Money market funds have quickly taken center stage in the real-estate-bubble-created credit crisis. Last week we saw 'safe' money market funds slip under a buck a share. A true run-on-the-bank-style panic was averted by (yet) another government scheme to calm the jittery (who are mostly institutional investors incidentally). Around $150 billion flew the money market fund coop early last week before Uncle Sam said 'keep buying increasingly questionable commercial paper, we'll pick up the losses!" Outflows dropped to just a few billion a day.

Now we're seeing tax free municipal money market fund yields skyrocket - which could be a good thing for investors. Hopefully. Tax free money market funds own debt issued by state and local governments - not corporations like the now defunct Lehman Brothers. Traditionally this is a very low risk investment, but then traditionally banks aren't failing every few days as a twenty trillion dollar real estate bubble deflates.

Today truly 'safe' money market funds that own government debt yield less than 2% (and falling). This below-inflation yield is also taxable. Municipal money market funds traditionally yield a little less than taxable money market funds, but can yield a little more after taxes to those in high tax brackets. Today this relationship is out the window. Now the unemployed will even earn a better after-tax yield in muni funds. A lot better. So much better that something just can't be right.

On Vanguard.com today, yields ranged from 1.52% for the taxable Treasury Money Market fund, to over 5% for certain single-state muni funds that let residents avoid state and federal tax on income. For those in a high tax bracket in Pennsylvania, this is like an 8%+ taxable yield on 'safe' money. Similar yield spreads can be seen on Fidelity and other money market fund manager's web sites.

How did this happen? Looking at Investment Company Institute data, in recent days money has been leaving muni money market funds faster than from taxable funds - a grave concern considering there is only about 15% as much money in muni funds. This, plus general problems in the municipal bond market partially because of Lehman's failure, has led to skyrocketing yields.

Is it safe? As we noted last year, even good money market funds can fail and break the buck if there is panic selling and nobody is left to buy the portfolio holdings - regardless of the their soundness. The same is true for municipal funds. However - and this is a big however - the government is also insuring muni money market funds from losses (according to the ICI). The coverage only includes those who bought in before September 19th, so those grandfathered in now have a 5% tax free federally insured investment while those buying in today are probably taking a risk (but if the flows of funds turns positive that risk will be negligible). Investors can tell if flows turn positive - the yields will fall back to earth.

Enjoy it while it lasts!

Kiplinger reports that T.Rowe Price Small-Cap Value fund (PRSVX) re-opened to new investors in the spring.

Yet another venerable fund has reopened its doors to new investors. After being shut for six years, T. Rowe Price Small-Cap Value quietly began accepting new money in May.

With assets of $5.2 billion and 300 stock holdings, Small-Cap Value is a large small-company fund. Preston Athey has run the fund (symbol PRSVX) since August 1991, and he's run it skillfully. Over the past ten years through June 30, the fund returned an annualized 10% -- an average of 4.5 percentage points per year better than the Russell 2000 index of small-company stocks and two and a half points per year ahead of the Russell 2000 Value index.

Athey says the breadth of his holdings helps dampen the portfolio's volatility, which is lower than that of the Russell 2000. 'I believe in having a broadly diversified portfolio with representations in nearly all industries,' he says. 'I'm not smart enough to tell you what the best sectors will be the next two years.'"

Smaller cap stocks have been under-performing larger caps. This, plus a weak stock market, has led to opportunities to get into some previously closed mutual funds.

So should you hop in while the door's open? We probably wouldn't. While T.Rowe Price Small-Cap Value is a solid fund with low fees, it is still a bit too large in terms of investor assets for our taste. In other words, they should have kept this one closed for a while longer.

LINK

The Onion is not a financial news organization - in fact it is not news at all - it's satire. As such we normally would not write about "news stories" that appears on The Onion, but in the case of a recent article about America's bubble-hopping economy, the joke was just too spot on to pass up:

A panel of top business leaders testified before Congress about the worsening recession Monday, demanding the government provide Americans with a new irresponsible and largely illusory economic bubble in which to invest.

'What America needs right now is not more talk and long-term strategy, but a concrete way to create more imaginary wealth in the very immediate future,' said Thomas Jenkins, CFO of the Boston-area Jenkins Financial Group, a bubble-based investment firm. 'We are in a crisis, and that crisis demands an unviable short-term solution.'

The current economic woes, brought on by the collapse of the so-called 'housing bubble,' are considered the worst to hit investors since the equally untenable dot-com bubble burst in 2001. According to investment experts, now that the option of making millions of dollars in a short time with imaginary profits from bad real-estate deals has disappeared, the need for another spontaneous make-believe source of wealth has never been more urgent."

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The vast majority of investors think that the U.S. dollar will continue its multi-year decline. Why else would the fund industry be launching so many new currency ETFs?

As long time MAXfunds.com readers know, we think most investors are usually wrong (this is the main reason why fund investors as a group underperform the market). For the last couple of years fund investors have been flooding into foreign funds for their S&P 500 beating returns. Most investors probably don't understand that much of foreign-fund's outperformance is a result of the dollar's fall. Most investors should read this Wall Street Journal Article:

Most shocking of all to those giddy over the past performance of funds like Dodge & Cox International (DODFX) - a fund we recommend here when it was brand spankin' new and has been on our favorite funds list since 2002 - is this nugget:

One option for dollar bulls going forward (besides increasing allocations to U.S. funds) is to focus on foreign funds that hedge currency exposure. While these funds can be expensive and can reduce the diversification benefit of investing globally, with the current down-and-out buck they are a reasonable solution in the short term.

The WSJ article details several funds that are hedging currency fluctuations. Surprisingly, some funds that never did so are now hedging (traditionally funds either hedge or don't). According to the article, Dodge & Cox International Stock (DODFX) is hedging for the first time since its launch.

Whos Hot on the Dollar, Whos Not

Mostly Hedging:

Tweedy, Browne Global Value (TBGVX)
Longleaf Internatinonal (LLINX)
Mutual Series European (TEMIX)

Not Much Hedging:

Vanguard Developed Markets Index (VDMIX)
Fidelity International Discover (FIGRX)
American Funds EuroPacific Growth (AEPGX)

Increasing Hedging:

Oakmark International (OAKIX)
Dodge & Cox International Stock (DODFX)
Henderson International Opportunites (HFOAX)

LINK

The funny thing about money market funds is investor interest often climbs as the main perk - safe yield - falls. You'd think investors would leave money market funds when the yields plummet to below the inflation rate, but just like in 2002 and 2003 when investors were leaving stock mutual funds by the boatload and money market fund shares were selling like hotcakes (all while yields plummeted to around 1%), today money market funds are all the rage:

Total money market mutual fund assets rose by $22.64 billion to $3.451 trillion for the week, the Investment Company Institute said Thursday.

Assets of the nation's retail money market mutual funds rose by $3.66 billion in the latest week to $1.240 trillion.

Assets of taxable money market funds in the retail category rose by $1.30 billion to $948.19 billion for the week ended Wednesday, the Washington-based mutual fund trade group said. Tax-exempt fund assets rose by $2.37 billion to $292.29 billion.

Assets of institutional money market funds rose by $18.98 billion to $2.210 trillion for the same period. Among institutional funds, taxable money market fund assets rose by $16.34 billion to $2.032 trillion; assets of tax-exempt funds rose by $2.63 billion to $178.10 billion.

The seven-day average yield on money market mutual funds fell in the week ended Tuesday to 2.78 percent from 2.89 percent the previous week, said Money Fund Report, a service of iMoneyNet Inc. in Westboro, Mass."

Of course the real interest by many investors today is avoiding the slide in stocks and eventual (we've been waiting for years...) rise in interest rates that will sting bond holders. Money market funds deliver: investors avoid stock market downside.

Money market yields are perilously close to the dividend yield on the Dow. At just under 12,000, the Dow yields about 2.62%, the S&P 500 yields about 2.22%. Hopefully these investors will move into stocks when money market yields drop below stock yields once again. More likely they will wait until the market recovers 20%, dividend yields are lower, and money market funds yield over 5%, a time when money market funds are actually attractive again.

LINK

If Axl Rose of Guns and Roses fame wrote songs about mutual funds, he might have had a hit with, 'Welcome to The (ETF) Jungle, Baby', especially after yesterday's 3-0 Securities and Exchange Commission vote. As reported in the Wall Street Journal:

The Securities and Exchange Commission voted 3-0 yesterday, as expected, to propose changes that would allow exchange-traded funds to be introduced quickly without review by federal regulators and give mutual funds more leeway to invest in ETFs.

Under the proposal, most ETFs could be brought to market directly, saving sponsors the time and expense of obtaining approval from the SEC. The speedier approach would apply to passively and actively managed ETFs that trade on national securities markets and provide daily pricing to investors.

...SEC Commissioner Paul Atkins endorsed the new approach, saying the agency's ETF review process has sometimes taken years, rather than months, and that innovative product ideas may wind up getting shelved.

...SEC Chairman Christopher Cox called the proposal 'a significant step forward for investors' that would allow new ETF products to be brought to market sooner, and provide similar disclosure documents to investors in mutual funds and ETFs. Currently, ETF investors receive a full-blown prospectus but the SEC proposal calls for such investors to get a shorter summary, in line with a pending SEC proposal for mutual funds.

Actively managed ETFs that don't provide daily information about their portfolio holdings wouldn't be covered by the SEC's proposal."

Perhaps the SEC is willing to give new exchange traded funds the benefit of the doubt because they are generally lower fee than ordinary mutual funds, and to them cheapness outweighs concerns about potential risk. Perhaps they are concerned they have an antiquated regulatory regime (true) that isn't keeping pace with ever more newfangled exchange traded fund like products, like exchange traded notes.

But this diminishing SEC scrutiny will only encourage the launching of ever wackier ETFs. While we have nothing against ETFs, our experience is that the more targeted a fund, the more fund investors as a group tend to lose. Adding intra-day trading, commissions, and bid / ask spreads will likely only exacerbate this problem.

We're not saying the government should get in the way, only that getting out of the way so investors can get more ETFs more quickly could expose some investors to less than desirable products. Lets not forget that in theory all the innovations in mortgage lending were a benefit to consumers and in some cases can save money over a traditional 30 year fixed mortgage. Trouble is, the typical home buyer probably didn't benefit from the innovation of a negative amortization, no money down, adjustable rate 5/1 ARM linked to LIBOR. Perhaps the same will eventually be said about a double inverse China tech stock ETF.

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Fund investors may not realize it, but some of the management fees they pay each year may be going to Washington lobbyists.

Mutual funds, which are technically called investment companies, have a trade association, the Investment Company Institute, that looks out for their best interest. Sometimes these interests are not the best interests of actual fund shareholders. Apparently the ICI was active in 2007 nuzzling up to politicians:

Lobbists may be ranked just above lawyers on many people's least popular list, but in this case the ICI's lobbying could be completely benign. Fund companies would like to get favorable tax treatment for fund shareholders. This would be good for shareholders and fund companies would have a more marketable product. However, sometimes fund companies want to rub out competing products (exchange traded notes perhaps...) that may offer tax and fee savings to investors who would ordinarily choose mutual funds.

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