No. of Recommendations: 7
I'm calling this post a squib, because I want to work fast, and jargon won't be explained.

MMF's have been on my mind lately, as has cash management generally. So I pulled books off my shelf and went reading. Bogle suggests that MMF's have two key characteristics: 95% of holdings have to be “of highest quality” and AWM can't exceed 90 days. Most board members know they can beat the yield of MMF's, even playing by those rules, and are doing so with their TD accounts, raising this question:

Are MMF's superfluous to a well-managed portfolio?

That's a can of worms, right? But let's go exploring. MMF's can access a wider range of underlying than can investors. (Read your prospectus.) The 90-day rule also means that investors are restricted, for all practical purposes, to T-bills for their underlying , due to transaction costs even if they could access the same underlying as institutions. Bogle also suggests that AWM's for MMF's typically range from 45 to 75 days. But is that what you see when you go to and poke around?

Why the observed departure from “normal” ranges? A rising interest-rate environment, right? But a couple of funds are long-dated outliers compared to their peers, and some are shorter-dated than investors can match. (They're trafficking in overnight paper & repo's.) But a plotting of yields versus AWM's suggests that departing from the norm doesn't incur yield penalties. Some managers are marching to their own drummers with respect to AWM's, but they're keeping up with the crowd with respect to yields. This suggests that an investor running what amounts to their own MMF's can make similar choices if they have a disciplined view of the market and a disciplined method of implemented that vision. In other words, as I always argue, if you know WHY you're doing WHAT you're doing, then don't listen to anyone else. Go for it.

A couple of posts back, I postulated that interest rates have four stages: basing, rising, topping, and falling, and I compared the 26-week bill against the 13-week bill and asked what penalty is incurred by staying long in a rising stage. (In basing and topping stages, longer is better, obviously.) A review of the historical data I could find suggested the penalty was negligible and that an “all-weather/all-stages” strategy of sticking with the 26-bill, rather than tactically dropping to the 13-week bill, was plenty good–enough, given that one of the goals of money management is simplicity of effort. What's the AWM (Average Weighted Maturity) of a 26-week ladder? Close enough to 90 days that it falls within the rule. What's the credit quality of any Treasury ladder? The highest, right? If you build T-bill ladders, you're running your own MMF (Money Market Fund). Your AWM is an outlier 90 days if you're working with 26-week bills exclusively, but you're beating the fundies, because you're avoiding their expenses, which is always a fun thing: to do to beat the pros at their own game.

Suggestions: historical data on T-Bill auctions and yields is available from the TD website in a format that can be imported into Excel. The data requires massaging to be useful, but it can be done. Likewise, the data that makes available for the top 12 funds in the categories of “prime”, “government”, and tax-free” (for both retail and institutional versions of the funds) can also be grabbed and imported into Excel for scanning, sorting, statistical analysis, charting, etc. Why do it? To better understand your benchmark, which is the fundies, and to make better portfolio decisions about how to allocate assets, one task of which is deciding how to coordinate your bond fund (which I'm assuming you created by buying your own bonds) with your MMF. Obviously, in your own life, you don't have to play by the 90-day rule. But it's a useful disciple to do so, or else you aren't really running a MMF. You're running a very short bond fund, which serves a different purpose than a MMF, which is meant to be both safe AND liquid.

Now some practical considerations. A 4-week T-Bill ladder costs $4k to set up; a 13-week, $13k; a 26k-week, $26k. If your goal is to never be more than 7 days away from a couple thousand cash –-as an emergency fund— then running two 26-week ladders ties up a lot of capital that might be better deployed elsewhere. And running three or four 26-week ladders is going to kill portfolio returns, or at least create a lot of friction. However, if you run one 4-week ladder and one 26-week ladder, you are never more than 7 days away from $2k, never more than 28 days from $8k, and have $30k you can unwind as bills mature. I don't know your individual circumstances, but $30k sounds like good-sized emergency fund to me. (Actually, $4k is where I'd argue that everyone should begin. If you're not rolling at least one 4-week ladder, you're cutting things too close.)

And I'd also argue –-if the opportunities are available, which isn't always the case-- that if you've got much more than $30k tied up in cash, you're sacrificing potential return. But that's going to be a personal decision, and I'll freely confess I'm cash-heavy right now, because 6-months T-Bills look way better than messing with longer-dated or lesser-quality bonds. The 6-month T-Bill is a “sweet spot”, so the structure of my own personal MMF is getting distorted, as I buy more 4-week bills than cash-needs dictate and I as dump more money into the 26-week than I “should”. But that's is also a reality of managing money and building portfolios: what looks good on paper, and can be argued for from theory, can't always be achieved in practice. Thus, you do what you can with what you've got. But you also try to understand what you're doing as best you can, and there's 708-page book on money markets sitting on my shelf that might give me answers to some of the questions I'm asking myself. (And if I'd stop posting, I'd have time to read it. LOL. But if I don't post –-which is a chance to work out ideas— then I don't have a need to read or the pleasure that comes from doing so.)

“No rest for the wicked, and the righteous don't need any.”, as my Dad used to say.


PS The terms "cash" and "cash-equivalents" tend to get used interchangably.Yeah, you spend "cash" at a grocery store, but you'e really spending "currency" even if you're using a credit card. "Cash", as I use the term and is commonly used in the context of a portfolio, is all of your short-term, interest-bearing vehicles that carrying no risk to nominal principal. If nominal principal can be put at risk, then you've selected an "investment", which is a vehicle that offers an upside, because it has a downside. Your profitability comes from the pockets of the opposite side of your trade (and every investment is also a trade), just as his profits will come from your pockets, and the "house" will take a cut of the action, coming and going.
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