$12 billion spent to avoid ‘breaking the buck,’ Moody’s says

At least 20 fund managers of U.S. and European money market funds spent at least $12.1 billion to preserve the net asset values of their constant net value funds, particularly during the 2007-‘09 financial crisis, according to a report by Moody’s Investors Service.

“Fund managers, which are typically financial institutions, have stepped in to help their funds in times of market stress, enabling them to maintain their constant net asset value,” Henry Shilling, senior vice president and author of the report, said in a Moody’s news release. “Also referred to as sponsors, the fund managers don’t have a legal or regulatory obligation to do so, but, with limited exceptions, they have stepped in to protect their franchises and reputations.”

Without that support, more than 200 funds would have “broken the buck,” and in all but two cases, involving three funds, between 1980 and 2009, such parental support mitigated shareholder losses, according to the news release.

Prior to the 2007-2009 financial crisis, at least 146 funds would have broken the buck without the support.

“The sponsor’s financial condition and its willingness to provide support are important factors to consider when evaluating how well a money market fund is positioned to meet its objectives,” Mr. Shilling said in the news release. “This is, of course, in addition to other key factors, such as the portfolio credit quality, its liquidity profile, its susceptibility to market risk, and the manager’s risk management practices.”

Sixty-two funds — at least 35 in the U.S. and an estimated 26 in Europe — received financial and balance sheet support during the 2007-2009 crisis.

The report cautions that management firms may respond in concert to future adverse credit, market and liquidity events by withholding support for their funds.

“In doing so, the otherwise unfavorable business or reputational consequences for individual management companies would be limited,” according to the news release. “However, this would shake investors’ confidence in the sector and may lead to fund ‘runs,’ such as in September 2008. In the absence of governmental intervention, fund runs have a destabilizing effect on financial markets.”

Mr. Shilling said in a telephone interview that management firms responding in concert to adverse events tend to come in cycles.

“I think it would require a pretty stressed scenario to again experience a level of deterioration in the mark-to-market value of money funds,” he said. “It’s more likely that in the near to intermediate term we would have these one-off events occurring as they have in the past.”

He used BP’s oil spill in the Gulf of Mexico as an example.

“There’s very limited tolerance that funds have to deviations in their mark-to-market values,” Mr. Shilling said. “Funds with BP exposure, for example, could have experienced some stress that might have required some action on their part.”

He said investors should evaluate some “key factors” before investing in a money market fund such as:

• credit quality;

• liquidity profile;

• susceptibility to market risk; and

• the manager’s risk management.

He noted that the role of the parent company also is important to evaluate before making an investment, including “whether they have the wherewithal, the willingness and the capacity to provide support.”