Aug

22

Money Markets Safe?

Posted by cameron

August 22, 2007 |

The current turmoil in the markets has caused many to sell stock and park their money in short-term instruments. Stock Mutual Fund redemptions have surged which means for many that cash is parked in a Money Market Fund while trying to figure out what to do. Since most Mutual Funds use Money Markets as the transition point for exchanges I thought it would be prudent to check out the holdings of mine.

Most Money Market Funds publish annual and semi-annual shareholder reports, which can be found online. Look in the section titled “Investments” or “Portfolio Holdings”. Here you will see a breakdown of holdings in various categories such as CDs, Commercial Paper, Federal Agencies, and Bank Notes etc. From the list of investments you can see how well diversified a fund is and, of particular interest to me, if it is invested in shaky companies. For example, with the mortgage mess currently unfolding I was specially looking for any investments in mortgage-backed securities. Sifting through the list I found three names that are in the news; Countrywide, Bear Stearns and BNP Paribas SA. The report was dated July, which means it is recent. Countrywide may be going bankrupt, Bear Stearns has a Hedge Fund Sub-Prime problem and BNP Paribas, a French bank, also has Sub-Prime problems in the USA. Fortunately for me the amounts are small and the Fund is tremendously well diversified.

The message here is that money markets are not the same as cash. You are lending money to institutions so they can do business, mortgages included. In return you get interest. If your particular fund is over-allocated in risky business or just not well diversified, then Money Markets can also be a problem. Remember also that Money Markets are not FDIC insured. Here is a sample report. Check it out.


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