Money market funds jolted by first collapse

September 29, 1994|By Newsday

Managers of money market mutual funds will likely throttle back on risky, yield-boosting investments in the wake of the first-ever collapse of such a fund earlier this week, experts said.

But the losses suffered by investors in the Community Bankers U.S. Government Money Market Fund didn't prompt a stampede out of the popular money funds. Spokesmen for mutual fund companies said they got only a handful of calls yesterday from concerned investors.

"This opened the eyes of people in management in the mutual fund industry," said Kurt Brouwer, a San Francisco-based investment adviser. "They're telling their managers, 'We don't have to be the actual highest-yielding fund, thank you very much.' "

Until Tuesday, the sellers of mutual funds had been able to boast that no one ever lost a dime from putting their cash in a money fund.

But unlike the money in passbook savings accounts at banks, the $600 billion currently held by money market mutual funds is not guaranteed by the U.S. government.

No individual investor was hurt in the liquidation of the Community Bankers fund, a small money fund whose shareholders were primarily banks that had invested a minimum of $100,000. And analysts said the precedent of sticking the investor with losses was not likely to be followed soon.

"All you really have as a money manager is your good name," said Don Phillips, vice president of Morningstar, a Chicago-based mutual fund evaluation service.

Most of the cash in money market mutual funds is invested in short-term, high-quality government securities.

However, some managers have tried to boost the yields paid to investors by putting a portion of their money in better-paying "derivative" securities, exotic concoctions whose value usually fluctuates widely when interest rates change.

A few funds have been hit with big losses from their derivative investments recently, but rather than pass those losses on to investors, they simply made up the difference from their own pockets.

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