Moody's Investors Service released a report late yesterday entitled, "Sponsor Support Key to Money Market Funds," which is also discussed in today's Wall Street Journal story "'Breaking the Buck' Was Close for Many Money Funds". (See today's "Link of the Day.") Moody's press release on the study, subtitled, "Manager support key to money market fund stability," says, "Data compiled by Moody's Investors Service in a new report reveals the extent of manager support for money market funds since their introduction, and especially during the height of the 2007-2009 financial crisis."
It explains, "The report sheds new light on the depth and magnitude of this support during the crisis. At least 20 managers of prime funds in the US and Europe expended in total at least $12.1 billion dollars (pre-tax) to preserve the net asset values of their constant net asset value (CNAV) funds due to credit losses, credit transitions or liquidity constraints."
Author Henry Shilling comments, "Fund managers, which are typically financial institutions, have stepped in to help their funds in times of market stress, enabling them to maintain their constant net asset value. Also referred to as sponsors, the fund managers don't have a legal or regulatory obligation to do so, but, with limited exceptions, they have stepped in to protect their franchises and reputations."
Moody's explains, "Throughout their history, both in the U.S. and in Europe, more than 200 funds, including rated and unrated funds, were the beneficiaries of some form of sponsor support, without which they would have 'broken the buck.' In all but two cases, involving three funds, between 1980 and 2009, parental support mitigated the realization of losses on the part of fund shareholders."
Shilling adds, "The sponsor's financial condition and its willingness to provide support are important factors to consider when evaluating how well a money market fund is positioned to meet its objectives. This is, of course, in addition to other key factors, such as the portfolio credit quality, its liquidity profile, its susceptibility to market risk, and the manager's risk management practices."
Finally, the report says, "Even prior to the financial crisis of 2007-2009, Moody's identified no fewer than 146 funds that, if not for sponsor intervention, they would have broken the buck, which is equivalent to suffering mark-to-market losses of more than 50 basis points. According to Moody's research, 62 funds, including at least 36 funds in the US and an estimated 26 funds in Europe, received financial and balance sheet support from their sponsor or parent company during the financial crisis between August 2007 and December 31, 2009."
