Fifteen of the largest money-market mutual fund companies, which together account for three-quarters of the market, said this week that they would take up the Treasury Department on its offer of a temporary guaranty
Funds Turn To Treasury Guaranty
Money-Market Managers Seek to Boost Confidence
By Annys Shin
Washington Post Staff Writer
Sunday, October 12, 2008; F01
Fifteen of the largest money-market mutual fund companies, which together account for three-quarters of the market, said this week that they would take up the Treasury Department on its offer of a temporary guaranty in an attempt to regain their status as one of the safest places to park cash.
None of the funds are in danger of going under, the fund companies say. Fund managers are turning to the guaranty program as a way of boosting investors’ confidence, which was badly shaken by recent turmoil at two established competitors.
The guaranty program, slated to last three months initially, covers fund holdings of taxable and non-taxable funds as of Sept. 19. Any investment made after that is not covered and neither is money that was lost in the closure of a fund before Sept. 19, the day federal officials unveiled the program.
The federal intervention has provided enough encouragement to help slow the exodus of investors. During the week of Sept. 23 — when concern about the funds was high — $263 billion flowed out of institutional money-market mutual funds and $30 billion more leaked out of retail funds, said Connie Bugbee, who tracks mutual funds for iMoneyNet in Westborough, Mass. By comparison, last week, institutional fund investors pulled $18.4 billion and retail investors $5.64 billion.
The guaranty program may be less help to those considering investing in money-market mutual funds. Analysts say the investments are safe despite the recent upheaval, especially compared with the bleak performance of stocks. But plain, vanilla savings accounts and CDs may be a better a deal. They offer a higher return and are backed by the Federal Deposit Insurance Corp. As a result of the $700 billion bailout package, the FDIC will insure deposits of up to $250,000 through Dec. 31, 2009. After that, the FDIC insurance on bank, credit union and savings-and-loan accounts will return to the standard $100,000.
Until last month, investors had been running to money-market mutual funds because they offered stability and higher returns than savings accounts without locking up their money the way CDs do. Money-market mutual funds manage a total of $3.4 trillion in assets and account for about a third of mutual fund investments in the United States, according to the Investment Company Institute, an association of investment companies.
The downside of money-market mutual funds is that — except for the extraordinary measures announced last month — they are not insured by the FDIC the way bank deposits are. What made them a safe haven for investors was that they typically invest in low-risk and short-term securities. For that reason, analysts still consider them extremely safe.
The recent turmoil was an anomaly, said Greg McBride, a senior financial analyst for consumer finance site Bankrate.com. It started with the bankruptcy of Lehman Brothers on Sept. 15. Lehman had sold commercial paper — short-term loans companies use to run their businesses — to the Reserve Primary Fund, one of the oldest in the business. When Lehman went under, that paper was worthless and the Reserve Fund’s share price fell below $1 — an event known as breaking the buck. The Reserve Fund was only the second fund to break the buck in more than 30 years. Scared investors staged a run, and the fund was closed. That was followed by a run on a $12.3 billion fund managed by another established player, Putnam Investments, which was forced to close the fund even though it wasn’t having any problems.
Many investors are still nervous. Analysts have a few tips for those already invested in money-market mutual funds and those who are considering taking the plunge.
Check to see whether your fund is participating in the Treasury’s insurance program. You will have to call the fund or look at its Web site.
If you’re looking to park some cash in a money-market fund now, be aware that money you put in now will not be covered by Treasury’s insurance program. Look for funds that are part of large, established financial firms such as Vanguard and Fidelity that “would have the financial wherewithal to step in in the event of trouble even after the period of government guarantee,” said Lawrence Jones, senior mutual fund analyst for financial research firm Morningstar. The Reserve Fund was not part of a larger firm.
If you think you can avert another Reserve Fund debacle by incessantly scouring your fund’s holdings for potentially toxic assets, think again, said Peter Crane, president of Crane Data, which tracks money-market mutual funds. Peeking under the hood may not prove very useful, he said. You probably won’t understand what you’re looking at and the information, which is posted quarterly, is likely to be outdated since money-market mutual funds hold a lot of short-term investments.
“Money fund securities are like subatomic particles,” Crane said. “By the time you look at them, they’re gone.”
However, you should pay attention to expenses and yield. If a fund has high expenses, it has to make more money to cover them, possibly encouraging it to make riskier investments. And a higher-than-average yield could be a sign that the fund is taking more risks.
There are also money-market mutual funds that consist solely of U.S. Treasurys. But the high demand for Treasurys means a lower yield, and Treasury-only funds are not covered under the temporary insurance program.
http://www.washingtonpost.com/wp-dyn/content/article/2008/10/11/AR2008101100174_pf.html
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Funds Turn To Treasury Guaranty |
Fidelity, Vanguard join money-fund insurance plan
Seattle Times, United States -
Fidelity Investments have joined the US Treasury’s emergency insurance program for money-market mutual funds, pushing the participation rate to more than 95 …
Want a safety net? Go with stable funds
Mail Tribune, OR -
By DAVID PITT AP DES MOINES, Iowa — Rapid changes on Wall Street and the uncertainty around the government’s multibillion-dollar bailout plan has created …
Chicago Tribune, United States -
By Michael Oneal | Chicago Tribune reporter Anyone who thinks irrational panic is all that’s behind the financial crisis sweeping the globe hasn’t had a …
Money-market funds flock to guarantee program
The Associated Press -
BOSTON (AP) — Nearly all the $3.4 trillion in money-market mutual funds is expected to be federally guaranteed for at least the next three months, …
Money-market funds flock to guarantee program
BOSTON (AP) — Nearly all the $3.4 trillion in money-market mutual funds is expected to be federally guaranteed for at least the next three months, now that all the major fund providers signed up to participate by a deadline that passed Wednesday.
The universal participation means investors won’t have to stay up at night worrying whether their fund family is taking part.
But the protection comes at a cost, with the higher fees that investors will pay for federal guarantees slightly eroding the already-modest yield that money-market mutual funds generate.
And beware of shifting money from one fund to another. The guarantees apply only to assets held in funds as of Sept. 19, so new share purchases since that date aren’t covered, including instances in which an investor pulls money from one fund and puts it in another.
But even those new, uncovered investments “are much safer than they were before the guarantee program,” said Peter Crane, president of Crane Data, publisher of the money-market fund newsletter, Money Fund Intelligence.
That’s because the vast majority of investors’ money currently in any fund also was held there at the Sept. 19 cutoff, and is consequently covered.
In case any fund takes a hit from a soured investment, the guarantees are expected to eliminate motivation for investors to hurriedly pull out money — and thus prevent fund managers from having to quickly sell assets at a loss, jeopardizing their ability to cover every dollar invested in the fund.
“It’s not the blowup from a single investment that kills you; it’s the resulting run on the fund’s money that kills you,” Crane said.
Fund management companies had until Wednesday to sign up for a guarantee program that the Treasury Department announced Sept. 19, three days after the value of the Reserve Primary Fund’s assets fell below the dollar-for-dollar level. The episode of “breaking the buck” led institutional investors to pull out cash from that fund and others, and flee funds investing in corporate debt in favor of those holding safer government IOUs.
Treasury Department spokeswoman Jennifer Zuccarelli declined to specify how many firms applied for guarantees by Wednesday’s deadline, but she said, “We have seen significant interest.”
Through Wednesday, the agency reported receiving $337 million from funds paying upfront fees to participate. For the vast majority of eligible funds, the fee is one “basis point,” or $1 for each $10,000 in fund assets.
Based on that fee level and the $337 million in fees paid, applications have been filed to cover virtually all the $3.4 trillion in money fund assets. And Crane, of Crane Data, said each of the 90 money fund managers his firm tracks reported filing applications as of Wednesday, though some of those firms did not seek guarantees for funds that invest in ultra-safe Treasury bills.
Some funds that applied may not be eligible, since funds must maintain asset values of at least 99.5 cents per each dollar invested to participate. For example, Reserve Management Corp. said Thursday that it had applied for guarantees to cover the Reserve Primary Fund and other funds it manages. But when it broke the buck, Reserve Primary Fund reported its assets stood at 97 cents for each investor dollar, below the Treasury Department’s 99.5 cent coverage threshold.
The fees to cover the guarantees are assessed directly to each fund, meaning investors ultimately pay the costs, and consequently see a slightly smaller return than they otherwise would see.
“Whether it’s explicit or not, you’ll pay for it somehow,” Crane said.
Lance Pan, a research director at Newton, Mass.-based Capital Advisors Group, said he’s been advising his firm’s institutional investors to be cautious in pulling money out of a money-market fund and putting it into another money fund. In recent weeks, many institutional firms have redeemed cash from funds investing in corporate debt and shifted it to safer government debt — moves that eliminate the federal guarantee if the shift occurs after Treasury’s Sept. 19 cutoff.
“We’re saying that is the wrong move,” Pan said, even if the money is shifted from one fund to another fund run by the same firm.
The guarantees are offered via the government’s $50 billion Exchange Stabilization Fund, extending protection similar to FDIC insurance for bank savings deposits.
For now, the guarantees extend only three months. After that, the Treasury Department will consider market conditions before deciding whether to end or renew.
On the Net:
- Questions and answers from the Treasury Department and Investment Company Institute on the government’s guarantee program: http://www.ustreas.gov/press/releases/hp1163.htm
- http://www.ici.org/home/faqs_guaranty_plan.html
September 29, 2008
hp-1163
Frequently Asked Questions About Treasury’s Temporary Guarantee Program for Money Market Funds
How does an investor sign up to participate in the Treasury’s Temporary Guarantee Program for Money Market Funds?
While the program protects the shares of all money market fund investors as of September 19, 2008, each money market fund makes the decision to sign up for the program. Investors cannot sign up for the program individually.
How will investors know if their money market fund participates in the program?
Investors should contact their money market fund directly to determine if it is participating in the program.
What type of funds does the program cover?
All money market mutual funds that are regulated under Rule 2a-7 of the Investment Company Act of 1940, are publicly offered, are registered with the Securities and Exchange Commission and maintain a stable share price of $1 will be eligible to participate in the program. This includes both taxable and non-taxable funds.
Is an investor in a fund that is managed like a money market fund but that is not registered with the SEC covered?
No, the program only covers money market funds that are regulated under Rule 2a-7 of the Investment Company Act of 1940, are publicly offered, are registered with the Securities and Exchange Commission and maintain a stable share price of $1 will be eligible to participate in the program. This includes both taxable and non-taxable funds.
When will my fund be covered by the program?
Each fund must decide to participate in the program. If your fund participates in the program, your investment as of September 19, 2008 will be covered.
How much of an investor’s money market fund is insured? What happens if the number of shares held in an investor’s account increase above the level at the close of business on September 19, 2008? What happens if the number of shares held in an investor’s account decreases below the level at the close of business on September 19, 2008?
The program provides a guarantee based on the number of shares held at the close of business on September 19, 2008. Any increase in the number of shares held in an account after the close of business on September 19, 2008 will not be guaranteed. If the number of shares held in an account fluctuates over the period, investors will be covered for either the number of shares held as of the close of business on September 19, 2008 or the current amount, whichever is less.
Examples include:
- If an investor owned 100 shares in a money market fund as of close of business September 19, 2008, but owns 50 shares on the day the guarantee payment is made, after the fund breaks the buck, then that investor will be guaranteed for 50 shares.
- If an investor owned 100 shares in a money market fund as of close of business September 19, 2008, but owns 150 shares on the day the guarantee payment is made, after the fund breaks the buck, then that investor will be guaranteed for 100 shares. The fund, upon liquidation, will distribute proceeds to the shareholder for the additional 50 shares, at net asset value.
- If an investor owned 100 shares in a fund as of close of business September 19, 2008, subsequently sold 50 shares and later bought 25 shares, the investor owns 75 shares on the day the guarantee payment is made and will be guaranteed for 75 shares.
- If an investor owned no shares in a fund as of close of business September 19, 2008, but owns 100 shares on the day the guarantee payment is made, none of the investor’s shares are guaranteed by the program and the investor will receive the net asset value directly from the fund.
What if another fund in an investor’s fund family breaks the buck before this program starts? Is the investor covered?
The program provides a guarantee on a fund-by-fund basis up to the amount of shares held as of the close of business on September 19, 2008. The performance of a different fund, even one in the same fund family of the investor’s fund, doesn’t affect the investor’s fund’s eligibility. Investors should contact their fund to determine if their fund participates in the program.
When does the program terminate?
The program is designed to address temporary dislocations in credit markets. The program will be in effect for an initial three month term, after which the Secretary of the Treasury will review the need and terms for the program and the costs to provide the coverage. The Secretary has the option to extend the program up to the close of business on September 18, 2009. In order to maintain coverage, funds would have to renew their participation in the program after each extension. If the Secretary chooses not to extend the program at the end of the initial three month period, the program will terminate.
Who provides this guarantee? Are investors able to get all of their money back whenever they want?
The U.S. Treasury Department, through the Exchange Stabilization Fund, is providing this guarantee. In the event that a participating fund breaks the buck and liquidates, a guarantee payment should be made to investors through their fund within approximately 30 days, subject to possible extensions at the discretion of the Treasury.
Is shareholder in a fund that broke the buck before September 19, 2008 covered?
No. This does not meet the program’s eligibility criteria noted above.
What should shareholders in a participating fund that breaks the buck do? Who should they call?
If your fund enrolled in the program you will be covered and do not need to take any action. Shareholders should contact their fund directly.
Who should a fund contact if it has further questions about this program?
Please e-mail the Treasury Department at moneymarketfundsguaranteeprogram@do.treas.gov.
http://www.ustreas.gov/press/releases/hp1163.htm
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Fidelity, Vanguard join money-fund insurance plan
Fidelity Investments have joined the U.S. Treasury’s emergency insurance program for money-market mutual funds, pushing the participation rate to more than 95 percent of assets managed by the industry.
Bloomberg News
Fidelity Investments have joined the U.S. Treasury’s emergency insurance program for money-market mutual funds, pushing the participation rate to more than 95 percent of assets managed by the industry.
Fidelity, the largest U.S. manager of money-market funds; Vanguard Group and T. Rowe Price disclosed their decisions to sign up for the program this past week in separate statements. Fidelity managed $425.7 billion of money-market funds as of Aug. 31.
The insurance protects investors against losses on money deposited with participating funds as of Sept. 19.
To join the program, funds must pay the Treasury an upfront premium, typically 0.01 percent of their Sept. 19 assets.
“The fact that everyone did it makes a stronger case for the safety of the asset class as a whole,” said Peter Crane, president of Crane Data, a money-fund research firm in Westborough, Mass.
Investors put $3.28 billion into money-market funds Oct. 6, the fourth straight day of net deposits, according to data compiled by IMoneyNet.
Assets rose to $3.36 trillion, the highest since Sept. 16, when Reserve Primary Fund became the first money-market fund in 14 years to fall below $1 a share.
The Reserve’s decline, resulting from losses on debt issued by bankrupt Lehman Brothers Holdings, triggered a run on money funds that slowed after the Treasury announced its emergency measure on Sept. 19.
Investors continued to shift cash from money-market funds that can buy short-term corporate debt, known as prime funds, into those restricted to government debt.
They pulled $13.1 billion from prime funds Oct. 6 and added $22.6 billion into government funds, according to IMoneyNet.
Money-market funds are the biggest buyers of commercial paper, debt that usually matures in less than 270 days.
Funds reduced their holdings of the highest-rated commercial paper $200.3 billion, or 29 percent, in the final two weeks of September, according to IMoneyNet, cutting off a vital source of short-term funding for companies, banks and public institutions.
The Federal Reserve said Tuesday it will create a special fund to purchase U.S. commercial paper.
Copyright © 2008 The Seattle Times Company
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