by Gordon Pape
There is no evidence that any Canadian money market funds are in difficulty but securities regulators have launched a "fact-finding review" to make sure there are no surprises.
Canadian securities regulators are concerned about the potential risk to money market funds in the wake of more U.S. bank collapses and have launched an investigation to see if we have any serious problems.
The Canadian Securities Administrators (CSA), which brings together all the provincial regulators, said last week that it is looking into the extent to which Canadian MMFs are exposed to high-risk U.S. debt securities, such as short-term notes issued by failed Lehman Brothers and Washington Mutual. The "fact-finding review" as it is called is being conducted in association with the Investment Industry Regulatory Organization of Canada (IIROC), which has oversight responsibility for brokerage houses.
MMFs invest in short-term securities with an average term to maturity of less than 90 days and a maximum maturity of one year. They have long been considered to be virtually risk-free and the equivalent of cash. However, as we have seen, even short-term notes can lose some or all of their value and MMFs are not protected by deposit insurance. Last year, National Bank had to spend $2 billion to bail out its MMFs as well as some Altamira funds after they were caught holding tainted asset backed commercial paper (ABCP).
Recently, the U.S. government had to step in and guarantee MMFs in that country for losses up to $50 billion after giant Reserve Primary Fund "broke the buck" i.e. reduced its net asset value to less than $1 because of losses due to its position in Lehman Brothers notes. Canadian MMFs normally have an NAV of $10. To date, I have not heard of any dropping below that.
Some fund companies are issuing press releases to reassure investors that their money is safe. Earlier this month, Mackenzie Financial put out a statement saying its Sentinel MMFs "are operating normally and are expected to maintain their constant $10 unit price." The press release went on to say that the funds "do not have any exposure to Lehman, Washington Mutual or AIG".
Fidelity posted a Q&A for investors on its website in which it says the company's number one priority in managing its MMFs is to preserve the $10 unit value. The company said its MMFs have no exposure to debt issued by AIG, Washington Mutual, Lehman Brothers, Goldman Sachs, or Morgan Stanley (the last two companies are solvent but have been rumoured to be in difficulty).
The company said the Fidelity U.S. Money Market Fund "has a 3.8% exposure to Merrill Lynch debt". However, it pointed out that Merrill Lynch has been acquired by Bank of America "and all its obligations have been fully assumed".
Franklin Templeton announced that its MMFs have no Lehman Brothers exposure and said that the company's worldwide exposure to Washington Mutual and AIG was less than 0.25% each.
Readers who are concerned about the safety of their MMFs should consider choosing funds that invest only in Treasury bills or government-guaranteed securities. The Altamira T-Bill Fund is an example. Most of the banks also offer T-bill funds.
Don't assume your money fund is safe. The fact the regulators have launched an investigation suggests there is reason for concern. Ask your financial advisor (or the fund company itself if you don't have an advisor) what your MMF invests in. If you are not satisfied with the answer, switch to another one or to a high-interest savings account, which will be covered by deposit insurance.
Adapted from an article that originally appeared in Mutual Funds Update, a monthly newsletter that provides advice on fund selection and strategies. For subscription information: http://www.buildingwealth.ca/bookstore/productdetail.cfm?product_id=80