Newspaper article St Louis Post-Dispatch (MO)

Money Market Funds Staging a Comeback

Newspaper article St Louis Post-Dispatch (MO)

Money Market Funds Staging a Comeback

Article excerpt

Cash is king in 1994.

That means the low-profile money-market fund, a leader in the world of short-term liquid "cash" investments, aims to reclaim its throne.

Investment strategists, who are worried about the stock and bond markets, have been gradually boosting the cash portion of their model portfolios. While the cautious 40-percent position recommended by Prudential Securities is extreme, 25 percent is common.

With $600 billion in assets, money-market funds are a growing force. As interest rates moved up in the past year, the number of available money-market funds increased by 36 to 632.

Still, they long ago surrendered their dominance of the early 1980s, when returns had shot beyond 20 percent.

Despite recent increases, today's yields remain modest. It's likely that only disasters in financial markets or a dramatic rise in rates could ignite a money-market frenzy.

Since these growing money-market funds aren't supposed to lose money, the Securities and Exchange Commission wants to make sure they don't. It recently ordered portfolio managers to weed speculative derivative securities out of their holdings.

That was prompted by Bank of America having to bail out two of its money-market funds to maintain their stable net asset value of $1 a share. Losses from risky derivative plays, especially so-called "range floaters" securities that don't pay interest if rates move beyond a certain range, threatened to slice investor asset value.

"If money-market funds were to breach the $1 a share rule, it would breach their trust level to a tremendous degree," said John Markese, president of the 175,000-member American Association of Individual Investors in Chicago. "But their asset quality and maturity are being carefully regulated by the SEC."

This "parking lot" is, after all, supposed to reduce portfolio risk and provide liquidity.

"No one's lost money in a modern money-market fund, and Bank of America pumped $69 million into those institutional money-market funds to make sure that remained the case," noted fund-tracker Bill Donoghue, publisher of Donoghue's Moneyletter in Ashland, Mass. "The SEC and the funds' independent directors maintain necessary pressure on funds."

Convenience, services and placement of other investments play roles in selecting a money-market. …

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