November 15, 2007 / 8:56 PM / 12 years ago

Investors getting nervous about short-term funds

BOSTON, Nov 15 (Reuters) - Main Street is getting a taste of Wall Street’s credit problems and investors may soon move money out of short-term funds, long considered safe, but now suffering losses, analysts and advisors said.

General Electric Co (GE.N) unnerved the asset management industry most recently when it reported mortgage-securities related losses at its cash enhanced bond fund and said all outside investors got out in a hurry with a loss.

That comes on top of news that Bank of America Corp (BAC.N), Wachovia Corp WB.N and other asset managers also reported losses in their money market funds.

“The increasing frequency of these events are beginning to spook the investing public,” said Lawrence Glazer, managing partner at Mayflower Advisors.

“And we are fielding calls from people who are now asking what types of securities are in these funds and saying they want to move,” he said about his clients, who are among millions of Americans with $3 trillion invested in short-term money market funds.

While the GE fund’s losses are small and will not result in a charge, and the company never promised to keep net asset values stable as many money market funds do, the news stoked talk that more losses elsewhere are inevitable, analysts said.

“At the very least, this was bad public relations,” said Geoff Bobroff, and independent mutual fund industry consultant. “It created a lot of angst and anxiety at a time people are already worried about falling interest rates in their funds.”

Peter Crane, who tracks the money market industry at Crane Data, said the half dozen asset managers who have already reported trouble may be just the tip of the iceberg.

“We think the big, bad news is all out there. But there will be others,” he said.

He said many money market funds were forced to buy more complex securities such as structured investment vehicles and collateralized debt obligations because there was little else to choose from.

“There are chain reaction events that could cause damage,” he added.

So far, Bank of America plans to spend as much as $600 million of its own money to prevent investors in its Columbia Management unit funds from losing out. Wachovia plans to take a $40 million loss to help bail out its Evergreen fund.

For years, investors trusted that no money market funds would “break the buck,” which turned these short-term portfolios into some of Wall Street’s most popular offerings as assets increased five-fold in 13 years.

But now people are worrying and the GE news in particular raises some concern.

Nick Chamie, who heads emerging markets research at RBC Capital Markets said GE’s ability to get outsiders to accept a haircut, or discount on the market value of these securities, might prompt others to become copy cats.

“This could trigger a wave of asset managers trying the same thing, which could accelerate the process of investor loss realization and fund liquidations,” Chamie wrote in a note.

The last time money market funds, often stocked with asset- backed commercial paper, ran into trouble was 13 years ago, when many bet interest rates would not rise and several dozen funds were bailed out by their asset managers.

But so far, big money managers have yet to see a shift. Vanguard Group, America’s second-largest mutual fund group, which manages $130 billion in money market funds, saw client add new money in November after sending $2.3 billion in new money in October, company spokesman John Woerth said.

But advisors such as Lawrence Glazer said investors may soon move more of their money to U.S. government paper, even as they acknowledge there are not many good alternatives for short term investments.

“We are seeing investors questioning the safety of the investments and the financial institutions backing them now,” Glazer added. (Additional reporting by Muralikumar Anantharaman; editing by Andre Grenon)

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