Credit crisis crushes money market funds myth

By Natsuko Waki

LONDON (Reuters) - A year after the credit crunch sent money markets into spasms, risk-averse investors have learned that juicy yields and safety do not coexist and have become increasingly discriminating within the money funds universe.

During years of easy credit and abundant liquidity, many asset managers invested in various high-yielding money market funds, believing they had offered the same safety of cash but with juicy additional basis points.

On the surface, the risk profile of these "enhanced" funds did seem low as easy market volatility masked what transpired to be the risky nature of their investment in structured products such as Asset Backed Commercial Paper (ABCP).

However, the unraveling of the 2001-2007 credit boom was a game changer for many market funds. As troubles in U.S. subprime mortgages posed severe questions about the credit quality of top-rated repackaged securitized assets, liquidity evaporated in these markets and money funds were forced to dive for cover.

"The enhanced money market funds industry has experienced huge outflows. There have been dramatic shifts in terms of liquidity," said Isabelle Demoliere, head of European short term asset group at Fortis Investments UK.

"(Before the crisis,) every market participant was running out to find yield and forgetting about risks. There was so much liquidity in the market. They thought, how can liquidity vanish just in one day?"

But liquidity did vanish rapidly. As a result, in Europe, at least a dozen enhanced money market funds were suspended or liquidated after their net asset value fell up to 20 percent in some cases, according to Fitch Ratings.

"Enhanced yield funds (are) probably the worst casualty," said Abisodun Soetan, associate director of fund and asset manager rating group at Fitch.