BofA to shut ‘enhanced cash’ fund
Bank of America Corp. said Monday that it would liquidate a $12-billion cash fund for wealthy clients and institutions, the largest investment of its type to close because of losses tied to the collapse of the sub-prime mortgage market.
The fund, Columbia Strategic Cash Portfolio, was sold as an alternative to money-market funds, offering a higher yield by taking more risk. It was the biggest so-called enhanced cash fund, with $33 billion in assets two weeks ago, before an investor pulled more than $20 billion, said Peter Crane, founder of Crane Data, publisher of the newsletter Money Fund Intelligence.
“This could be the death of enhanced cash funds,” Crane said. Such funds hold about $850 billion in assets.
Some investors in Bank of America’s fund will get their money back at net asset value, which fluctuates, and was last quoted at 99.4 cents on the dollar. Others may get control of assets held in the portfolio, said Robert Stickler, a spokesman for the second-largest U.S. bank.
Some enhanced cash funds hold commercial paper or medium-term notes issued by structured investment vehicles, or SIVs, that have fallen in value with delinquencies on home loans rising to the highest level in 20 years, according to data compiled by the Mortgage Bankers Assn. in Washington. SIVs use proceeds from the short-term debt they sell to buy longer-term securities backed by assets including sub-prime mortgages and credit-card receivables.
An enhanced cash fund managed by General Electric Co. last month returned money to investors at 96 cents on the dollar after losing money on mortgage-backed securities. Federated Investors Inc., the third-largest manager of money-market accounts in the U.S., bailed out investors in its Enhanced Reserve cash fund as credit markets seized up.
Towns and school districts in Florida last month pulled almost half of $27 billion in assets from a state government investment pool that bought SIV debt and other mortgage-linked assets. State managers froze the fund until they hired BlackRock Inc. to salvage the portfolio. It reopened last week.
Unlike money-market funds, which are considered the safest investments besides bank accounts and government debt, cash funds don’t purport to maintain a $1 net asset value. To generate higher yields, enhanced funds buy riskier assets that money funds aren’t permitted to hold.
