Federated absorbs failed Putnam money fund

BOSTON (Reuters) - Federated Investors Inc (FII.N), one of America's biggest money market fund managers, took an unprecedented step on Wednesday when it acquired assets from a rival's portfolio facing heavy cash withdrawals.

Federated said it moved securities from Putnam Investments' $12.3 billion Prime Money Market Fund into its $22.1 billion Prime Obligations Fund in a $1 per share for $1 per share transaction that will leave Putnam shareholders with shares in the Federated portfolio.

Putnam, one of America's oldest mutual fund managers, said last week it would close and liquidate the fund, which was reserved for professional investors, as clients suddenly demanded their money back.

The fund had roughly 155 institutional investors. Putnam is a unit of Canada's Great-West Lifeco Inc (GWO.TO)

"Preserving capital, providing liquidity and competitive yields for clients has been a fundamental strength of our cash management business for more than 30 years," said Deborah Cunningham, chief investment officer for Federated's taxable money markets. "The transaction further reinforces our position as an industry leader."

Federated Investors gained experience in adding large amounts of funds when the company bought Alliance Capital's cash management business, but it has never before acquired a fund that was closed amid heavy redemptions.

While the Putnam fund's shares did not fall below $1, or break the buck as the expression goes, the heavy redemption requests illustrated just how nervous investors were becoming as U.S. stock prices plunged last week as the country faced its worst financial crisis since the Depression.

Money market funds are usually considered safe investments and are often favored during market turbulence.

Last week, however, marked one of the worst ever for these portfolios as investors hastily pulled out roughly $169 billion, shrinking the market to about $3.4 trillion, data from the Investment Company Institute, a trade group, show.

Markets were initially unnerved by news The Reserve Fund, founded by the man who helped invent money market funds in the 1970s, said its prices had dropped below $1 because of soured investments in Lehman Brothers.

Putnam Investments hired fund industry veteran Robert Reynolds as chief executive officer this summer to help stem persistent outflows. Putnam approached Federated Investors to make this deal, a Federated spokeswoman said.

The news follows on the heels of Putnam's announcement that Kevin Cronin, its head of investments, will leave the firm.

(Editing by Andre Grenon)