ho ho ho WSJ warns on money market funds
Mutual Funds
Money Funds Might Carry
More Risks Than Expected
By AARON LUCCHETTI
Staff Reporter of THE WALL STREET JOURNAL
How safe are the havens in your investment portfolio?
Reacting to the rocky stock market and September's terrorist attacks in the U.S., many investors have shifted dollars into money-market mutual funds and other low-risk alternatives in their personal accounts and retirement plans.
However, some of these holdings may involve somewhat more risk than investors expected.
Last week, a money-market portfolio offered in the retirement plan for U.S. employees of British oil company BP PLC fell 1.9% in a single day. The reason? The portfolio -- managed by UBS AG's Brinson Partners -- had invested about 2% of its $2.5 billion in assets in the short-term debt obligations of Enron Corp., the Houston energy-trading concern that recently filed for protection from its creditors under Chapter 11 of the U.S. Bankruptcy Code. The portfolio's two Enron notes, marked down Dec. 3, resulted in the first significant loss in the portfolio's 20-year history.
The value of the Brinson Partners portfolio fell $47.8 million. The BP retirement plan, which constitutes 39% of the portfolio's assets, had paper losses of $18.6 million.
While BP labeled the account a "money-market fund" in its investment plan, the choice was far different from a money-market mutual fund, an ultrasafe fund investing in short-term debt obligations subject to strict requirements about the quality and duration of the debt it can hold. A BP spokeswoman says the company's investment Web site for employees explains that the portfolio doesn't have the same investment protections as a money-market mutual fund.
Some financial professionals say the situation serves as a warning for investors to look more closely at what their so-called haven accounts actually hold. "There's a misunderstanding" and "mismarketing of cash-management funds" and other money-market type products, says Bruce Bent, chairman and chief executive of Reserve Funds, a New York money-management firm specializing in money-market funds. Further, even among true money-market mutual funds, he says there are some significant variations in risk.
Money-fund alternatives such as "stable value" funds, ultrashort bond funds or commingled portfolios sometimes known as cash-management or enhanced-cash funds, all offer unique features, which can mean less protection. (Meanwhile, bank certificates of deposit carry federal insurance, but don't offer the easy and penalty-free exit privileges of money-market funds.)
Craig Coleman, a 50-year-old former manager for BP's Amoco Corp. unit, found out this month what the differences among money-market options can mean. At one point this year, he had more than $500,000 in the BP retirement plan's "Money Market Fund," figuring it was a much safer option than the stock market. He had paper losses of $10,000 when the portfolio was marked down.
What Mr. Coleman says he didn't know was that the BP money-market portfolio was investing all of its assets in Brinson Trust Co. U.S. Cash Management Fund, a "commingled" portfolio for institutional investors, rather than a mutual fund. Such portfolios, offered to individual investors through 401(k) retirement plans, usually have lower fees but less regulatory oversight than mutual funds.
Unlike the Brinson portfolio, for example, money-market mutual funds are required to keep at least 95% of their assets in the highest quality debt obligations. Furthermore, these funds are allowed to invest no more than 1% of their assets in debt from any single issuer with a less-than-top credit rating. The two Enron loans in Brinson's portfolio were one grade below the highest quality, meaning the most a money-market mutual fund could have invested in them is 1% of assets. The Brinson fund, which is offered in the 401(k) plans of several other companies, had 2% of its assets in Enron paper. BP says it is reviewing the management of the fund.
"What I'm concerned about is what my exposure is now," says Mr. Coleman, who frets that other weak companies may be included in the Brinson portfolio.
Investors in true money funds will find that some take on a bit more risk than others and typically deliver a bit more yield. To gauge how much risk a money fund is taking, investors should start by looking at the fund's credit quality and duration, or the period for which the fund lends its assets before it expects to be repaid with interest. (Several fund-tracking agencies, including Moody's and Standard & Poor's, track the risks of money-market funds.)
An investor also can look at a fund's 12-month yield and fees. If both are high, the fund likely is taking on extra risk to get the better return, says Peter Crane, vice president at iMoneyNet, a research firm in Westborough, Mass., that tracks money-market funds.
Mr. Bent, the CEO of Reserve Funds who helped create the first money-market fund in 1969, keeps all the assets of the Reserve taxable money-market funds in government and government-agency paper or certificates of deposit. Overall, his funds hold debt with an average duration of about 60 days. They avoid yield-enhancing investments made by many other money funds, such as short-term commercial paper, asset-backed debt and short-term funding agreements.
Money funds almost always maintain a $1-a-share net asset value, though that promise isn't always held. In 1994, one money-market fund "broke the buck," or slipped below $1 in net asset value, after it made a bad interest-rate bet using derivatives.
A number of firms sponsoring money funds have taken special steps to keep their money funds from breaking the buck. Amid the California energy crisis this year, two money-market funds run by Zurich Scudder Investments and one run by Mellon Financial Corp.'s Founders Asset Management were bailed out by their management firms.
Money-fund yields have dropped sharply in tandem with other short-term interest rates this year, to an average compound seven-day yield on taxable funds of 1.73%, according to iMoneyNet. As a result, some funds have been aggressively marketing themselves as "money-market-plus" vehicles that try to deliver added yield. Most of these, however, are more like short-term bond funds, which may invest in debt with a duration of one to three years. Such longer-duration investments introduce more risk, especially if interest rates rise, says Jeff Keil, an analyst for fund tracker Lipper Inc., in Denver.
Stable value funds are fixed-income portfolios that invest in instruments, including insurance-company guaranteed investment contracts, that aim to deliver attractive yields without principal fluctuation. The investor is partly relying on insurers or other financial institutions for the safety of their principal.
Despite their risks, money-market funds and their various cousins still are far more stable than most long-term bond or stock funds. That helps explain why skittish investors are flocking to them. For instance, investors have put a net $340 billion into money-market mutual funds this year, compared with $15 billion for stock funds and $82 billion for bond funds. |
