March 24, 2020
Earlier this month, the Federal Reserve announced some measures to support certain segments of the money market fund sector. This raised investor concerns about the safety of money market funds. As a result, we wanted to provide some clarity on the money market funds we use for our clients.
For a little background, the goal of any money market fund is to provide some current income, while maintaining liquidity and stability. This has included a stable Net Asset Value (NAV) of $1.00, ensuring that the value of principal will never change. In September of 2008, the Reserve Prime Money Market “broke the buck” when its NAV dropped to $0.97.
In response to this 2008 event, the Securities and Exchange Commission established new regulatory guidelines for money market funds in 2014. The biggest changes included these requirements:
- Some prime and tax-exempt money market funds must be priced at a floating NAV (not always stable at exactly $1.00.) These funds can own non-government issued securities.
- Prime and tax-exempt funds must establish gates (restrictions on withdrawing money) and redemption fees in certain circumstances – for instance, if liquid assets fall below a certain percentage.
For years, CMH Wealth Management has been using only Government or U.S. Treasury money market funds, rather than prime and tax-exempt money funds. Government and Treasury money market funds are exempt from the floating NAV requirement as well as from the requirement for gates and redemption fees. Because of these beneficial characteristics, the funds we use have a constant NAV of $1.00. The Boards of these funds have determined not to subject the funds to liquidity fees or redemption gates. While they could change their stance on the fees and gates, they have committed to only do so after providing appropriate notice to shareholders.
Having been through other challenging financial times, we have prioritized money market funds that provide the most security for our investments. We are confident in the liquidity and the stability of the money market funds we have selected.
If you have any questions about this topic or any others, we would love to hear from you.
Author:
John Fredette, CFA
Portfolio Manager
Disclosure:
This post is not an offer or a solicitation to buy or sell securities. This information may not be construed as investment advice and does not give investment recommendations. Any opinion included in this report constitutes the judgment of CMH Wealth Management, LLC as of the date of this report and are subject to change without notice.
Additional information, including management fees and expenses, is provided on CMH Wealth Management, LLC’s Form ADV Part 2, available upon request. Past performance is not a guarantee of future results.
