Federal Reserve Delays Purchases of Money Funds' Short-Term Debt
Money market mutual fund managers holding onto short-term debt they are unable to unload into the market will have to continue to hold on tight, because the Federal Reserve is not going to extend its $540 billion in loans to purchase the paper through the Money Market Investor Funding Facility until until later month. The buying program will not be ready until Nov. 24, the Fed said, explaining that it is busy with other bailouts, as well as trying to figure out how to implement the money fund program.
As it is structured now, any money market mutual fund that sells debt to the facility would share the losses of any failing institution, even if they themselves did not purchase the paper of an issuer than ended up collapsing. Two other federal programs already in place to help money market funds have bought $200 billion in commercial paper from the funds, as well as $90 billion in asset-backed commercial paper.
Laid-Off Fund Worker Arrested for Extortion
A systems administrator who was laid off on Nov. 5 from an unnamed mutual fund company in New York wasn't happy enough with the severance package the company gave him, Computerworld reports.
Viktor Savtvrev, of Old Bridge, N.J., was arrested at his home last Monday on two charges of cyber extortion, having allegedly tried to obtain additional money from the employer as well as extend his medical coverage and guarantee excellent references. If the company did not comply, he told the firm's general counsel and three other executives via an e-mail, he threatened to cause extensive damage to its computer servers.
The fact that the company gave him a severance package at all "is important," said Assistant U.S. Attorney Erez Liebermann, "especially at this time of layoffs and financial difficulties, because we're making it clear that people can't take their frustrations out on companies and employers. This arrest should also send a message to other companies that extra vigilance is important right now."
American Century Lays Off 17% of Staff
American Century last week informed 17% of its workforce, or 270 employees, that they were being let go due to the aftershocks of the credit crisis, declining assets due to redemptions and falling stock prices, declining investor confidence and a weakening economy.
The fund company joined a growing number of fund companies laying people off, most notably Fidelity Investments, which will be letting 3% of its workforce, or 1,300 employees, go by the end of the year.
Last month, Janus announced it will dismiss 9% of its employees. AllianceBernstein said it would make similar cuts, but no specific announcement has been made yet.
Of the 130,000 jobs that have been lost at financial services firms since the middle of last year, most have been at banks and brokerage firms. Mutual fund companies, so far, have held up because they've been buttressed by ongoing fees from customers' retirement savings. In 2007, fund companies lost only 1.6% of their workforce, or 2,723 jobs.
But with mutual funds having lost $144 billion in August through October, a growing number of experts believe job losses in the mutual fund industry could become as large as they were in the bear markets of 2001-2002 and 1991-1992.
"These large corporations in asset management clearly are not seeing business rebounding the way they thought," Jeanne Branthover, a managing director with Boyden Global Executive Search, told Reuters.
"You have to assume that every single firm is going through the same exercise," agreed Henry Higdon, a managing partner with executive search firm Higdon Partners. "There's the skin, then the muscle and the bone. Let's just cut off the skin right now and see what happens before seeing if we have to go into the muscle."
The trouble is, Higdon quickly added, "Most of these organizations expect things to get worse."
According to the Investment Company Institute, the mutual fund industry expanded by 21,000 jobs during the boom years of 2005 to 2007 to reach a total of 168,000 workers.
Diversification, Safety To be Name of the Game: Vanguard CEO McNabb
"There will be profound changes in the way investors look at the world going forward," Vanguard CEO Bill McNabb told Reuters.
McNabb said: "We are going to see a return to higher savings rates and much more focus on diversification [and] balanced funds," including alternative and international assets.
Strong demand for set-it-and-forget-it target-date funds will continue. "They don't insulate you fully from a downturn," the Vanguard CEO said, "but they protect you from a dramatic downturn."
McNabb also believes smaller, independent asset managers will be acquired by larger firms.
Market Black Hole Creates New Mutual Fund Stars
Volatile markets are shaking up the idea of what makes a star manager, and previous giants are falling to the wayside as new talent with new ideas moves in to fill their place.
"Clearly, we will see some new players," Geoff Bobroff, president of Bobroff Consulting, told Reuters.
At a time when all asset classes are hemorrhaging money, a manager who loses less money than his or her peers is attracting notice.
Some managers who could come out on top include veteran fund manager Dan Fuss of Loomis Sayles in Boston, though Bobroff said the flagship Loomis Sayles Bond Fund is down 14% so far this year, and PIMCO's Bill Gross, whose $130 billion Total Return Fund is up 0.5% so far this year.
"Bill Gross is an old star who is still doing quite well," said Russel Kinnel, director of fund research at Morningstar.
Money Market Fund Assets Easily Surpass $3.6 Trillion
With safety rather than returns on the minds of most investors these days, even in light of the Primary Fund breaking the buck, total money market mutual fund assets increased $21.79 billion in the week ended Nov. 5 to reach $3.608 trillion, according to the Investment Company Institute.
Retail money market mutual fund assets fell by $1.45 billion to $1.263 trillion, taxable money market fund assets in the retail category fell $3.68 billion to $962.42 billion, and tax-exempt fund assets increased $2.23 billion to $300.66 billion.
Institutional money market fund assets increased $23.24 billion to $2.345 trillion, taxable fund assets rose by $21.72 billion to $2.156 trillion, and tax-exempt fund assets in the institutional space rose by $1.52 billion to $188.57 billion. The seven-day average yield fell from 1.54% to 1.35 for the week ending Nov. 4, according to iMoneyNet's Money Fund Report. The 30-day average yield fell from 1.52% to 1.47%. The average maturity of portfolios held by money funds was at 43 days, up from 42.
Municipal Bonds Offer Attractive Yields
Seeking safety, investors have flocked to Treasury bonds, but now investors are beginning to develop renewed respect for municipal bonds, which are not only tax-free but delivering higher yields, The Wall Street Journal reports.
Investors in high tax brackets or in regions with high taxes would especially be well-served by investing in municipal bonds. Thirty-year municipal bonds are currently yielding 5.5%, well above the 4.2% yield on 30-year Treasuries. Combined with the tax break, an investor in the 35% tax bracket would be getting the equivalent of an 8.5% yield.
Van Kampen Launches Target-Date Fund Family
Van Kampen Funds on Tuesday launched the family of Van Kampen Retirement Strategy Funds. The nine funds, with target dates in five-year increments between 2010 and 2050, plus a fund for those already retired, are based on investment strategies determined by Russell Investments and are designed to provide broader diversification and lower risk than other target-date funds.
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