The real headline investors should pay attention to is slipped into a side column in today’s WSJ. A large New York based money market fund manager “broke the buck” on a few funds including the Reserve Primary Fund (RFIXX). This is the first time this has happened in 14 years! Virtually anyone with a brokerage account has some kind of money market fund in their account where uninvested cash is held.
The mandate of money market funds is to maintain a $1 price (net asset value) every day and earn some interest buying short term corporate debt, CDs, treasuries, etc. Funds run by the above mentioned manager are now worth less than $1 — thanks in part to Lehman’s collapse yesterday.
In recent times, many of these so called “conservative” funds have had to dip into less secure debt in order to pump up their yields and attract more investors. In the past, a fund or two have had the parent company (like the big institutions that are failing at the moment) pump in some cash to avoid breaking the $1 threshold. There was no bailout for the folks at the Reserve and their investors.
The lesson here is that not all money funds are alike — if you’re really worried about this happening to you, try a money market fund that only invests in US treasury securities. You may get a lower yield, but at least you’re going to be in a default risk free asset.
