Tags: mutual funds | sec

What appears to be a crusade within the SEC to protect us from money market funds has taken a bizarre turn as a top regulator tries to silence industry critics.

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Elisse Walter is one of the SEC's five commissioners and was appointed in July 2008, right when the wheels were coming off the global credit markets.

However, that doesn't explain her commitment to changing the way the money markets work -- even though fund managers claim their portfolios work just fine.

Walter recently warned members the Investment Company Institute to "stay away from media statements" on the issue or risk "destructive disengagement."

It's a strange attempt to squelch debate on what was already a strange issue for the SEC.

Mary Schapiro has made MMF reform a top priority and it looks like Walter is in her corner.

Other SEC commissioners have balked at the push as "premature and possibly unnecessary."

And while the industry has protested what they see as a pointless attempt to kill the entire asset class, I haven't seen much of the "emotional, strident and, to a certain extent some of us are losing our heads" behavior that Walter is complaining about.

If ending the fixed NAV and enforcing new capital reserve requirements would kill MMFs as we know them, then that's just how it is. 

Saying so doesn't represent anyone "losing their heads."

But we still don't know why the SEC has turned money market funds into investor enemy No. 1.

Are we poised for another Reserve Primary-style collapse? Short-term interest rates have been so low for years that these funds are slowly bleeding out -- they've had to waive fees simply to avoid breaking the buck on an after-cost basis, so scale works against them.

Has the entire $2.6 trillion asset class started to rot, but Walter, Schapiro, and company don't want to cause a panic?

At this point, nobody's talking about why MMF reform is such an overriding priority at the SEC. If this is an emergency, tell us. If not, the SEC has plenty of other things to worry about.

And as a result, the people who run those funds aren't necessarily the ones who look like they're losing their equilibrium.

Tags: mutual funds | sec

Industry research firm Celent has put together a new report on money market funds concluding that ending the fixed $1 NAV structure will kill the asset class.

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"A floating NAV will negate the entire incentive that investors have to buy and sell these funds and ultimately eliminate the $2.7 trillion industry," says Scott Sullivan, the analyst who put the report together.

Celent is fine with the 2010 MMF rules, which beefed up liquidity in order to minimize the odds of another fund "breaking the buck" and starting a panic among investors who consider these vehicles equivalent to cash.

MMF portfolios now have to contain 10% of their holdings in one-day securities and have an average maturity of ony 60 days, giving them time to ride out any temporary upheaval while still making their day-to-day distributions.

However, SEC Commissioner Mary Schapiro has made deeper MMF reform her top priority, even though matters of top-level concern to advisors -- like who's going to regulate them in the future -- drift from year to year.

Leading fund managers like Fidelity have already balked at the notion of abandoning the fixed $1-a-share NAV structure.

The question is why Schapiro is so stubborn on an issue that nearly every other commentator says has already gone far enough. 

Does she know something ominous about looming instability of the money markets that we don't?

If she does, maybe she can tell us in a way that doesn't panic the markets. And if not, why is this such a big deal? 

Tags: 401(k) | advisor technology | asset allocation | client satisfaction | fiduciaries | financial advisor | goals | integrity | investment fiduciaries | retirement | risk | suitability | target date funds | value proposition

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Tags: ETFs

Some investment products become wildly popular with their sponsors and managers, but are a tougher sell to the actual investors. Active ETFs may be the perfect illustration.

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Charles Schwab has jumped into the active ETF arena in an effort to carve out a role for itself as a seller of non-indexed exchange-traded funds.

It's likely that the first actively ETFs out of the Schwab pipeline will be clones of its existing mutual funds, much like PIMCO's recent effort to duplicate its Total Return fund in ETF form.

Fund complex executives love active ETFs as a new way to monetize their existing fund management and marketing expertise.

On paper, it's a brilliant idea. After all, growth in the mutual fund world has slowed down, so why not spin out the portfolios into an asset class that is cannibalizing market share from those older products?

However, the PIMCO move has so far won scattered yawns and about $100 million in asset flows, which is not bad for a barely a week of active subscriptions but is still sub-average for the active ETF market.

And active ETFs themselves represent a tiny niche in the almost exclusively indexed ETF world.

Commission-based advisors won't recommend ETFs of any type because they can't get paid on those assets.

Fee-based advisors would generally rather build a portfolio out of lower-cost passive funds, maybe with some favorite active managers in the mix.

Institutions have their own money managers -- or should -- and so tend to use passive ETFs as core beta holdings to round out their proprietary strategies. Active ETFs would get in their way.

That leaves self-directed investors as the target market here. While there are rumblings that the self-directed investor is back, it's unclear whether these people are diving back into actively managed mutual funds the way they once did.

The cult of the active fund manager seems to have died a messy death over a decade ago and never came back.

Unless active ETFs can somehow rebuild that mystique -- with or without the traditional funds by their side -- they probably won't get much traction.

Look at the wasteland that indexed ETFs have become. Outside a few hit funds, there aren't many of these vehicles that crack $100 million in assets. 

Many launch to some hoopla as a novelty, then stall at under $12 million or so. At these levels, it's hard to trade these things actively even if someone wanted to do so -- and if it doesn't trade, why not just buy a mutual fund instead?

Still, the ETF complexes love launching these things like balloons. They'll keep launching them until they run out of money. 

Last point: it's more expensive to run an active fund. That's why the fees are higher. PIMCO is subsidizing its overhead because it's already paying the managers on the mutual fund side.

But an active ETF with no preexisting mutual fund to support it could have a much harder time.