Federated bails out cash fund

Federated Investors Inc. bailed out a so-called enhanced cash fund for wealthy investors and institutions after declines in the market value of mortgage-backed securities the fund held.

But Federated, the third-largest manager of money market mutual funds, said it hadn’t propped up any of its money-market portfolios. Some Federated rivals have recently had to pump in millions of dollars to bail out ailing money funds.

Considered the safest investments after bank accounts and government debt, money funds, which are open to all investors and hold about $3 trillion in assets, seek to maintain a $1-a-share net value by investing in highly rated short-term debt.

On the other hand, enhanced cash funds, which hold about $850 billion in assets, offer higher yields than those on money-market funds by buying riskier assets such as mortgage-backed securities and aren’t expected to maintain a fixed share price.

Enhanced cash funds became popular in 2003 when interest rates sank to their lowest level in almost five decades and the average yield on money-market funds fell to less than 1%. But as rates rose starting in 2004, enhanced cash funds lost much of their attraction.

“I wouldn’t say enhanced cash funds don’t make sense, but it is more challenging to generate the extra return over money-market funds in today’s environment,” said John Krieg, director for product management at Chicago-based money manager Northern Trust Corp.

As for money market funds, fallout from the credit crunch caused by the sub-prime mortgage crisis has generated losses for some portfolios.

In recent weeks, Bank of America Corp., Wachovia Corp., SunTrust Banks Inc., SEI Investments Co. and Legg Mason Inc. have disclosed they had to step in to make sure their funds’ share prices didn’t drop below $1, or “break the buck.”

The disclosures helped depress the stock prices of money-fund managers, including Pittsburgh-based Federated, which manages $218 billion in money funds. But Federated’s chief investment officer for taxable money markets, Deborah Cunningham, said the company “has never had to put money into a fund to maintain a $1-per-share net asset value and we have never broken a dollar.”

Federated said it pumped $5 million into its Enhanced Reserves cash fund and wrote down $4.9 million of that amount. The company’s shares fell 29 cents to $38.12 on Tuesday.