Putnam money fund to liquidate as investors rush to sell

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More trouble for the $3.5-trillion money market mutual fund industry: Boston-based Putnam Funds today said it had closed its institutional Putnam Prime Money Market fund at 5 p.m. on Wednesday and would liquidate the portfolio, after big investors rushed to get their cash out.

Putnam said the $12.3-billion-asset fund didn’t have ‘credit-quality’ issues, meaning the problem wasn’t with the short-term IOUs it owned.


Rather, the fund ‘experienced significant redemption pressure’ on Wednesday, Putnam said. With too many investors wanting their money back at once, ‘serious constraints on liquidity in money market instruments created the risk that, in order to process redemptions, the fund would realize losses in selling its portfolio securities,’ the firm said in a statement.

The trigger for the redemptions almost certainly was the announcement Tuesday by the Reserve Primary fund, a large New York-based money fund, that it had ‘broken the buck’ -- fallen below the standard $1 a share -- because of losses on IOUs from brokerage Lehman Bros. Holdings Inc.

That marked only the second time in the history of money funds that a fund’s investors lost some of their principal. The Reserve Primary fund said it cut its share price to 97 cents and that it would take up to seven days to meet investors’ redemption requests.

Now the question is: How many money funds are experiencing the kind of serious redemptions that Putnam has seen? Institutional funds are in the most danger because big investors typically are fast on the trigger.

The Putnam fund had a minimum investment requirement of $10 million.

The firm said the fund’s trustees ‘determined to close the fund to ensure equitable treatment of all fund shareholders. Putnam and the trustees believe that this action is in the best interests of shareholders because it ensures an orderly distribution of assets in light of the current unusual market conditions and treats all shareholders in an equitable manner.’

A spokeswoman said it was ‘premature’ for Putnam to say whether investors would get all of their money back or whether the fund would experience losses in liquidating.

The company said it was ‘working to develop a detailed plan of distribution, with the goal of providing shareholders with the opportunity to receive distributions as expeditiously as possible, depending on market conditions.’