Credit Tremors Crop Up in Cash Funds
By SHEFALI ANAND and ANN DAVIS
August 15, 2007
Turmoil in the credit markets is spreading to one of the most conservative kinds of investments, causing a small money-management firm to freeze its clients' assets.
That move sent tremors through stocks as well as commodities, until now one of the few markets relatively untouched by recent worries.
Yesterday, Sentinel Management Group Inc. -- citing "panic" conditions in the market -- prevented its clients from withdrawing money from their cash accounts. Sentinel manages money for hedge funds and commodities traders in what are loosely akin to money-market accounts: short-term investment vehicles that are supposed to behave something like a bank account.
Sentinel said in a letter to clients dated Monday that an inability to easily buy and sell securities in the credit markets was making it tough to price its holdings. "We are concerned that we cannot meet redemption requests without selling securities at deep discounts to their fair value and therefore causing unnecessary losses to our clients," the letter said. Sentinel didn't respond to requests for comment.
It is the latest sign that the bond-market turmoil is hurting even investments considered among the most conservative places to temporarily park cash.
Buyers for some debt instruments -- particularly in asset-backed securities and some subprime securities -- have dried up in recent weeks. A general lack of liquidity such as this in global markets is what prompted central banks in the U.S. and elsewhere in recent days to open up emergency lending windows to help investors that suddenly found themselves squeezed by a shortage of cash.
The illiquidity is also hurting a handful of institutional funds and mutual funds that are marketed as "enhanced" money-market products, or funds that are slightly riskier than regular money-market funds and aim for higher yields.
For instance, State Street Global Advisors' Limited Duration Bond Fund, a $2.8 billion fund catering to institutional investors, fell 11% for the month of July. One of State Street's mutual-fund offerings, the SSgA Yield Plus fund, is down 5.5% for the three months and 4% since the start of the year through Monday, according to Morningstar Inc. Both products hold asset-backed securities including subprime-mortgage securities.
A spokeswoman for the company, a unit of State Street Corp., said "Market-driven events occur from time-to-time, such as the current liquidity constraints, that can affect segments of our investment portfolios, and we actively address these events working closely with our clients."
Sentinel manages about $1.5 billion, according to CME Group Inc., parent of the Chicago Mercantile Exchange. It invests clients' short-term cash holdings in a myriad of securities ranging from U.S. government bonds to short-term bank time deposits.
Firms such as Sentinel play an important role in the commodities markets. It is one of a few niche providers of short-term cash-management services for clients in the commodities-futures trading business. It took in clients that included so-called futures clearing firms, which are institutions that execute a client's trades on an exchange and stand behind the client's obligations. Clearing brokers give futures traders confidence that they will be paid if they are owed money when a contract expires.
The Chicago Mercantile Exchange confirmed that some of its clearing firms were Sentinel clients. Sentinel's clients also include a variety of firms that manage pooled commodities funds for investors.
Jeffrey D. Barclay, a partner at Schuyler, Roche & Zwirner who specializes in regulatory issues in the commodity futures industry, said that some of his clients invested money with Sentinel and aren't able to get it out.
In commodities, traders (and their clearing firms) need to keep a large amount of cash on hand. Traders can make wagers by putting up only a small amount, say 10%, of the value of a trade, but they have to be prepared to cough up much more cash if their bets go the wrong way. Their clearing firms demand cash collateral, known as "margin," that changes daily based on the changing value of their position. Sentinel managed some of that cash for clearing firms and commodities traders.
If commodity traders or clearing firms need cash that Sentinel is unwilling to give over, they could be forced to liquidate other investments to raise cash. Yesterday, the Chicago Mercantile Exchange said all the clearing firms registered with its exchange were in good financial standing.
The liquidity problems affecting Sentinel have also caused pain at some mutual funds as well as funds that cater to institutional investors. These so-called enhanced cash funds, also known as "ultra-short" or "yield-plus" funds, have about $850 billion in assets, including investment from governments, institutions and mutual funds, according to research firm iMoneyNet Inc. Still, that's only about a third of the total assets invested in traditional money-market funds.
Unlike basic money-market funds, they don't aim to maintain a $1 net asset value. But some say in their prospectuses that "preservation of capital" is one of the stated goals.
"I can't recall a time when you saw losses like this in the ultra-short category," says Russel Kinnel, director of fund research at Morningstar.
These products usually have the ability to steer into varied securities, such as mortgage-backed securities and other asset-backed securities.
Among other similiar funds that have been hurt: the Fidelity Ultra-Short Bond fund, which is down about 3% in the one -month and 1% year-to-date through Monday; and the Dreyfus Premier Yield Advantage fund, which is down 2.2% for the one-month and 1.14% since the start of the year.
A Fidelity spokeswoman said several factors have affected the fund's recent performance, including its subprime-mortgage securities, which are very highly rated, and other fixed-income securities.
About 22% of the Dreyfus fund is invested in subprime securities, 97% of which are A-rated or higher. A spokeswoman said it is "not a money-market fund" and "we expect that the value of the investment may fluctuate."
The Fischer Francis Trees & Watts U.S. Short-Term fund, which caters to institutional investors, is down around 2% for the one-month ended Monday, and 1.35% for the last three months, according to Morningstar data. According to SEC filings, the fund had about 70% of its assets in asset-backed securities as of March 31, 2007, and 41% in subprime mortgage loans.
A company official says the fund's holdings are primarily rated triple-A and double-A, and they have no credit problems. They are being hurt in the short-term because of lack of liquidity in the market, which makes them hard to price, she said. |
发表于 2007-8-15 10:39:00
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