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SEC Proposes New Money Market Reforms

Fairholme manager defends portfolio, personnel moves, and more. 

Morningstar Fund Analysts, 02/09/2012

The SEC is set to propose a new round of regulations for the $2.7 trillion money market fund business, and the mutual fund industry isn't taking the news lying down. The Wall Street Journal reported the regulations could include a floating net asset value stipulation as well as new capital requirements and redemption restrictions. Any new regulations would first need to be approved by the agency's commissioners and then submitted to a public comment period.

If enacted, the changes would continue to alter an investment option that had already been overhauled by new rules during the past several years. (Here's Morningstar's take from 2010 on the previous regulations.) For example, money market funds traditionally keep their NAVs at a stable value, or $1 a share. Funds are said to "break the buck" if they drop below that threshold. That policy has historically made money market funds a perceived safe haven, at least until the Lehman Brothers collapse pushed the Reserve Primary fund, a large money market offering, under the $1 level and triggered a run on money market funds in general that was only calmed by government intervention. A floating NAV would, in effect, erase the stigma attached to breaking the buck. As with traditional open-end mutual funds, a floating NAV for money market offerings would also be a clear signal as to which ones are taking the most risk, depending on how far and frequently the NAV fluctuated away from the $1 level.

In addition, the SEC is also reportedly contemplating regulations that would ease runs on these funds. Higher capital requirements would ensure funds have enough cash to deal with redemptions. Meanwhile, shareholders reportedly will be able to only liquidate about 95% of their positions immediately before having to wait 30 days to cash out the rest.

It's too early to tell what the ultimate impact of these regulations will be or if they have a chance of passing. The mutual fund industry--and major providers of money market funds like Vanguard, Fidelity, Federated FII, BlackRock BLK, and Schwab SCHW --will surely be impacted. The Investment Company Institute, the industry's trade association, argues the changes could disrupt short-term credit and increase the costs associated with cash management. If the changes convince investors to seek out other options like bank-run offerings, fund companies could also be hit where it hurts the most: their bottom lines. For example, Federated derived 46% of its $678 million revenue through the first nine months of 2011 from money market fees. According to the Journal, Federated plans to sue the SEC if the new rules have an adverse impact on its business.

Goldman Sachs Buys Stable Value Shop
Goldman Sachs Asset Management has acquired Dwight Asset Management, a subsidiary of Old Mutual Asset Management. Terms of the deal weren't disclosed.

The acquisition isn't large--Dwight manages or advises on $42 billion in assets compared with GSAM's $828 bilclion--but it could help the Wall Street firm expand its footprint in several ways. Dwight is a sizable player in the stable value fund universe. These funds are similar to money market offerings but typically have higher returns. They are also traditional cornerstones in defined contribution plans. GSAM has reportedly been trying to build out its DC business. The stable value products could be a selling point for plans looking to round out the conservative part of their lineups. (GSAM already offers short duration and money market options.) In addition, Dwight will continue to subadvise Old Mutual Dwight Intermediate Fixed Income OAFJX and Old Mutual Short Term Fixed Income OIRAX.

The deal fits a recent trend of GSAM filling holes in its fund lineup with acquisitions. Late last year it bought the $182 million Rising Dividend Growth ICRDX. Goldman didn't have any pure dividend-focused strategies prior to that move.

Fairholme Manager Makes His Case
Fairholme FAIRX recently released its new portfolio holdings, and now manager Bruce Berkowitz is explaining some of his moves in a video interview posted on the fund's website. While some things in the portfolio have remained the same-- American International Group AIG is still the top holding--Berkowitz did trim financials like Citigroup C that were the chief culprits behind poor performance in 2011. In the video he admits that even though he still owns these types of firms, he bought them too early. Aside from financials, he defended his position in Sears SHLD, which accounts for about 11% of assets. Berkowitz says the retailer's anchor-tenant status in malls is being undervalued along with its brands. He also addressed the $6.8 billion in asset outflows that cut the fund's size in half last year, adding that it now has a leaner, more loyal shareholder base. While the firm parted ways with comanager Charles Fernandez, the video also introduced new research chief Fred Fraenkel. Shareholders are coming off a roller-coaster ride at the fund. After a prolonged stay atop the category rankings for much of the 2000s, it dropped 32% last year, a larger loss than in 2008. But in 2012 it has jumped 17.8% through Feb. 8, one of the best showings in the large-value peer group.

Morningstar fund analysts cover more than 1,700 mutual funds and write regular commentary covering fund industry news, fund investing trends, picks, portfolio planning, international investing, and more.

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