Loan fiasco leads to money fund concerns

Fearing ties to mortgages, some advisers yank millions from money funds

Dec 17, 2007 @ 12:01 am

By Sara Hansard

Advisers are getting nervous about their money funds. In reaction to mounting concerns about the spreading subprime-credit crisis, some advisers are starting to move their clients' assets out of money market funds and into vehicles they perceive as less risky, such as government security funds. This week, for example, Reason Financial Advisors Inc. of Northbrook, Ill., will move about $1 million out of the TDAM Money Market Portfolio, which is run by TD Asset Management USA Funds Inc. of New York, and into the TDAM U.S. Government Portfolio. Executives at Reason Financial Advisors are worried that the money fund is invested in a structured-investment vehicle, a complex investment pool that has suffered greatly from the subprime fiasco, they said. "There is nervousness" about possible risks related to subprime-credit problems that have spread throughout the market, said Mark Gilbert, a principal with Reason Financial Advisors, which manages about $20 million.

TD Asset Management failed to return telephone calls seeking comment.

Mr. Gilbert worries that fund companies will no longer continue to back up money funds as the subprime problem worsens.

"The losses are potentially larger, [and] investment providers can certainly claim that in-vestors should be aware of the risks," he said.

However, "it's clearly in the investment community's best interest to make sure that money market funds stay at $1 a share," Mr. Gilbert added.

Unlike bank accounts, money market funds are generally not insured by the Federal Deposit Insurance Corp. Reason Financial Advisors is not alone. Over the past several weeks, FBB Capital Partners of Bethesda, Md., has shifted about $30 million out of money market funds managed by Charles Schwab & Co. Inc. of San Francisco and into exchange-traded U.S. Treasury securities, said FBB president Susan Fulton.

FLIGHT TO SAFETY

"Every money market fund is exposed" to SIVs, said Ms. Fulton, whose firm oversees about $400 million in assets.

"There's a fair amount of good credit out there," she added. "The problem is [that] no one knows where it is. Everything has been so bundled up that you don't know where the good stuff is and the bad stuff is."

FBB is reviewing its municipal bond investments following the multibillion-dollar losses from subprime loans experienced by the Florida Local Government Investment Pool, a fund intended for Florida public entities to make short-term, low-risk investments.

Schwab, for its part, maintains that it has not seen a pickup in advisers' withdrawing assets from its money funds.

"We have seen positive net inflows all fall," said company spokeswoman Sondra Harris.

At the end of November the average money fund rated by Standard & Poor's had 6.25% of its assets in SIVs, according to Peter Rizzo, senior director of the New York-based fund ratings group. By comparison, 1.35% of the average mutual fund's assets are in SIVs, Mr. Rizzo said.

"Will this spread to money market funds?" Mr. Rizzo said of the subprime crisis. "I don't have a crystal ball."

Over the past two months, total exposure to SIVs among money funds rated by S&P has dropped more than 40%, he said. While some of the drop is due to the fund managers reducing their exposure to the SIVs, most of it is due to SIVs maturing.

"The programs are paying off as they are intended to," Mr. Rizzo added.

While it remains to be seen to what extent traditional money market funds will become embroiled in the subprime meltdown, it's clear the nation's mortgage mess is spreading.

Last week, New York's Citigroup Inc. said it would assume control of the seven SIVs it advises to help them repay lenders. The move comes as major credit-rating agencies are considering downgrading the credit ratings on the seven SIVs, a move that would likely make it more difficult for the SIVs to keep renewing their debt.

Three weeks ago, Florida officials temporarily froze an enhanced-cash fund in the wake of billions of dollars of withdrawals due to the fund's exposure to the credit markets. A week later, Bank of America Corp. of Charlotte, N.C., announced plans to close its $34 billion Columbia Strategic Cash Portfolio, another enhanced-cash portfolio, after it also faced massive withdrawals due to credit concerns.

CONFUSION ABOUNDS

Enhanced-cash funds, which are sold mainly to institutional in-vestors, are designed to carry slightly more risk than money market funds. In exchange for the added risk, the funds shoot for higher returns — in part by investing in complex securities backed by mortgages and other assets.

Unlike money market funds, enhanced-cash funds are not required to maintain $1 per share in net asset value. Even so, they are often confused with money market funds, mainly because investors rarely lose their principal by investing in them.

In an effort to emphasize the distinctions between money market funds and other cash-management investments, such as enhanced-cash funds, the Investment Company Institute in Washington last week issued an advisory highlighting a "frequently-asked-questions" list on money funds that it put out in August. Cash-management investments "don't meet the strict standards for money market funds" in terms of Securities and Exchange Commission requirements for high-grade, short-term investments, said that advisory

Year-to-date through Oct. 31, more than $523 billion in new cash made its way into money market funds, ICI spokesman Ed Giltenan wrote in an e-mail. "Total money fund assets, which have been hitting new highs every week since the credit concerns began in early August, now exceed $3 trillion," he wrote.

Peter Crane, president and chief executive of Crane Data LLC of Westborough, Mass., is worried that confusion between money market funds and other cash-management investments will hurt the money market industry.

"Thankfully, investors have been astute enough to know the difference to date," said Mr. Crane, whose firm tracks money market funds. "Money continues to move in to money markets whereas it's moving out of these other sectors."

Indeed, some advisers believe much of the apprehension surrounding money funds is unwarranted. If a money market fund drops below the $1 net asset value, the fund manager is going to cover losses to avoid the negative publicity it would experience, said Randy Clayton, secretary-treasurer of Clayton Financial Services Inc. in Topeka, Kan.

"There are money market funds that have some bad bonds or some bad instruments," Mr. Clayton said. "They'll have to deal with them. But I'm not worried about clients losing money.

"We tend to do things to give our clients the impression we're staying on top of things," he added. "Sometimes it's much ado about nothing."

Meanwhile, some advisers are looking under the hoods of their money fund investments to make sure they don't get caught off guard by losses. Cornerstone Financial Partner Inc. of Cornelius, N.C., for example, recently called its clearing company to find out if any of the money market funds it uses have subprime investments.

"So far we're faring pretty well," said Jeff Carbone, managing partner of the firm, which manages about $300 million and has between $30 million and $50 million in money market funds. "No holdings that we've come up with have any subprime lending concerns for us."

Sara Hansard can be reached at shansard@crain.com.

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