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Vanguard makes changes to money market fund lineup

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Vanguard has announced a number of changes to its taxable money market fund lineup.The Vanguard Prime Money Market Fund will be reorganised into a government money market fund and renamed Vanguard Cash Reserves Federal Money Market Fund, while the company is also lowering the cost of investing for more than one million Prime fund investors by dropping the investment minimum of the fund’s Admiral Shares to USD3,000 from USD5 million. In addition, the Vanguard Treasury Money Market Fund has reopened to new investors.

 
Vanguard has a successful track record of refining its fund lineup to strengthen its offerings, meet investors’ evolving needs, and adapt to shifting market dynamics. The USD125.3 billion Prime fund will transition to a government money market fund and be renamed Vanguard Cash Reserves Federal Money Market Fund in late September 2020 to better meet investor needs and lower risk. Having observed and navigated two market crises in the past 12 years, Vanguard believes it’s better to seek to provide clients with a higher yield through lower expenses on a secure government portfolio than incurring risk in the prime market.
 
The fund will enhance its credit quality and liquidity levels by investing almost exclusively in US government securities, cash, and repurchase agreements that are collateralised solely by US government securities or cash. Given the current low-interest rate market environment and tight credit spreads, Vanguard has already increased the fund’s exposure to government securities, while commensurately decreasing credit risk by letting non-government holdings, such as commercial paper, mature.
 
“Vanguard investors prioritise 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,” says Vanguard Chief Investment Officer Greg Davis. “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.”
 
For the past 30 years, Vanguard’s government money market funds have delivered strong returns relative to many prime money market funds by keeping costs exceptionally low[i]. Enabled by decades of experience and deep manager expertise, Vanguard’s taxable government money market funds have outperformed their peer group averages and are ranked within the top decile of peers over the 1-, 3-, 5-, and 10-, year periods.
 
For more than four decades, Vanguard’s Prime fund has provided investors with a stable cash alternative to save for short-term goals, build emergency reserves, or complement a portfolio of stocks and bonds. The fund has taken meaningfully less credit risk relative to peers over the years to ensure liquidity in even the most challenging markets. For example, the Prime fund maintained a 33 per cent allocation to government securities—in contrast to the industry average of less than 3 per cent—leading into the sharp volatility of March 2020. Over the past two decades, Vanguard’s approach has helped Prime Admiral Shares outperform 97 per cent of the competition. However, Prime Investor Shares have only slightly outperformed Vanguard Federal Money Market Fund over this same time period. This shift in the fund’s portfolio underscores Vanguard’s belief that government money market funds can better meet investor needs for capital preservation and liquidity while avoiding undue risk.
 
In addition, Vanguard is lowering the cost of investing for more than one million Prime fund shareholders, who will now be eligible for a lower expense ratio of 0.10 per cent. Effective immediately, the investment minimum of Prime Admiral Shares will be reduced from USD5 million to USD3,000. Relative to the 0.16 per cent expense ratio for Prime Investor Shares, this change is expected to deliver an estimated USD64 million in aggregate investor savings, based on current total assets.
 
Vanguard encourages qualifying clients to convert to Admiral Shares by visiting vanguard.com. Any remaining Investor class shareholders will be automatically converted to Admiral Shares beginning in September 2020 and continuing through 2021.
 
Vanguard also announced the reopening of its USD38.9 billion Treasury Money Market Fund. Vanguard closed the fund in April 2020 to protect existing shareholders following a spike in demand for government money market funds during the first-quarter. Vanguard sought to preserve the fund’s yield by preventing excessive purchases of low-yielding government securities over a short time period. Vanguard expects that new cash flow will no longer have the same dilutive effect and has reopened the fund to new investors.
 
There will be no changes to the USD196.4 billion Federal Money Market Fund, which will continue to operate as a government money market fund that meets the needs of a broad range of investors, while continuing to serve as a sweep vehicle for retail brokerage clients.
 

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