Vanguard shifting prime money market fund to safer U.S.-backed investments

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Changes are coming for risk-averse Vanguard investors who are parking cash.

Late next month, Vanguard will transition its $125.3 billion Prime Money Market Fund to a government money market fund, investing "almost exclusively" in U.S. government securities, cash and repurchase agreements backed by government securities or cash.

The fund will be renamed the Vanguard Cash Reserves Federal Money Market Fund, the firm said.

Money market funds often provide investors a safe haven to stash cash and get a little yield, as well.

We believe that the rewards of even the most conservatively managed prime funds are no longer worth the risk.

Greg Davis

Chief Investment Officer at Vanguard

While some of these funds invest in government securities and cash, others — including prime funds — often buy commercial paper, which are short-term notes issued by companies.

"Vanguard investors prioritize capital preservation for their money market investments, and we believe that the rewards of even the most conservatively managed prime funds are no longer worth the risk," said Greg Davis, Vanguard chief investment officer, in a statement.

"We are committed to structuring and managing our money market funds prudently while preserving their safety and liquidity, and are confident these changes will best position the fund to continue to meet the expectations of our clients, while still providing a competitive yield over the long term," he said.

March shake-up

Vanguard isn't alone among managers backing out of a prime fund in recent months, said Pete Crane, president of Crane Data.

Northern Trust announced in May that it would stop taking new investments in its Northern Institutional Prime Obligations Portfolio and begin liquidation on July 10, according to a filing with the Securities and Exchange Commission. The fund had $829.5 million as of June 30.

These changes all follow the market havoc that went on this spring, said Crane.

As investors fled from prime money market funds in March, the Federal Reserve stepped in to provide the Money Market Fund Liquidity Facility to help funds meet those redemption requests.

Normally the funds would have had to sell some of their assets in order to cash out investors, but the funds grappled with illiquidity amid the coronavirus outbreak.

The point of this move was to stabilize the market and avert a repeat of the 2008 money market fund crisis.

On Sept. 16, 2008, the Reserve Primary Fund's net asset value fell from a steady $1 to 97 cents, thereby "breaking the buck." Institutional investors dumped the fund — which held bonds from Lehman Brothers — after the bank filed for bankruptcy.

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A series of regulatory changes kicked in afterward, including the imposition of liquidity fees and redemption gates, leading to an overhaul of money market funds through 2016.

The decision by asset managers to pull some of their prime funds this year is "all about March and the Fed support that's necessary to stabilize the market," said Crane.

Managers are concerned that this spring's shake-up in money market funds might lead to further regulatory changes, he said.

 "They probably would rather duck out of that debate and not be involved," Crane said.

Lower fees ahead

In addition to its fund announcement, Vanguard also said it would also make prime fund investors eligible for lower fees by reducing the investment minimum for its prime Admiral shares – its cheaper share class -- to $3,000 from $5 million,

Prime Admiral shares carry an expense ratio of 0.10%, compared to the 0.16% expense ratio on prime Investor shares, according to Vanguard.

Investors can swap to Admiral shares by visiting Vanguard.com. Those who don't make the change on their own will be automatically converted from September 2020 through next year.

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