| 04 September 2006
Many of my clients have money parked in either GM Demand Notes or the Ford Interest Advantage Floating Rate Demand Notes (quite a mouthful!). Employees, family members and others with a relationship to the car makers have taken advantage of these exceptionally high yield liquid investments. After all, they pay more than most money market funds and money market accounts. GMAC Demand Notes were recently yielding about 6%, while the Ford account was just a little lower. This is a great rate for a low-risk, liquid account, right?
Yes, this is a nice return for money that would otherwise linger in a bank checking or savings account earning from 1% to 3%, or maybe nothing at all. The problem is that there IS more risk with these accounts. They are not the same as bank money market accounts and money market mutual funds. In fact, last year the SEC forced Ford Motor Credit Company to stop calling its offering the Ford Money Market Account – as it was known for many years - so that investors would not be confused.
Bank money market accounts are FDIC insured, which provide the safety that many investors want. Money market mutual funds – while not insured – must by law be diversified portfolios of short-term investments that make them pretty darn safe too, as no money market fund has ever failed to repay its investors.
The GMAC and Ford Motor Credit accounts are unsecured obligations of the respective companies. This means that there are no specific assets backing up these IOU’s – just the financial strength of the companies. And they are not diversified as the money is invested in only the obligations issued by the respective companies.
Both companies are the finance arms of the parent auto companies – and both are in pretty good financial shape. Unfortunately, we all know that the car makers are struggling to say the least, and have poor credit ratings. The credit rating of the parent company taints the credit rating of the finance unit, which forces it to pay higher yields in the market place. This squeezes profit margins, but to the benefit of the investors.
Many of my clients want to know if it’s safe to use the GMAC and Ford high-yield accounts to keep cash. The answer is the one you often get from economists – it depends. Clearly, they are not as safe as other short-term accounts – but this is the very reason they pay more. All investments have some kind of risk. With these particular accounts the investor assumes a slightly higher risk for a slightly higher return. This is the case in many investment decisions. As long as your portfolio as a whole is not overly aggressive, or you are not exposing too much of your cash accounts to undue risk, then there is no cause for concern.
Keep in mind, though, that short-term interest rates have risen across the board and there are many places to get good yields. In addition to local banks, and money market funds from places such as Vanguard and Fidelity, there are on-line banks that offer FDIC protection to go along with high interest rates. A wise consumer will shop interest rates just as they would shop for the best price on other goods and services.
When it comes to your liquid accounts, the adage “don’t keep all of your eggs in one basket” also applies in this case. There is no problem using either the GM Demand Notes or the Ford Interest Advantage Floating Rate Demand Notes for a portion of your cash. Just make sure you diversify by having some money in even more conservative investments such as bank money market accounts and money market mutual funds.
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