Since the fund has promised to redeem them at $1 per share, instead of at the day’s market value, investors have an incentive to get out as quickly as possible. The quicker they redeem, the more likely they are to get all their money back. It’s a bank run.
According to a report in today’s WSJ, Deutsche Bank is now launching 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 ….
Many in the fund industry are opposed to the idea of floating money-market NAVs, saying the move would essentially destroy the money-fund business.
They think it could destroy the business because if the NAV floats, then it’s not possible to market the funds as “cash equivalents.” Suddenly they’re just another bond fund, albeit an ultra-short/relatively safe one.
If you want the nitty gritty on why the $1 NAV is so crucial to the marketing of money funds, take a look at the March report of the Investment Company Institute’s working group on money funds, in particular section 8, pages 107-111. In a nutshell, allowing money funds to use amortized cost accounting, i.e. NOT marking their assets to market, provides for many tax, operational, legal and liquidity conveniences that an ultra-short bond fund doesn’t.*
More money market funds should follow this example. Hopefully the Obama administration pushes them in that direction when it releases its report on money market fund reforms September 15th.
*also check out footnote 25 on page 27 (ht Felix)