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Banking on money funds
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February 20, 1997: 7:02 a.m. ET
Money markets offer no guarantees, but come pretty close
From Contributing Editor William S. Rukeyser
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NEW YORK (CNNfn) -- When Mercury Finance Co. recently missed payments on its short-term commercial paper, Strong Capital Management had to bail out three of its money-market funds that held Mercury's commercial paper.
No investor lost a penny. But the incident holds some lessons for money-market investors whose stake in the funds is approaching $1 trillion.
Even though money-market accounts are not federally insured, more and more investors now use them as checking accounts, raising the question of what would happen if the funds lost value. Take the Mercury Finance incident. People were startled when Strong had to bail its funds out of some bad investments to keep depositors whole.
"The main attraction of money-market funds is their liquidity and their constant share value," said Peter Crane, managing editor of IBC Financial Data. "But if they have an investment that goes south on them, there's a chance that they could be valued at 99 cents per share, 98 cents per share."
To advertise yields a fraction of a percentage point higher than competitors, some funds look for the riskiest securities the Securities and Exchange Commission allows. Several taxable funds hold no investments rated below top-tier quality and require minimum investments of $3,000 or less. Click here for a look at the highest yielding such funds.
As a rule, high yields come with high risk. But many money funds, including Strong's, are keeping expenses down and yields up by waiving some management fees. (112K WAV) or (112K AIFF)
"I don't think investors need to be terribly concerned," said Al Ehrbar, senior vice president of Stern Stewart & Co. "Assume that the fund hadn't had the money to make it up, they simply would have lost some of the higher yield they were expecting."
Investors evidently were not terribly concerned about Strong's quick fix. Strong Heritage Fund, which requires a $25,000 minimum investment, is still the highest-yielding money fund and its assets have grown since the Mercury Finance default.
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IBC Financial Data
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