Friday, December 28, 2007

More money funds are bailed out

(Financial Times) More than 10 North American banks and fund managers have collectively injected $3bn into their money market and cash funds since October to stem losses.

Janus, the fund manager, this week became the latest to bail out its money market funds. It put in $109m to buy troubled asset-backed securities from its funds. Half a dozen firms have made similar moves.

The bail-outs, in the form of guarantees, credit lines and the buying out of troubled securities, are intended to stop funds falling below the $1 a share promised to investors. They show how seriously the parent companies take the reputational risk of “breaking the buck”.

Not all bail-outs have been made public but more are believed to be being drawn up. The extent of losses is not yet known.

BlackRock – which has been hired to manage Florida’s troubled cash investment fund – faced further pressure this week over one of its funds. Moody’s downgraded its credit rating on BlackRock’s institutional cash strategies fund to junk status after redemptions in the fund were suspended a few weeks ago.

Two other fund managers have suspended redemptions at money market funds.

Only one money market fund in the US has broken the buck – in 1994 – but, in effect, many funds have recently. Observers question how the funds can be properly valued, given that many of the asset-backed securities they hold are not trading.

Even conservative managers have been caught by the credit crisis. It takes only a tiny loss to push a fund’s value below 99.5 cents in the dollar, the point at which boards must take action.

James McDonald, a portfolio manager for T Rowe Price, said some of his firm’s funds had invested in the short-term paper of four structured investment vehicles – instruments that sell cheap, short-term debt to invest in longer-term assets with higher yields. But Mr McDonald thought the exposure amounted to less than 1 per cent in each fund.

“We have moved those securities to our ‘illiquid’ bucket in the fund until they start trading again,” he said.

T Rowe Price, known as one of the most conservative managers, values its securities daily rather than weekly. The firm would act if the fund’s value fell three-tenths of a cent below the $1 par value, Mr McDonald said.

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