Monthly Commentary

April 2024 - The Pitfalls of Money Market Funds: A Case for US Treasuries

Dear Investors and Friends,

One of the most pressing inquiries we encounter is the question of whether money market funds harbor risks. While it's true that investors have historically not experienced significant losses in such funds in the United States, it would be remiss to assume they are devoid of risk. Today, we delve into the realm of money market funds through the lens of risk management, aiming to shed light on potential pitfalls.

Past Failures and Close Calls

There have been instances where money market funds failed to maintain the sacrosanct promise of returning 100 cents on the dollar. The Reserve Primary Fund, a stalwart in the industry, faltered in the wake of Lehman Brothers' 2008 bankruptcy, causing its net asset value to plummet to 97 cents per share. Similarly, the Community Bankers U.S. Government Money Market Fund succumbed to substantial losses in 1994, primarily due to risky investments in derivatives, resulting in liquidation at 96 cents on the dollar.

Moreover, there have been numerous near misses where the stability of money market funds was put to the test. A notable report by the Federal Reserve Bank of Boston in 2012 highlighted 56 instances in which fund managers proactively injected capital into their money market funds to ensure that investors received 100 percent of their expected returns.

Recent Warnings

The echoes of caution surrounding money market funds have only grown louder. Treasury Secretary Janet L. Yellen, during the banking crisis of 2023, singled out money market funds as a focal point of concern, citing their vulnerability to runs and fire sales.

Understanding the Risks

Money market funds come in several flavors, including Prime, Tax-Exempt, Government, and Treasury-Only. At RCM, we eschew Prime, Tax-Exempt, and Government funds due to their exposure to debt that is not explicitly backed by the United States government. While Government funds may seem safer, they still carry inherent risks, especially through involvement in repos, where default by borrowing parties can imperil invested funds.

Funds & Risk Management

The structure of money market funds introduces inherent risks, particularly through commingling assets, which can magnify the impact of large redemptions or purchases. This dynamic can force funds to sell securities at unfavorable times, compromising investor returns.

The RCM Approach: Prioritizing Safety

At RCM, our approach to cash management is rooted in risk mitigation. Why expose capital to any degree of risk when the incremental benefits are marginal? Consequently, we advocate for the direct holding of US Treasury securities in a separately managed account (SMA), providing a safe haven for our clients' funds while relieving them of the burden of navigating cash management complexities.

Please reach out to us with questions and comments. Thank you for trusting RCM with your capital. It is a privilege for us to serve you.

David and Mike

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Roosevelt Capital Management LLC is a registered investment adviser.  Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies.  Investments involve risk and are not guaranteed.  Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.

Past performance is not indicative of future performance.  Principal value and investment return will fluctuate.  No guarantees or assurances that the target returns will be achieved, or objectives will be met are implied.  Future returns may differ significantly from past returns due to many different factors.  Investments involve risk and the possibility of loss of principal.

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