Some mutual fund firms are taking steps that will make it easier for them to respond in the event of significant shareholder redemptions.

Three fund groups this month have disclosed plans that will make it easier for their funds to borrow if necessary to pay shareholders that redeem their holdings. The lending arrangements run the gamut from simply increasing the amount of money a fund can borrow to permitting one fund to borrow from another within the same fund complex.

The increased flexibility to borrow is a prudent way to protect shareholders from a fund being forced to sell securities into a declining market to meet redemption orders, fund executives and consultants said. The ability to borrow readily also reduces the amount of cash a fund needs to keep on hand to respond to redemptions. Cash can be a drag on fund investment performance.

The moves to build flexibility in borrowing come as the industry - despite net sales - faces rising redemption rates. Redemptions for 1999 through June 30 increased by 46 percent to $498 billion over the same six-month period last year, according to Financial Research Corp., a fund tracking and consulting firm in Boston. (See related story, pg. 10)

In addition to anticipating a continuation of recent redemption trends, the industry is preparing in case funds face increased redemptions at the end of the year because of investor concerns about year 2000 computer programming snafus, according to some industry consultants and executives. For whatever reason, fund executives are taking note of the rising redemption rates, these people said.

"What you're seeing is a much greater sensitivity to redemptions," said Burton Greenwald, a consultant for mutual fund firms in Philadelphia. "I think there is a awareness that you have to be prepared."

Fund groups that have filed preliminary proxy statements with the SEC this month to expand their ability to borrow include:

* SSgA Funds of Boston - The proposal would permit the $8.2 billion SSgA Money Market Fund to lend cash to other SSgA Funds in a so-called inter-fund lending agreement.

* Intrust Funds of Wichita, Kan. - The Intrust Multi-Manager Stock Fund is asking shareholders to allow the fund to borrow from the fund's adviser or affiliates on a short-term basis, a transaction that the fund's rules currently do not allow. The $61.4 million fund had net sales of $3.2 million through June 30, according to FRC.

* Acorn Funds of Chicago - the Acorn Fund and the Acorn International Fund are asking shareholders for approval to borrow up to 33 percent of their funds' assets if needed. The funds now have a 10 percent borrowing limit.

Also, Federated Investors of Pittsburgh, Pa. in July applied to the SEC for permission to establish inter-fund loan agreements for its funds.

The Acorn Funds' borrowing proposal provides an effective means for the funds to respond if there is a need for cash, said Marilyn Morrison, a spokesperson for Wanger Asset Management of Chicago, adviser to the Acorn Funds. "It's like an insurance policy."

At Acorn Funds, the proposals come as both the Acorn and Acorn International funds reported net redemptions for the year through June 30. Acorn, with assets of nearly $3.6 billion, had net redemptions of $386 million through June 30, according to FRC. Acorn International, with assets of approximately $1.9 billion, had net redemptions of $113 million.

However, Morrison said the move to expand the borrowing capacity of the funds is not linked to recent redemptions but part of routine business. The redemptions at the Acorn funds are modest in comparison to the funds' assets, she said.

Several fund groups have been making changes to provide more flexibility to handle redemptions. Funds in recent years have established lines of credit in the event of substantial redemptions, fund executives said. In addition, some fund groups facing substantial redemptions may take longer to issue redemption checks to shareholders than they have historically, Greenwald said. Federal securities laws give funds up to seven days to pay shareholders. Funds traditionally have issued redemption checks more quickly than that, Greenwald said.

In addition, it appears that fund complexes increasingly are seeking approval for inter-fund loan programs such as that proposed by SSgA. The Vanguard Group of Malvern, Pa. received shareholder approval last year for such an arrangement. (MFMN 6/22/98.) Other firms are following suit, Greenwald said. Four fund complexes in addition to Vanguard have permission from the SEC to institute inter-fund lending arrangements, according to the SEC. The firms include Fidelity Investments of Boston, Janus of Denver, Colo., Stein Roe Funds of Chicago and T. Rowe Price Associates of Baltimore, Md.

The inter-fund lending arrangements allow one fund in a mutual fund complex to borrow from another on a short-term basis. The borrowing fund pays below-market interest on the loan, mutual fund executives said. At the same time, the fund that lends funds receives more in interest than it would in a cash investment, executives said.

"It's a win-win," said Forrest Foss, associate counsel for T. Rowe Price.

T. Rowe Price initiated its inter-fund loan program in the past 12 months, Foss said. It has used the lending arrangement only once, when a $1 billion fund borrowed $11 million over a two- to three-day period in July, Foss said. He declined to identify the funds.

T. Rowe Price's inter-fund program provides the firm with another source of cash, in addition to bank loans and fund cash reserves, in the event of excessive shareholder redemptions, Foss said.

"You want to have as many tools as you possibly can," he said.

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