American to Pare Money Market Lineup

In a recent supplement to its money market prospectuses, American Funds is proposing to merge its two taxable money markets, The Cash Management Trust of America and The U.S. Treasury Money Fund of America, into the American Funds Money Market Fund. Additionally, the firm is proposing to convert its only municipal money market fund, The Tax-Exempt Money Fund of America, into a fund with slightly longer maturities whose net asset value would fluctuate. If shareholders approve, American Funds will go from having two taxable money market funds and one muni money market fund to only one taxable money market fund. The Tax-Exempt Money Fund of America would effectively become a short-term or ultra-short-term muni-bond fund under the reorganization.

We think this is a loss for American's shareholders, though we understand that it's difficult to run money market funds in the current environment. Treasury bills, commercial paper, and short-term munis aren't yielding enough for fund companies to make a profit on funds dedicated to them. Indeed, American has been subsidizing its money markets, and the Tax-Exempt Fund of America and The U.S. Treasury Money Fund of America currently offer no yield. Fund companies are increasingly faced with the prospect of losing money on money market funds or taking untoward risk to achieve yield.

We think that shareholders in the taxable funds should stay put. The new fund will probably be slightly riskier than the pure Treasury option, but not enough so to make us worry. It will likely own a slug of debt from U.S. federal agencies among other high-quality securities. Shareholders of the muni fund have a more difficult decision, because they face the prospect of having money that was once in a fund whose NAV didn't fluctuate in one whose NAV does fluctuate. We suggest that those working with a full-cost advisor seek another option such as the BlackRock Municipal Money Market Fund. Investors willing to do without advisor help may also consider Fidelity's or Vanguard's municipal money markets. Finally, investors should understand that there is no guarantee that other shops won't eliminate their money markets, including muni money markets, given the current environment. Fund companies suffer virtually irreparable reputational--and, therefore, ultimately financial--damage if money market prices fluctuate, whereas the fundholder bears the burden of short-term bond-fund price fluctuations.

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