:Quarterly Commentary

QUARTER ENDING december 31, 2011

Overview Statement
The tone in the fourth quarter 2011 was one in which has become all too familiar. Rates were low, quality paper at a decent rate was a preciously rare commodity, and Europe was the 800 pound gorilla around which we treaded ever so lightly. Through it all, however, our credit process has remained the cornerstone of our conservative investment philosophy that has kept our funds stable while providing daily liquidity without interruption. The 2011 stage carries over into 2012 as the expectation for a prolonged low interest rate environment is evident and real. And while the 2012 environment looks quite the same for money funds, we are greeting it with another year’s worth of invaluable knowledge, experience, and conclusions to frame our strategy, which puts us in a stronger position to deliver increased value to our shareholders.

Economy
The economy continues to inch forward but just cannot seem to get out of its own way. While the stock market at times has given us reason to believe we are back, the usual suspects of high unemployment, weak housing market, and restricted business lending held us in check. It appears as if the unemployment rate has improved, however, it is likely not representative of the reality, as it does not factor in the multitude of individuals that have ceased looking for work and whose state benefits have run their course. Companies are surviving with fewer employees, have installed new fiscally conscious expense reduction mandates, and are embracing innovation to drive increased productivity. While these are the quintessential attributes of sound business practices that typically bolster competition, the lack of loan growth, particularly in small businesses, is weighing heavily on new job creation. The causal effect of job creation is a pickup in spending, and an increase in the pool of qualified applicants to hasten the pace of personal loan growth and mortgages that will billow the embers of the smoldering housing market. A focus on job creation is paramount and needs to occur on a consistent basis to resuscitate the economy and jumpstart the growth cycle once again.

The problems amongst the various European economies remain the focal point of global investors and money managers alike. Europe’s prolonged issues, along with few productive economic reforms, keeps us painfully aware that what may well hang in the balance is the eventual negative effect on the U.S. economy. We keep a careful watch on Federal Open Market Committee (FOMC) activity and the “what ifs” around the potential for additional quantitative easing (QE3), which has clearly not been ruled out. The FOMC’s opinions on it are far from unanimous, however, the theme of utilizing a QE3 strategy to purchase mortgage securities to assist the ailing housing market seems to be bubbling up as their selling point to the American public. If they are successful in that regard, they will then have to do an even better job of selling us on what will be done about possible increased inflationary pressures with a still unacceptable unemployment rate. The dark horses in this race are about a half dozen Fed Presidents that are calling for an interest rate hike as early as this year or sometime in 2013 if the economy continues to improve. Obviously, we will be paying close attention to these Fed hawks and plan accordingly should we make the earlier than expected turn to higher interest rates. In the mean time, we are buckled in with the expectation that rates will remain where they are for at least the better part of this year.

Portfolio Management
We have factored into our 6-month strategy that rates will remain stable over the short-term. In normal circumstances this would lead to a clear extension of maturities within the portfolios in search of more attractive opportunities for yield. However, normalcy in the global markets continues to evade us, therefore, we have been steadfast in maintaining appropriate and deliberate weighted average maturities (WAMs) to provide liquidity should there be further deterioration in Europe, stoking investor fear regarding their money fund holdings, whether real or perceived.

Portfolio Transparency
At the risk of sounding cliché, the best defense to this conundrum in the money fund space is a strong offense—in the form of education and transparency. Reich & Tang continues to lead by example and advocate for shareholders by offering complete transparency in our prime portfolios. To date, Reich & Tang is the only fund company that we are aware of that shares both its portfolio holdings and approved issuer list on a daily basis with both shareholders and prospective shareholders. This underscores our confidence in our stringent credit process while providing full disclosure for shareholders to see what they own on a daily basis, and what their portfolio could own in the immediate or near term—after all, it is their money, not ours. This unprecedented level of transparency creates an even playing field for all investor types, and enhances and expedites the due diligence process to quickly determine the suitability of our funds to shareholders’ short-term investment or liquidity needs. More information creates more opportunity for dialogue with our shareholders—dialogue that we encourage as it creates a forum for investors to get a better understanding of how we manage money, why we buy and sell what we do, and how our conservative investment philosophy has allowed us to safely navigate throughout every market environment for the past four decades.

Taxable Funds
Within our prime funds, we have greatly reduced our holdings in European banks and have continued our strategy to find attractive paper in non-Euro-based countries within Europe (Denmark, Sweden, UK), outside of Europe (Japan, Australia, Canada), and in high-quality corporate issuers. Exposure to Euro-based banks in our prime portfolios is mostly constrained to overnight investment. We are finding the most value in LIBOR-based paper with maturities of one to three months, helping to offset dismal overnight and Treasury returns, which are hovering at all time lows. Variable Rate Demand Notes (VRDNs), typically used in tax-exempt portfolios, are attractive on a relative basis and continue to be used to generate competitive yield while maintaining 1 and 7-day liquidity options.

Tax-Free Funds
The sentiment within the municipal markets has improved over the past several months. Nervousness that was created from the 2011 bankruptcies of Jefferson County, Alabama, and Harrisburg, Pennsylvania, turned from a “Who’s next?” moment into somewhat of a catalyst for reform at the state level. Cost cutting measures put in place have contributed to the improving health of municipalities, and tax receipts have made a positive turn and have improved moderately. Note issuance has not changed noticeably from mid-2011 levels and we continue to find value in VRDNs,  tax-exempt general obligation notes and bonds, and select school districts.

Conclusion
The fourth quarter and the rest of 2011 dealt the money fund industry a hand that would make even the most stoic poker faces wince. It truly tested the mettle of money fund managers across the board and has forced some of the competition to close its doors or merge with other fund companies. With interest rates expected to stay at current levels likely for the short and medium term, and with expense ratios being cut to afford shareholders competitive returns, we expect this trend toward consolidation to continue in 2012. We are pleased to report that Reich & Tang’s strategy and conservative investment philosophy has weathered yet another difficult year and, as a result, became an even stronger organization that is uniquely prepared to excel in 2012. 

We will continue our efforts to provide the most transparency in money fund portfolios, which has been extremely well-received with our shareholder base to date. In these unprecedented times, with uncertainty abound in global markets, we feel it is our responsibility to ensure that our shareholders have full access to the information that guides their important investment decisions. We thank you for your business in 2011 and look forward to serving your liquidity and short-term investment needs in 2012.

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