U.S. money funds seen safe from subprime problems

on August 21 2007 8:08 PM

Experts are reassuring investors that U.S. money market mutual funds, which have gathered about $165 billion in new assets over an eight-week period, are safe from the subprime mortgage problems that have caused steep losses at several hedge funds.

Money market mutual fund assets stood at a record $2.7 trillion on August 15, according to the Investment Company Institute, a trade group for the fund industry.

Fidelity Investments, the largest U.S. mutual fund company, recorded net inflows of $5.8 billion to its money market funds in July, substantially more than the $700 million that went into equity funds last month.

Money market mutual funds seek to hold the net asset value of fund shares at $1.00, and let the yield vary according to money market conditions.

In the 30-plus year history of money market mutual funds, there has been only one relatively small instance of a fund breaking the buck. That occurred in 1994, when a fund was liquidated at 96 cents on the dollar.

It's highly unlikely that any money fund will break the buck over the recent credit squeeze, said Peter Crane, president of Crane Data and publisher of Money Fund Intelligence.

Bruce Bent, who with a partner created the first money market mutual fund in 1970, agrees.

I don't see any money fund that is going to break the buck, said Bent, who is chairman of The Reserve. The New York-based firm oversees more than $70 billion in money fund and other short-term assets.

Concerns that money market funds have tainted by the subprime blow-up are unfounded, say Crane and others.

Money funds do not touch subprime directly, Crane said.

But even if some money funds had indirect exposure to subprime mortgages, so far there is no report of any money market security defaulting.

While the chances of anyone losing money in a money market mutual fund may be slim to none, the yields on the funds have slipped slightly.

Money funds typically hold short-term government securities and commercial paper. Yields on three-money Treasury bills have fallen below 3 percent this week.

While many taxable money funds are yielding around 5 percent, the yields lag daily gyrations in the markets.

Vern Hayden, who heads the Hayden Financial Group, a financial planning and investment management firm in Westport, Connecticut, says money funds are a good defensive move for people who want to reassess their risk exposure.

The yield is not necessarily the No. 1 criteria, Hayden said. The primary objective is safety.

The Vanguard Prime Money Market Fund, a $93 billion fund that Hayden considers a good choice for those who want such a fund, currently yields 5.11 percent.

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