Tide turned

The tide has finally turned for prime money-market mutual funds.

From mid-October through Feb. 11, assets in such money market funds — those that invest in short-term corporate and bank debt, but not government securities — grew 13.45% to $1.98 trillion, according to the Investment Company Institute, the mutual fund industry's Washington-based trade group.

Total money fund assets were $3.9 trillion on Feb. 11, up from $3.46 trillion on Sept. 17, ICI said.

Once considered among the safest and most uninteresting investments, prime money funds were thrust into the spotlight in mid-September when the prime fund managed by The Reserve Management Co. Inc. of New York "broke the buck" and redemptions were frozen. The fund, which had invested in securities of Lehman Brothers Holdings Inc. of New York, is being liquidated and its value is 97 cents a share.

"The Reserve (Primary Fund) is being seen more as an isolated incident because no one else broke the buck," said Peter Crane, president of Crane Data LLC, a Westborough, Mass.-based research firm focused on the money fund industry.

Custodian TD Ameritrade Holding Corp. of Omaha, Neb., helped restore confidence when it stepped in with $35 million to bail out its clients and those of its affiliated registered investment advisers after the Reserve Primary Fund broke the buck, said Veena Kutler, principal at the Garnet Group LLC, Bethesda, Md., which manages $150 million in assets.

Other money managers also learned something from the Reserve experience, she said.

"They are making sure the pricing on the holdings is accurate, which gets rid of a lot of the risk," Ms. Kutler said.

"Among investors, some of the emotions are starting to calm down," said Matthew Illian, a wealth manager with Marotta Wealth Management Inc., Richmond, Va., which has $120 million in assets under management. "People are able to discern the difference between a collateralized debt obligation, a structured investment vehicle and the type of money market fund they own."

To be sure, the Treasury program guaranteeing money fund assets held as of Sept. 19 helped instill investor confidence.

"The federal government recognized the centrality of the money-market system to the rest of our financial world and made it clear that it couldn't be allowed to fail," said Eric Jacobson, a senior fund analyst at Morningstar Inc. of Chicago.

While new flows are not covered by the guarantee, Mr. Crane said the government's action has been "an endorsement of the sector" and has helped bring about a higher overall level of confidence. Having a guarantee, he said, "puts a floor on the asset base and prevents a run on the fund."

Other factors are restoring confidence too.

"Investors took a step back and realized that their managers were running the funds conservatively," said Robert Deutsch, a managing director and head of global liquidity at JPMorgan Asset Management of New York. "Also during that time, Treasury fund yields had dropped to very low levels. We've seen money that had gone into Treasuries move back to prime money funds."

Assets in the JPMorgan Prime Money Market Fund dropped to $102 billion Sept. 30 from $120 billion Sept. 12. New inflows raised the fund's assets to $150 billion Feb. 19.

"Ultimately, I think yields are a contributing factor," said Deb Cunningham, a senior vice president and chief investment officer at Federated Investors Inc. of Pittsburgh, which managed $78 billion in its 12 prime money funds as of Dec. 31.

But advisers say many investors are just looking for safety.

"Now everybody is saying that they just want to know that their equity will be preserved, Mr. Illian said. "For the majority of clients, money market funds are a vehicle for liquidity. We can get a higher return with bonds or a CD ladder."

Still, advisers remain cautious about using the funds.

"People may be more trusting of the investment, but it remains to be seen if that is well-placed trust," said Cern Basher, chief investment officer at Madison Wealth Management of Cincinnati, which manages $140 million in assets. "I feel strongly that the industry needs to take a good look at how these things are structured. You can still have a run on the funds," he said.

"Funds may have investments that mature in 45 to 90 days, but if everybody wants out in one day, they have to sell securities to meet the redemptions. There may not be a market for those securities."

Sue Asci is a reporter at InvestmentNews, a sister publication of Pensions & Investments