Don’t Be Busting My Buck: The Relation of European Debt and some of the World’s Largest Money Market Accounts

Last week the Wall Street Journal pulled an arrow from its quiver and launched it at the heart of the largest money market funds in the country for loading up on debt issued by European countries, which have affectionately become known as The PIIGS.

A real life experiment on how to put lipstick on a pig has just begun and we all get a front row seat.

In the July 6th issue of The Daily Reckoning, Eric Fry offers some interesting insight as he references the Wall Street Journal June 27th editorial “Money-Market Mayhem” where the Journal accuses the money market fund industry of “piling into European bank debt, even as everyone knew those banks stocked up on bad European sovereign paper. The US Treasury is even saying privately that the US needs to support the European bailout of Greece lest European banks fail, US funds take big losses, and we get a flight from money funds.”

It’s been a few years since we have discussed the concept of “Busting the Buck” which occurs when a money market fund is forced to reduce its share price below the coveted $1 marker. While historically, “Busting the Buck” is a rare event, it behooves all of us to pay attention to stressors that could trigger a domino effect leading to the heart of some of the nation’s largest money market funds.

To understand the importance of this while providing you a little industry insight, I reference an article in “The Daily Reckoning” entitled “Going Broke with Greece”. You can access this article by clicking here. The author Eric Fry touches upon how some of the biggest Money Market Funds offered by companies like Fidelity, Vanguard and BlackRock have beefed up on debt from Greece, Portugal, Italy and Ireland in an attempt to boost yield.

Mr. Fry references the $67 Billion behemoth, Fidelity Institutional Prime Money Market Fund to raise the question of who is benefiting from these funds hogging up on risky sovereign debt. The investor or the manager? “According to the Fidelity Web Site, the managers of the 67 billion Fidelity Fund (FIPXX) charge a 14 basis points (.14%) management fee to oversee the fund. The Investors in this particular fund receive only 12 basis points a year (.12%). Obviously if the managers of FIPXX did not load up on European bank debt, they would not be able to pay out .12% to the shareholders. But neither would they be able to pay themselves .14% per year for doing so. A fee of .14% in the case of FIPXX amounts to more than $93 million per year in fees for Fidelity.” Perhaps the managers are earning all 14 basis points of their fee while rewarding investors with 12 basis points. Or perhaps they are taking risks just to stay employed. The answers to these questions are up for each individual investor to decide for themselves.

The bottom line is there has never been a more important time to start asking questions and doing research on your portfolio regardless of how diversified you may feel you are. As always the devil is in the details. And when it comes to mutual and money market funds the details can change unbeknownst to you. For this reason and more it is important to evaluate and stress test your portfolio on a regular basis.

You can find out if your funds contain risky sovereign debt by reading the prospectus or contacting the fund company. For your convenience you may want to inquire about The Quiver Portfolio Review and Stress Test.

Contact us today to learn how a portfolio review and stress test may be able to help you gain a greater insight into your investment portfolio.

Warmest Regards

Colby McFadden
Quiver Financial

The opinions expressed are those of Colby McFadden and Quiver Financial as of 7-11-11 and are subject to change due to market and other conditions. Securities offered through Newport Coast Securities member FINRA/SIPC. Advisory services offered through Newport Coast Securities a registered investment advisory.