You probably heard the recent news about the Reserve Primary Fund. This money market mutual fund “broke the buck” in September, which means its value fell below $1 per share. What you may not know is that the founder of the Reserve Fund was Bob Bent, the same man who created money market mutual funds.
Here’s a brief history.
Until the 1970s, your savings and emergency cash was most likely stuck in an account at your local bank. Taxes and inflation typically ate up the low rate of interest paid by the bank, leaving you with a net decrease in purchasing power.
Then Bob Bent and his partner Henry Brown came up with a better idea—a money market fund that provided liquidity, was relatively safe and offered a higher interest rate than a bank savings account.
Despite criticism and skepticism from brokers, bankers and the Securities and Exchange Commission (SEC), the two men started the Reserve Fund Inc. By 1974, a year after the Reserve Fund opened, other investment companies began offering money market fund accounts, too.
The concept was simple. You deposited your money into a money market mutual fund along with other investors, creating a huge pool of money. This allowed fund managers to purchase larger amounts of short term government bonds, bank certificates of deposit and corporate commercial paper than you could buy as an individual. Interest rates varied, but the funds usually paid a higher return than banks even after fees were deducted.
Though money market funds were not insured by the federal government like bank deposits, they were considered safe because their holdings were widely diversified. In addition, fund managers had to follow strict credit quality rules established by the SEC.
Due to that perceived safety, investors flocked to the accounts, and the assets of all US money market mutual funds grew to more than $3 trillion (at the beginning of 2008).
Then the financial crisis began, and the Reserve Primary Fund “broke the buck.” To calm investors, the US Treasury stepped in with a limited guaranty of government backing.
How will the funds evolve from here? That’s a tale for future financial market historians.