A normally low-risk money market fund managed by oil company Atlantic Richfield Co. for its employee savings plan lost $22 million in April, or 5.3% of its principal--a surprise beating that experts said probably points to soured investments in so-called derivatives.
Los Angeles-based Arco declined to say why the fund dropped in value. Arco advised employees of the loss in a letter and said it is "looking into ways of reducing the effect on individual account balances." That may include some form of reimbursement by Arco, the company said.
Arco's immediate attempt to appease employees may stem from the shock some workers expressed upon learning of the loss in the fund, which many apparently felt was as safe as a bank account.
The $400-million fund, called Money Market Plus, is managed by Arco Investment Management Co., the oil giant's investing arm. Employees could use the fund for both tax-deferred retirement savings and regular savings plans.
Arco said the fund took a $22-million write-off at the end of April--the equivalent of 5.3% of its assets--to reflect losses on certain securities.
Generally, money market funds are used by investors who want to avoid any loss of principal and who may for that reason shun riskier, more volatile investments such as stock or bond funds. The typical money market fund yields about 3.2% currently, and the funds' share prices--or principal--stay constant.
The Arco fund's stated investment objective was "stability of principal" but with a yield higher than what the average money fund paid.
Al Greenstein, an Arco spokesman, said the company would not comment on how the fund lost money or on the nature of the fund's investments.
Investment experts speculated that the fund had invested too heavily in longer-term bonds, or hybrid derivative securities linked to bonds, in an effort to boost its yield. As market interest rates have surged this year, long-term fixed-rate securities have plunged in value.
In particular, mortgage-backed securities and more esoteric mortgage derivatives have proved dangerous for fund managers this year, because the securities have failed to perform as expected.
Some bond experts said the name used by Arco for its fund--Money Market Plus--suggests that the fund may have invested in adjustable-rate mortgage securities or other hybrid mortgage securities considered shorter-term and thus less risky in nature.
In theory, adjustable-rate mortgage bonds shouldn't lose much value when market rates rise, because rates on the home loans underlying the loans will rise as well. But this year, the meteoric rise in market interest rates has devalued even adjustable-rate securities.
In addition, recent losses sustained by other investment funds and by corporations speculating or hedging in such derivative securities have roiled the bond market, artificially depressing prices of the securities. For example, Procter & Gamble last month revealed that it lost $102 million on a derivative securities bet that soured.
In the letter to employees, Arco said the Money Market Plus fund's return between 1989 and 1993 "was well ahead of the universe of traditional money market funds," thanks to the firm's investment strategy.
But Arco also conceded that the success of the fund may have lulled employees into believing there was no risk involved. "We recognize that some participants may not have expected a decline in the value of this fund," Arco said.
For that reason, the company said, it is considering a "supplementation by Arco of affected accounts," apparently meaning it may make the investors whole. But the firm said "this approach may require government approval, which will take some time to obtain."
In the meantime, Arco said the fund has "changed its strategy" and now will invest like a traditional money market fund.