In recent days, major institutions that offer money market funds have rushed to follow each other in announcing a change of heart: posting the net asset values for some of their funds every day, allowing investors to see the minor fluctuations that can occur even as shares trade at a constant $1 apiece.
Goldman Sachs Asset Management, JPMorgan Chase, Fidelity, BlackRock, Federated Investors, Charles Schwab—many of the biggest players in the $2.6 trillion industry have made the concession to transparency, after long resisting efforts by regulators.
One company, though, is conspicuously not on the list: Vanguard.
That’s curious, because Vanguard Group markets itself as having transparency and “plain talk” in its DNA. Founded in 1975, the Valley Forge (Pa.) mutual fund firm has grown to manage $2 trillion, with a reputation for driving down costs industrywide and demystifying the world of investing. Money market funds became a popular investment class in large part thanks to their seeming simplicity—that steady $1-per-share price that makes transactions a breeze. During the 2008 financial crisis, though, investors learned that the funds weren’t as stable as they had been led to believe after the $62.5 billion Reserve Primary Fund “broke the buck,” falling below $1. Regulators added restrictions on the industry in 2010; Securities and Exchange Commission Chairman Mary Schapiro pushed for more, but failed before exiting the agency in December.
One option on the table called for doing away with the funds’ fixed $1 value, and recording each transaction at its true price, which can fall anywhere from $0.995 to $1.005. Managers screamed that the tax implications would be a logistical nightmare and scare away customers. The steps taken in recent days by Goldman, Fidelity, and others are a half-measure: They will post “shadow” NAVs, while transactions still go through at $1. This builds on the 2010 regulations, which called for monthly NAV disclosures, at a 60-day delay.
While Goldman promoted “more frequent disclosure and greater transparency,” Vanguard stood pat. “We have not seen an increased demand for more frequent disclosure from our clients, who are primarily retail investors (a different client base than Goldman and other institutional players),” Linda Wolohan, a Vanguard spokeswoman, wrote in an e-mail. Fluctuations in Vanguard’s biggest money fund, the Vanguard Prime Money Market Fund, have been “de minimis,” Wolohan wrote. “Given the small degree of fluctuation and lack of demand from our clients, Vanguard currently has no plans to increase the frequency of money market fund NAV disclosure.”
What’s behind this? Peter Crane, the founder of Crane Data, which tracks the industry, says more disclosure can sometimes have the unintended effect of confusing ordinary, or “retail,” investors. Money market funds aimed at retail investors “normally are much more reluctant to disclose technical information,” says Crane. “It would be costly for [Vanguard] to answer all the ridiculous questions they would get” from overloaded customers. “They just don’t have the infrastructure and the capital to spend on frivolous things.”
The shift makes more sense for funds that cater to more sophisticated institutional clients, Crane says. That some firms with retail clients did join the pack came as an eye-opener. “It’s surprising that Fidelity would do it too,” Crane says. “Charles Schwab doing it was a shocker as well.”
Why would they get out in front of Vanguard? “That indicates that it’s an effort to forestall more dramatic regulation, and, I think, in order to appear reasonable and flexible in the regulatory battle,” Crane says. The Financial Stability Oversight Council, which is chaired by the secretary of the Treasury, took up the floating NAV cause after the SEC’s inaction last year.
One possibility is that retail investors will lose curiosity in precise NAVs after they see how small the variations are.
“I’ve been joking, if you like zeros and nines, you’re gonna love the market NAV,” Crane says.