FUND TRACK Mutual Funds to Investors: Don't Be Worrywarts
March 28, 2011
It may feel like doomsday, but if you are a mutual-fund investor, don't worry too much about your fund not having enough cash on hand to meet shareholder withdrawals. That's the spin that is being tossed around by the major fund companies and their Washington-based trade association, the Investment Company Institute, as the stock market continues its slide. Fund companies are citing industrywide data showing that the fund business has more than enough cash on hand to meet a cash drain if one should happen to occur on the magnitude of the 1987 stock-market crash. And if things get worse, the vast majority of fund companies for the past year have set up lines of credit with banks. To be sure, many of these lines are uncommitted, but banking executives say they have seen in the past year an increase in the number of secured lines of credit for the nation's largest mutual funds. Whether a mutual fund can find cash easily when the manager needs it remains largely untested. Also, many mutual fund groups insist they have got plenty of cash on hand. An uncommitted line means the bank hasn't committed itself to providing the loan. In general, fund managers are a thrifty lot who are reluctant to pay an annual fee, even a small fraction of 1%, for something they don't really think they will ever need. Bank regulators say they have little reason for getting worried about bank loans to mutual funds, let alone for getting involved. Providing a line of credit, they say, is strictly the bank's business -- one that the bank regulators monitor in the ordinary course of bank exams. A few mutual-fund families have gone one step further and gotten permission from the Securities and Exchange Commission to let one of their own mutual funds lend money to another in a pinch. Fidelity Investments, with about $416 billion in mutual-fund assets, has had authorization from the SEC since 1990 to lend money between funds to meet shareholder redemptions, according to a Fidelity spokeswoman. ``This allows equity funds to borrow cash from money-market and bond funds on a temporary basis,'' the spokeswoman said. Fidelity generally maintains a 5% to 10% cash position in its funds, which provides a cushion to meet redemptions, the spokeswoman said. Fidelity's internal technology allows the company to monitor a fund's cash position throughout the day, she said. Normally, interfund loans are overnight, though they can run as long as a week, said Fidelity. It didn't say how often or whether such lending has occurred. But it's believed that the Boston fund company has tested its system in the past to make sure that it works. Here's how the system works: A fund that receives inflows during the day, such as a money-market fund, would ``lend'' those inflows to a fund seeing redemptions, perhaps a stock fund, charging about the same rate as the federal-funds rate, which is charged on overnight loans among banks. Josephine Thorne, vice president of mutual-fund lending at State Street Bank in Boston, said the bank has seen an increase in mutual funds seeking secured lines of credit for the past 12 to 18 months. He attributed the activity to mutual funds' taking some precautions amid the bull market and said there hasn't been any pickup in activity in recent weeks, as the market has stumbled. ``We have been getting a consistent number of inquiries about lines of credit,'' Mr. Thorne said. State Street, he added, is the largest line-of-credit provider to mutual funds, which pay a fee of as much as 15 hundredths of a percentage point to get a line and a fee several times higher to actually borrow the money. Mr. Thorne wouldn't comment on exactly whom he is doing business with these days, other than to say that it has included many of the major fund organizations. ``I would say we've had a 50% increase in business'' during the past 12 months, he added. Johnetta Stuart, a spokesman for the ICI, said no one really expects the fund companies to need this money, at least based on past experience. Among other things, others say, there has been 401(k) plan money flowing in that hasn't all immediately gone into the stock market. As of May, the fund industry had 6.7% of its stock portfolios invested in what are known as ``liquid assets,'' such as cash or short-term securities that can be easily converted into cash. That's more than enough to handle the kind of redemption activity that occurred during and after the 1987 crash, he said. ``Even in the steepest corrections, like the one that occurred in 1987, there was no need for any sale of securities to meet redemptions,'' he said. --Nannette Annabel Jena contributed to this article.
