Parent Firms Bucking Up The Buck

Paul Katzeff Tue Jul 22, 5:37 PM ET

It's a game of chicken. So far, money market fund shareholders have been the winners.

Since last August, at least 17 financial firms have spent or pledged at least $6.1 billion to bolster money market funds hurt by mortgage-related securities gone sour.

The firms' goal is to keep any money fund's net asset value from falling below $1 -- a calamity known as breaking the buck.

That has been taboo for money funds and accounts because they are pitched as ultrasafe investments. Their strategies are supposed to limit risk to principal to almost zero. All money funds and accounts are sold at an NAV of $1, which is maintained day after day.

But a $1 NAV is threatened when enough holdings plummet in value. In diversified stock funds, that is common during market downturns. Money market funds usually avoid that by buying relatively stable investments. But many got into trouble by holding securities like structured investment vehicles (SIVs).

As the mortgage and credit markets seized up last year, such securities plunged in value. That endangered the ability of funds owning them to maintain a $1 NAV.

Parent firms stepped in. They bought wounded assets from their funds -- or gave or pledged cash to make up for stricken values.

So far the remedial strategy has worked. No fund has broken the buck. And it's publicly known to have happened in only one money market account -- the bank version of money funds. When IndyMac Bank failed, shareholders lost money in any money market account whose balance topped $100,000, according to the Federal Deposit Insurance Corp.

The FDIC insures deposits, including money accounts, up to $100,000. It does not cover money funds.

Fund families (including some owned by banks) have been willing to fork over dough for the costly precautions. The alternative could be far more expensive.

The Stampede Scenario

"If shareholders even thought a financial complex was about to let a fund break the buck, it could trigger a stampede of shareholders out of that fund," said Peter Crane, president of money market research firm Crane Data.

In anger or fear, shareholders might also pull out of other accounts at the firm, says Connie Bugbee, managing editor of iMoneyNet, another researcher firm.

Shareholders continue to see money funds as safe havens.

Money fund assets overall have soared 34% to $3.498 trillion as of July 16. That's up from $2.614 trillion a year earlier.

"Shareholders have pulled money from sectors like financial services," Crane said. "Money market funds, though they've had painful bailouts, benefited from this."

Mutual fund groups that have committed money to shore up institutional and retail money funds include Wachovia, Legg Mason, Janus and SEI.

Some banks that have taken remedial steps for their funds are Bank of America, HSBC, Northern Trust, SunTrust and Wells Fargo.

The only other time a money market fund broke the buck was in 1994.

Shareholders can take steps to protect themselves from troubled money funds. Start by eyeballing yield. If a fund pays a lot more than its peers, ask customer service why.

"High yield is good when it comes from certain things," Crane said. "Low expenses are good. A big, diversified (portfolio) is good. Also, a big asset base gives you protection."

If superior yield comes from one or just a few investments, be wary.

At best, it may be hard for a fund to continue outperformance due to maturity limitations. At worst, an odd-ball investment could implode -- the way SIVs did.

In addition, watch out for a fund whose weighted average maturity exceeds the industry average by a lot. The average is currently 41 days, Crane says. Unless a fund is very big, long maturity can cause lack of liquidity, he adds.

And when interest rates are rising, a long-maturity fund can be overly exposed to lower rates.