By Eileen Ambrose, The Baltimore Sun
May 28, 2013
Baltimore's two major mutual fund companies have joined a small but growing number of investment firms offering ultrashort-term bond funds, which may become an alternative to the traditional money market fund.
The T. Rowe Price Ultra Short-Term Bond Fund launched in December and has $175 million in assets. Legg Mason Inc.'s California subsidiary this month filed to register the Western Asset Ultra Short Obligations Fund with regulators.
There are now close to 50 ultrashort bond funds, with seven of them introduced last year, according to Morningstar Inc., which tracks funds.
Ultrashort bond funds generally invest in government and corporate securities that have slightly more risk — and thus a slightly higher yield — than a money market fund. But the average maturity of these securities also is less than those of a typical bond fund, so ultrashort funds will be less affected by interest rate changes. Though rates have been at historical lows, many analysts don't expect them to remain low for long.
Some fund experts say companies are offering ultrashort-term bond funds as an alternative for risk-averse investors fed up with the low rates offered by money market funds. But others say companies also are gearing up for possible regulatory reforms that could make money market funds less attractive.
For decades, investors have parked cash in money market funds, considered the safest investment for preservation of principal outside an insured bank account. Such funds aim to maintain a $1 per share price.
But some money market funds several years ago started holding riskier securities to boost yields — a strategy that blew up on them in the 2008 financial crisis and caused investors in the oldest money market fund to lose money.
The Securities and Exchange Commission reportedly is weighing a proposal to eliminate the fixed $1 share price that can lead investors to believe that money market funds never lose value. Under the proposal, the share price would go up and down with the value of the securities held by the money market fund, the same as with mutual funds.
Industry experts say this floating share price, or net asset value, would only apply to so-called prime funds that can invest in corporate debt in addition to government securities. And, they added, the SEC might decide to adopt a floating share price for institutional investors, not individuals.
It's unclear when or what the SEC will decide about money market funds.
Russ Wermers, associate professor of finance at the University of Maryland, College Park's Robert H. Smith School of Business, said fund companies aren't waiting to find out. They are preparing for potential reform by introducing ultrashort-term bond funds as an alternative to money market funds, he said.
"Without the fixed [net asset value] benefit, investors may see little reason to invest in something with such a low yield," he said.
Jerry Klein, managing director at Treasury Partners at HighTower, a New York firm that manages cash for corporations, agreed. But, he added, fund companies also might have their sights on small investors who "are earning close to zero in money market funds and seeking investments with higher yields with relatively low risk."
Legg Mason declined to comment, noting it can't do so while the Western Asset Ultra Short Obligations fund is being registered.
Joseph Lynagh, manager of the new Price Ultra Short-Term Bond Fund, said the money manager introduced the fund in response to current low interest rates, not potential changes in money market funds.
"Regulatory reform is going to happen in some way, shape or form, and we can't predict what that will be or when that will be," he said. "Here is a product we felt filled a gap in our product line up."
Lynagh said the ultrashort bond fund fits between a money market that now pays an annual yield of 0.01 percent and a short-term bond fund at 1.63 percent. It's geared for investors who want a place to park cash that they won't need immediately, he said.
The annual yield on the fund is currently 0.3 percent. It invests in corporate and government securities with an average maturity of no more than 1.5 years. Though the share price can fluctuate, it has remained at $5 since the fund's launch in December.
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