Money-Market Fund Investors Fret About Their SIV Risk
Sunday, October 28, 2007
It's like subprime redux: Some money-market fund investors are again wondering if their investments are at risk because another complex investment product has fallen out of favor and become difficult to unload.
As occurred this past summer with worries about investments in subprime loans -- those made to borrowers with poor credit -- investors are uneasy that their cash investments might take a hit. Just as some money-market funds invested in subprime loans, some funds have lent money to what are called structured investment vehicles, or SIVs. The SIVs take this money and put it in high-yielding risky investments like mortgage debt. SIVs make money by collecting more interest on the risky debt than they pay to borrow it.
A distaste for any type of investments deemed risky has hurt SIVs.
The uncertainty among money-market fund investors centers on what would happen if the SIVs couldn't repay their debts because their assets lost value. Some money-market fund investors are, in turn, worried about losing money.
But that's unlikely, said Bruce Bent, who invented the money-market fund in 1970. His firm, the Reserve, has about $83 billion in assets and does not hold investments in SIVs.
"In the history of the money funds, you've had a number of situations where the management companies have bailed out the funds," he said.
He thinks it's unlikely the companies running money-market funds would allow them to "break the buck," as it's known in Wall Street parlance, even if the funds lost money on SIV-related investments. The draw of money-market funds, of course, is that an investor putting in $1 gets $1 back plus interest. If a fund were to give back 90 cents for every dollar, for example, investors would be outraged.
Still, it's important to remember that money-market funds, though considered safe investments, aren't FDIC insured.
One flag about potential risky investing by a money-market fund is if it consistently is the highest yielding, observers say. Tom Roseen, senior research analyst at fund tracker Lipper, said investors should be cautious and ask why yields are high: "Are they getting it by waving a portion of their expense ratio or are they taking a little bit more risk?"
He noted that a bit more risk doesn't necessarily mean a fund is investing in lower-quality investments.
The credit markets have shown varying degrees of tightness in recent months because of concerns about the quality of some investments such as mortgage-backed securities. These are mortgages that have been bundled and sold off as investments. Worries about a spike in mortgage defaults have led to unease about the quality of such debt.
Some money-market funds got involved in SIVs by lending them money. Now, though, as it has become more difficult for the SIV wheel to keep spinning, some money-market fund managers have grown concerned that SIVs are less likely to repay the money they borrowed.
John Atkins, a corporate bond analyst at IDEAglobal, thinks the market's pain could be widespread, though he cautions no one can know how far the losses will spread or whether they will extend to money-market funds.
"In terms of whether or not people are going to be made whole in their investments, I think the answer is pretty unequivocally no," he said.
But money-market funds are governed by rules that limit how much they can invest in any one area -- rules that force diversification so the funds can absorb shocks without jeopardizing investors' money.
"If you're well managed, then this is a problem but not a disaster," Atkins said of money-market funds.
"From a money-market perspective heavy exposure to that stuff would, I think, speak very directly to the risk-management policy of the manager. It may be useful to figure out who are faddish investors and who really bit off more than they can chew in terms of an opaque and relatively new model."