Bermuda Fundamental Financial Review CASH and Money Funds

Part 4 - see bottom of page for links to Part 1-3

This is the fourth in the new series on your Moneywise Annual Fundamental Financial Review. We are now at the category of money market mutual funds (MMMFs) that are actually investments. In our fundamental financial review, investments (and adviser recommendations) are always approached last on the list. Why should that be?

How can you even begin to think about investing when you don’t know where you stand financially? A financial review means assuring yourself (and an adviser, if you take that route) that all of your finances: cash flows, expenses, savings, legal, tax, insurance, risk contingencies, pension plans, and legacy wishes are in order first, before you decide that you can afford to take on investing in the uncertainty and vagaries of capital markets.

Never be like the individual years ago, in another time and another place, who came into a brokerage house with $20,000 to invest in “something with a great rate of return, like 15 percent”. The broker traded as requested. When markets took a downturn, several days later, and he had to report to the client that the investment had tanked, the screaming about “how could you invest my money in something so risky, that was all the savings I had” could be heard all over the room.

A sad, true story and a terrible lesson to learn. Neither party exercised due diligence. The broker did not ask enough questions, and the client did not provide sufficient information about her “real” financial status.

Many people think of MMMFs as just another form of cash at the bank, sometimes also erroneously assuming that the MMMF returns are made of an interest rate that is guaranteed. Money market funds aren’t cash in the bank, they are investments.

What really is a money market mutual fund?

What it is not:

— not cash,

— not a fixed or term deposit,

— not a statement savings account,

— not guaranteed,

— not a fixed interest rate for the term of the deposit,

— not maths-calculated interest rate, that is taking the amount of your deposit and multiplying by the interest rate offered,

— generally, not subject to early withdrawal penalties, since the funds can be bought and sold daily. There are exceptions to no early withdrawal penalty — as evidenced in a bank’s announcement on Wednesday in The Royal Gazette.

— money funds are not held on your bank’s liability balance sheet.

What it is:

A money market mutual fund is separate stand-alone legal entity encompassing an underlying group of actual investment security selections, whose value can rise and fall with the changes in capital markets. No, it is not money – in spite of its name; it is the purchase with your cash of shares of short-term debt and other investment vehicles offered for sale capital markets.

Investments are subject to risk.

According to Wikipedia that, by the way, has an excellent section on pure risk*, under finance risk, we see, “the probability that an actual return on an investment will be lower than the expected return. Past performance is not indicative of future results. All investments have some level of risk associated due to the unpredictability of capital markets’ direction as well as other risk exposures: capital risk, country risk, default risk, delivery risk, economic risk, interest rate risk, liquidity risk, political risk, etc.”

There are grades of risk; some investments have far less risk than others. Typically, the higher the investment risk, the higher the return on the asset. But, let’s face it — life itself is a risk. The best we can do is to plan carefully and knowledgeably to manage the risk — that we are willing to take — with our lives and our investments.

Each money market mutual fund is a separate fund that is required by securities law (in the country of registration) to operate under very strict guidelines. Almost universally, mutual fund companies issue an investment prospectus (that can be thought of as a recipe book for a mutual fund) that details at a minimum the information about the fund and the risks of investing. At first glance, these are long missives, collectively designed, it seems, to dull the senses, confuse the intellect, and incite severe boredom.

Where do you obtain a prospectus? Your financial salesperson should provide one for each mutual fund you are interested in, along with a highly detailed fact sheet. You can also find prospectuses rather easily, just by using Google search. Learn to use this search engine at every opportunity. It will become your second-best friend. Information on the web is substantial, verifiable (mostly) and so rapidly current. An example. Once an individual requested help with a rather obscure investment person touting a high-yielding investment opportunity. “We just don’t know anything about this firm, or this representative,” they lamented. We searched Google with the names. Presto! The individual in question had been prosecuted and jailed twice on securities fraud - the salacious details were all over the net. End of questionable high-yield security story.

However, if you are planning to drop a substantial amount into any mutual fund or investment, you should take the time to review your prospectus thoroughly, it will provide another facet to your investor education. Keep in mind that we aren’t talking just about money market mutual funds here, but the opportunity to understand the mutual funds in your pension accounts, possibly sub-accounts in variable and universal insurance policies as well.

Prospectuses contain all of the key factors relevant to the fund: investment objectives, principal risk factors, fees and administrative expenses, historical and current performance numbers, investment strategies, composition and allocation of the underlying investment securities purchased and managed, how to buy, sell, and transfer shares, conflicts of interest, portfolio manager reputation, and related items.

What are the underlying — as known in the trade — securities that comprise a money market fund?

Going forward with our series, we will take a look at the prospectus and fact sheets composition of the Blackrock® Ready Assets Prime Money Funds**. Since everyone is concerned with fees and the actual cost of carrying a mutual fund, the focus will be on fees, then the underlying securities, and finally performance related attributes.

From the prospectus, we see that “the investment objective of this fund is preservation of capital, liquidity, and the highest possible current income consistent with the objective of investing in a diversified portfolio of short-term money market securities”.

Annual fund operating expenses are as follows: management fee 0.385 percent, distribution fee 0.125 percent, other expenses 0.18 percent for a total of 0.69 percent annually. Are these fees competitive. Next in the series, we learn how to compare fees, and mutual funds.

Investor people aren’t happy with their returns these days, since they are sitting at zero percent — an image far removed from the years not so long ago when money funds were earning in excess of seven percent, annually. Remember?

However, it may be time soon to invest in them again. Stay tuned.

Links to Royal Gazette

Part 1 - http://www.royalgazette.com/article/20140118/BUSINESS08/140119756

Part 2 - http://www.royalgazette.com/article/20140201/BUSINESS08/140209995

Part 3 - http://www.royalgazette.com/article/20140208/COLUMN07/140209774

Source: Blackrock https://www2.blackrock.com/us/financial-professionals/literature/prospectuses/money-market-funds

Blackrock money market funds are carried by AFL Investments in Bermuda.

Disclaimer. Martha Harris Myron has no relationship to AFL Investments, or its parent company Argus Holdings. This is a general information educational article and cannot be used as recommendations to buy, sell investments, implement a financial plan. Readers are advised to consult with their personal professional advisers.

Martha Harris Myron CPA PFS CFP JSM

Masters of Law in International Tax and Financial Services

Pondstraddler* Life™ Consultancy provides independent cross border financial planning, publications and integrative presentations for Bermuda residents, international citizens (and businesses) living, working, crossing borders, and straddling ponds in the North Atlantic Quadrangle: United States, Canada, United Kingdom, Europe, and the island of Bermuda, the premier international finance centre.

Contact: martha@pondstraddler.com Bermuda Tel: 1 441 735 4720

* Pondstraddler. A person with one foot on each shore whose heart resides in both countries.