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Rating:Start Shopping if the Fed Cuts Not Rated 0.0 Email Routing List Email & Route  Print Print
Tuesday, November 05, 2002

Start Shopping if the Fed Cuts

Reported by Sean Hanna, Editor in Chief

Fund families without at least $500 million in their money market fund may want to look into outsourcing their efforts. The tip comes from Bruce Bent, the creator of the nation's first money market fund. Of course, Bent does have a stake in the decision as his Reserve Funds specializes in private-labeling money funds for on other fund firms.

Still, Bent points out that there is a strong possibility that the Fed will again reduce interest rates tomorrow (he personally thinks that there will be a 25 basis point cut), and that if it does fund firms will find their margins on money market products squeezed some more, or even pushed into negative territory.

"We are going to see a lot of peripheral players acknowledge the fact that they should not have their own fund. They will outsource," predicted Bent in an interview with the MutualFundWire.com. "If they are doing it right and have a credit committee and the whole infrastructure, they should be asking 'do I want to do this?'"

Fund family executives typically believe that they can run a mutual fund as well as any other firm, only to learn that money funds are different than their equity and fixed income funds that do not require a stable NAV.

"There is a realization that takes place, they think 'I can do this like anyone else can,' but you can't really. We can do it better, cheaper and faster and you can focus on your business," said Bent.

Bent said he expects that fund firms that see their expenses pushed above their yield of the fund will choose to subsidize it rather than offer a negative interest rate. Failure to do so would be preposterous and make the fund unmarketable, he explained.

For some fund firms, those subsidies should be taken as a push to explore the alternatives. "We can make sure a fund firm has a positive bottom line on as little as a million dollars," said Bent.

Reserve Funds hottest business today is actually offering FDIC funds, confided Bent. "Money funds of a conventional style are going out of style and there is much more of an interest in FDIC funds," he said. In that fund, investors may receive up to one million dollars of FDIC insurance on their account. Reserve pulls this trick of surpassing the normal FDIC account cap by acting as a deposit broker and daisy-chaining banks together to pool their coverage. It is offering the bank deposit product to other fund companies, investment advisors, and banks.  

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