McNabb op ed - possible 8% cash requirement

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SGM
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McNabb op ed - possible 8% cash requirement

Post by SGM »

Thursday's WSJ has an op-ed by McNabb that large mutual funds may be required by regulators to have 8% cash on hand. That would be 8% out of the market.
See http://www.wsj.com/articles/the-tax-thr ... 1430951829. Google the title of the article if you do not have a subscription.
555
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Re: McNabb op ed - possible 8% cash requirement

Post by 555 »

Wow that's crazy! It's hard to believe anything like that could possibly happen.
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in_reality
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Re: McNabb op ed - possible 8% cash requirement

Post by in_reality »

The Investment Company Institute (ICI), which is the national association of US investment companies, including mutual funds, closed-end funds, exchange-traded funds (ETFs), and unit investment trusts (UITs) seems to be fighting it pretty hard.

They point out that not only the size but also the leverage of the funds > $100 billion (all in the US) are quite different than the banks in question. The funds are leveraged at 1.04 or so and the banks at 10X.

So why consider much small much less leveraged funds the same???? -- they ask.

Might be other things in their statement too, only had time for a cursory read and now am being demanded to make dinner....

http://www.ici.org/pdf/14_ici_fsb_gsifi_ltr.pdf
Last edited by in_reality on Thu May 07, 2015 7:07 am, edited 1 time in total.
Leesbro63
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Re: McNabb op ed - possible 8% cash requirement

Post by Leesbro63 »

So would, say Vanguard Total Market, then become a 92/8 fund for purposes of our asset allocation?
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Re: McNabb op ed - possible 8% cash requirement

Post by denovo »

With due respect to McNabb, this sounds like a lot of fear mongering.
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EyeDee
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Re: McNabb op ed - possible 8% cash requirement

Post by EyeDee »

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Denovo,

Why do you think it is fear mongering? If these rules are being proposed by regulators for Vanguard funds, it could be costly to many of us on this board who have most of our assets at Vanguard if we did not adjust our asset allocation calculations as suggested by Leesbro63 and definitely would be very costly if another crisis occurred and we had to pay to bail out a bank or an AIG.
denovo wrote:With due respect to McNabb, this sounds like a lot of fear mongering.
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aaaaaaabbbbbbbbbb
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Re: McNabb op ed - possible 8% cash requirement

Post by aaaaaaabbbbbbbbbb »

One could leverage his investments to cancel out the cash position. Although it would be a hassle, and there would be some (small) costs.
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Epsilon Delta
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Re: McNabb op ed - possible 8% cash requirement

Post by Epsilon Delta »

EyeDee wrote:.
Why do you think it is fear mongering?
The headline and first sentence for a start. Just how yellow is it possible for journalism to get? I thought saturation capped out at 100%, but I'm going to have to rethink this.
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lack_ey
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Re: McNabb op ed - possible 8% cash requirement

Post by lack_ey »

It's not journalism. It's an op ed. Furthermore, an op ed by McNabb, Vanguard's CEO, who obviously wants to influence opinion.
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Re: McNabb op ed - possible 8% cash requirement

Post by EyeDee »

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I agree Mr. McNabb seems to be trying to influence opinion, which as a Vanguard owner I am glad to see him doing as these proposed changes would be costly to us - either in ongoing adjustments and expenses if we stayed invested in Vanguard mutual funds or in costs to switch to owning individual securities which would also be much more risky.
lack_ey wrote:It's not journalism. It's an op ed. Furthermore, an op ed by McNabb, Vanguard's CEO, who obviously wants to influence opinion.
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telemark
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Re: McNabb op ed - possible 8% cash requirement

Post by telemark »

Shrug. If a mutual fund has the potential of crashing and burning so horribly that it could trigger a financial crisis, I don't want to own it anyway. Nothing that Vanguard manages is even remotely in that category.

Hint: think LTCM, and maybe some existing hedge funds.
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Re: McNabb op ed - possible 8% cash requirement

Post by EyeDee »

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Telemark,

I agree, but unfortunately the initial criteria they are considering using is a fund being over $100B in size which includes several of Vanguard's funds (or companies that have such funds which would be all of Vanguard's funds). If the final criteria is more reasonable, then there should not be a problem.

I take Mr. McNabb's article to be an effort to get the criteria changed to be more reasonable as you suggest it should be.
telemark wrote:Shrug. If a mutual fund has the potential of crashing and burning so horribly that it could trigger a financial crisis, I don't want to own it anyway. Nothing that Vanguard manages is even remotely in that category.

Hint: think LTCM, and maybe some existing hedge funds.
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Steelersfan
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Re: McNabb op ed - possible 8% cash requirement

Post by Steelersfan »

telemark wrote:Shrug. If a mutual fund has the potential of crashing and burning so horribly that it could trigger a financial crisis,
I don't have a position one way or the other on the matter, but I it sounds like the intent is to give a very large fund a cushion that it could use in times of extreme stress, say the market falling rapidly in a few days. If people panic and too many issue sell orders, that would only feed the panic since the fund has to sell to accomplish the order, driving prices even lower, creating even more panic, and so on.

With many more regular folks getting into index funds, I suspect the risk of a panic from a segment of them is greater than previously.
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Re: McNabb op ed - possible 8% cash requirement

Post by Theoretical »

If it's by fund having more than $25 billion in assets, then that's easy to fix on the technical side, but not the human side. Imagine if VTI was split into 16 different ETFs/Mutual Funds - Class A, B, C, D, E, F, G...AA, BB, CC. On the human side, if they were required to have different managers, then that would mean that expense ratios would shoot up, even for index funds.

Expense ratios of .15-.40 for vanguard funds would be a lot more common, and iShares/SPDRs would be closer to .5 than .25.

If it's by company, then it gets even more complicated. One thing it would do is temporarily benefit lucky or perceptive active managers who have small funds that haven't reached the bloat stage. Their costs wouldn't go up, but the big guys' costs would increase.

If 8% had to be stored as cash, then it seems like the logical solution would be to reduce your bond holdings by 10% such that an 80/20 portfolio should instead become a 90/10 portfolio, possibly with a greater focus on individually held treasuries or munis?
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Re: McNabb op ed - possible 8% cash requirement

Post by EyeDee »

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Leesbro60,

Another possibility might be for Vanguard to use futures/options to bring the stock exposure back up to the equivalent of 100% stock. The cost might or might not be covered by the interest on the cash.
Leesbro63 wrote:So would, say Vanguard Total Market, then become a 92/8 fund for purposes of our asset allocation?
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Theoretical
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Re: McNabb op ed - possible 8% cash requirement

Post by Theoretical »

EyeDee wrote:.
Leesbro60,

Another possibility might be for Vanguard to use futures/options to bring the stock exposure back up to the equivalent of 100% stock. The cost might or might not be covered by the interest on the cash.
Leesbro63 wrote:So would, say Vanguard Total Market, then become a 92/8 fund for purposes of our asset allocation?
It seems like adding derivatives to otherwise "pure" funds is like playing whack-a-mole with risk. In providing a cash cushion, you increase the leverage and derivatives plays to keep the same goal. That sounds...shortsighted on the gov'ts part, although if it's really a way for the government to have mandatory treasury bill investment, then it's a pretty good way to accomplish it.
EyeDee
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Re: McNabb op ed - possible 8% cash requirement

Post by EyeDee »

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Theoretical,

I agree. I am guessing that part of Mr. McNabb's goal is to keep things simple and avoid having the potential costs/risks of changing how things are done. In the past, according to some annual report foot notes, Vanguard has used options/futures to allow 1-2% in cash in funds while trying to keep a fund matched to its goals. However, I would think 8% might mean much more effort/cost would be needed to provide such a large cushion.
Theoretical wrote:
It seems like adding derivatives to otherwise "pure" funds is like playing whack-a-mole with risk. In providing a cash cushion, you increase the leverage and derivatives plays to keep the same goal. That sounds...shortsighted on the gov'ts part, although if it's really a way for the government to have mandatory treasury bill investment, then it's a pretty good way to accomplish it.
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Re: McNabb op ed - possible 8% cash requirement

Post by IlliniDave »

I don't like the sound of this--it punishes successful funds by stripping investors of 8% of their returns. That's almost adding an additional 0.48% ER to a fund making 6%.

Low cost investing will be a game of hunting around for smaller funds. Would cut the 3-fund strategy off at the knees maybe.
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Re: McNabb op ed - possible 8% cash requirement

Post by Silence Dogood »

Is there any way to read this op-ed without having a WSJ subscription?

I tried to Google the article but I hit a pay wall.
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Re: McNabb op ed - possible 8% cash requirement

Post by Christine_NM »

Silence Dogood wrote:Is there any way to read this op-ed without having a WSJ subscription?

I tried to Google the article but I hit a pay wall.
Try highlighting the headline and dragging it into a Google search box. Works for me, anyway.
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Re: McNabb op ed - possible 8% cash requirement

Post by Johno »

telemark wrote:Shrug. If a mutual fund has the potential of crashing and burning so horribly that it could trigger a financial crisis, I don't want to own it anyway. Nothing that Vanguard manages is even remotely in that category.

Hint: think LTCM, and maybe some existing hedge funds.
The whole point is that the proposed regulation would measure 'the potential of crashing and burning so horribly that it could trigger a financial crisis' solely based on size of assets, that is mis-measure it. That's why the correct reaction might not be 'shrug'. :D
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Re: McNabb op ed - possible 8% cash requirement

Post by Steelersfan »

Silence Dogood wrote:Is there any way to read this op-ed without having a WSJ subscription?

I tried to Google the article but I hit a pay wall.
It just worked for me, as it did earlier when I posted a response.

Copy the exact title into google search and click on the first entry that comes up.
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Re: McNabb op ed - possible 8% cash requirement

Post by Silence Dogood »

Okay, now I can read it. For whatever reason I can't seem to read it using Firefox (but I can using Chrome).

How likely is it that these regulations will actually take effect? And when will this happen?
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Archie Sinclair
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Re: McNabb op ed - possible 8% cash requirement

Post by Archie Sinclair »

Y'all are thinking of this the wrong way, because (frankly) the distinguished head of our mutual fund company has stooped to scare-mongering.

By statute, designation of a nonbank as a systemically-important financial institution (SIFI) is on a company-by-company basis. It's a highly individualized process. So there would never be a uniform rule that said that all mutual funds in the country of $100 billion or more are automatically designated.

Moreover, if a mutual fund were designated as a SIFI, the idea that it would be required to hold 8% of its investments in cash is a laughable canard. :( The Federal Reserve, who regulate SIFIs, are not total idiots.

Note that there are already mutual funds run by SIFIs like Wells Fargo. Does Wells Fargo Advantage Growth Fund (SGROX, expense ratio 1.24%) have 8% in cash? Of course not, it has 0.11% in cash.
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Re: McNabb op ed - possible 8% cash requirement

Post by Boglenaut »

If all index funds had to hold 8% cash, then they are not index funds anymore. Active funds would also be constrained.

It is frightening, but in that scenario a Boglehead would be better off buying 100 individual stocks and sampling from the index. Those with bigger portfolios would be able to sample more precisely. Those without a brokerage option in some accounts would be out of luck. Scary.

PS - is this a legit topic?
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Re: McNabb op ed - possible 8% cash requirement

Post by Archie Sinclair »

Boglenaut wrote:PS - is this a legit topic?
Forum Policy wrote:Note that discussions of proposed laws or regulations are prohibited.... Proposed regulations that are directly related to investing may be discussed if and when they are published for public comments.
I don't know. For the reference of the moderators, Mr. McNabb is discussing possible "designations," which I guess might be analogous to proposed regulations, although they only affect one company at a time. They have not been published for public comments.
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Re: McNabb op ed - possible 8% cash requirement

Post by EyeDee »

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The document linked by in_reality above implies the Investment Company Institute (ICI) is responding to methodologies published for public comment: "The Investment Company Institute, on behalf of its entire fund membership,1 appreciates the opportunity to comment on the Financial Stability Board’s proposed assessment methodologies for identifying non-bank non-insurer global systemically important financial institutions . . ."

http://www.ici.org/pdf/14_ici_fsb_gsifi_ltr.pdf
Archie Sinclair wrote:. . .
I don't know. For the reference of the moderators, Mr. McNabb is discussing possible "designations," which I guess might be analogous to proposed regulations, although they only affect one company at a time. They have not been published for public comments.
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Re: McNabb op ed - possible 8% cash requirement

Post by Christine_NM »

Both the op-ed and the ICI comments are worth reading. Apparently, out of all the world's mutual funds, FSB finds that 14 US-based mutual funds might be SIFIs.

Any fund designated SIFI would not be worth an 8% headwind, or even a 5% headwind. If you would not pay a load, you would not invest in these funds.

So the most likely cause of failure of these designated funds would be the SIFI designation itself! :D Live by the sword, die by the sword.
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Oicuryy
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Re: McNabb op ed - possible 8% cash requirement

Post by Oicuryy »

Looks like the comment period ended last month.
http://www.financialstabilityboard.org/ ... _140108-2/

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Re: McNabb op ed - possible 8% cash requirement

Post by EyeDee »

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Looks like there is a new ongoing comment period (previous one ended in April 2014):

Press Release: http://www.financialstabilityboard.org/ ... titutions/

Publication: http://www.financialstabilityboard.org/ ... titutions/
Oicuryy wrote:Looks like the comment period ended last month.
http://www.financialstabilityboard.org/ ... _140108-2/

Ron
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Re: McNabb op ed - possible 8% cash requirement

Post by LadyGeek »

This thread is now in the Investing - Theory, News & General forum (investing news). To be clear, the forum policy permits discussion when regulations (different than legislation) have been published for public comment. See: Forum Policy
UNACCEPTABLE TOPICS

Politics and Religion

In order to avoid the inevitable frictions that arise from these topics, political or religious posts and comments are prohibited. The only exceptions to this rule are:
  • Common religious expressions such as sending your prayers to an ailing member.
  • Usage of factual and non-derogatory political labels when necessary to the discussion at hand.
  • Discussions about enacted laws or regulations that affect the individual investor. Note that discussions of proposed legislation are prohibited.
  • Proposed regulations that are directly related to investing may be discussed if and when they are published for public comments.
The Financial Stability Board (FSB) is the publisher of the regulations, which has international scope.

The regulations are here: Assessment Methodologies for Identifying Non-Bank Non-Insurer Global Systemically Important Financial Institutions

That being said, please stay factual and on-topic.

Update: Corrected link to 2015 regulations. See below (thanks).
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Re: McNabb op ed - possible 8% cash requirement

Post by EyeDee »

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LadyGeek,

I believe you posted the link to the 2014 publication, please see my post above yours for the 2015 publication.

Thank you.
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Re: McNabb op ed - possible 8% cash requirement

Post by Archie Sinclair »

The Financial Stability Board is a private association organized under the laws of Switzerland. It serves as an unofficial forum of financial regulators. It's influential, but it is a private body and it has no formal authority to regulate anyone.

Designations of SIFIs in the United States are made by the Financial Stability Oversight Council, a government body established by U.S. law. After designation, decisions about how to regulate the SIFI are made by the Federal Reserve.
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Re: McNabb op ed - possible 8% cash requirement

Post by LadyGeek »

Archie Sinclair wrote:The Financial Stability Board is a private association organized under the laws of Switzerland. It serves as an unofficial forum of financial regulators. It's influential, but it is a private body and it has no formal authority to regulate anyone.

Designations of SIFIs in the United States are made by the Financial Stability Oversight Council, a government body established by U.S. law. After designation, decisions about how to regulate the SIFI are made by the Federal Reserve.
Thanks for the correction (and education). If it's a private body with no formal authority, then I was in error to keep the thread open.

An additional consideration is that this discussion is a "what-if" scenario which is creating a lot of conjecture.

Let's stop the discussion here. This thread has run its course and is locked.
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