Filed under: Market matters, Mutual funds, Money and Finance Today
Bankrate.com reports that money market funds’ exposure to subprime mortgages is creating the riskiest climate for these supposedly safe investments since the 1994 derivative crisis. Peter Crane, a money market fund expert, ranked the 1994 crisis as a 10 on a scale of one to 10, and ranks today’s situation an 8.
Since August, I’ve posted about this topic myself here, here and here. Bankrate.com has some useful tips:
- Not a bank account. Recognize that money market funds are not FDIC insured so you can lose money if they fail.
- Know what type of money market fund you have. A Treasury or government agency fund would not have any commercial paper that could be linked to Structured Investment Vehicles (SIVs), which may be backed by subprime mortgage-backed securities. But a prime, or a general purpose type fund, could have commercial paper, although not all do. Typically, the makeup of 200 such funds that can buy commercial paper, is 40% or 50% paper and the rest in repossession, Treasury, agencies, bank paper and other money market investments. These are the riskier ones.
- Read the prospectus. As I pointed out in this post, if you look at the prospectus, you can see how exposed your fund is to SIVs.
I would add an obvious point — if you have money in a fund that’s exposed to subprime mortgages, consider finding one that has no commercial paper and shift your money to that.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter.
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