Alternatives to Money Funds

BlackRock and Legg Mason launch new bond funds designed to work like money funds, but with very short maturities and a floating NAV.

BlackRock Inc. and Western Asset Management Co. are offering a new twist on traditional money-market funds as regulators are set to impose sweeping changes on the $2.58 trillion industry.

BlackRock, the world’s biggest money manager, and Legg Mason Inc.’s Western Asset unit have started bond funds designed to work much like money funds, with a key difference. The new “ultra-short” funds have share prices that fluctuate along with the value of their holdings, rather than a fixed net asset value, or NAV, a distinguishing feature of money funds. They also have shorter maturities than similar ultra-short bond funds that ran into trouble when credit markets froze in 2008.

‘Reshaping’ Industry

Money-market funds are allowed to use an accounting method that produces a stable net asset value of $1 a share under Rule 2a-7 of the Investment Company Act of 1940. Investment earnings, rather than lifting the share price, are distributed in cash or new shares. This feature has made money-market funds a favorite among individuals, institutional investors, and corporations who want a place to park their cash that will provide a higher return than those typically paid on bank deposits.

Credit Quality

The BlackRock and Western Asset funds expect to invest at least 25 percent of their assets in securities issued by companies in the financial services sector, such as banks and brokerages.

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