Funds Buy, Sell Quickly : Not Always Easy to Know Just Where Your Money Is
Do you know where your money is?
Sure, you say. It is in a money market fund. But there are 469 of those, with $323 billion in assets, according to last week’s statistics from the Investment Company Institute, an industry trade group.
Do you know what it is doing in that money market fund? With whom is your cash keeping company? Does it hang out in high-grade government securities and corporate bonds or with junk commercial paper? Do you know which ones? Does it matter?
Usually it doesn’t matter. Most of the time your money is in safe company.
But then along comes a default like that of Integrated Resources commercial paper and questions arise about what kind of investments the funds are holding and whether investors can get hurt.
Integrated, a New York real estate and investment company, defaulted on $995 million in short-term debt last month, including $373 million in commercial paper, short-term debt that corporations sell to raise money.
When asked, executives for many major money market funds said: “Integrated commercial paper, what’s that? We don’t have any,” and heaved a sigh of relief. Or they said with self-congratulatory glee: “It didn’t pass our credit checks. Didn’t even come close.” But not everyone was that astute.
Firm Did Honorable Thing
Value Line Inc., whose $630-million money market fund had about $24 million of Integrated’s commercial paper, did the honorable thing and bought the paper out of the fund to protect its shareholders. Mutual of New York, which had about $9 million in its Liquid Green Trust money market fund, has said the fund will not allow anyone to take a loss.
As a group, money market funds are considered very safe.
“I would suggest that this is the first time that a money market fund bought something that didn’t pay off at maturity. And since 1980 nobody (no shareholder) has lost any money, which is amazing considering the fluctuations of the 1980s,” said William Donoghue, publisher of Donoghue’s Money Fund report, an industry newsletter.
“The industry has been able to maintain its reputation of keeping the net asset value of the funds,” said Dick Pogue, senior vice president of the Investment Company Institute, who said that Value Line did the right thing for the industry, as well as its shareholders, by buying back the paper to preserve the fund.
Funds have been tempted to buy speculative-grade commercial paper to attain higher yields to attract shareholders, but funds that dip into that riskier category tend to limit the purchase to tiny percentages of the fund. Some money market funds competing on yield are now cutting back on the management fees they charge the fund, so they can push the yield even higher. Eventually, though, they will charge those fees back, reducing the yield. But by that time, they hope inertia and a competitive return will keep most people in their funds.
Updated Information
One high-yield money market fund, Fidelity Investments’ Spartan Fund, will supply updated portfolio information every two weeks, said marketing vice president Neal Litvak at Fidelity. “They will tell you the top 10 holdings for that two-week period,” he said.
But most shareholders will have a problem finding out what their money market funds invest in at any given time. A prospectus might say a fund invests in high-grade commercial paper rated P-1 or A-1, or government bonds or high-grade corporate debt rated Aa or AA or better, depending on the rating agency.
But even the semiannual statement you get will not tell you exactly what a fund is now holding. It will tell you only what it did hold. Fund officials say that by the time the report is compiled and sent out, it is 45 to 60 days old, and that means it is outdated, because the average maturity of instruments in money funds is 38 days, according to Donoghue’s newletter.
More frequent updates would cost too much money, said one fund executive. “To notify a million shareholders of what the fund is holding would be an expense against the fund because it is for the benefit of current shareholders and would lower yield,” he said.
“Nobody asks the same question about what bank CDs (certificates of deposit) are invested in,” said Gerald Cole, executive vice president of Kemper Financial Services, “and there is no ability at any time to know what they (CDs) are in. People don’t care because of the FDIC (Federal Deposit Insurance Corp.) insurance. But the insurance costs something and you pay for it in the yield.
“The first objective of the portfolio manager should be the safety of the principal,” Cole said. “The second is to get as high a yield as is consistent with maintaining the integrity of the first objective.”
