Bruce R. Bent is the founder and chairman of The Reserve Funds of New York and the creator of the first money market fund in 1970. Now, 33 years later, Reserve manages more than $20 billion among 17 money funds, seven equity funds and several cash-management vehicles, including two patented products.
Bent recently spoke with Mutual Fund Market News' Editor-at-Large Lori Pizzani about the state of the money fund industry and what lies ahead.
MFMN: What gave you the idea to start the first money market fund?
Bent: Thirty-five years ago, Regulation Q limited the amount of interest a bank was allowed to pay on savings accounts to 5.25%. In 1969, interest rates went through the roof, and short-term T-Bills were paying 8.5%. I saw the opportunity for a spread that we could get in between. I tried to find a bank that would allow me to exploit the spread, but I couldn't. In August 1969 I kept thinking, why not develop a mutual fund to do this? I read the Investment Company Act of 1940, and thought that a demand for an interest-paying account that could take advantage of this spread would work.
MFMN: How did you get a fund that would do something as specific as taking advantage of that spread to get off the ground?
Bent: Before I founded Reserve, I ran the cash portfolio for TIAA-CREF, which made me realize that to reach high volumes, a fund such as this would have to be very transaction-driven. We had to build an infrastructure and make sure a system was in place to accommodate what we wanted to do. We designed all of the interfaces - and started selling.
MFMN: Once all of these pieces were in place, how did you begin marketing the world's first money fund and to whom?
Bent: When we started, we had no money to hire salespeople, advertise or promote the fund. So we decided to call on registered investment advisers with trading authority on behalf of their accounts. I was getting money from them, but I was also building up debt and running out of endurance.
I was going out to raise money - working capital - and I put together four-color brochures and handed them out to lots of people. They all said, "No way."
I was also commuting on the Long Island Rail Road and I would step into the train and casually drop one or two brochures, knowing I was violating all kinds of laws. But it worked. By the end of the first year, I had raised $500 million.
At the same time, in the summer of 1972, I had been talking to a reporter at The New York Times. A story about our fund eventually ran on the front page. By the end of that year, our money market fund had pulled in $300,000.
MFMN: Did you ever doubt that the money market fund concept would be a viable and sustainable business?
Bent: I always believed it was going to be a going concern. But I predicted we would have assets of $10 million, which we quickly surpassed.
MFMN: And what said you to the early skeptics?
Bent: There were lots of skeptics, many of whom ended up starting their very own copycat money market funds. But copying, they say, is the highest form of flattery.
MFMN: Be honest, Bruce. Didn't the copycats annoy you?
Bent: Well, yes, they annoyed me. After all, I had done so many things to make something so complex work. A lot went into that effort. I even asked my then attorney if we could patent my idea for the money market fund. He said no, that I couldn't patent an idea.
Since then, I've learned you have to keep asking until you get the answer you want.
MFMN: What are the most significant changes you've seen over the past 33 years?
Bent: The fact that we've added all of the bells and whistles. And having lots of competition keep us constantly on our toes. Fidelity was the first to introduce the checking feature on a money fund. I went to our bank and asked if we could do this, and they said no. So I said to our bank, "Either we get checking or we are gone."
We got the checking.
I've also heard people say, oh, any idiot can run a money market fund, and many fund families added their own. But in reality, only some can really run them well, and not buy Orange County or Mercury Finance paper, both of which famously defaulted.
Now, companies are saying, let's stick to our knitting and outsource our money fund. Banks and brokerage houses are coming to us and saying, hey, maybe you should do this for us. They are passing along the risk you run in the money fund business that if investors put their money into a money fund, they might want it back! And they've decided they can't add value to a business with thinner margins, where the velocity of transactions can make it error prone, and where high technology is absolutely needed.
MFMN: Money funds have certainly captured investors' attention this year, particularly as some of them have run the risk of breaking a buck. What trends are you seeing in 2003?
Bent: I think we will see a major consolidation of money market funds. There will be fewer participants because those who survive can do it better and faster.
We are also seeing a huge need for cash-management services. The principle of putting one dollar in and getting one dollar out along with a rate of return is becoming increasingly important.
We are also seeing movement from traditional money funds into accounts which carry FDIC insurance. There are lots of grandmas who still have their money in their FDIC bank accounts. That's the one thing money funds are missing - FDIC insurance.
MFMN: Doesn't Reserve now have a product that does that?
Bent: Yes. We asked ourselves, how could we tie FDIC insurance to the deeper services money funds offer? So we came out with the Reserve Insured Deposits last year and received a patent for it last April. It is the first FDIC-insured money market account.
MFMN: How does it work?
Bent: With a regular money fund, when a broker/dealer sends money over for, say, 100 accounts, we aggregate those into a Reserve Fund account and we buy a $1 million certificate of deposit from XYZ Bank.
With the Reserve Insured Deposits, instead of investing the money into a Reserve Fund account, we open FDIC-insured accounts.
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