Roanoke Times
Copyright (c) 1995, Landmark Communications, Inc.
DATE: SUNDAY, June 10, 1990 TAG: 9006080056
SECTION: BUSINESS PAGE: A-13 EDITION: METRO
SOURCE: By CAROLE GOULD/ THE NEW YORK TIMES
DATELINE: LENGTH: Medium
But investors in the 10 money funds left holding $75 million of sharply downgraded paper did not realize the extent of the troubles until they were resolved: T. Rowe Price, whose money fund held the lion's share of the paper, anted up $65 million to buy the paper from its fund so investors would be protected. The nine others did the same.
But this multimillion-dollar debacle - the second in a year - sent up warning signals to Washington, and the Securities and Exchange Commission wants to make sure it doesn't happen again.
Kathryn McGrath, head of the SEC's division of investment management, has put together a proposal that would force money fund managers to upgrade their portfolios and take fewer risks with investors' money.
Under it, managers would have to shorten the average maturities of their holdings, diversify their investments and buy issues with higher credit ratings.
McGrath said she expects the proposal to come before the commission "sometime soon. A handful of problems in the last year have caused us to take a new look at the rules," she said.
The relatively small size of the recent bailout allowed the funds to absorb losses rather than pass them on to investors.
But the SEC wanted to act before more money was involved. "When the amounts get bigger, the funds simply won't be able to afford it," McGrath said.
The Mortgage & Realty bankruptcy - and last year, Integrated Resources' default on $23 million in commercial paper held by the Value Line money fund - offer key reminders that money funds, which now have $400 billion in assets, carry certain risks, despite industry efforts to promote them as being as safe as savings accounts.
"Investors should be aware that money funds are not insured savings accounts and they don't have the blessing and guarantee of the U.S. government," said Michael Lipper, president of Lipper Analytical Services in New York, which monitors mutual funds.
To keep a rein on money funds until her proposal is acted upon, McGrath recently wrote to fund companies to remind them that under current rules, money funds must maintain high-quality portfolios whose underlying "securities present minimal credit risks."
And she ordered SEC field inspectors to keep a closer watch over the funds.
Despite these efforts, McGrath thinks fund investors face no imminent danger. "I'm not particularly worried," she said.
The huge size of some of the fund groups can provide a cushion if their money funds run into trouble.
And there are already safeguards in place - like regulations on creditworthiness of holdings - that preclude a disaster.
Furthermore, the recent close calls scared money fund managers, she said, and they are probably being extra cautious.
Still, funds are not legally required to absorb losses. And publicly held fund groups are accountable to shareholders not just investors, so they might refuse to bail out funds with shareholder money, McGrath said.
So how can investors protect themselves? Minimize your risk by spreading your money among several money funds.
Or avoid the risk of default by investing in money funds that buy only Treasury issues.
But remember: Some funds that tout themselves as "government only" invest in repurchase agreements, or "repos." Even though repos are collateralized by government securities, losses are possible.
Check the fund's semiannual or annual reports for descriptions of its investments.
Funds that buy commercial paper should buy only top-tier paper, rated A1 or P1 by Standard & Poor's or Moody's.
But because money funds turn over their portfolios rapidly, annual reports may not reflect current holdings.
Ask for an interim report and if the fund refuses to give you one, "hold that against them," said Norman Fosback, editor of Income & Safety, an investment newsletter based in Fort Lauderdale, Fla.
Look at when the fund's portfolio matures. In a volatile market, like today's, shorter-term holdings are less risky.
Fosback recommends avoiding funds with portfolios that mature in more than 100 days because "if interest rates rise, the prices of the longer-term issues drop and that creates a loss."
The average of maturities is now 31 to 40 days, but the funds vary widely from less than 10 days to more than 100 days.
Look to see how diversified a fund's portfolio is. Funds that concentrate investments among a few issues are riskier than funds that spread their holdings among 100 or more.
Besides the ability to diversify, size is a plus. In general, the smaller funds have lower yields because they must spread their expenses across a smaller base.
Because the recent bailouts have been business decisions made by funds, not legal imperatives, investors should deal with well-managed fund companies.
"Know who you're dealing with and make sure it's a reputable crowd," McGrath said.
by CNB