Investors Still Wait For Answer On Frozen Reserve Funds
In September, investors were shocked to learn that the Reserve Primary Fund had “broke the buck,” and as a result, access to their cash unavailable. A few days later, investors got another surprise courtesy of the fund’s manager, the Reserve Management Company, when they discovered that the supposed safe, conservative fund had doubled its investment in Lehman Brothers during a time when the firm clearly was in financial trouble.
The revelation is especially disturbing because the transactions were contrary to what investors had been told about the fund and its investments in only high-quality, short-term securities. In May 2008, more than 50% of the holdings in the Reserve Primary Fund were in commercial paper. By comparison, the percentage was less than 1% a year ago.
Investors’ worst fears came to fruition on Sept. 17 when the Lehman debt, with a face value of $785 million, was written down to zero, which in turned caused the asset value of the nation’s oldest money market fund to drop below $1 a share.
Since then, the Reserve Primary Fund has invoked a mandatory suspension of redemption proceeds. The suspension was supposed to last only seven days. In October, however, the manager of the Fund asked the Securities and Exchange Commission (SEC) to extend the suspension indefinitely, or until the financial markets became liquid. The SEC approved the request, leaving investors in the Primary Fund, as well as a dozen other Reserve funds, unable to access their cash.
In early November, after weeks of delay, investors in the Reserve Primary Funds finally began to receive their checks, following an initial distribution of $26 billion. Even that, however, only covers about half of each client’s total account balance.
Adding to investors’ woes are the words of the Reserve Primary Fund’s founder, Bruce Bent. For years, the 71-year-old touted the safety and liquidity of money-market funds and was resolute in the fact that commercial paper paying slightly higher yields had absolutely no place in money-market funds. He apparently changed his belief because in May 2008, more than half of the Reserve Primary Fund’s holdings were in commercial paper.
Bent, along with his company’s Web site, also proudly advertised the Reserve Primary Fund’s “unwavering discipline and focus on protecting investors’ principal.” Right before the Reserve Primary Fund broke the buck, in fact, Brent is quoted in the Wall Street Journal as saying: “The purpose of a money fund is to bore the investor into a sound night’s sleep.”
For investors in the Reserve Primary Fund and similar Reserve funds, “nightmare” might be a more suitable depiction.
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