DES MOINES, IOWA — Industrial engineer Peter Miter of Doylestown, Penn., is like millions of American investors who had retirement money invested in the stock market, but sought the safe refuge of money-market funds recently when stocks became too volatile.
“Hearing that the banks and AIG, solid institutions are going under, I’m wondering where can I put my money where it’s secure,” said Miter, a 52-year-old employee of McNeil Consumer Healthcare.
He said he’s worried that money-market funds may not be the safe haven he thought they were and he’s looking for the next safest bet.
So were lots of other people.
Industry watcher iMoneyNet said investors pulled $89 billion from money-market funds on Wednesday alone. That came on the heels of five days of withdrawals that totaled $80 billion, which combined shrunk total fund assets by 5 percent in a week — the biggest such drop since the firm started tracking the fund market.
The safety of moneymarket investments has been the hallmark feature of the funds that hold as much as $3.4 trillion of investor assets.
The money market world shuddered after New York-based Reserve Management Co. said Tuesday the value of $785 million in unsecured debt issued by Lehman Brothers Holdings Inc. had been written down to zero in its Reserve Primary Fund.
The fund’s managers were swamped by investors wanting to pull their money — more than $40 billion — out. Spokeswoman Ming Lee Hatch said that in just over two weeks, fund assets plunged from $65 billion on Aug. 31 to $23 billion on Tuesday.
All told, the value of the fund’s holdings dropped to 97 cents for each $1 put in by investors.
It was only the second time in the four decades — since industry-founding Primary Funds pioneered the money-market account — that a fund couldn’t assure clients of the full value of their investments.
Greg McBride, senior financial analyst at , stressed the point that many industry analysts were making Thursday: money-market funds are safe. Most investors’ funds are with large mutual fund or brokerage companies that would do everything in their power to preserve the dollar-for-dollar value, he said.
After all, the idea behind the money-market mutual fund was that it would invest in safe debt issued by the government and financially solid corporations. These funds typically pay an interest rate above what could be earned in a savings account, but also allow investors access to their money.
Some funds, however have moved to boost returns by moving toward riskier investments.
The Reserve Primary Fund had shown an average 12-month yield of around 4 percent, the highest among the 2,100 money market funds tracked by research firm Morningstar Inc. The average for the other funds was around 2.75, said Karen Dolan, Morningstar’s director of fund analysis.
Higher than typical returns should be a warning sign for investors, she said. She advised investors to seek low-cost money market funds that don’t need to stretch for yield. She advised that large reputable firms such as Vanguard and Fidelity have the resources to back up the investments in their money-market funds.
Fitch Ratings, which rates about 20 percent of money-market mutual funds, said Wednesday it reviewed the Lehman Brothers debt exposure for the 87 funds that carry its stable net asset value rating globally. It found fund advisers had anticipated deterioration of the Lehman debt and took action to eliminate exposure.
Fitch said in a statement that in all but one of the funds it covers, there was no exposure to the unsecured Lehman debt. In the one instance, the fund sponsor promptly bought the asset out of the fund.
There are options to consider if your money-market account is suddenly keeping you awake at night: —Move the money into a U.S.
Treasury money fund at your brokerage firm. The upside is that it removes the exposure your current fund may have to corporate debt.
The downside is you’ll take a bit of a hit in yield on the government instruments, which have dropped in recent days. For example, the one-year Treasury note yield is about 1.5 percent, down from 2 percent, where it was trading as recently as Friday.
Top money-market funds are likely trading around 2 to 2.5 percent, McBride said.
—Park your money in a bank money-market deposit account or savings account. This option carries two big advantages. The money is covered by the Federal Deposit Insurance Corp. from losses if the bank goes under. Another plus, the yield at some banks is about 3.5 percent.
“If you find yourself staring at the ceiling at 3 a.m.
wondering if your money is safe, money-market deposit accounts and savings at banks offer safety of money without sacrificing yield,” McBride said.
As was illustrated with a run on investors wanting out of the Reserve Primary Fund, too many people moving to cash out of a money-market fund can cause problems.
The point was demonstrated again on Thursday when Putnam Funds said it closed its $12 billion Putnam Prime Money Market Fund when too many clients tried to cash out.
The fund was offered to institutional clients with a minimum initial investment of $10 million.
Putnam said selling the fund’s securities rapidly enough to meet demand for liquidation would have caused it to sell some assets at a loss.
“In the face of these challenges, the trustees determined to close the fund to ensure equitable treatment of all fund shareholders,” Putnam said.
Other Putnam funds were unaffected, the company said.
Peter Rizzo, senior director at ratings firm Standard & Poor’s said panic withdrawal from money-market funds can only complicate things by forcing fund managers to sell assets under duress.
“If everyone can take a deep breath, and let things work, things will be just fine. But if you have irrational behavior…If you yell ‘fire’ in a theater, people will run,” he said.
Miter, the Pennsylvania engineer, said he makes most investment decisions himself and chose several weeks ago to take his money out of the stock market, where he was invested in international stock funds and some energy sector companies.
“I just had a gut feeling that things were not looking too good,” he said.
He moved his money into money market funds at two major brokerages. He called them this week to see whether they had exposure to Lehman debt.
He said one mutual fund manager made him feel worse because they wouldn’t provide him with enough information. The other assured him that they were maintaining the dollar-for-dollar ratio in the money-market account, which he said helped.
He decided Wednesday, however, to transfer money out of one of his money-market accounts into secure bonds.
“I do have concerns being just 10 years away from retirement,” he said.
