Posted on: Sunday, April 4, 2004
Portfolios could use a money fund
By John Waggoner
USA Today
The average money market mutual fund yields just 0.51 percent. What kind of crazy person would invest in one?
Well, there's Irina Simmons, and we all should be so crazy. As treasurer of EMC, the data storage company, she puts a chunk of her company's idle cash into money funds nearly every day. EMC, which had $6.9 billion in cash at year's end, earned $188 million in interest income last year.
Companies and institutions are the biggest investors in money funds, and they won't jump into the stock market, no matter what hopeful pundits say. But that doesn't mean you shouldn't invest in money funds. In fact, they may be the ultimate contrarian investment.
A money fund invests in money market securities — short-term, high-quality IOUs issued by banks, corporations and the U.S. government. Unlike all other funds, a money fund's share price stays at $1 every day. The advantage:
If your share price doesn't change, you don't lose money. But money funds aren't insured, so it is possible, but unlikely, to lose money.
Money funds have $2.1 trillion in assets; institutions own $1.2 trillion. Many, like EMC, use money funds to invest otherwise idle cash. Because EMC has so much cash, Simmons uses more sophisticated investments for much of that $6.9 billion. But part of it resides in a humble money fund.
Stock analysts often point to the $2.1 trillion in money funds as a reservoir of buying power for the stock market.
"It's a fallacy," says Peter Crane, editor of iMoneyNet Money Fund Report, a newsletter that tracks the funds. Institutions like EMC won't ever jump into the market. They can't risk their short-term cash.
"Our guidelines don't allow us to invest in stocks," Simmons says.
At Charles Schwab, the nation's largest discount brokerage, money fund assets remain about the same percentage of overall investor assets in up markets and down, says Steve Ward, the company's chief investment officer. "Even when customers are buying stocks, someone else is selling," Ward says. That money goes into money funds.
Why would anyone invest in a money fund now? Two reasons. Some people use money funds as an interest-bearing checking account. And others think that the money market is the best place to be now.
Consider Robert Rodriguez, who has managed the FPA New Income fund for 20 years. The bond fund hasn't had a losing year under his guidance. A rare switch hitter, he also manages FPA Capital, a stock fund. It's up 67 percent the past three years, compared with an 8 percent loss for the Standard & Poor's 500 stock index.
Given a choice between the stock market and the bond market, Rodriguez would choose the money market. Stock prices are high, relative to earnings, he says. Bonds have been in a bull market since 1981, and their prices are even higher.
Rising interest rates could smack both markets, and hard. Bond prices fall when rates rise. And higher rates make it more expensive for companies to borrow and expand. "It won't take much of a shift to have a dramatically negative effect," Rodriguez says.
The catalyst for higher rates could be inflation. When prices rise, investors demand higher yields. In fact, Rodriguez says, inflation could already be here. The government's main measure of inflation, the Consumer Price Index, is deeply flawed.
Most experts exclude the volatile food and energy components of the index, for example. Curiously, however, many people insist on eating and driving. And, Rodriguez says, the Consumer Price Index understates soaring home prices and healthcare, too.
If rates do rise, money fund yields will rise, too. Rodriguez has 31 percent of FPA Capital in money market securities, and his bond fund has 37 percent — a position that leaves him lonely in the investment business, but not alone. Two other superb funds, Weitz Value and Clipper, are about 20 percent in cash. When these funds hold lots of cash, investors should pay attention.
"I wish I could be more upbeat, but it's an absolutely miserable investment environment," Rodriguez says.
A money fund should be part of your portfolio, even if you love stocks now. But choose one with low expenses. With rates this low, even a contrarian wouldn't pay more than 0.5 percent for a money fund.
