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Commonfund

Commonfund Restricts Investor Withdrawals In Two Funds

The credit crisis has hit home for a number of higher education institutions after learning Connecticut-based investment advisor Commonfund is now limiting investor withdrawals in a second fund regularly used by about 200 colleges and universities to pay for long-term campus expenditures. Until credit market conditions improve, Commonfund says institutions will only be allowed to withdraw 30% of their assets from the $1 billion Intermediate Term Fund.

It is the second freeze announced by Commonfund in less than two weeks. The first was the popular Common Fund for Short Term Investments Fund. For more than three decades, about 1,000 schools invested in the $9.3 billion Common Fund for Short Term Investments, using their funds much like a checking account for daily operating expenses. Now, some of these schools are wondering how and where they will come up with alternative cash to pay the bills.

The trustee for the Short Term Investments Fund was Wachovia Corp., which on Sept. 29 stepped down from that role and subsequently notified participating institutions that it planned to terminate the fund and distribute its assets through an “orderly distribution process.”

In the interim, according to a Sept. 30 statement issued by Commonfund, investors could redeem up to 20% of their holdings in the Short Term Investments Fund as of Oct. 1, with more in October and November, and up to 57% by Dec. 31. The earliest that investors will be able to access all of their money in the fund is 2010.

In the case of the Intermediate Term Fund, the decision to freeze withdrawals was even more of a surprise to many colleges and universities, and signaled to market analysts that fears over the stability of once-safe funds are indeed on the rise among money managers.

“It's unheard of to shut down a fund if investors aren't already taking their money out,” said Peter Crane, president of Crane Data LLC, a money-fund research firm in Westborough, Massachusetts, in an Oct. 2 article on Bloomberg.com.

Approximately half of the Intermediate Term Fund was invested in mortgage- and other asset-backed securities - the value of which has plummeted in recent months.

As of June 30, the fund returned less than 1% and 2.7% annualized over the past five years, underperforming its benchmark Merrill Lynch 1-3 Year Treasury Index, says Commonfund.

According to Commonfund's Web site, the company hopes to lift restrictions on investor withdrawals from the Intermediate Term Fund “as soon as possible.” Given the current state of the credit markets, however, colleges and universities may be in for a long wait.

Meanwhile, many of the institutions that invested money in the Common Fund for Short Term Investments Fund are now scrambling to find other forms of cash. The fact that they have limited access to their accounts in the fund - which was marketed as “conservative and safe” - is especially troublesome for smaller institutions. Reportedly, Commonfund is trying to help investors secure other forms of financing. Given the state of the credit markets and banks' unwillingness to make loans, however, that may prove extremely difficult.

Our affiliation of securities lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.


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