January 25, 2011 / 8:52 PM / 9 years ago

Fund companies brace for new SEC money fund data

BOSTON (Reuters) - The U.S. mutual fund industry is bracing for fallout from new data on money market funds that will be made available next week.

Some in the industry expect they will need to reassure investors if they see funds valuing their shares at less than $1 apiece.

The U.S. Securities and Exchange Commission on Monday will publish data showing shadow prices for money funds as of November 30, a new monthly disclosure required following the financial crisis.

Changes in interest rates, inflows and other factors mean money market fund shares often have shadow prices worth just above or below the $1 per share “net asset value” at which they sell shares to the public. Funds can claim $1 NAVs if their shadow prices are between $0.9950 to $1.0050.

Some investors unnerved by the data might shift their money into bank accounts or other products with government guarantees, Brian Reid, chief economist of the Investment Company Institute, said on a conference call with journalists and investors on Tuesday.

But Reid said investors will eventually get more used to the new details.

“It’s not that they should disregard the figures. But they should recognize this price is going to fluctuate and they should accept that,” he said.

Peter Crane, whose cranedata.com website tracks the fund industry, said the comments from ICI reflected fears at some mutual funds that skittish customers will bolt.

“The ICI is trying get ahead of the shadow NAV story,” Crane said. Executives are right to urge calm, he added, since consumers typically do not keep track of other financial transactions beyond one penny, or $0.01.

“We live in a world of two decimal points. The third decimal point can concern you, but worrying about the fourth decimal point is ridiculous,” he said.

Money funds held $2.8 trillion as of January 19, down from a peak of $3.9 trillion in January 2009. Low interest rates have held back yields and led to outflows, forcing some fund companies to waive fees.

To date, the $1 NAV has been a sacrosanct selling point for money funds — and an Achilles’ heel in times of stress. At the depths of the financial crisis in 2008 the Reserve Primary Fund was not able to meet redemption requests because of its big holdings in the collapsed investment bank Lehman Brothers.

The fund “broke the buck” or reported a net asset level less than $1 per share, forcing it to liquidate.

Dozens of other funds also had trouble maintaining the $1 NAV, later studies showed. In response, the SEC adopted new rules to stabilize the funds, such as requiring them to hold certain percentages of highly-rated assets that can be sold quickly if necessary.

The SEC is also considering rules that would allow NAVs to float or not be tied to $1 per share value. The industry has resisted, worried it would lose customers.

Reid said the $1 NAV also means customers do not have to keep track of capital gains and makes it easier to complete the sale of fund shares within one day.

The mutual fund industry group ICI also issued a study on Tuesday finding it would take major market shifts to swing fund NAVs much above or below $1.

Short-term interest rates would have to rise more than 300 basis points in a single day to reduce a fund’s per-share value to $0.9950, for instance.

Changes in the price of the funds rarely provide an early warning of other troubles, the trade group said. In the week ending September 10, 2008 — days before the collapse of Lehman — 90 percent of prime money market funds the group studied had per-share market values within 5 basis points of $1.00, or between $0.9996 and $1.0005.

Last year, several fund companies put some extra cash into their money funds to lessen the likelihood they would have to report NAVs much below $1 under the new rules.

Reporting by Ross Kerber; editing by Andre Grenon

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