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September 19, 2008 Dear Client: In light of the recent market turmoil, some clients have asked about the safety of their cash holdings. Cash held in a bank that is a member of the Federal Deposit Insurance Corporation (FDIC) and certificates of deposits (CDs) issued by an FDIC member bank are insured by the U.S. Treasury up to $100,000 per owner per bank. Individual retirement accounts (IRAs) are insured to $250,000 per IRA holder per member bank. Money Market Funds Brokerage accounts hold cash in the form of money market funds. A money market fund is a mutual fund that invests in short-term debt instruments. The fund may hold commercial paper, CDs, repurchase agreements, debt issued by the U.S. Treasury, government agencies, and a variety of other short-term obligations. The goal of these funds is to provide safety of principal, liquidity, and a stable $1.00 Net Asset Value (NAV). There are more than 2,000 money funds in the U.S. with over $3 trillion in assets. Recently, a large money market fund "broke the buck". It became only the second to do so since the inception of the money market fund in 1971. Its NAV declined to $.97 due to exposure to $785 million in debt securities issued by Lehman Brothers Holdings. Treasury Intervention Money market funds are not FDIC insured. To address investors' concerns about the lack of FDIC insurance, the U.S. Treasury announced this morning that it would back money market funds. Money market funds play a crucial role in providing liquidity to short-term credit markets. The Treasury's willingness to guarantee support reduces the possibility that the Treasury will actually need to pay a claim. Fidelity and Schwab Money Market Funds Fidelity and Schwab's objectives for their own money market funds has always been safety of principal, liquidity, and stability. This week both firms stated unequivocally that their #1 objective is maintaining the $1.00 NAV. Both firms have negligible exposure to Lehman, AIG and Washington Mutual. What is the exposure in the money market funds at Schwab and Fidelity to AIG, Lehman Brothers, and Washington Mutual (WaMu)? Below is a chart showing the showing the exposure to different issuers of debt:
This chart shows Fidelity Cash Reserves exposure to ASIF Global Funding which is a subsidiary of Sun America, owned by AIG:
Other money market managers may have reached farther for yield. For example, Reserve Primary Fund, the fund that recently broke the buck, issued this press release in 2004: Reserve Primary Fund - Class 8 Ranks as Number 1 Yielding AAA-Rated Prime Money Fund for the Second Consecutive Year; Propels Reserve to Record Asset Levels. This is another reminder that excess return is achieved only with excess risk. Our objective for cash holdings has always been, and always will be, to preserve your prinicipal. In Summary Clients have expressed concern, rightly so, about the safety and stability of what is the bedrock of any investor's portfolio: cash and money market funds. After the move today by the US Treasury to provide $50 billion in funds to guarantee money market funds, investors have been reassured. As always, feel free to call or email us at any time. We are happy to talk with you about any of your specific or general concerns.
Regards, |