Money funds should reexamine $1 NAV: Joy
NEW YORK (Reuters) - The chief market strategist of RiverSource Investments LLC on Wednesday said the $3.71 trillion money market mutual fund industry should examine its longstanding policy of always preserving investors' principal, and whether it might allow funds to "break the buck."
Speaking at the Reuters Investment Outlook Summit in New York, strategist David Joy said September's collapse of Lehman Brothers Holdings Inc (LEHMQ.PK) illustrated how even investors in short-term instruments not necessarily backed by the federal government should be prepared to accept principal losses. Such losses would cause money funds' $1 net asset values to fall.
"You cannot take for granted that what appeared to be solvent institutions are going to remain solvent," Joy said. "The industry is at least going to open that question to discussion, about whether the $1 is sacred and something that should be maintained at all costs."
RiverSource is a unit of Minneapolis-based Ameriprise Financial Inc (AMP.N). Ameriprise is litigating on behalf of clients trying to recover money from the Reserve Primary Fund REPXX.O, a money fund that broke the buck in September. Joy declined to discuss the litigation. Ameriprise had invested clients' funds in Reserve Primary.
Reserve became the first money fund to break the buck in 14 years after writing down its Lehman holdings to zero. The litigation turns in part on the timing of the write-down, and whether investors who redeemed earlier but whose requests had not yet been processed must share in the write-down.
But more money funds may struggle to maintain $1 NAVs if corporate defaults keep rising as expected, or if yields on the short-term debt that the funds buy fall further.
The average yield fell this week to 0.94 percent on taxable funds and 0.62 percent on tax-free funds, according to iMoneyNet Inc. Meanwhile, the U.S. Federal Reserve is expected next week to cut a key short-term lending rate from 1 percent.
Joy said the end of a guaranteed $1 NAV could send investor cash to government-only money funds, or to banks, but said: "I'm not so sure that would represent a big dislocation."
Last month the Treasury Department extended a program to guarantee money fund principal through April 30. The Reserve fund wasn't covered. Joy expects the program to end when the commercial paper market and economy are functioning better.
RiverSource's own Cash Management Fund IDSXX.O had about $4.75 billion of assets as of September 30.
(For summit blog: summitnotebook.reuters.com/)
(Additional reporting by Dena Aubin and Herbert Lash; editing by Leslie Adler)
