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Thursday, 18 September 2008

Money-market fund dips below safety benchmark

By Mark Jewell
Fund 'breaks the buck,' only second time in history of money-market funds

BOSTON (AP) -- The assets of a money-market fund that held $62 billion three months ago have fallen below a safety benchmark intended to ensure investors who put money in can get it all back -- just the second unsettling instance in which a fund has exposed investors to potential losses in the nearly four-decade history of money-market funds.

Reserve Management Co.'s announcement that its Reserve Primary Fund had "broken the buck" after its assets fell sharply because of soured investments in Lehman Brothers Holdings Inc. marked the first such investor exposure to money-market losses since 1994.

New York-based Reserve said the value of $785 million in debt securities issued by Lehman and held by the Primary Fund were written down to zero as of Tuesday afternoon -- a consequence of Lehman's collapse and bankruptcy after the federal government failed to bail out the investment bank over the weekend.

Money-market funds normally maintain assets of at least $1 for every dollar invested in funds, and are supposed to return interest to investors in the form of dividends.

Money funds are normally seen as among the safest investments after cash and bank deposits because they're required under federal regulations to invest only in low-risk securities. However, they lack the federal deposit insurance that other safe investments such as bank accounts offer. Consequently, money funds typically offer smaller returns than investments such as stocks, though they have become increasingly popular amid recent market turmoil, and enable investors to easily put money in and take it out when needed.

Reserve said Tuesday night that "unprecedented market events of the past several days" had reduced the value of the fund's holdings to 97 cents for each $1 put in by investors -- an event known as "breaking the buck."

Investors who put in orders to remove money from the fund before Tuesday afternoon will get their money back at $1.00 a share. As for redemption orders that came in after 3 p.m. EDT on Tuesday, the amount they get back depends on the fund's daily share price calculated at 5 p.m. -- a price that could vary depending on the performance of the fund's investments, and ability to raise capital to bring the asset level back up.

Reserve said Tuesday night that effective immediately, investors redeeming cash from the fund will not receive their money until as long as seven days later -- the maximum allowed by law.

Calls to Reserve for further comment rang busy on Wednesday morning.

According to the company's Web site, the Primary fund held $62 billion as of June 30 -- an amount that is likely smaller after Lehman's collapse. The Primary fund was the very first money-market fund when introduced in 1970.

Overall, Reserve oversees more than $124 billion in products including mutual funds, bank products and government-insured deposit accounts, serving millions of accounts, according to its Web site.

In the case in 1994, investors in the Community Bankers Mutual Fund ultimately lost about 4 cents on the dollar. And the fund was for a group of bankers, not retail investors.

In most instance in which a fund is in danger of breaking the buck, the fund's parent firm supplies cash from its own holdings or finds money elsewhere on the open market to maintain an adequate fund balance, said Peter Crane, president of Westborough, Mass.-based Crane Data, publisher of the money-market fund newsletter, Money Fund Intelligence.

"Most funds would take action long before the $1 net asset value was jeopardized," Crane said.

But Reserve "is really an anomaly, because they are one of the few advisers that is privately held, and doesn't have a large financial institution as a parent," Crane said.

Crane said in the past 14 months, the managers of 21 money funds have stepped in to supply additional cash to avoid breaking the buck. Crane said he was aware of three such "support events" this week alone, involving the money-market funds of Wachovia Corp.'s Evergreen Investments unit; Ameriprise Financial Services Inc.'s RiverSource Funds; and the money fund of Northwestern Mutual's Russell Investments.

In cases in which money funds aren't able to fully repay investors, Crane said, "The loss is typically so small that investors should keep the interest income in perspective. You are talking about a loss that is small than the likely interest income they earned."

The Investment Company Institute, an industry organization, issued a statement calling the Reserve case "extremely rare," and said the "fundamental structure of money market funds remains sound."

The ICI said it is "working closely with its members and regulators ... to maintain open communications about market conditions and their impact on funds."

Money funds hold $3.5 trillion in assets for a wide range of individual and institutional investors.

AP Business Writer Tim Paradis contributed to this report from New York.

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