Money market funds battered

Several money market funds are losing money as the $3.5 trillion sector that long had been considered as safe as cash is buffeted by the turmoil on Wall Street.

Separately, four mutual fund firms are taking extraordinary steps to calm investor fears and protect customer investments. The companies – Wachovia Corp.’s Evergreen Investments, Bank of America Corp.’s Columbia funds, Ameriprise Financial, and Frank Russell Funds – said they had either injected millions of dollars to shore up their money market funds or were ready to do so. More companies are expected to make similar moves in coming days to compensate for losses from fund investments in the securities of Lehman Brothers Inc. after the financial behemoth filed for bankruptcy protection this week.

The Reserve Primary Fund, a pioneer of money market funds, was the first this week to announce it had reduced the value of its shares to below $1. The fund cut its share value by 3 cents to 97 cents, which means a loss for investors, unthinkable for funds that were long regarded as safe havens. Only once before, in 1994, did a money market fund “break the buck,” as the industry calls it.

The Reserve, which runs the fund, then announced two more of its funds were also losing money. One more fund, the Colorado Local Government Liquid Asset Trust, which holds investments for schools and government in that state, also saw the value of its assets fall below $1 a share, according to the rating service Standard & Poor’s.

“This is the real human cost of allowing Lehman to fail. There’s a ripple effect,” said Don Phillips, managing director of Morningstar Inc., the Chicago mutual fund tracking firm.

Although money funds are not insured by the federal government as bank deposits are, investment analysts and fund companies said there is no need for worry. “I’m certainly not thinking I need to move my money out of a money market fund and into a mattress,” said Phillips.

Wall Street investors have pumped a record $1 trillion into money funds since the summer of 2007. But some ordinary investors, who have watched some of the nation’s largest financial institutions fall like dominoes, were terrified.

“It’s Armageddon,” said Gokmen Kilincarslan of Westport. The 27-year-old said he transferred money from his money market account to a bank savings account yesterday. His money is now “safer,” he said, “but I still don’t feel confident.”

Fund companies, including Fidelity Investments in Boston, the nation’s largest, offered reassuring statements to investors.

Today, most Americans who invest have some money in money market funds, either as part of their mutual fund portfolios or in their 401(k) retirement accounts. There are 33 million retail money market accounts in the United States, in three forms: those that invest in tax-exempt municipal bonds, in US Treasury securities, or in corporate bonds.

Money market funds were designed as a place for investors to store their cash safely. They exploded in popularity during the late 1970s, when Americans learned they offered better returns than low-interest bank savings accounts.

In the early 1990s, after some money funds ventured into more risky investments to boost payouts to investors, the Securities and Exchange Commission tightened regulations, restricting the types of investments funds could make to only the most secure, short-term, and highly rated corporate debts. The Lehman bonds were highly rated, analysts said.

Worries over the holdings of money market funds began last year after companies, including Bank of America’s Columbia unit, disclosed they had spent capital to buoy funds that lost money on complex corporate investment vehicles. Since then, there have been 21 episodes of mutual fund managers bailing out their money funds.

Connie Bugbee, managing editor of iMoneyNet, which publishes a weekly newsletter called the Money Fund report, said he “can’t guarantee there would not be a run” on money funds, creating a Depression-style situation where the government might have to step in. However, he stressed that institutional investors such as pension funds and corporations own more than half of their total assets and are unlikely to panic.

“We’d like to think there’s a certain amount of sophistication there,” he said.

About $1.5 billion in Lehman securities were held by funds run by the four companies that said they had or would shore up those funds, according to Lance Pan, director of research for Capital Advisors Group in Newton. Morningstar’s Phillips said, “This is something that could happen to any fund.”

The companies said their Lehman holdings represented a tiny portion of their funds’ total assets. For example, Evergreen Investments, the Boston asset management arm of Wachovia Corp., said three Evergreen funds had Lehman credit exposure of $309 million, $110 million, and $75 million respectively, or roughly 1 percent to 2 percent of their total assets. Wachovia will support the value of those holdings, the company said.

“This is a message of reassurance to investors,” said Laura Fay, an Evergreen spokeswoman.

By Kimberly Blanton and Robert Weisman

https://archive.boston.com/business/markets/articles/2008/09/18/money_market_funds_battered/