Fed prepared to prop up money-market funds
Move is intended to keep funds from experiencing cash crunches

http://www.msnbc.msn.com/id/27315420/

By Neil Irwin

Washington Post

updated 59 minutes ago
The Federal Reserve yesterday created a program to provide cash to money-market mutual funds, the latest step in a vast expansion of the government’s safety net for the financial system.

The Fed will make up to $540 billion available to buy assets from money-market mutual funds — in which pension funds, university endowments and millions of Americans stash money — if they need it. The measure is intended to keep the funds from experiencing cash crunches.

Money-market mutual funds invest by lending money on a short-term basis to companies, banks and other financial institutions, as well as the government. They are normally considered safe places to park cash because they buy only debt that is highly likely to be paid back.

But from early September to mid-October, nervous investors pulled about $480 billion out of a particular class of money-market funds. If that run on the funds had continued, it could have forced them to sell assets into an already troubled market, potentially causing a cascading series of losses to investors, more fund redemptions, more forced selling and further losses.

Whereas a Treasury Department initiative announced last month protected investors in money-market funds against losses, yesterday’s action was designed to ensure that a run on the funds would not prove devastating; government officials hope the action will also help ensure that lending remains available to banks and other financial institutions.

But the new program is a vivid example of how the government’s rescue of the financial system has raised new questions about long-term policymaking.

For example, though the new Fed lending is designed to be temporary — it is scheduled to begin winding down in April — the central bank has continued renewing other emergency lending programs that had been scheduled to expire. The Fed will have to decide by April whether the “unusual and exigent” circumstances that permitted the bank to set up the new facility have persisted. If they haven’t, it must close the program by law.

Moreover, now that the Fed has taken extraordinary action once, investors in money-market funds will assume that it could do so again in a crisis. That might lead them to take inappropriate risks, counting on a government bailout if things go awry, analysts said.

“It’s going to be difficult for the funds to wean themselves off of this,” said Peter G. Crane, president of Crane Data, which collects information on money-market mutual funds. “It wouldn’t be shocking to see an FDIC-like system put in place for money-market funds. At some point, a big strategic discussion will have to take place.”

Inside the Federal Reserve, leaders are only beginning to grapple with the longer-term implications of their actions after weeks of round-the-clock work designing a series of novel actions to try to keep the global financial system from spiraling into chaos. Fed Chairman Ben S. Bernanke and his colleagues intend to be as aggressive in removing the government interventions in the economy when things turn better as they have been in creating them. But that might prove difficult, as it could be hard to tell when the financial system is back on solid footing for good.

To ease the current crisis, the Fed already has said it will help the banks and other financial institutions that normally rely on this funding by standing ready to lend them money directly. Now it is also offering to be a backstop for the other side of the transaction, the funds themselves.

In early September, there was $2.2 trillion invested in “prime money-market funds,” the term for the funds that invest in those short-term loans to all manner of companies. That figure had been reduced to $1.7 trillion by Oct. 15.

Two things changed in mid-September. The bankruptcy of the investment bank Lehman Brothers made investors worry about the safety of their investment in money-market funds. And on Sept. 16, the Reserve Primary Fund, a $62.5 billion fund, “broke the buck,” meaning that its share price fell below its normal $1 level.

In the weeks that followed, investors — especially large institutions like pension funds and college endowments — pulled cash out of money-market funds that lend to companies and banks, redirecting most of the money to funds that buy Treasury bonds. In the past two weeks, conditions have stabilized, but Fed officials believe the new program could help head off future disruptions.

Since mid-September, the Fed has been searching for new ways to backstop money-market funds. The problem: Under the Federal Reserve Act, the Fed can lend only against solid collateral. Therefore it couldn’t simply accept mutual fund assets that were not backed by collateral.

The mutual fund industry and J.P. Morgan Chase found a way around that restriction. The central bank will lend up to $540 billion to five specially created entities, managed by J.P. Morgan Chase, that will buy up to $600 billion of assets from money-market mutual funds. The first $60 billion in any losses would be incurred by the mutual funds themselves, which offers the Fed some measure of protection.

“The government has encouraged the private sector to think hard about sensible ways to address the difficulties we see and to find measures that would help restore normal functioning,” said Paul Schott Stevens, chief executive of the Investment Company Institute, the trade group for mutual fund managers. That group, and many of its members, were involved in designing the plan, senior Fed officials said yesterday.

As for the longer term? “There’s a lot for us to ponder and to think about,” Stevens said. “I’m sure we will be doing that at the institute, and undoubtedly the Fed, Treasury and Congress will be thinking a lot about it, as well.”

© 2008 The Washington Post Company

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Mutual Funds

Alternatives to Money-Market Funds

Money-market funds are low-risk investments that offer investors modest yields and easy access to their cash. Still, fund managers are finding¹

investments in commercial paper may expose them to mortgage-backed securities that include risky subprime loans.

What to do: If you invest in money-market funds, there’s no need to panic — mortgage-backed securities are unlikely to endanger these holdings. But if it gives you peace of mind, there are other safe alternatives to stash your cash. Online banks offer rates of 5% or more for high-yielding FDIC-insured savings accounts. (Find rates here²

.) Short-term bond funds and inflation-indexed Treasury bonds also offer safety and modest returns. This article³

suggests some reliable low-cost funds. Finally, consider prepaying your mortgage. Extra principal payments earn you a pretax return equal to the interest rate on your mortgage. Then open a home-equity line of credit to ensure the cash is there if you need it. (Shop home-equity credit here⁴

.) –Terri Cullen⁵

, 8/9/07

Legg Mason’s Posner, Angerame Start Over, Sell 90% of Stocks
By Sree Vidya Bhaktavatsalam

Brian Posner CEO of ClearBridge Advisors

Aug. 9 (Bloomberg) — Brian Posner and Brian Angerame turned around the Legg Mason Partners Capital Fund by starting from scratch when they took over a year ago.

Posner and Angerame sold 90 percent of the stocks in the $1.4 billion mutual fund and used the proceeds to buy shares of companies including Cisco Systems Inc., the world’s biggest computer-network equipment maker, and American Express Co., the third-largest U.S. credit-card company.

The fund rose 18 percent in the past 12 months, beating 85 percent of its competitors that invest in a mix of fast-growing companies and those considered cheap relative to financial yardsticks such as profits, data compiled by Chicago-based Morningstar Inc. show.

“We’re prepared to be aggressive,” Posner said in an interview from his office in New York. “We’re putting our money where our mouth is.”

The fund held 41 stocks at the end of June, less than half that of its peer group, according to Morningstar. The five biggest investments — American Express, Cisco, General Electric Co., Marsh & McLennan Cos. and Motorola Inc. — accounted for 22 percent of the fund’s assets.

American Express and Marsh & McLennan are based in New York. Cisco is in San Jose, California. GE is based in Fairfield, Connecticut, and Motorola is located in Schaumburg, Illinois.

“Investors need to know that this is a very flexible fund, which is not that common,” said Gregg Wolper, an analyst at Morningstar.

Five Stars

The Legg Mason fund has the highest rating of five stars from Morningstar. It has a Sharpe ratio of 0.84, compared with 0.95 for competitors. A higher ratio indicates better risk- adjusted returns.

Posner and Angerame put 30 percent of Partners Capital’s assets in information-technology stocks, including Cisco and New York-based L-3 Communications Holdings Inc., twice that of the benchmark Russell 3000 Index. They doubled the fund’s stake in financial-services companies to 27 percent of assets.

Cisco shares jumped 71 percent since Posner and Angerame purchased their stake. Chief Executive Officer John Chambers said this week that revenue rose 18 percent in the second quarter, beating analysts’ estimates. The company sold more products such as a Web-based videoconferencing system and bolstered sales of Internet phones.

American Express shares have advanced 16 percent since Posner and Angerame took over, compared with the 1.2 percent increase of the Russell 3000 Financial Services Index, as credit-card customers spend more and merchants pay higher fees. American Express is the fund’s biggest holding.

Fidelity Links

Financial stocks are the worst performers on the Russell 3000 this year, dropping 6.2 percent, compared with an increase of 5.2 percent for the market benchmark, led by companies tied to the slumping U.S. housing market.

In addition to American Express, the Legg Mason fund holds shares of New York-based JPMorgan Chase & Co., the third-largest U.S. bank, and American International Group Inc., the world’s biggest insurer. The three companies have little or no business in the subprime mortgage market.

Posner, 45, who has a master’s degree in business from the University of Chicago, managed funds at Fidelity Investments in Boston and New York-based Warburg Pincus Asset Management before he co-founded Hygrove Partners LLC, a hedge-fund firm in New York. While at Fidelity, he managed the Equity Income II and Value funds. Under Posner’s watch, Equity Income II’s assets swelled to $15 billion from $840 million in four years.

Selling Stocks

Angerame, 35, joined New York-based Citigroup Inc. in 2000 and started working with Posner after the company’s asset- management unit was acquired by Baltimore-based Legg Mason Inc. He has a bachelor’s degree in government studies from Dartmouth College in Hanover, New Hampshire.

The Legg Mason fund fell 0.2 percent in the year before they replaced Kevin Caliendo.

Posner and Angerame sold shares of pharmacy-services company Omnicare Inc.; Amgen Inc., the world’s largest biotechnology company; and Bed Bath & Beyond Inc., the biggest U.S. home furnishings retailer.

Omnicare of Covington, Kentucky, and Amgen in Thousand Oaks, California, are declining for a second straight year, and Union, New Jersey-based Bed Bath & Beyond is close to a 52-week low as the housing slump hurts sales of bedding and curtains.

Legg Mason hired Posner in 2005 to head its Clearbridge Advisors LLC unit, which oversees 14 stock funds carved out of the acquisition of Citigroup’s asset-management division. Legg Mason funds, including Bill Miller’s $22 billion Value Trust, are separate from the Clearbridge subsidiary.

Posner has replaced managers in half of the 14 Clearbridge funds to improve returns. Since then, seven funds have met or exceeded their benchmarks, data compiled by Bloomberg show. Posner said turning around the funds may take years rather than months.

“This isn’t a process that will be completed overnight,” Posner said. “Our managers have embraced the message: Don’t think short-term.”

To contact the reporter on this story: Sree Vidya Bhaktavatsalam in Boston at sbhaktavatsa@bloomberg.net

Last Updated: August 9, 2007 00:07 EDT

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Credit Suisse Multi-Manager Constellation Portfolio

By Daniel Thomas

Published: July 3 2007 03:00 | Last updated: July 3 2007 03:00

Credit Suisse Multi-Manager Constellation Portfolio bond

The Credit Suisse Multi-Manager Constellation Portfolio fund aims to invest in equity-only funds across the world, but specialises in the “boutique” funds run by the smaller management groups.

Graham Duce, co-head of multi-manager services at Credit Suisse, said boutique funds were often more dynamic and flexible, although he added that Constellation would also invest in the larger fund groups if he was convinced the fund in question was run by a suitably pioneering manager.

“The smaller boutique managers often offer a more bottom up, total return approach,” Mr Duce said. “The manager’s interests are often more aligned with their unit holders. It has been a good hunting ground for us over the past few years.”

The fund has been running for almost six years, although Mr Duce only took over management in March this year. Subsequently, he sold out of all the fixed income components of the fund and it is now 100 per cent invested in equities. The fund had 30 holdings when he took over and this has now been reduced to 26, with a goal of taking it down further to about 21 investments.

“We have done a lot of stress testing on dangers presented by concentrating the portfolio,” said Mr Duce. “But our modelling has proven that this move will make it more efficient without increasing risk.”

The portfolio is heavily weighted in large-cap funds, making up 70 per cent of the portfolio, with mid-cap funds making up 10 per cent and small-caps 20 per cent.

“This bar-bell strategy reflects our opinion that valuations of the mid-caps are slightly worrying,” Mr Duce said.

The portfolio is spread fairly evenly across the world, with 16.7 per cent in the UK, 24.6 per cent in Europe, 16.5 per cent in the US, 9.4 per cent in Japan, 8.9 per cent in Asia, 8.7 per cent in emerging markets and 8.5 per cent in specialist funds.

The fund also holds 7 per cent in cash, which Mr Duce said was unusual. “We see the equities environment as still quite sweet, but we feel that at the present time it is worth taking a little bit of the risk away and be a bit more cautious. It is quite a defensive position, but it is only a short-term holding.”

Mr Duce said Credit Suisse was more optimistic than most about Japan, with good news predicted soon from the domestic market, but that the US was one of the more difficult areas for the fund because of the lack of boutique managers.

In spite of this, Mr Duce said one of the best performing funds had been Findley Park US Smaller Companies, which made up about 5.8 per cent of Constellation. He added that its South American-focused stablemate, Findley Park Latin America, and the Melchior Asian Opportunity fund had also performed well.

Mr Duce said that one of the worst performing holdings in the last year had been Legg Mason Japan Equity, which Constellation had now fully sold.

Mr Duce said the fund would continue to have an overweight position in Europe, where the economic outlook looked good and valuations were compelling.

TER: 2.62% (The TER provided for this fund of funds is inclusive of underlying funds’ TERs)

Sector average not available

Source: Lipper Fitzrovia

Copyright The Financial Times Limited 2007