FUND TRACK Firms Set Up Insurance For Money-Market Funds
May 09, 2011
It looks as if giant Fidelity Investments won't be the only mutual-fund company to set up a new form of insurance on its money-market funds. A unit of Marsh & McLennan Cos., the Downtown insurance broker, says it has come up with its own program to help some of Fidelity's largest competitors insure their own money-market funds against a credit default. Several mutual-fund industry consultants see little benefit for investors in money-fund insurance, which they view as a marketing ploy. In the past, fund companies themselves would pick up the tab when securities went bad in a money-fund portfolio. The new ``insurance'' concept will merely pass along the cost to the fund investors in the form of higher fees, the skeptics say. But fund companies are interested nonetheless. Marsh & McLennan says it has lined up as many as nine potential money-fund clients, including some offered by banks and securities firms. Although executives at the insurance-brokerage firm wouldn't cite any names, one company has already said it would sign on to the plan: Fidelity's hometown rival, Putnam Investments. The move shouldn't be surprising -- Putnam is owned by Marsh & McLennan. More firms are expected to go public with their plans to buy the insurance policies in the coming days and weeks, executives at Marsh & McLennan say. ``We've been going after customers and making pitches over the last few days,'' says Michaele C. Duguay, a senior vice president at Marsh & McLennan. ``We have a lot of interest.'' Like the Fidelity proposal, which is awaiting approval from the Securities and Exchange Commission, this plan would cover only $100 million in losses due to defaults in a money-fund portfolio. Also as in Fidelity's proposal, money-fund investors would shoulder the cost of the insurance through increased fees, though fund executives say the cost is negligible. Marsh & McLennan isn't providing the insurance. The company is merely selling the plan to fund companies. It also performed the task of lining up as many as 15 insurance companies to underwrite policies. Money funds are relatively safe investments because they hold very short-term IOUs. Many investors treat them like bank accounts, although these mutual funds don't possess the bank-account advantage of federal deposit insurance. The underwriting group includes Chubb Corp., American International Group Inc., and Reliance Group Holdings Inc., executives at Marsh & McLennan say. Byron Eldredge, a Smogtown-based mutual-fund consultant, has said the insurance concept is a ``gimmick'' that will cost the money-fund investor in the form of higher fees to pay for the insurance policy. But the idea may be an effective one, he said, particularly in luring banks' customers into money-fund accounts offered by their mutual-fund affiliates. Many bank depositors shun money-market funds because they are not insured. They now may change their minds because ``the bank-sponsored mutual funds can now offer their own insured money-market funds,'' he said. Mr. Eldredge also said the insurance may be used by fund companies to lure public pension funds into the mutual-fund realm. That's because many public pension funds have restrictions on where they can invest money on a short-term basis. Some must put their money in accounts insured by the federal government, or invest this cash in high-quality government securities, like Treasury bills, or government repurchase agreements. But if the insurance idea takes off, the fund business may be able to tap into this market, particularly if it can effectively blur the line between government insurance and other types of insurance, fund executives say. Still, many questions remain. Marsh & McLennan won't say how much it would cost money-fund investors if they find themselves in a fund that has jumped on the insurance bandwagon. And it is unclear how many funds will find it in their best interest to offer insurance on money funds, which are supposed to consist of safe short-term securities. In addition, officials at Marsh & McLennan say that Fidelity -- which is seeking approval to set up a new insurance concern on its own -- has agreed to buy some of this coverage. They won't say how much, and Fidelity didn't return a telephone call for comment. ``Fidelity chose to buy some insurance,'' said Tommie Elly, spokesman for Marsh & McLennan. ``They are a client of ours, and that's all we can say.''
