Funds Turn To Treasury Guaranty

By Annys Shin
Washington Post Staff Writer
Sunday, October 12, 2008

Fifteen of the largest money-market mutual fund companies, which together account for three-quarters of the market, said this week that they would take up the Treasury Department on its offer of a temporary guaranty in an attempt to regain their status as one of the safest places to park cash.

None of the funds are in danger of going under, the fund companies say. Fund managers are turning to the guaranty program as a way of boosting investors' confidence, which was badly shaken by recent turmoil at two established competitors.

The guaranty program, slated to last three months initially, covers fund holdings of taxable and non-taxable funds as of Sept. 19. Any investment made after that is not covered and neither is money that was lost in the closure of a fund before Sept. 19, the day federal officials unveiled the program.

The federal intervention has provided enough encouragement to help slow the exodus of investors. During the week of Sept. 23 -- when concern about the funds was high -- $263 billion flowed out of institutional money-market mutual funds and $30 billion more leaked out of retail funds, said Connie Bugbee, who tracks mutual funds for iMoneyNet in Westborough, Mass. By comparison, last week, institutional fund investors pulled $18.4 billion and retail investors $5.64 billion.

The guaranty program may be less help to those considering investing in money-market mutual funds. Analysts say the investments are safe despite the recent upheaval, especially compared with the bleak performance of stocks. But plain, vanilla savings accounts and CDs may be a better a deal. They offer a higher return and are backed by the Federal Deposit Insurance Corp. As a result of the $700 billion bailout package, the FDIC will insure deposits of up to $250,000 through Dec. 31, 2009. After that, the FDIC insurance on bank, credit union and savings-and-loan accounts will return to the standard $100,000.

Until last month, investors had been running to money-market mutual funds because they offered stability and higher returns than savings accounts without locking up their money the way CDs do. Money-market mutual funds manage a total of $3.4 trillion in assets and account for about a third of mutual fund investments in the United States, according to the Investment Company Institute, an association of investment companies.

The downside of money-market mutual funds is that -- except for the extraordinary measures announced last month -- they are not insured by the FDIC the way bank deposits are. What made them a safe haven for investors was that they typically invest in low-risk and short-term securities. For that reason, analysts still consider them extremely safe.

The recent turmoil was an anomaly, said Greg McBride, a senior financial analyst for consumer finance site It started with the bankruptcy of Lehman Brothers on Sept. 15. Lehman had sold commercial paper -- short-term loans companies use to run their businesses -- to the Reserve Primary Fund, one of the oldest in the business. When Lehman went under, that paper was worthless and the Reserve Fund's share price fell below $1 -- an event known as breaking the buck. The Reserve Fund was only the second fund to break the buck in more than 30 years. Scared investors staged a run, and the fund was closed. That was followed by a run on a $12.3 billion fund managed by another established player, Putnam Investments, which was forced to close the fund even though it wasn't having any problems.

Many investors are still nervous. Analysts have a few tips for those already invested in money-market mutual funds and those who are considering taking the plunge.

Check to see whether your fund is participating in the Treasury's insurance program. You will have to call the fund or look at its Web site.

If you're looking to park some cash in a money-market fund now, be aware that money you put in now will not be covered by Treasury's insurance program. Look for funds that are part of large, established financial firms such as Vanguard and Fidelity that "would have the financial wherewithal to step in in the event of trouble even after the period of government guarantee," said Lawrence Jones, senior mutual fund analyst for financial research firm Morningstar. The Reserve Fund was not part of a larger firm.

If you think you can avert another Reserve Fund debacle by incessantly scouring your fund's holdings for potentially toxic assets, think again, said Peter Crane, president of Crane Data, which tracks money-market mutual funds. Peeking under the hood may not prove very useful, he said. You probably won't understand what you're looking at and the information, which is posted quarterly, is likely to be outdated since money-market mutual funds hold a lot of short-term investments.

"Money fund securities are like subatomic particles," Crane said. "By the time you look at them, they're gone."

However, you should pay attention to expenses and yield. If a fund has high expenses, it has to make more money to cover them, possibly encouraging it to make riskier investments. And a higher-than-average yield could be a sign that the fund is taking more risks.

There are also money-market mutual funds that consist solely of U.S. Treasurys. But the high demand for Treasurys means a lower yield, and Treasury-only funds are not covered under the temporary insurance program.

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