An Introduction to Schwab Money Funds

Rick Holland, Vice President, Head Money Fund Portfolio Strategist, explains the key features of Schwab Money Funds.

As one of the nation’s largest money market fund sponsors, Charles Schwab Investment Management is often recognized as an industry leader.

The Schwab Money Funds are managed with three, primary objectives in mind. Our money market funds strive to provide our clientele with stability of principal, liquidity and a competitive market based rate of return.

Our rigorous and disciplined investment strategy emphasizes safety and liquidity over relative performance. But of course, this isn't to say that we are unconcerned or unaware of our performance, it’s quite the contrary; but in money market funds, it is always appropriate that performance is subordinate to both safety of principal and liquidity.

Money market funds have strict investment guidelines and they are governed by SEC Rule 2a-7. The Rule provides specific criteria when selecting securities which are considered "money market fund eligible". These guidelines mandate that money market funds pay particular attention to: credit quality, diversification, maturity, liquidity, and of course, transparency.

Now, let’s talk about some of the key features of our Money Funds. Given our primary objectives and investment guidelines, it is critical that the portfolio management and credit research professionals who guide these funds, have significant industry experience in this asset class. We utilize a team-based, research driven approach to security selection and portfolio management. We have a disciplined and dynamic investment process, which focuses on thoughtful risk management.

Charles Schwab Investment Management employs an independent credit research team which is singularly focused on the in-depth review of fixed income and money market fund eligible securities. The credit worthiness of each issuer is determined and limits are approved both internally and from a Rule 2a-7 perspective. So, Taxable and Municipal Credit Committees each review and approve issuers, and then, issuer limits are set within each fund, and, of course at the aggregate level.

Charles Schwab Investment Management performs deep analysis on multiple factors which collectively contribute to oversight and to portfolio optimization. For example, interest rates, Fed policy, spreads, liquidity, diversification and of course an assessment of net asset value, each contribute and are monitored on a daily basis. In addition, we work to minimize net asset value fluctuations by managing and analyzing credit and sector diversification, peer group exposure, weighted average maturity contributions, and finally, frequent stress testing.

So, what differentiates Charles Schwab Investment Management from other money market fund managers?

Well, as one of the largest managers of money market funds*, our critical mass is significant and it provides for economies of scale as well as access to securities supply.

Another important differentiator is the intentional segregation of the portfolio management and credit research teams. Now imagine the potential conflict of interest which could occur if portfolio managers were charged with the responsibility of approving the securities for the funds they also manage.

Schwab Money Funds are only available to Charles Schwab clientele; we do not sell our money market funds “off platform.” This affords us the opportunity to better understand our client base and what is likely to motivate their liquidity needs. And while we have options for institutional accounts, the vast majority of our money fund shareholders meet the SEC definition of “retail shareholders or investors.” Why is this important? It’s because retail assets are typically recognized as less interest rate sensitive than institutional assets, providing more stability with respect to potentially large shareholder redemptions.

Lastly, the Schwab Money Funds are generally not available to “balance sheet” investors, who can be highly interest rate sensitive. Portfolios managed for this shareholder type could carry excess liquidity which potentially compromises performance as a result. Schwab Money Funds are not distributed through what are commonly known as money market fund portals.

I invite you to review the Schwab money funds. We provide a broad choice of prime, government and municipal solutions for both retail and institutional client types. They may offer higher yields on cash, with low investment minimums and no transaction fees.

On behalf of the Money Market Product Management and Client Portfolio Strategy teams, we want to thank you for your time and we look forward to serving you and your clients.

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