New rule threatens to drive millions of investors out of money market funds, ICI chief warns

The head of the Investment Company Institute sounded the alarm about a threat to the $2.7 trillion in U.S. money market funds at Thursday’s Bloomberg Portfolio Manager Mash-Up Conference in New York City.

Paul Schott Stevens, the ICI’s president and chief executive, said that a rule proposed by the Securities and Exchange Commission would impose two requirements that, if enacted, could hobble the already besieged money market fund industry. The first of the two “bad options” would force money market funds to abandon the stable $1 net-asset-value minimum and the other would impose capital buffers and the ability of the SEC to freeze assets, he says. See: Five steps to get your clients out of bonds and into alternative, low-volatility investments.

“These proposals are like a game of Clue,” Stevens said. “[It’s] death by rope or death by candlestick.”

According to Stevens, the proposed SEC rule could drive millions of investors — both individual and institutional — away from the funds with potentially disastrous results, considering that one-third of commercial paper, 57% of short-term state and local government debt, 21% of large-bank CDs and 16% of Treasury bills are in money market funds.

Furthermore, the ICI chief maintains that any additional changes are unnecessary since the SEC rules adopted in 2010 made the industry stronger and safer. As proof, Stevens pointed out that U.S. money market funds have survived severe stressors — including the European sovereign debt crisis, the U.S. credit downgrade by Standard & Poor’s following the debt-ceiling crisis and the “long-running punishment of near-0% interest rates.” See: How exactly RIAs can leverage the new transparency as a marketing tool.

 Jack Bogle, being interviewed by Betty
Liu: I like equities.

Despite these challenges, Stevens said, the funds have met their redemptions and kept their liquidity. The new rules, he said, will harm investors and economy and “undermine a product that plays a central role in cash management and funding for businesses, state and local governments, nonprofits, and individuals.”

Mixing and matching

True to its theme, the conference, held in the Union Square Ballroom in downtown Manhattan, brought together an array of asset managers, portfolio managers, analysts and investors, mixing and matching them in a series of brief, fast-paced panels.

“It’s a like a music mash-up — we’re taking the best tracks and put them together,” says Bob Bierman, who heads up the conference division for Bloomberg LINK.

The conference was notable in that it was Bloomberg LINK’s first conference geared specifically to the fee-only advisor segment. Advisors paid $1,400 for the day-long event, $700 if they were Bloomberg clients.

“We’ve been doing conferences for portfolio managers and institutional advisors since 2009,” says Bierman. “More and more financial advisors have been asking to come the these events.”

On Wednesday, Bierman said he expected that about 120 of the 200 people at the gathering would be advisors.

Fundamental rules apply

Jack Bogle, founder of The Vanguard Group Inc. and president of Vanguard’s Bogle Capital Markets Research Center, was interviewed by Bloomberg news anchor Betty Liu. Remarking that he hoped the audience didn’t object to bluntness, Bogle went on to speak forthrightly on the subject of long-term investment versus speculation, coming down squarely in the buy-and-hold camp.

“The fundamental rules apply as time goes by,” Bogle said, throwing an old standard into the mash-up. “I like equities.”

When asked by Liu if the era of buy-and-hold was at an end, Bogle drew guffaws by doing a Jack Benny-inspired double-take after which he exclaimed, “I mean really!”

Bogle added, “It’s a holder’s game. [Frequent] traders will pay the croupier’s fee [as well as the] penalties for their own bad behavior — jumping in and out with what looks good at the moment.”

The 'mash up’ is Bloomberg LINK’s
first conference geared to fee-only advisors.

'Ghastly combination’

Bogle is also leery about the future of exchange-traded funds.

“ETFs are the biggest marketing innovation in the 21st century. But are they best for investors? The evidence is overpowering that they are not. If you buy and hold for the rest of your life, that’s fine. But if you’re trading all day long …. what kind of idiot would want to do that?” See: Coming from behind, Vanguard is gobbling up ETF market share.

Bogle had even harsher words for hedge funds. While he singled out a few people in the industry whom he admires for their “high character and deep insight,” Bogle ascribed the popularity of the funds to a “ghastly combination of greed and hope.”

He was equally decided on the capital gains tax debate. “No one’s tax [burden] should be lower than those who make a living by the sweat of brow or their brain,” Bogle said, noting that when he started in the business there was a 70% tax on unearned income. “Why give a tax break for gambling?”

When Liu seemed to express surprise regarding Bogle’s views, he clarified, “I am a lifelong Republican, but [along the lines] of Abraham Lincoln or Teddy Roosevelt — a vanishing breed.”

Stressing that he is no fan of the “soak the rich” school of thought, Bogle concluded by saying: “It has nothing to do with capital formation. It’s logic with a touch of concern for those who aren’t doing as well as we are.”

Pressure

Hussein Amad, Raphael Aronowicz and Shannon
Doyle of Yorkville Asset Management: The
ability to resist the quarter-to-quarter pressure
is paramount.

At the lunch break in the media room, members of the Toronto firm Yorkville Asset Management Inc. reflected on Bogle’s remarks. Hussein Amad, president and CEO of the $2 billion portfolio management and wealth management firm, said he was intrigued by Bogle’s critical stance but was unsettled by his equation of investing and gambling.

“It’s an industry problem,” agreed Amad’s colleague, Raphael Aronowicz, who handles derivatives and trading for the two-year-old firm. “People are just trying to get paid. The ability to resist the quarter-to-quarter pressure [and do the right thing by your clients] is paramount.”