As the subprime contagion infects new corners of the financial markets, portfolio managers are voting with their feet and moving money into what are perceived to be safer investments.

Among the prime beneficiaries of this flight to safety are money market mutual funds and municipal bond funds.

On the money market front, the combination of the subprime mess and the Fed's rate-cutting reaction to it, this sector is seeing a jump in inflows. According to Money Fund Report, there was a $57 billion move into the instruments in the week after Bernanke's first rate cut.

But chasing safety has its price. Money Fund Report said the average money-market fund currently only has a yield of 3.17%.

And the yield on money market mutual funds may be further constricted by the effects of another part of the subprime virus, namely the pressure on money market funds to sell investments in loan vehicles that are themselves being depressed by the crisis.

Money Management Executive spoke to two portfolio managers to garner some tips about how they are reacting to the crisis.

David Schoenwald, who runs the Melville, N.Y.-based New Alternatives Fund, said that although market conditions are troubling, he's avoiding many of the popular destinations for conservative investors such as money market funds or municipal bonds.

New Alternatives is a socially responsible fund whose emphasis is on holdings in alternative energy and environmental companies.

It invests in companies in three primary areas: renewable energy, fuel cells and hydrogen power development, and energy conservation and enabling technologies. It does not invest in oil, coal and nuclear energy in line with its socially responsible definition.

Schoenwald said market can make managers scared and uncomfortable, but New Alternatives isn't reacting to the current climate by buying financial services or mining stocks, for example.

It may well turn out that, the New Alternatives Fund manager said, taking an example from the sector his fund invests in, that solar energy funds will turn out to have been overvalued.

Another port in the storm for money managers is municipal bonds. Often compared with Treasuries for safety, municipal bonds are at a rare inflection point at which their yields are higher than those on T notes. When you factor in the tax advantages that come with municipal bonds, it is no surprise that portfolio managers are piling into these vehicles.

"You're seeing money pouring into municipal bond funds," said Steven Shachat, a portfolio manager at Alpine Mutual Funds of Milwaukee.

Alpine is a family of funds that invests in select areas of specialization for growth and income. Categories include: equity dividend portfolio management, real estate equity securities, and financial institutions, corporate innovators, small- to mid-cap growth value and short to intermediate tax-exempt securities instruments.

Shachat said one reason for the popularity of these holdings is that compared to other alternatives, municipal bonds have nearly a non-existent default rate. The average default rate on a triple-A rated municipal bond has been less than 0.01%.

Municipal Bonds: How Safe A Haven?

One worry for portfolio managers who are considering shifting assets into municipal bonds is that the companies that insure these bonds are in trouble. Companies like MBIA Inc., Ambac Financial Group Inc. and Financial Guaranty Insurance Co. provide a layer of insurance against the slight risk of default in these tax-free debt instruments that are issued by cities, hospitals and some non-profit groups.

Problems with these bond insurers' exposure mortgage debt is a concern for potential investors in the space whether they are retail or institutional. These insurers' losses on their mortgage investments have to be balanced against the fact that most local government and other issuers of these bonds have a miniscule default rate.

But Shachat said that even without relying on the backup these insurers provide, investments in municipal bonds are a safe place to ride out the financial turmoil elsewhere in the market.

Managers considering municipal bonds should be further comforted by the announcement last week that renown "Oracle of Omaha" investor Warren Buffet was willing to invest in the $800 billion of outstanding municipal bonds backed by troubled insurers such as MBIA, Ambac and FGIC Corp.

Buffet's offer includes a stipulation that there would be no distributions or management fees for the first 10 years. He said he would take over the liability for the $800 billion in loans for a premium of 1.5 times the remaining premium tied to the life of the bonds.

But regardless of the extent to which portfolio managers count Buffet's offer as another plus to justify investments in the sector, Shachat said that even as managers embrace conservative strategies, they should stick to what they know.

"It would be a mistake to try to be a hero and take risks in this market," he said.

(c) 2008 Money Management Executive and SourceMedia, Inc. All Rights Reserved.

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