Word: funding
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...problem with the Putnam fund, which was sold only to institutional investors (such as pensions funds and insurance companies), wasn't that it was losing value but rather that so much money was being withdrawn. The fund was going to be forced to dump a big block of its holdings, and flooding the market like that has the effect of driving down security prices - thereby driving down the value of the fund you want to keep at $1 per share. "The investors are almost as important as the investments here," says Peter Crane, money fund expert and CEO of Crane...
...talk about Reserve Primary Fund, which was the first of three funds at Reserve Management to break the buck. What Reserve announced was that because of investments in Lehman IOUs, it was worth 97 cents per share instead of a dollar. In other words, it was down by 3%. Not worthless. Down by 3%. Let's keep that in mind...
...also keep in mind that if Reserve Management were a big, multi-faceted money manager instead of a focused, privately held company, there's a good chance it would have averted having to mark down its fund. We can say that because that's what big, multi-faceted money managers have been doing. According to Crane Data, over the past 13 months, 21 money market funds have received capital infusions from their parent companies in order to avoid breaking the buck. Parent companies can go as far as actually handing the funds cash and take the troubled assets onto their...
...Companies don't routinely have to back up their money market funds this way, but they do from time to time. In 1994, for example, amid the bankruptcy of Orange County, Calif., more than 20 money market funds were bailed out by their corporate parents. Only one fund was liquidated. And even then, investors received 96 cents on the dollar. The reason Moody's is considering downgrading 13 of Lehman's money markets isn't because of what they own, but because the ratings agency isn't sure the parent company, which is in bankruptcy, would be able to step...
...what should you do now? Nothing, right? Okay, maybe there are a few small things. For starters, look at the yield on your money market fund and compare it to the sector. Naturally, you want the highest return on your money. Except that maybe you don't. Higher yields usually mean riskier investments - more commercial paper, say, as opposed to Treasuries. Last Friday, before the Lehman implosion, Reserve Primary Fund was the second highest-yielding fund of the 100 largest tracked by Crane Data. For months before that, it was in the No. 1 slot. "You want to act like...