Money Fund Inventor Bent Offers Insurance
February 17, 2003
Bruce R. Bent is the founder and chairman of The Reserve Funds of New York and the creator of the first money market fund in 1970. Now, 33 years later, Reserve manages more than $20 billion among 17 money funds, seven equity funds and several cash-management vehicles, including two patented products.
Bent recently spoke with Mutual Fund Market News' Editor-at-Large Lori Pizzani about the state of the money fund industry and what lies ahead.
MFMN: What gave you the idea to start the first money market fund?
Bent: Thirty-five years ago, Regulation Q limited the amount of interest a bank was allowed to pay on savings accounts to 5.25%. In 1969, interest rates went through the roof, and short-term T-Bills were paying 8.5%. I saw the opportunity for a spread that we could get in between. I tried to find a bank that would allow me to exploit the spread, but I couldn't. In August 1969 I kept thinking, why not develop a mutual fund to do this? I read the Investment Company Act of 1940, and thought that a demand for an interest-paying account that could take advantage of this spread would work.
MFMN: How did you get a fund that would do something as specific as taking advantage of that spread to get off the ground?
Bent: Before I founded Reserve, I ran the cash portfolio for TIAA-CREF, which made me realize that to reach high volumes, a fund such as this would have to be very transaction-driven. We had to build an infrastructure and make sure a system was in place to accommodate what we wanted to do. We designed all of the interfaces - and started selling.
MFMN: Once all of these pieces were in place, how did you begin marketing the world's first money fund and to whom?
Bent: When we started, we had no money to hire salespeople, advertise or promote the fund. So we decided to call on registered investment advisers with trading authority on behalf of their accounts. I was getting money from them, but I was also building up debt and running out of endurance.
I was going out to raise money - working capital - and I put together four-color brochures and handed them out to lots of people. They all said, "No way."
I was also commuting on the Long Island Rail Road and I would step into the train and casually drop one or two brochures, knowing I was violating all kinds of laws. But it worked. By the end of the first year, I had raised $500 million.
At the same time, in the summer of 1972, I had been talking to a reporter at The New York Times. A story about our fund eventually ran on the front page. By the end of that year, our money market fund had pulled in $300,000.
MFMN: Did you ever doubt that the money market fund concept would be a viable and sustainable business?
Bent: I always believed it was going to be a going concern. But I predicted we would have assets of $10 million, which we quickly surpassed.
MFMN: And what said you to the early skeptics?
Bent: There were lots of skeptics, many of whom ended up starting their very own copycat money market funds. But copying, they say, is the highest form of flattery.
MFMN: Be honest, Bruce. Didn't the copycats annoy you?
Bent: Well, yes, they annoyed me. After all, I had done so many things to make something so complex work. A lot went into that effort. I even asked my then attorney if we could patent my idea for the money market fund. He said no, that I couldn't patent an idea.
Since then, I've learned you have to keep asking until you get the answer you want.
MFMN: What are the most significant changes you've seen over the past 33 years?
Bent: The fact that we've added all of the bells and whistles. And having lots of competition keep us constantly on our toes. Fidelity was the first to introduce the checking feature on a money fund. I went to our bank and asked if we could do this, and they said no. So I said to our bank, "Either we get checking or we are gone."
We got the checking.
I've also heard people say, oh, any idiot can run a money market fund, and many fund families added their own. But in reality, only some can really run them well, and not buy Orange County or Mercury Finance paper, both of which famously defaulted.