Births and deaths are facts of life, even in the fund industry. While Reserve Funds of New York, the father of the money market fund, has just launched a new and innovative cash management fund that expects to sport a boosted yield, American Century Investments of Kansas City, Mo., has just pulled the plug on its longest, novel Target Maturity Fund, which had been set to mature 25 years from now.
Existing somewhere between a true money market fund and an ultra-short bond fund, the new hybrid Reserve Yield Plus Fund first launched in mid-June, according to Eric Lansky, senior vice president of Reserve Management Co., adviser to The Reserve Funds.
But this Reserve Yield Plus Fund, from the folks who created the first money market fund, is definitely not a money fund. Instead it's a cash management mutual fund that hopes to pump up the yield over what a traditional money fund can offer.
Yield-Plus Game Plan
Unlike traditional money funds which, under Securities and Exchange Commission Rule 2(a)7, may not invest in cash equivalent securities with maturities longer than 13 months, Reserve's new non-money fund will invest in cash equivalents with maturities as long as 18 months.
That's where one portion of the performance kicker comes in.
"We think it can add an incremental yield," said Michael Sheridan, portfolio manager of Reserve Yield Plus. Sheridan also expects to leverage up to one-third of the fund's assets in order to snare a bit more yield.
Also, unlike Reserve Fund's more traditional money funds, this fund will invest in commercial paper. Although SEC rules fully allow money funds to invest in commercial paper issued by corporations, concerns over corporate blow-ups has dictated Reserve's longstanding money fund policy under which it has declined to invest in commercial paper [see MFMN 7/24/00, 4/14/03). But remember, this is not a money market fund.
Just like a money fund, however, this fund will strive to maintain the typical 90-day weighted average maturity and will invest in securities with the same high credit quality. Also taking the lead from its money fund siblings, this new enhanced yield fund will strive to maintain a $1 net asset value. Although there are no guarantees it will achieve that goal, this is an unusual characteristic for a non-money fund, and one feature that sets this fund part.
Finding a Niche
"This fund is trying to fit into the money fund-plus, or enhanced cash, category, which has a stable net asset value, but goes a bit beyond Rule 2(a)7 as far as maturity.
"This is the first mutual fund to address that niche," said Peter Crane, vice president and managing editor with iMoneyNet of Westborough, Mass.
This fund is also different because up until now, enhanced cash investment options were never packaged within a mutual fund wrapper, Crane said. "Most of these are pooled investments or separate accounts," he said. All told, such enhanced cash investments, including those managed by JP Morgan, Dreyfus and Federated Investors, have $600 billion in assets. That's roughly one-third of the size of the entire money fund universe, he noted.
"This Reserve fund is unique in that it is attempting to bring this [concept] to the masses," Crane added.
The fund maintains two institutional share classes, with corresponding minimum initial investments of $20 million or $10 million, and one share class designated for retail investors, who must pony up $250,000.
Whether the new Reserve Yield Plus is considered an enhanced cash fund or a money fund-plus, SEC rules mandate that it not be referred to, or marketed as, a money market fund because it doesn't meet the letter of Rule 2(a)7.
Key Issue at the SEC
"Rule 2(a)7 protects the use of the terms "money market," "cash," "stable net asset value," and "guaranteed" among others, Crane said. And the SEC is very touchy over anyone using those terms improperly.
Case in point: On June 14, the SEC sanctioned Ford Motor Credit, a subsidiary of Ford Motor, for marketing its so-called "Ford Money Market Account" and promoting the account as comparable to a traditional money market investment.
In actuality, the "money market account" held unsecured corporate debt of Ford Credit. The SEC charged that Ford had advertised it as paying a guaranteed interest rate slightly higher than the average rate paid by money market accounts. Ford was ordered to cease and desist, and pay $700,000 in disgorgement.
But the launch of the new yield plus fund is not the only thing on Reserve's agenda. The group is actively seeking to hire two novel institutional relationship managers to pitch Reserve's offerings, bring in clients, build a relationship with and service those clients, and even serve as the securities trader for each client. The firm currently has six relationship managers on staff.
"Our business model is different. We do not separate channels between wholesalers and traders like other firms. Here, the relationship manager is also the trader. We have a single point of contact," Lansky noted.
"Over the last six to nine months, the money fund business has been flat, but corporations with free cash are looking for alternatives to money market funds," Lansky said. Corporate treasurers want to know what to do with their money. Since April, Reserve has scooped up $4 to $5 billion in new money and has increased its corporate relationships by 25%, according to Lansky.
Where is the most new interest deriving? "We are seeing hedge funds, for the first time, looking at the performance of their cash, and looking to get an extra 20 or 30 basis points," Lansky added.
But unlike Reserve, not all fixed-income mutual funds are in hot demand. In fact, two of the Target Maturity funds sponsored by American Century, were recently liquidated, once by design, and one by default.
This November, American Century will liquidate its Target Maturity Fund 2005 because it will have, literally, come to the end of its planned life. The fund, which invests exclusively in U.S. Treasury zero-coupon bonds and similar securities, was established more than 20 years ago, back in 1985. The goal of the fund was to return to investors all of the principal they had initially invested in the fund, with the possibility of returning a bit more.
One of its features is that it was designed to be a long-term investment holding, although as a mutual fund, investors were able to invest and redeem as they desired. Consequently, nearing its expiration, the fund will liquidate all assets come November.
Likewise, American Century had created several follow-on Target Maturity Trusts, each expiring in five-year increments from 2010 through 2030.
But this past March, American Century threw in the towel on the most recently created fund, the American Century Target Maturity 2030, and fund liquidation took place June 17. That was a bit of a disappointment for American Century, but was necessary due to a lack of liquidity in the zero-coupon long bond market, said portfolio manager Jeremy Fletcher. Concerns were raised that there could be a "potential problem should fund assets rapidly increase," he added.
The real problem began when, in October 2001, the U.S. Treasury, at that time facing a budgetary windfall, chose to cease issuing 30-year bonds. The ripple effect of that decision is that there is currently a dearth of long-term zero-coupon bonds into which the fund would typically invest. In fact, the zero-coupon market now represents a fractional 0.12% of the entire $800 billion U.S. Treasury market, Fletcher noted.
With a shrinking market from which to invest, and investors' apparent appetite for holding any investment for the long-term waning, American Century chose to pull the plug, Fletcher said.
There's a bit of irony in that decision, since Morningstar rated this fund the best performing non-energy fund year-to-date through June 17 on account of its considerable 18.59% return.
So does this mean American Century's Target Maturity funds will go the way of the dinosaur? "Never say never," said Fletcher. But he conceded that there are no current plans to open any new zero-coupon funds.
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