Investors have fewer alternatives

Jittery investors, reacting to US-based Reserve Management Corp's decision to delay redemptions in a money-market fund, don't have a lot of safer alternatives, financial advisers say.

Reserve Management, a pioneer in the money-market business, became the first fund in 14 years to expose investors to losses Thursday. Shareholders had withdrawn more than 60 per cent of the New York-based fund's assets over two days.

The fund on Thursday wrote off debts worth $785 million (Dh2.88 billion) in Lehman Brothers Holdings, Inc.

Bank accounts insured by the Federal Deposit Insurance Corp and US Treasury bonds are among the few alternatives for investors who pull out of the $3.45 trillion money-market industry.

The three-month US Treasury bill dropped to its lowest rates since World War II Thursday as investors fled the stock market and drove down yields.

Larger companies that offer money-market funds, such as Fidelity Investments, Charles Schwab Corp and Merrill Lynch & Co, have resources to prop up their funds, said Stan Richelson, a financial adviser and author of Bonds: The Unbeaten Path to Secure Investment Growth.

"Reserve didn't have the cash or the will to buy the Lehman paper," Richelson said. "The large sponsors have a track record. When paper goes down, they buy it back."

US taxable money-market mutual-fund assets were down $80.7 billion the week ending September 16, according to the Money Fund Report, a newsletter based in Westborough, Massachusetts. Overall, money-market mutual fund assets fell 2.5 per cent to $3.45 trillion.

Move Funds

A client asked whether he should move funds out of money markets and into US Treasury bonds, Richelson said. "I told him we're not doing that with our own money," citing the transaction fees and the cost of moving cash from a tax-free mutual fund. Any gains on the Treasuries would also be taxable, he said, since they wouldn't be in a pension account.

Money-market funds, which are regulated by the US Securities and Exchange Commission, strive to preserve the $1-a-share net asset value, meaning that investors can always get back their principal, as well as interest earned by the fund on its investments. They are required to hold debt that matures in 13 months or less, with a weighted average maturity of 90 days or less.

All mutual funds are allowed seven days to pay redemptions, although most funds pay out right away, said Mike McNamee, spokesman at the Investment Company Institute, the mutual-fund industry's Washington-based trade group. This power, granted under the 1940 Investment Company Act, should be outlined in a fund's disclosure statement, he said.

Investors need to know that money-market funds aren't insured, even though they have come to be used much like bank accounts, said Andrew Tignanelli, a fee-only financial planner in Hunt Valley, Maryland. He said the belief that money markets are risk-free is "an illusion."

Money-market funds that invest only in US Treasuries offer greater security and that's where Tignanelli said he put money of clients that needed a conservative investment.

"I wanted that money to be there, safe and liquid," Tignanelli said. "For 20 years, I've endured those lower yields. This is why."

The 1994 failure

The only other instance of "breaking the buck" occurred when Community Bankers, a small institutional fund, paid investors 96 per cent of their money in 1994, Investment Company Institute President Paul Schott Stevens said in a statement on Thursday.

"This type of event is extremely rare," Stevens said. "While not obligated to do so, fund sponsors have voluntarily lent support to their money-market funds with credit lines or cash infusions.''

Bank certificates of deposit offer more safety for consumers than money markets because they're FDIC insured. But they're not as liquid.